Does democracy always assist development?
Does democracy always assist development?
Even in a democracy such as America, a powerful electorate has created inefficient economic institutions, responsible for slowing down growth. It would therefore seem that democracy is not a cure-all for the problem of underdevelopment, above all when there are enormous differences of interests.
so my introduction will be very brief because we're going to let rajon speak so why under development why is democracy not necessarily a remedy to under development and why do we have inefficient and unjust institutions uh also in developed countries what influences the free market and how free is the market as many open questions to which our guests will uh respond we're talking about ragram rajan who actually identifies essentially two obstacles first of all the power of economic elites the same monopolistic groups which distort competition and prevent other subjects or players from competing and this is an aspect which has already been discussed by russian in a successful book published in italy and written together with luigi zingales and the title of the book itself is stimulating that you say saving capitalists from capitalists so starting from here rajan has further developed his theory and has found out that well there is a constant obstacle uh or other two constant obstacles uh on the one hand uh the elites the economic elites the social classes and then on the other hand the different needs of other classes of the middle classes for instance we should not have the same needs interests and expectations of reform as the poorer classes and rajan will explain that this is something which crosses all frontiers it is found throughout the world in asia africa america if you want you can start thank you very much uh thanks for coming here and uh let me explain uh um uh very briefly what i want to talk about then uh walk you through through some from some slides uh i will actually present a model uh but i'll make it uh absolutely crystal clear and it won't have any greek letters it won't be greek economics uh as as paul krugman defined yesterday what i want to talk about is actually the the underlying thesis behind uh our discussion today here is it true that democracy leads necessarily to the development of strong markets and to economic growth or more generally does development in political institutions create the underlying conditions uh for economic growth or is it possible to have paralysis in democracies and what might that paralysis be caused by and how do you sort of unfreeze countries and uh clearly this is a an issue which is of importance in this country in italy it's an issue of importance in my country uh india where there is a constant discussion about whether there is a discount for democracy in india and as a result india is held back but it's also a discussion which becomes very relevant when we look at the fact that over the last 30 or 40 years we've had a tremendous development in political conditions across the world a number of countries have become independent a large number of countries have become democracies from being dictatorships and authoritarian before and yet uh there is a sense of disappointment certainly in a number of countries in africa but also in latin america and sometimes even in asia that these political developments haven't haven't paid off as much in terms of economic growth and and i will argue that the reason is not so much that that democracy is detrimental for growth i certainly don't want to make that argument but it may well be that there are other conditions which are also necessary to create the atmosphere for good policies to be enacted and the fact is that many of these countries that have become independent have become independent without those underlying conditions and as a result they can get trapped in dysfunctional politics and to some extent the way out sometimes seems to be to get the politics to get aligned and that means changes on a number of other dimensions than the political institutions uh put differently i want to argue that a lot of the people a lot of the time people look at their own countries when it's not growing and say ah this is because it has a presidential form of government people in other countries say ah this is because we have a parliamentary form of government sometimes they complain about proportional representations sometimes they complain about majoritarian rule people complain about political institutions a lot of the time but i think in reality the political institutions are to my mind reflective uh and sometimes uh sometimes second order uh to the underlying conditions in society and i want to talk specifically about those conditions which i will define largely in terms of inequality of various kinds of endowments and those create frictions uh within society of course this is just one view of the growth process and i'd be happy to talk about more as we go on so let me with that preamble uh let me let me talk about some of the reasons people argue for why underdevelopment is so persistent a lot of recent theories focus on the fact that in many of the countries which stay underdeveloped there are strong elite groups sometimes the elite are landowners sometimes they are a very powerful group in the middle class but essentially the idea is here are people who enjoy certain benefits from the status quo and they get a big share of what is a small pie and their fear about letting the pie grow is that in that process their share will fall disproportionately and it may be that on net they're worse off by letting the pie grow so they maintain policies that actually keep the pie small rather than allowing the pie to get bigger now often it's argued that these people are are enabled to maintain these policies because they have political power either they control the army or they control uh political institutions or political institutions are skewed to give them disproportionate part of their voting rights skewed such that this this this group continuously uh maintains power but to some extent economists would argue well aren't we looking in the wrong place if in fact they had all the power wouldn't it make sense for them to allow for more growth and then tax the growth so that they maintain their share in in other words let people do the right thing but then expropriate them by taxing them of course taxation