The Challenges and Importance of Institutions Building in the Developing Countries

By Dr. Kalim Siddiqui

There has been on-going debate about the utility of the ‘free market’ system versus ‘government intervention’ in promoting development policies and wellbeing for general populace. In this article, the author examines the question as to what pattern of development should be adopted if developing countries need to build institutions.


I think institutions are very important in the building of a democratic and economically prosperous country. All the current developed countries have very efficient and transparent institutions to promote growth and prosperity within them, and it is for this reason the developing countries should learn from developed countries regarding the importance of institutions to promote economic advancement. Institutions have to be transparent and professional, such as ensuring an independent judiciary, law enforcement agencies, and bureaucracy in order to attract inflows of foreign capital, facilitate economic development and domestic transformation of the society in general. This will also curtail corruption and malpractice.1 Such policy measures will promote equity and the fair distribution of the fruits of economic growth, as happened in the recent past in the East Asian economies, where the state has played an important role in successfully building institutions.2

The establishment and functioning of any institution is critically dependent on the social, economic and political support it receives from the government. It is assumed that the well-directed and efficient functioning of institutions will ensure a better quality of life for people at large.

Institutions are created as a part of any national building process. Our focus here should be on state sponsored institutions such as the judiciary, police, education, and government officials. The establishment and functioning of any institution is critically dependent on the social, economic and political support it receives from the government. It is assumed that the well-directed and efficient functioning of institutions will ensure a better quality of life for people at large.

Over the last few decades, there has been on-going debate about the utility of the ‘free market’ system versus ‘government intervention’ in promoting development policies and wellbeing for general populace. The question was put forward as to what pattern of development should be adopted if developing countries need to build ‘institutions’. Everyone agrees that there is a need to apply the rule of law, good governance, political stability, transparency and accountability. These policies are important to implement in order to achieve the target of raising the living conditions of the common people. The question arises, though, as to what the purpose of an institution actually is: is it for keeping law and order to maintain the status quo, or for a transformation and real change in society?


Foreign Intervention and Undermining of Sovereignty

A progressive country is where real power rests in the hands of the people, and those in authority are accountable to the people through various structures of accountability. Developing countries need democratic governance, which is transparent, has checks and balances, and the decision-making process engages a wide range of stakeholders and citizens. The democratic process should also enable the weakest and most marginalised sections to participate in decision-making processes and to claim their stakes.

However, foreign intervention in the developing countries hinders the development of independent institutions, and protects the strategic interests of their former colonizers (metropolis). For example, in the first quarter of the 20th century, the British did two major things in the Middle East which affected not just the entire region but the rest of the world; namely, they undermined the peace, prosperity and development of the region. 

First, the colonisation of Palestine fitted well with the interests and policies of the British Empire on the eve of the First World War. With the backing of Great Britain, the colonisation project expanded, and became a solid presence in the country after World War I. . The British control was strengthened with the establishment of the British mandate in Palestine (i.e., between 1918 and 1948). The Arabs in Palestine protested British colonialism and Jewish immigration from Europe. Their revolt in 1936, which lasted for three years, failed to change British policy, which was already decided in 1917 when the British foreign secretary, Lord Balfour, promised Zionist leaders that Britain would help to establish a homeland for the Jewish people in Palestine, which is also known as Balfour Declaration (Said, 1993). More than one hundred years have passed since the Balfour declaration was signed, which reminds the promise then made by the British of a Jewish “national home”, while completely ignoring what were notoriously described as the “non-Jewish communities”, then constituted about 92% of the population of the country.3

Under the British mandate, the number of Jewish immigrants increased rapidly, and by the mid-1930s, the Jewish population had risen to around a quarter of the total population, but possessing only 4% of the total land. In 1948, the Zionist organisations decided to expel native Arabs and, by doing so, would create a Zionist state. As Pappé (2009) argues, from its early inception Zionist thinkers propagated the need to ethnically cleanse the indigenous population of Palestine if the dream of a Jewish state were to be realised. The preparation for implementing these two goals of statehood and ethnic supremacy accelerated after the Second World War. Hussein Sharif’s revolt achieved only minor victories over the Ottoman army and failed to mobilise people in any part of the Arab world, despite being subsidised by the British to the tune of  £11 million (around $400 million in today’s money). British officers such as Colonel T.E. Lawrence served as military advisers to Hussein during the revolt. Meanwhile, one month before the Arab revolt broke out, Britain and France had secretly decided to divide the Middle East between their zones of influence, in what was known as the Sykes-Picot Agreement, in 1916.4 

