Gridlock Economy

Economists love nothing more than being contrarian, and the concepts of the 'tragedy of the commons' and the love of private property are fairly well entrenched among the Economist-reading crowd.   So naturally someone is going to attack this consensus in a popular book with a catchy name.  

The basic idea--that often property rights can prevent anything from getting done--is true enough as far as it goes but doesn't seem like much more than an emphasis on transaction costs.  It does, however, seem like a good way to think about land acquisition for Indian industry.

Though India was the world's top textiles maker at one point, services have recently been the bigger growth story.  It's true that productivity is higher in this sector, owning a great deal to bad government regulations and low investments in human capital and infrastructure by nominally leftist governments.  Plenty of people believe the overall mix should weight more to manufacturing, because it's what all sorts of countries do and it feels better to make real things.  But manufacturing today is increasingly automated, and continues to be highly environmentally destructive.  Regardless, there's certainly room for a larger Indian industrial sector--and the biggest hurdle is acquiring the land for it.

A number of land acquisition targets have been plagued with violence, while others are stalled.  Tata Motors' pullout from a factory designed to build the new Nano car is the latest incident.  It seems obvious that land ought to go to the most productive investment, which is rarely agriculture, and well-capitalized industries are in a good position to offer ample compensation to farmers.  But somehow, land acquisition is rarely easy, owning to several gridlock economy concerns: Uncertain and ill-defined property rights, highly fragmented land ownings, and veto rights exercised by any holdout property owner.  Add to that political concerns in a democratic polity which prioritize the rights of farmers and fail to entirely marginalize the dispossessed.  The new SEZ policy, intended to ease the process through expanding eminent domain rights in certain areas, has sometimes worsened conditions and prompted violence.

I've always been puzzled, though, about regional variations in the success of land acquisitions.  Though Gujarat has by far the greatest number of planned SEZs, it's had few problems.  By contrast, the eastern states of West Bengal and Orissa seem to fail at most things they attempt.  I chalk this up to good governance (barring the occasional religious cleansing) by a politically dominant party in Gujarat, and fragmented, Communist governance in other states.  I recently came accross this argument, that big differences lie in the process.  Instead of simply seizing the land, offering people a stake in the future project and ample compensation seem to be far more effective.  Imagine that.