has some negative effects on growth but if you could do that wouldn't that be better than keeping the pie really small so is it really that people have disproportionate power or is it something else i also want to argue that this notion that the elite have power and therefore have disproportionate political power and therefore can keep the pie continuously small is not consistent with some of the some of the facts that you see even in developing countries for example in india for a long time uh certainly until the uh late 1980s we had totally dysfunctional economic policies economic policies which tended to preserve a relatively small elite of businessmen and large landlords and uh you know the the question here was why was it this the case here why was it that somehow uh people could maintain these groups in par despite the fact that democracy in india was quite vibrant and you just have to travel to india during an election to see that there are no holes barred everything can be questioned uh it's just like democracy everywhere else and my view of and you can repeat this argument for countries in africa and elsewhere why is it that post-independence policies change so little why is it that post post democratization policies change so little they keep continuing the same set of policies it's not that things change that much why is it that where is that the case and uh to my mind it's not so much that democracy is subverted in the sense that people don't have votes but really it is that we feel the world is divided into two groups the elite and the rest and that when we have democracy the rest will decide ah it's now time for us to get rid of those old policies and we will have new policies that benefit all the truth is the rest are not one whole the rest are very divided and they have very different views on the kinds of policies that can benefit themselves and it is this fractionalization of the rest which prevents you from actually changing the status quo it's very easy for the status quo to persist despite a change in the underlying political conditions simply because the status quo has enough support even amongst the oppressed and i will give you some examples of this but let me give you a quick example just to fix ideas think about what is happening on the in china one of the things that's happening in china is tremendous growth in the coastal areas and you would argue well there's tremendous growth in the country it's spilling over to the rest of the country people should be very happy about this but the chinese authorities are extremely worried about the unequal growth why because they hear it from the people the people are saying especially the people in the interior areas what have we benefited from economic growth we continued farming the same farms but earlier we used to get subsidized education now the price of education has gone up we have to pay fees and the teachers are no longer as good because the good teachers have gone to the coastal areas to work on healthcare we used to have the barefoot doctors we used to have a reasonable healthcare system now the healthcare system is totally broken down and if we can get to see a doctor we have to pay an arm and a leg to get them to actually treat us and again the reason is because the coastal areas are flourishing anybody who's any good at offering medicine has gone to the coastal areas increasing the cost for all of us so what i'm arguing is unequal change unequal development comes from the fact that in part the interior areas are not as suitable for develop for the export-oriented growth that china has in part many of the people in the interior areas are uneducated they're farmers they can't benefit from the growth processes that are taking china forward and as a result they don't benefit as much from the opportunities but the opportunities that others are having starts costing them a fair amount because it comes back through the price of grain through the price of medical care through the price of education and so what you have is in a society which is divided which faces substantial new opportunities there can be substantial dissension about whether in fact we should seize these opportunities now china hasn't slowed down in its growth because still the leadership is is not as ris you know it doesn't listen as much to the democratic public as in a democracy but i can tell you in india these inequalities which are emerging are becoming a big source of concern and are causing a political reaction within the country which can in the future hold back policy reform and essentially hold back growth so the basic point i'm trying to make is it's not democracy itself which is a problem it is the underlying conditions of access of inequality which can work towards reducing growth and i will talk about that and uh that that really is the point i want to make uh with some examples and what follows so uh where where does this inequality come from i think in in major ways the inequality comes from an inequality in endowment people who are differentially educated for example have a different ability to take advantage of the opportunities that come into the economy for example as a caricature in india everybody talks about the software economy about these wonderful indian professionals well that segment of the economy is about 2 million people out of an economy of over one billion people so one fiftieth uh actually one five hundredth of the economy is benefiting from these opportunities and the larger uh part of the indian economy uh still a significant portion is illiterate can't actually read a significant portion is very poorly schooled the very few elite that you see have been schooled in the best you know universities those universities take at most 25 30 000 people this notion that there are millions of engineers waiting to take jobs from the west in india is complete bogus it's it's some it's it's pure utter nonsense when you look at the universities in india the good ones that are on par with the university here you will find at most 35 40 000 students being produced every year it's a drop in the ocean but the rest of the economy doesn't benefit from this kind of growth and there is a reaction coming in a reaction setting in these are the people who pay high grain prices today these are the people who are saying where is all that growth growing we're not getting any of it and so the point i want