Second, Britain provided money and support to Abdul Aziz Ibn Saud to consolidate power in the Najd and finally the Mecca and Medina region, which is now known as Saudi Arabia. The Middle East was seen by the British government as critical to both its strategic and commercial interests. Britain then fully backed the takeover by the Islamic extremist of Wahhabi sect, namely Abdul Aziz Ibn Saud in Saudi Arabia in 1915, while at the same time also assisted the Zionist organisation to take over Palestine and to establish Israel. Both these acts by the British imperialists promoted religious extremism and violence. And both tactical moves were undertaken with the aim of securing the region for imperial strategic interests, in particular the Suez Canal and safe routes to India. British officials described Abdul Aziz Ibn Saud as a desert Bedouin warrior, determined to unify the country and save it from the chaos of tribal warfare. Later, in the 1960s and 1970s, when the US and British hegemony came under threat from nationalism and communism, Saudi Arabia exported radical Islam and its Wahhabi extremism to assist its allies.

In 1915, the British aim was to prevent the German and Ottomans from establishing in the Sinai region, and protect the route to Indian subcontinent. For British Empire, it was crucial to keep rival European powers away and to maintain and control the region; as such acts were crucial to boosting its industrial and commercial strength. Meanwhile, Germany, under Kaiser Wilhelm II, had been taking increased interest in the Middle Eastern region. However, Britain had plans to block Germany from entering this region being upset by the potential development that Germany would seize the Suez Canal to prevent Britain from transferring troops from the Indian subcontinent. The Suez Canal was built in 1869, which made travel route from Europe to Asia easier and cheaper.

Under the British mandate, the number of Jewish immigrants increased rapidly, and by the mid-1930s, the Jewish population had risen to around a quarter of the total population, but possessing only 4% of the total land. In 1948, the Zionist organisations decided to expel native Arabs and, by doing so, would create a Zionist state. As Pappé (2009) argues, from its early inception Zionist thinkers propagated the need to ethnically cleanse the indigenous population of Palestine if the dream of a Jewish state were to be realised. The Zionist para-military forces became crucial for achieving this aim. The Zionist para-military forces such as Betar, which Menachem Begin joined in 1929 and Stern gangs of Yitzhak Shamir, later on both became Likud Party leaders of Israel. These armed gangs also included Irgun, and with the full support of newly created state of Israel launched war against native Palestinian and Arab population. But still in 1949, they faced a Palestinian population more than three times as large and owning 93% of land. These Zionist armed gangs were well disciplined and organised and also they had far superior weapons and training than natives. As a result of their attacks, they destroyed more than 400 Palestinian and Arab villages and towns and expelled 750,000 people. Due to all this chaos, violence and expulsion by 1960, the ratio of land ownership had been reversed. 

The presence of the Britain and the US in the region has given them of the world’s largest and easiest accessible oil and gas deposits. As Scott (2015:79) argues of a ‘dark quadrant of unaccountable power’, which provides a “proof of inscrutable governmental, financial, and corporate relationships between the United States and Saudi Arabia. There is a “black hole” at the centre… in which the interests of government, petrodollar banks, intelligence agencies, and multinational oil companies, are all inscrutably mixed.”5 In fact, the US dollar gold convertibility was abandoned by the President Richard Nixon in 1971.This was a policy change to end dollar convertibility to gold and implement wage and price controls and the policy was intended to address the international dilemma of a looming gold run and the domestic problem of inflation and also to correct the balance of payments and lower the unemployment rate. It meant that foreign governments could no longer exchange their dollars for gold. 

However, few years later in 1973, the oil prices quadrupled, which provided huge increase in oil revenues to the oil exporting countries. These countries informally agreed that trade in oil would be conducted in the US dollars and also their surplus money will be deposited in Western financial institutions. Moreover, the increased revenues and growing conflicts suited well with the interests of the arm exporters. As Nitzan and Bichler (2002) have noted that the wars in the Middle East have provided huge steadily increasing markets for weapon exports, where oil revenues have been major markets after the 1973. It appears that the rising markets for weapons in the region help to maintain the US primacy in sector and financing the deficits by which rising military expenditure is covered.6

The Western strategy was to create on-going conflict in the region and also to support a policy of destroying a strong states and institutions coincide with the US need to control the region’s energy sources and the requirements of maintaining the US dollar global hegemony.

