By Bhagirathi Panda
These days, the conceptualized Act East Policy of Government of India is being positioned as the contemporary strategy of development of the North Eastern Region(NER) of India. This explicit positioning came at the backdrop of the journey of the political economy of the North East from a relatively isolated subsistence agrarian economy to an uncertain, question marked integrated economy. This positioning and its advocacy, although came very late, is well backed by rational development thinking and established pragmatism. In terms of thought out strategy, it definitely has brought out clarity and direction to the future strategy of development for this part of the country. However, operationalisation of this idea and conceptualized policy is the biggest challenge that all of us are realizing today.
One of the important objectives of this envisaged policy is to undo the immense harm that the earlier model of state colonialism brought to this region post partition of the country. Operation of this state colonialism model for the last 65 years has distorted the practice of development in the NER. Before the emergence of the peasant economy and its subsequent transition to state-colonialism, NER’s economy and society even in the initial condition of mono-cropping hilly agrarian state was based on the universal understanding and practice that “development was basically to produce goods and services with the use of community’s and individual’s enterprise and available natural resources like land, forests, rivers, rivulets and minerals etc”. With partition this region became landlocked and its strategy of development got caged to the deliberately perceived and propagated security concerns of interests both in Delhi and the NER.
State colonial model brought in and planted new institution of rent seeking. The culture of rent seeking subsequently became endemic with eulogisation of rent seeking capital. This subverted the age old culture of tribal entrepreneurship, led to high youth unemployment, skewed structural transformation, distressed diversification of income and employment, and inward looking economy with sub-optimal governance. The unemployment rate of youth in the age group of 15-35 as per NSSO data in the year 2009-10 at 10.2 % was more than double the youth unemployment rate for the country as a whole. Subsequent surveys for 2011-12 show improvements in this situation. However, 2009-10 survey was the quinquennial round with large sample sizes and its results are more dependable compared to the intermittent surveys undertaken till the next quinquennial round results come out in near future.
Further, up to the year 2000, the economy of NER in its income space exhibited a steady moving away from agriculture to services sector bypassing the secondary sector to a great extent. Its employment space exhibited increased casualisation of women’s employment. Rural employment diversification showed signs of distress and helplessness. People and particularly rural women had to take up any kind of low-end non-farm activities because of poverty and distress (not out of their choices). Quality of governance particularly the law and order situation remained sub-optimal. Post 2000, economic growth picked up. However, this growth has not resulted in growth of substantial employment. Overall employment growth in NER has almost remained stagnant at 0.13 per cent during the period 2005 to 2012. None the less, some visible improvements are noticed in the field of physical, social and institutional infrastructures like communications, education, health and banking services. This has caused the Human Development Index of the NER to improve substantially and remain above the national average. Consequently, it has also made the NER society more aspirational.
Now having taken a conscious decision to leverage this policy as the core approach of development for the NER, the most important criterion on which the success of this policy depends, is the broad acceptability of it by the people of this region.Such an acceptance is contingent on, inter alia, linking it up with the expansion in the livelihood and employment opportunities of its people particularly the youth. Expansion in livelihood and employment opportunities depend on emergence of a strong regional and local economic base led by fragmented networked industry and high end services sector to produce goods and services specifically for export to ASEAN , Bangaladesh, China and beyond.This looks more promising today compared to any period in the past because of our low labour cost of production in the NER vis-a-vis the increasing labour cost of production in China and other South East Asian countries.
However, labour cost is only one component of the overall cost of production of goods and services. The most important component in the cost structure happens to be ‘transaction costs’. This is where the NER has the most revealing disadvantage because of the existence of very high magnitude of transactions costs. Thus, eventually, the emergence of the envisaged fragmented networked industrial production centres squarely depends on the reduction of the present level of high transaction costs. Transaction cost comprises of a number of cost types. One of the important visible components of it in NER is the issue of property rights. A relevant area where this issue comes up poignantly is the tradability of land and its acquisition for construction of infrastructure and establishment of firms and industries. There are issues with respect to its definite ownership, security and tradability which have their origins in the societal norms of different parts of the region.
The next component is the negotiation and enforcement costs. Negotiation becomes costly because of presence of multiple stakeholders. In many states, there are multiple formal and informal authorities having their respective rules, norms and stipulations on acquiring properties, getting license, doing business etc. You have to negotiate with the central government, state government, autonomous district councils (ADCs, where they exist), local traditional institutions, underground and over ground elements, armed and paramilitary forces etc. Similarly, the existence of such multiple stakeholders, formal rules and informal norms and practices and the non-existence of a separated judiciary in few states at the district and sub-district levels make the cost of enforcement of contracts very high. One more factor that increases the transaction cost is the high transportation cost because of relatively poor connectivity, bad condition of the roads, frequent bandhs and road blockades in different parts of NER. As per an estimate of the Department of Economics, Manipur University, during the infamous 120 days prolonged bandh and economic blockade of NH 2 and NH 37 in 2011, Manipur suffered a loss of Rs. 245.64 crore at a rate of Rs. 2.67 crore per day.
Further, we have this prevalence of institution related transaction costs. One of the important macro institutional variables that affect transaction cost in the region is relatively deficient law and order situation and governance. This is reflected in bandhs and blockades, smuggling across borders, collection of illegal fees and lack of effective mechanism to resolve conflicts etc. Rent seeking is another macro institutional variable that have significant implications in terms of increased transaction costs. As Murphy, Shleifer and Vishny (1991) mentioned, “in countries where more talents are allocated to rent-seeking rather than production, growth and regulatory failure will eventually ensue.”
Last but not the least, NER is yet to emerge as an integrated economic entity. Although the states were created here on ethnic and political lines, today the developmental imperatives require that they have to emerge as a single economic entity. Working of firms and economic agents under such a sub-optimal regional economic arrangement increases the transaction cost. Agents can significantly reduce their transportation costs and realise more of vertical production integration if intra-regional physical and governance communications gets considerably improved. This kind of integration would lead to reduction in market related transaction costs including the costs of negotiation and enforcement of contracts. For example, efficiency in export and import of commodities and services requires critical scale of production and demand respectively. Many times individual states on their own are not able to realize it, but they can do it if they come together.
The pertinent question is how to reduce this transaction cost and promote calibrated integration that can produce goods and services, create jobs for our youth without severely compromising the environment and cultural foundations of the society. This is a difficult but not an impossible job. As it stands today the ‘establishment space’ in development in NER is governed by four establishments i.e. the government, community, market and civil society in varying degrees. All of them largely move and work parallel to each other. Reduction in transaction costs depends on reducing this disproportionate parallelism and realising maximum convergence in the matters of development.
(The author is a professor, in the department of Economics, NEHU, Shillong)