to make is that when you have these unequal endowments and the voice of this unequal endowment can get expressed through a democratic process it can lead to less of a consensus for growth essentially what i'm talking about is society is divided society is divided because people have different endowments whether it be of land or of education and people who have different endowments see reform very differently what i see depends on where i stand and where i stand is different because i have different endowments and it can be that no reform path commands majority support as a result of which the status quo can continue for some time because there are things that break the status quo that has helped break it in india or broken it in india but by and large the the result of this tremendous inequality is is of a very bad stereoscope uh which can be problematic so i want to give you a very quick example and i want to tell you uh what goes behind the greek letters in an economic model so some of you who've seen economic models from far let me give you a quick verbal model of what i have in mind and you tell me whether it rings true think of a country with just one monopolist firm this is the sole capitalist and he employs everybody else and the the economy has has educated people the educated people can work as managers for this firm or they can work as uh as uh as doctors in the economy and and let's assume that everybody has to go and get get services from this doctor and then there are the uneducated the uneducated poor who can work only as laborers for this firm they don't have other employment of opportunities so essentially we have three groups in this in this country we have the capitalist we have the middle class educated and we have the lower class uneducated and let's assume that each one has one one port and you need two out of three votes to win so this is an imperfect democracy where money matters so the capitalist was a lot of money even though he has only one vote can sway public opinion so he has a fair amount of power but he doesn't have absolute power there's not an autocratic system it's a democracy and you need two out of three votes to actually get uh get consensus on reforms and let's talk about two reforms which seem completely obvious reforms in any country one is to have universal education and let's assume for now that there are no costs usually when you have cost to education you can complain about who will bear the cost and you could get decisions let's assume it's free you just have to press a button and you get universal education and the second is to enhance competition that is instead of there being just one one monopolist in town people can open up their own firms the only stipulation i will make is it requires some education to open firms so if you're uneducated you can't open firms but if you're educated you can go to the bank you can get a loan etc so you know how to open firms if you're educated okay and i'm going to argue that in this kind of setting the status quo is very much a possibility how do i argue this well the details are obviously worked out in the model but the the idea is basically this the middle class uh who can open new firms want more product market competition they want liberalization they love it because they can get you know new jobs opening up entrepreneurial firms uh and and they really benefit from it now the firms that they open up will also employ the uneducated so it's not that they will not get new opportunities but those opportunities are of lesser quality the real good opportunities go to the middle class the monopolist obviously hates this he's the elite he gets competition he doesn't want any more competition doesn't want to open up doesn't want to liberalize now it turns out the poor's view on this depends very much on whether they get access to universal education or they do not if they do get access to education they very much welcome more competition because once educated they can also open up firms as entrepreneurs etc and they're very happy with that okay but if they don't have education they may have a very different view about liberalization because liberalization may create a few jobs for them not very remunerative ones but it substantially can increase their costs why is that because the middle class who was earlier providing them services by for example providing health care services or services as teachers etc now have other opportunities they can have substantially other jobs and so the fees that will they will charge on edu for health healthcare will go up the fees they will charge as teachers go up in a sense this is reflective of what i'm talking about in china that the cost for the rest goes up when opportunities go up and if some segment is not benefiting from the opportunities they're not just indifferent they're actually worse off and they dislike this this this structure so you would argue well isn't the answer obvious shouldn't we give the the lower classes more access to education open up education for them the problem however is the middle class is very resistant to this process the middle class have access to all the nice jobs why would they want more competition for this by getting the lower classes to actually get educated now you might think the capitalist wants the lower classes to get educated because then he gets higher quality labor he has a wider labor pool but he's going to reason as follows if i get the lower classes to become educated they're going to join hands with the middle class and vote for more competition because that's going to be more beneficial for them so essentially what you can get in this kind of structure uh with unequal unequal endowments is status quo now i call this rent preservation uh i call it comparative rent preservation and why do i call it trend preservation after all why do the poorest of the poor have any rents what are they preserving well it turns out in an unequal society where there are limitations on everybody everybody enjoys rents the middle class certainly enjoys some rents because they don't have competition from the laborers who would serve as competition if they could get more education but the lower class also has rents because the middle class has limited opportunities so the lower class gets very cheap medical services and those cheap medical services would go away if the middle class got better opportunities think of