The Western strategy was to create on-going conflict in the region and also to support a policy of destroying a strong states and institutions coincide with the US need to control the region’s energy sources and the requirements of maintaining the US dollar global hegemony. As Desai (2007:452) stresses: “measured in value terms, oil is the largest trade in the world – provided the USA can ensure that it continues to be denominated in US dollars. This is not the least reason for the US administration’s ire against Saddam Hussein. Only two years before the war in Iraq that country’s oil trade had been denominated in euros… To the extent that world trade ceases to be denominated in dollars, the world looses a major motivation to hold dollars and the ability of the USA to consume more than its produces, including the destructive consumption of the military, diminishes.”7


Role of State and Market in the Economy

Whether resource allocation could be achieved through the market or state or a combination of both has been matter of debate among economists and policy makers. However, both mechanisms may sometimes deviate from their norms. This means the necessary and sufficient conditions for fulfilling ‘Pareto optimum’ through the pricing mechanism may not be met because of externalities, imperfect markets and information deficiencies. Neo-classical economists have emphasised efficiency in terms of improving institutional change through the reduction of transaction costs while relying on pricing mechanisms to act as the driving force in resource allocation, if this safeguards property rights. Institutions which can lower transaction costs are crucial to performance of economies, including negotiations to reduce costs, monitoring and enforcement of contracts, all of which need proper institutions to meet their targets. Institutions only focus on rights and obligations in economic transactions, while organisations such as lobby groups, political and social organisations that support the interests of different groups will influence these organisations. Cultural and ethical values are always present in the very process of economic decision making. Karl Polanyi (1957:148) had a deep understanding of the importance of both institutions and the economy; he insisted that “the inclusion of non-economic is vital”.8

Neo-classical economists have largely focussed on ‘getting prices right’ and, according to them, this should be a guiding policy. However, such overemphasis on one issue can only have the desired consequences when there is already an emphasis on property rights and it is assumed that this will lead to the production of competitive market conditions. The state can create a favourable environment in which the markets can function. This emphasises one role of the state, however, namely that of a wide range of interventions in the shape of developmental processes. Income inequality, in turn, grows for a structural reason. Neoliberal policies entail the withdrawal of state support from peasant agriculture and petty production in general.9 This undermines those sectors, forcing peasants to migrate to the cities in search of jobs. At the same time, these policies remove all restrictions on the rate of technological-cum-structural change, so labour productivity rises rapidly making employment growth insufficient to absorb even the natural growth of the workforce, let alone the distressed peasant migrants. Neoliberal policies aggravate wealth inequality in several ways. First, they widen income inequality. Since the ratio of income that is “saved” (for adding to wealth) is higher within the upper-income groups, a rise in income inequality raises both the overall savings ratio in the economy and also the extent of the concentration of wealth in the hands of the rich. A neoliberal regime typically entails handing out tax concessions and tax rebates to big corporations in order to usher in “faster growth”. The obverse of this is the constraint on public spending on education and health and the withdrawal of state support for peasant agriculture as noted above. Such tax concessions to corporations, not to mention tax evasion and non-repayment of loans to public-sector banks, promote wealth inequality.

An innate individual rationality dominates neoclassical theory. Institutions in the neoclassical model typically seek to identify a measurable variable in order to estimate the impact of institutions on rational behaviour. As a consequence, these theorists set out to investigate whether culture ‘affects’ economic outcomes but paradoxically as Guiso et al (2006:29) note, “maintain the standard economic assumption that each individual has one identity and maxims the utility of this identity”. 

According to Ha-Joon Chang (2002), the main ideas of neo-classical economists is that the state intervention cannot be seen as an impartial and omnipotent social guardian, and they consider both state and organisations to be run by self-seeking politicians and bureaucrats who are under pressure from interest groups, and thus do not act in a neutral manner. These result in government failure in the form of regulations, rent-seeking and corruption, and for them the costs of governmental failures are typically greater than the costs of market failures (Siddiqui, 2019). They argue that only limited areas such as law and order, defence and infrastructure and the state should play a minimal role. Chang criticises neoliberal views on state and policies. According to Chang, a state action can be considered an intervention in one society but not in another. To answer this, Chang notes that few people in advanced countries will now consider a ban on child labour as constituting state intervention, i.e., restricting entry into labour market, while many developing countries would regard such action as unfair intervention. For some academics, the biggest failure of the market is to generate high levels of inequality. However, Ha-Joon Chang (2002:544-45) argues, “in neo-classical economics, this is not considered market failure because the ideal neo-classical market is not supposed to generate equitable income distribution in the first place”.10 For neo-classical economists, the market is essentially the economy, and if the market fails then the economy fails.11 However, institutionalists regard the market as only one of the many institutions that make up the capitalist economic system, and market failures may not matter as much because, for them, there are many institutions other than markets and state intervention through which economic activities are organised.

