Wednesday, March 19, 2014

Gujarat slips badly in economic legal structure, security of property rights ranking: Pro-Modi economists

Legal structure and security of property: State rankings
By Our Representative
In a surprise observation, top pro-Narendra Modi economists Bibek Debroy and Laveesh Bhandari have criticized Gujarat -- which they say on “many parameters is a well-governed state” – for experiencing “a steep fall” in its score of “legal structure and security of property rights”. They find, Gujarat’s score on a scale of 0 to 1 for this has been constantly going from 0.54 in 2009 and 0.52 in 2011 to “just 0.39”, pushing its ranking from No 4 to No 9. The main parameters taken into account while analyzing “legal structure and security of property” include “the efficiency of the government in protecting human life and property”. 
The report says, “The quality of the justice mechanism is measured by the availability of judges, by the completion rate of cases by the courts and investigations by the police. The level of safety in the region is measured by the recovery rate of stolen property, and by the rate of violent and economic crimes.”
Poor ranking for this happened at a time when, the economists say, “looking at changes since 2011, Bihar, Jammu & Kashmir and Punjab have shown the most improvement.” There has been “substantial improvement in police investigations in Bihar”, while “Punjab’s index scores have been rising over time, and these have been reflected in a sharp improvement in its ranking from 11th position in 2011 to 6th position today.”
Praising these states, the economists say, “This improvement is mainly on account of a higher rate of recovery of stolen property, a lower ratio of violent crimes to total crime and higher rate of completion of court cases. The efficiency of the government in protecting human life and property is measured by this category.” They say all this in the latest “The State of Economic Freedom in India 2013”, released jointly by the Cato Institute, Friedrich Naumann Foundation, Indicus Analytics, and Academic Foundation.
No doubt, the report, whose authors include these two economists and Swaminathan S. Anklesaria Aiyar, says, “Gujarat has widened its lead at the top of the economic freedom table, with an index score of 0.65 (on a scale from 0 to 1.0). Tamil Nadu remains in second position, but some distance behind, with a score of 0.54. Next in line come Andhra Pradesh (0.50), Haryana (0.49), Himachal Pradesh (0.47) and Madhya Pradesh (0.47).”
The economists have taken into account three main issues for calculating economic freedom – (1) “legal structure and security of property rights”, (2) “size of government: expenditures, taxes and enterprises”, and (3) “regulation of labour and business.”
Chart suggests Gujarat slipping into minus in size of
government ranking between 2011 and 2013
Apart from “legal structure and security of property rights”, the economists also find that Gujarat is sharply slipping in “size of government…” On this point, while Gujarat’s ranking remains No 2, its score sharply slipped from 0.74 to 0.64 between 20011 and 2013, one of the sharpest falls among Indian states.
On the “size of government…”, the main issue analyzed is: “Interference of the government in the functioning of the economy or a large role of the government as a producer and provider of services and goods or as a redistributor of resources reduces the level of economic freedom. Government revenue expenditure, administrative GDP and a relatively large employment in the public sector are therefore indicators of size of the government. Taxes on income, commodities and services, property and capital transactions, and other duties are indicative of the extensive role played by the government in the Indian economy.”
Only on “regulation of labour and business”, the economists find Gujarat not only continuing to score No 1 but sharply improving its position from 0.67 to 0.87. Interestingly, while rating Gujarat No 1, one of the most important criteria taken into account is allowing enterprises to go ahead with “right-sizing employees”, insisting, “Constraints on worker exit can seriously hamper an entrepreneur’s freedom. Labour laws for many decades have favoured excessive security for workers (in companies with more than 100 employees, no worker can be sacked save with permission from the State Labour Ministry).”
Following top propounder of laizes faire economics Milton Friedman, the report points towards issues in which Gujarat may have overcome are: “The number of strikes and industrial disputes is a parameter that reflects economic freedom in terms of the control that an entrepreneur has over his own business. Other areas where an entrepreneur may lack control over his own business relate to inadequate infrastructure.”
The report adds, “High transactions costs are well-known deterrents to efficient trade and economic activity, and can also contribute to black market transactions. The higher the cost of business in the form of licences and clearances, the more they constrain economic freedom. And, of course, corruption is a widespread problem that translates into higher transactions costs and lower economic freedom.”

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