cuba today cuba the cost of health care is very very low cubans love their country for the health care they provide they may not like it for other reasons but they love the health care they provide and a lot of people go to cuba to get health services that's because as your age if you're educated you don't have a ton of opportunities in cuba you don't have a free market providing a variety of jobs as lawyers as entrepreneurs etc and that makes medical services very cheap and this is what i'm arguing that as you open up if people don't have an equal ability to take advantage of the opportunities created by reform you could get resistance to reform and again and again across in my view a number of emerging markets you've seen democracy can sometimes lead to paralysis you see it in philippines for example this is not the necessary outcome but it is a possible outcome and what is to prevent this paralysis in my view it's to start out with a condition of broader access to education to health care to variety of other facilities that keeps you more on an even footing makes you see reforms from the same perspective for example in italy my sense is there would be a lot more welcoming of the kinds of reforms that are proposed by the european union if people felt they had an equal chance when those reforms actually happened to take advantage of the fruits of reforms but i think that in the current environment there are very differential abilities to take care of to take advantage of these reforms the people who are older who have a more limited education because they left school in high school they may not be as able to take advantage of the high-tech i.t oriented new economy they may you know be better at working with their hands and be more competed uh out competed by china uh and in that sense be less favorable to a broader opening up than for example the young i.t professional who thinks uh he or she can take on the world so inequality in my in my view uh has tremendous effects i've already given you the chinese example i can give you an indian example again the indian example is uh the right now comes when when the government is trying to take uh take land from farmers for industrial purposes the large farmers are very happy with this land acquisition process because they get a lot of compensation but you have tremendous opposition to this from the unskilled and the landless they're very unhappy because they lose the old jobs they're not qualified for the new ones and in the areas where they used to live with all this development the cost of every service that they used to benefit from is going to go through the roof education healthcare everything because these are now developed areas so essentially their only option is to leave the places where they used to live and go to new places where in fact things will be will be cheaper the right process here of course is to get broader education give people more opportunities so that they can actually take advantage of the of the new economy but again uh there are there are there are difficulties in this and uh and one can talk about that so um basically why do i think countries are poor i'm offering one reason there are obviously many other reasons um i think a number of countries which we see are poor today had substantial inequality stemming from historical past whether it was that was nature of populations when they were colonized whether it was because the technology of production required large plantation economies or hacienda economies where you needed unskilled uh low low education workers to provide the muscle power to produce and therefore the elite wanted to keep it that way by keeping the education levels low or whether it was because of the disease environment which which limited the extent of europeans who went to these countries and created hierarchical societies whatever the reason there were initial inequalities in the population and my sense is these inequalities persisted and supported the policies that entrench the inequality policies on land policies on education policies and finance and it's no surprise that with the advent of democracy nothing much changed because the old structures were the same as they were historically and they essentially pushed for the same things that they had pushed for historically there are some papers which actually established this much more definitely one is by abhijit banerjee and lakshmir who look at the structure of land holdings in india and they show that places that were historically had very concentrated land holdings because of the way the the land settlement occurred at that time are places where you had very little investment in social goods in public goods like education and which are now the states which are relatively backward in india which haven't grown as much similarly with a with a colleague from the former colleague from the imf we've done a study in in the united states looking across a number of states uh looking at land concentration in the united states in in the early part of the 20th century there was a time when rural areas were very very important and the rural vote was important and we find that areas that were more concentrated in terms of land holdings typically tended to have far fewer banks and the effect of this kind uh on financial structure and the argument there is landlords preferred it that way because by limiting the access of their tenants to finance they could squeeze them on other margins including for example the goods that they bought from the local shop which is often controlled by the landlord himself there is evidence of the sort that we unearth but we also show that this had persistent effects that into the late 20th century the effects of the land holdings and their negative effect on bank banking patterns affected growth in manufacturing right till the late 20th century and what broke this was really a change in technology not a change in the uh the political structures in that in in that area and what do i mean by technology the information technology revolution made it much harder for a particular area to control the financial services as people had access to by controlling the number of banks in that area because you could now bank across state it became much more feasible and you can date the kind of breakdown of the old structures to the development of technology and the reforms as a result um so that's uh let