The privatisation of essential services such as education and healthcare makes them effectively more expensive for lower income groups. Hence, they have to spend more from their already meagre incomes on these services and are unable to save and add to their wealth to the same extent as might have previously been possible.

The privatisation of essential services such as education and healthcare makes them effectively more expensive for lower income groups. Hence, they have to spend more from their already meagre incomes on these services and are unable to save and add to their wealth to the same extent as might have previously been possible. This also contributes to growing wealth inequality. The emphasis on the effect of an institutional change on control of surplus by a specific class also suggests that the question of efficiency to improve institutional change cannot, in fact, be separated from redistribution issues. This means the issues of collective action, bargaining power and class interests are important to effecting any meaningful change. On market as institution, Ha-Joon Chang (2002:546) notes: “the capitalist system is made of a range of institutions, including the markets as institutions of exchange, the firms as institutions of production, and the state as the creator and regulator of institutions governing their relationships…, as well as other informal institutions such as social convention. Thus, focusing on market (and market failures), as neo-classical economists does, really gives us a wrong perspective in the sense that we lose sight of a large chunk of the economic system and concentrate on one, albeit important, only part”.10

Further Chang (2002) emphasises that the market was not seen as important alone or the dominant part of human life until the rise of capitalism, and the emergence of the market was almost always deliberately engineered by the state, especially in the early stages of capitalist development. Even in Britain, where capitalism first developed, spontaneous state intervention played a critical role in the emergence of the market and the modern market system. As Karl Polanyi (1957:140) noted, “the road to free market was opened up and kept open by an enormous increase in continuous, centrally organised and controlled interventionism. To make Adam Smith’s ‘simple and natural liberty’ compatible with needs of human society was a most complicated affair. Witness the complexity of provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in they meritorious task of municipal reform…”8

Acemoglu and Robinson (2012) described an important distinction between “inclusive” and “extractive” institutions. Their book Why Nations Fail emphasises the category of ‘extractive institutions’, which it contrasts with institutions of private property. Under extractive institutions dictators and their ruthless regime, whether they suppressed market or monopolised control of the economic sectors, undermine the market economy. The authors, however, were looking for single causes rather than at the multitude of factors which influenced the nature of the interactions that ultimately influenced economic growth. Their work attempted to build an interesting case with the more pluralistic institutions that gradually emerged after the English Revolution of 1688, and for them this was the underlying reason why the Industrial Revolution began in Great Britain rather than in Holland, Spain, Portugal or France. The competition between European monarchies compelled them to adopt new management and strategies to emerge as most powerful, while among the empires of the Asian subcontinent there was no such competition at that level, like the Mughals or Mings. Despite this, Asian empires were more technologically and socially advanced in the 17th century than those in Europe. Capitalism was associated with slavery and colonialism, and European large companies owned mines and plantations in the colonies which gave them the opportunity to extract large profits.

Amartya Sen (1999) argues in his book Development as Freedom that investments in health and education can make a big difference, and can ultimately improve people’s living conditions. The author cites the examples of the 1979 economic reforms in China when, despite the low per capita income, a huge public investment in health and education were part of what made the reform era growth spurt possible. According to Sen, investment in education expanded dramatically at the higher levels in the 1980s and 1990s, and the social capability of local Chinese people, including the Chinese diaspora in North America, Taiwan, Hong Kong and Singapore, also proved to be huge assets to post-economic prosperity.18

