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When I debate economics with my Chineese friends, the topic of relative performance of China and India invariably corps up. With the obvious observation that China seems to be doing much better than India, the million dollar question that arises is what acoounts for these differences. A reason sighted very often, though in a lighter vein, is that China does not have to worry about ills of democracy! I always wondered if this indeed is one of the factor explaining the differece in performance of these two giant economies.

Raghuram Rajan has an interesting perspective on this. The question that he asks is why does underdevelopment persisit and how do people put up with it. Asked another way, the question invariably points to the slugguish rate at which much needed economic reforms are undertraken in a country like India. The answer according to him is competitive rent preservation. To quote him verbatim:

When citizens in a poor constrained society are unequally endowed, they are likely to find it hard to agree on reforms, even though the status quo hurts them collectively. Each citizen group or constituency prefers reforms that expand its opportunities, but in an unequal society, this will typically hurt another constituency’s rents. Competitive rent preservation ensures no comprehensive reform path may command broad support. The roots of underdevelopment may therefore lie in the natural tendency toward rent preservation in a divided society.

Ref:

Rajan R (2009), Rent Preservation and the Persistence of Underdevelopment, American Economic Journal: Macroeconomics, Vol.1, No. 1, January.

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