me uh how much uh maybe five minutes to conclude uh let me let me talk about what the uh what the implications of this kind of thing are uh it's basically saying that a lot of people including uh you know organizations like uh like mine uh in the past the international monetary fund or or the world bank used to think that reforms were just a matter of selling the ideas to the people you go to a poor country and you say this is what you're doing badly and here's how you do it properly and then it was a question of you know those guys basically enacting it but we always heard back from the countries that this is politically difficult that it was not possible that if they did implement it people wouldn't follow through and it it wasn't something that was fully internalized by the multilateral financial institutions because they said well you know it seems seems obvious that this is going to increase growth in welfare why don't you do it and their problems you know there'll be some surplus left over to redistribute to those who've been made worse off well that redistribution never gets done and so it's very hard to get consensus within a number of these countries for reform parts and a lot of it gets timed even before it starts it it gets blocked and i think the reasons are precisely that even for obvious reforms uh not everyone is better off and a substantial number of people in fact can be worse off especially those who don't have access which typically in some of these countries are the majority of the people so even if they were democratic i think precisely because they're democratic in some countries the politicians that the multilateral institutions talk to hear the voice of the people and therefore are reluctant to actually to actually espouse these reforms so broadly speaking what we would argue for is you also need to fix the other elements in society you need to spread the endowments more widely spread access to education to higher quality education spread access to health care spread access to governance you need to do all those things in order to get more consensus and reforms that has to be part and possible of course the problems in doing that are not are not inconsequential there are investment interest groups that benefit from the way things are and will also get hurt if you spread access so ultimately it comes down to why do reforms take place in my view a lot of it is either because people haven't noticed that these reforms could eventually have the effect they have or because you have by by luck the right sort of political coalition at the right place or sometimes simply because the outside world in a sense makes it attractive to form breaks the uh the uh the status quo uh i think one of the reasons the world economy has has expanded so much and reforms have been substantial in the last 35 years is because we've had the outside world expand for a number of countries making it attractive for them to undertake reforms within their own country so the whole point of this book that i wrote saving capitalism from the calculus was to argue that that in a sense what made the capitalists go to support reforms rather than protect their own turf and protect the size of the pie that they had was that the outside world created tremendous opportunities over the last 35 years which made it attractive for them to reform and i think that's been one important reason why a number of countries have have reformed um i will in the interest of of time skip over some issues let me just just add that it seems to me a large part of the asian miracle and why the asian miracle has not been replicated in latin america has to do with the fact that some of the asian countries that worked very well taiwan korea japan focused very early on in endowment enhancing reforms land reform and education reforms and that created the underlying conditions for reform to have support as they went through similarly china in my view has had the benefit of having fairly widespread education to begin with which has allowed a lot more support for reform and i think their concerns now as these inequalities increase is very much well placed because it could act eventually uh to uh to to suppress reforms so the bottom line uh i think i want to argue are um you know reforms are difficult and some people argue that economists don't even know what reforms to undertake uh bill easterly is is a prominent supporter of this view i'm not so pessimistic i think economists actually do know something and we have some ability to say what what makes sense but the reforms that make sense may not have broad political support because they will leave some segments worse off and it's very hard for many societies to undertake the kind of bargains that are necessary to convince the people who are going to be made worse off that this is not a permanent state of affairs and as a result there is opposition and often democracy becomes the way this opposition gets expressed it's not democracy itself is a problem democracy sometimes can be the solution but i'm arguing that democracy is in a sense not an answer to all this by itself it needs the underlying conditions in society and improving access is often an important part of how you improve the underlying conditions synthetic well thank you very much when i introduced the subjects the old japan i forgot to tell people what to do i've been a professor at the university of chicago you have been economic advisor and uh director at the uh international monetary fund so this is it so oh no we would like to entertain some questions and are there any questions from the floor i am a student of economics and i wanted to know about how would you finance um those equalizing reforms in countries that are poor i guess those are costly reforms thank you um it's a it's a it's a very good question uh i actually i'm not sure i agree with the idea that they're particularly costly given the benefits uh for example education uh i can see from my my own country india that the biggest uh biggest uh sort of barrier to widespread education is really the power of vested interest uh on the primary education side it's the government teachers and uh interestingly this is something that is uh that is quite uh quite universal the problem there is that many of these teachers essentially have two or three jobs uh the um the attendance rate in schools for these government teachers is approximately 