According to Samuels (1995), institutionalists emphasise about the role of the organisations and institutions in the controlling and facilitating of the economy, a system which is wider than the market. They are also concerned with the distribution of power within society and the manner in which the markets interact with other institutions. The institutionalists’ criticism of neo-classical economists includes their treatment of individuals as independent and self-subsistent and their use of pure market. The institutionalists consider individual and culture mutually interdependent, and they also take into the power structure in the country. They also argue that the neo-classical assumption of the operation of ‘pure and automatic markets’ creates the illusion of an autonomous free market operating independently of the people’s control, while the institutionalists emphasise that the market, per se, is itself a system of social control and the specific market performs in such a manner because of institutions have social control over the markets. On Institutionalist, Samuels (1995:571) argues “The conception of the market as the guiding mechanism of the economy,… It simply is not true that scarce resources are allocated among alternative uses by the market. The real determination of whatever allocation occurs in any society is the organizational structure of that society – in short, its institutions. At most, the market only gives effect to prevailing institutions. By focusing attention on the market mechanism, economists have ignored the real allocation mechanism…Although institutionalists disagree as to how much and what precisely is important in the neo-classicists’ analysis of the operation of pure market mechanism in allocating resources, they all agree that markets  are organized by and give effect to the institutions which form them”.19  

Joseph Schumpeter (1987) emphasises the importance of institutions and government supportive polices to facilitate technological innovation, diffusion, interdependence and the cumulating nature of technological change. Innovation consists of a good, new method of production, the opening of a new market, the discovery of a new source of supply of raw materials or semi-manufactured goods, and the introduction of a new organisation in an industry. The main motivating factor behind an innovating entrepreneur was profit expectations and entrepreneurs played an important role in determining the rate of economic growth. Schumpeter argued that the existence of non-competitive markets is inevitable, and a dynamic and successful economy is driven by constant technological innovation.

Thorstein Veblen was an US economist who sought to apply an evolutionary approach to the study of institutions with The Theory of the Leisure Class (1899) describing the life of the wealthy, which he termed conspicuous consumption. The industrial system, he wrote, required men to be diligent, efficient, and cooperative, while those who ruled the business world were concerned with making money and displaying their wealth; their outlook was survivalist, a remnant of a predatory, barbarian past. He profoundly influenced the development of institutional economics and was among the first theorists to identify advertising, financial manipulation, and stagnation as essential features of a mature business economy. His central emphasis hinged on the evolution of human institutions that reflected both industrious and aggressive dispositions and habits. Modern business elites, for Veblen, distort and waste the benefits of technology in order to slake chronically dissatisfying quests for ever-increasing power and status, as signified by wealth. Veblen wanted economists to attempt to understand the social and cultural causes and effects of economic changes.

In India, the formation of an independent state as a consequence of the anti-colonial struggle constitutes a major milestone in the course of the associated struggle.


Institution Building is Post-Colonial India

In India, the formation  of an independent state as a consequence of the anti-colonial struggle constitutes a major milestone in the course of the associated struggle.12 However, it requires even greater determination to take this struggle forward towards the formation of economic independence and to defend the gains of independence, and ultimately to build a self-reliant economy (Patnaik, 2007). Soon after gaining its independence, the Indian government assumed that public-controlled economic development would distribute these gains more evenly and protect the interests of the poor. For this, the Nehru government decided to establish institutions to support parliamentary democracy based on universal adult suffrage, a secular polity of a separation of religion from politics, and with a leading role assigned to the public sector. For this, a national planning commission was established. There existed strong communal organisations such as the RSS and the Hindu Mahasabha who did not play any role in the struggle for independence, but rather sided with the British and tried to divide the anti-colonial struggle along religious lines. However, within the Congress Party, there were some who adhered to anti-minority views, and disagreed with Nehru and Azad. As Patnaik notes, (2007:19) “[They] might not have subscribed to the RSS notion of a Hindu Rashtra, on a whole range of specific issues of secular views such as those espoused by Jawaharlal Nehru came into conflict with theirs. Likewise, the introduction of parliamentary democracy based on universal adult franchise was a revolutionary measure in a country characterised for millennia by a strictly hierarchical caste system whose utter inhumanity was manifested in phenomena like ‘untouchability’”.13