50 on any day you go and show up at the school 50 percent of the teachers are actually teaching i i actually i take that back 50 of the teachers are actually there of the 50 percent who are actually there uh it turns out that only 50 of the time they're actually teaching the rest of the time they're doing something else so it's a very pathetic state uh of affairs and comes from the fact that these are very powerful uh uh groups that uh you know as one politician tells me these are the guys who man the election boots uh during the election and as a result you don't want to cross them uh but but but i think the the the point really is that you have private school teachers who are paid one-fourth the rate that these public school teachers are paid and uh you know always uh are showing up much more frequently people are hungry for an education and they're willing to pay the private school rates uh even though they're very poor because they feel in that process they can get the kids out of out of out of poverty but it is a travesty that in a poor country so much is spent by the government on trying to ensure public education but the public education system doesn't respond this is not to say that there's a blanket indictment of public education public education systems in some other countries work very well but it is to say that in india the problem doesn't seem to be money it seems to be trying to get the system to provide what it's supposed to provide okay so in that sense i don't think capital is really the problem in fact i'm uh i've sort of moved to a somewhat extreme view on the role of capital in development to my mind with the right policies with the right structures uh you will always find capital the problem is you don't have the right policies you don't have the right structures therefore capital is not available and we when we try and thrust capital down people's throat when you have the wrong policies the wrong structures you make things worse uh that's to some extent my view of the whole aid debate also that uh that aid uh you know hasn't proven if you look across countries hasn't proven particularly useful and my sense is because uh the the real problem is you don't make the adjustments in those countries uh commensurate with utilizing the capital appropriately surprisingly thank you one thing which is interesting is that sometimes those vested interests you are discussing that as you are you argue they are coming from essentially an unequal and that distribution or endowment of resources at the beginning somehow historically sometimes they also develop through ways of creating some more equality i'm thinking for example the vested interest of the unions of the you know labor systems that you have in the in the west and the industrialized world that are more and more affected by the new waves of globalization and the insecurity that this is creating you know so in a way what we're looking at is is a process of transition of institutions and sometimes these institutions have had the role of you know spreading the endowments and essentially distributing wealth in the growth process to several parts of the society and these very parts that have been endowed by these distributions or benefited from these redistributions now somehow are against further you know redistribution so that's i think it's an interest even you can read also if you want the transition from the from the planned economies into market economies you can read it this way i mean the in a way you know the all the communist waves was a way of redistributing resources in principle you know and essentially created the vested interest that prevented then the the entry of market forces again or something like that so it's really what creates this in unique unequal endowment or these endowments that prevent reforms can be can come from very different patterns in a way i i think that's that's absolutely right that the uh and in a sense i want i want to take you further i want to uh ask uh you know you you hinted at something which which i think may actually be uh which is an initial force for redistribution uh can actually be a good force where if you can remove the vested interest that that sort of uh you know focus only on redistribution why is vietnam such a capitalist economy nowadays i mean yes there's a communist party in charge etc but if you walk the streets of hanoi everybody's a capitalist and everybody says vietnam is the new china well china was the old china and you look at the countries of eastern europe how they have taken uh to a market economy even though they've had the institutions of communism for 30 40 years overnight they can vanish so unleashing that pressure uh or taking away those those constraints can be very useful if you've got a relatively equal society but of course those things can come back i think one of the big problems in in russia is the uh is the fact that so much wealth uh is uh is concentrated in a few hands but not just that it's that it's perceived as having come about illegitimately which then gives the oligarchs very very little political power to support property rights because their own property is suspect similarly you mentioned the idea of unions well unions can be a very strong force and were a very strong force towards broader education better education better health care and so on and they can be a very good force but of course when you get inequalities as emerge over time they can be a reactionary force also so you're absolutely right i've taken for granted the inequalities but where the inequalities come from very important and how do you reduce them sometimes the forces that reduced inequality in the past can be forces that prevent it from reducing in the future uh gentlemen here just five minutes for two big questions but you know just to ask you if you think about the italian case which is very interesting because as you know italian economy is so called dual economy north and south and in this case i think i was just thinking about this when you were speaking the indian case and so on i think that there is no demo that we have many troubles in democracy because of this inequality inequality the big one is north and south of italy and this is really impairing the democracy democratic process for instance the middle class or south italy doesn't really want reforms because they will lose you know they they we say clients so really they