Commenting on Jawaharlal Nehru’s strategy, the first Prime Minister of independent India, Patnaik (2015) argued, that for an economic strategy emphasising the development of basic and heavy industries, was as an important step for accelerating economic growth, especially when export prospects were uncertain. Then the option was that to achieve the growth of an economy with a set of interdependent sectors was to remove this hurdle. Then, a higher growth rate would initially require the bulk of the resources to be directed towards launching industrialisation, which amongst Indian leaders had already been identified during the independence movement as meaning the basic and heavy industry sector. This strategy was criticised for emphasising investment allocation in favour of heavy and basic industry and ignoring agriculture. However, this ignores the fact that the government sought to increase its output through increased public investment in areas such as canal irrigation and the power sector, rather than through land reforms, which could have achieved rural equality and minimised Hindu caste discrimination. However, the government then needed those rural elites, along with the capitalists, to consolidate its power.14

The Indian government of the 1950s created institutions such as the Planning Commission and also a number of higher academic institutions such as the engineering IIT (Indian Institute of Technology) to facilitate public sector and modern industrialisation, which was then considered a bulwark against foreign capital domination of the Indian economy as Indian capitalists were too weak to replace metropolitan capital and the state had to step in to address this purpose. State-owned financial institutions, replacing the metropolitan ones, were essential to building up a domestic productive base that was different from that of the colonial economy, where financial institutions had mainly served British managing agencies, trading houses and the plantation sector. The development of capital goods production under the aegis of the public sector was an essential step towards self-reliance, and away from reliance on metropolitan products. Technological self-reliance was developed within a host of sectors, from setting up fertiliser plants to oil refineries, to conducting off-shore oil exploration and extraction through the public sector alone. State-owned research and development units became the hub of research activities, and state-sponsored technology institutes became the main source of training skilled manpower.15 

However, Nehru’s strategy failed in two crucial and interrelated domains. The first was in the area of land reform. No radical land redistribution occurred after independence, and the pre-independence promise of ‘land to the tiller’ remained unfulfilled due to a number of factors including poor institutions and a lack of will amongst the political elite and government officials. However, there were some very modest attempts to implement land reform, and the result was limited to removing large intermediaries and absentee landowners rather than transferring ownership rights to actual cultivators and agricultural labourers. And as a result, this policy failed to break land concentration in rural India. The more egalitarian land distribution in the Indian countryside would have created a wider market for industrial goods, which in turn would have been more employment-intensive. This did not happen. Instead, the landless got further marginalised, as the process of industrialisation, based on a skewed income distribution (arising from a skewed asset distribution) restricted the growth of employment opportunities. The second failure was that growth became largely dependent upon the provision of the continuous stimulus of government investment. A ruthless process of ‘primitive accumulation of capital’ was unleashed by the bourgeoisie, and the government had to subsidise the industries and also overlooked tax evasion.

Some have considered interest rather than class to be the basis for the motivating and organising principle of political economy, attaching greater significance to the well-off and religious and caste factors in Indian society (Rudolph, 1988), while the critics have noted that such an analysis ignores the relationship between production and property rights. Property relations have influenced government policies, for example, in India in the 1960s, to accelerate agricultural output and productivity, also known as the ‘Green Revolution’ with minimal disruption to the prevalent land relations and without upsetting rural class relations. Of course, external agencies such as the Ford Foundation supported such policy measures. This experience indicates that government can develop infrastructure and institutions to accomplish and achieve its target of higher output. These institutions helped to develop new seeds, provide subsidized water, chemical fertilisers, institutional credits, and allow price support for a few selected agricultural commodities. These institutions were critical to the success of government agricultural policies.16

The government, in order to continue growth, though of course to different degrees, undertook measures to squeeze the workers and sections of the peasantry, which adversely affected aggregate demand, the growth process of its main stimulus. Thus, the government resorted to external borrowing in the mid-1960s and again in the 1980s, which temporarily helped to overcome economic difficulties but ultimately undermined the aim of building a self-reliant economy in and of itself. In 1991, India received an IMF loan on the conditions that the country would implement policy measures including opening up the economy to foreign corporations, the deregulation of industries, privatisation of public companies, liberalisation of foreign trade regimes, and would encourage foreign investors (Siddiqui, 2016). However, after 1991, in a neoliberal reform the state moved away from its earlier position of claiming to be alone in guarding welfare. The development process was opened up to greater reliance upon market forces, thereby shifting the focus from ‘equity’ to ‘growth’ by the market. Due to resource constraints, the government was forced to rely on foreign capital (Siddiqui, 2014). The desire to build industrialisation was far less prominent in African and Latin American countries. In India, the economic crisis and the state’s inability to mobilise domestic resources, i.e., to raise taxes on the large land owners and capitalists led to a fall in public investment, which seemed to be the key factors in undermining the construction of a successful industrial sector. A decline in public investment in the power sector, irrigation, infrastructure, and a skewed distribution of demand and slow growth in employment were the major contributory factors. This meant a lack of adequate income inhibiting the stimulation of demand for industrial goods.

The economic inequality in India grew particularly sharply after the 1991 economic liberalisation, with policies focussing on GDP growth at any cost. This has led to an increasing proportion of wealth in the hands of fewer people at the top, who could then use this wealth to influence elections. Hence, polity came to be increasingly controlled by large corporates, and policies were tailored to meet the economic interests of such large corporates rather than the people. Noam Chomsky referred to this as ‘manufacturing consent’. Since Modi came to power, elections are being increasingly influenced by monetary power. 

Consequently, economic inequalities have grown enormously and the Indian GINI index, which measures economic inequality, is perhaps the highest in the world. It was recently reported that the wealth of the nine richest Indians is equivalent to the wealth of the bottom half of the Indian population as a whole. All this, coupled with the control exercised by a mere few corporations over a large section of mainstream media, has accentuated the manufacture of consent in India. A recent Oxfam report (2018) on India stressed about the sharp increase in wealth inequality in India in recent years. In 2017 alone, the top 1% of the population owned 73% of the addition to wealth that occurred. A year ago, the top 1% owned 58% of the stock of wealth. Thus, its share, which is already phenomenal, is still increasing. One can infer from the Oxfam report that the rich have disproportionately cornered the “benefits of liberalisation”. This is a rather incorrect reading of what happened, however; “liberalisation” itself is responsible for the growth in inequality, as is clear from the fact that it is not just India, but the world as a whole, that is witnessing increasing wealth inequality.

In conclusion, appropriate institutions play very important roles in the success of any economic policy.  The ‘national’ economic planning under the aegis of the postcolonial state and under the framework of a ‘mixed economy’, which was supposed to develop a self-reliant economy, has failed. At present, with the recent wave of globalisation, the international situation has fundamentally altered. The strategy of the bourgeoisie to pursue autonomous development independent of the West is impossible because of the demise of the Soviet Union, and because of the emergence of a new form of international finance capital which denies national autonomy17 and with which the bourgeoisie cannot sever links. It is a myth propagated by neo-classical economists that the market can be free from politics. At present, within the developing countries, a very small minority of the population enjoy all the social and economic privileges, and therefore any meaningful development would be impossible without radical changes in government institutions and policies. The miracle economies of East Asia,18 such as Japan, South Korea and, more recently, China and Malaysia,20 have pursued widely divergent but still highly state interventionist policies in order to achieve the rapid expansion of their manufacturing sectors and the overall economic transformation of their economies.21

Governments, however, not only try to prevent economic crises but must also take steps to ensure that the capital gains made through such bubbles do not just remain fictitious but are converted into real assets. They do so by incessantly throwing new assets into the market through the privatisation of natural resources such as water, education and health, and through the sale of public sector assets. The current ecological crises and rising inequality within these countries compel us towards a search for alternative economic solutions that facilitate a shift away from the singular goal of higher growth rates and of material affluence. Such a shift can only be accomplished by considering different rationalities and patterns of behaviour, which will indeed require different kinds of institutions to meet the associated objectives.

About the Author

Dr. Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, UK. He has taught economics since 1989 at various universities in Norway and UK.


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2. Siddiqui, K. 1995. “Role of the State in South-East Asia”, The Nation, 27 May.
3. Said, E.W. 1993. Culture and Imperialism, New York: Vintage Books.4. Pappé, I. 2009. The Modern Middle East, London: Routledge.
5. Scott, P.D. 2015. The American Deep State, Wall Street, Big Oil and the Attacks on U.S. Democracy, Maryland: Rowman & Littlefield.
6. Nitzan, J. and S. Bichler. 2002. The Global Political Economy of Israel, London: Pluto Press, Chapter 5.
7. Desai, R. 2007. “The Last Empire? From Nation-  Compulsion to Nation-Wrecking Futility and Beyond”, Third World Quarterly, 28 (2): 435-456.
8. Polanyi, K. 1957. The Great Transformation, Boston: Beacon Press.
9. Siddiqui, K. 2012a. “Developing Countries’ Experience with Neoliberalism and Globalisation”, Research in Applied Economics, 4(4):12-37, December.
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