they don't really agree in this process of reforms well this is a big question not to speak about in a few minutes but another another question i don't know if you in your book considered about the role of religion in this process because you know max weber studied about hinduism in confucianism and buddhism compared as far as they were concerned with economic development i mean it's a very very important factor yes the question is too long so we'll let our speaker answer extremely good questions i mean north and south of italy well uh i wish my friend luigi zingales was here to respond he has strong views on this i mean i don't know enough italian history i do know that at some point the normans were responsible for setting up large feudal estates in the south and whether it's the same story that the large feudal estates created a different culture so to speak economic culture from the north is is is an important question but you're absolutely right that that division creates very different attitudes towards the reform process because people benefit very differently and it's no good to say well the pie is bigger we can make you transfers because the transfer is not going to take place plus who wants handouts why does the south always want handouts from the north it's not going to accept that so really it seems to me that if this were the case and again i plead ignorance of of italian conditions in history if this were the case the real answer will be to upgrade the institutions in southern italy so that it can actually benefit from the reform process but that's going to be much harder than just saying it it's it's extremely difficult and and and you know you're fighting against history so to speak that said i i i am very resistant to the notion that culture uh is uh is is unchangeable and you know uh i remember a book milton friedman's book on free to choose which has a a piece a sentence there about this uh this american who went to japan and basically has the comment that this is in the late 19th century before the tremendous change and says the japanese are lazy people and because they're lazy are unlikely to achieve much you can find the same comment made about the south koreans and nobody today would say the south koreans are lazy i'm sure you'll find the same comment made about indians in fact one of the i think that a lot of similarity uh on on some dimensions with the caricature of indians and caricatures of italians maybe that's why i like italian so much uh but the the the idea sometimes is that indians are very reluctant to be on time there's something called indian standard time which is two hours after every event is supposed to start that's when the indian shows up uh that's changing that's changed overnight in bombay today i mean i go ten minutes late for a meeting in bombay and i feel apologetic and people on the other side expect me to be apologetic because they started on time so the culture is changing and i'm sure the culture in the north has changed when the economic need has changed so to that extent i believe that when the economic structures change in southern italy they will in fact prompt the need for quote-unquote cultural change and so i don't think that's irredeemable which then leads to my your question on religion uh i mean again i i mean i i am resistant to the idea that that there is a protestant ethic to my mind uh you know no religion says uh even hinduism doesn't say be fatalistic don't do anything there are versions of hinduism which basically says you have the duty to work very hard and you know part of your your duty is to fulfill your role in society so i think to some extent religions also change as and when uh or maybe not the underlying philosophy but how it's interpreted changes as the economic environment changes so i i don't think there's there's permanence uh in these cultural and religious concerns yeah good evening i would just like to have your comment on the term democracy i think democracy is not really free what do you think is it more controlled democracy because of all the institutions that come and the bureaucratization also of democracy i just want to have your comment on this that's a deep question is democracy free um i mean if you mean is everybody's vote equal i don't think it is for sure uh some people have far more influence and rightly so some people are intellectual leaders and can can influence a lot of people some people are rabble browsers uh in the united states you have some people on tv who essentially can command a huge audience uh and can say simply awful things but get a lot of people to believe them so you know ideas matter uh even wrong ideas and uh and um money matters uh and more money better i mean uh part of obama's success is he's raised more money much more money than hillary and probably will raise much more money than mccain so now i i think these things matter uh the the real question is are we getting something which is totally against the wishes of the people and i think with with the moderate uh i i i think democracy the one share one vote can tolerate a fair amount of uh of problems like this and still produce an outcome which broadly represents the views of the people so in that sense uh i think many democracies are quite free so let me let me leave it at that point indeed you can ask questions in italian for we have a translation service you talk about land and human capital but how about the liquidity constraints a lot of people cannot go to don't go to school because they cannot afford it so you talk about human capital and land and the consequences government reforms but how about the financial sector do they play a role in this inequality um i think it does uh actually my list of uh broadening access included finance if i didn't say that sorry yeah i think finance education healthcare and also a safety net for old age i think those are important factors uh in in promoting a better uh better growth and better attitudes towards growth um one of the uh one of the big problems in the united states right now is the perception that even the middle class is being uh shut out of of good quality higher education that the cost of college has gone up so much that a middle class family cannot afford it and the reaction to that in the united states has been that a number of schools with large endowments have announced that they won't charge fees of people even with incomes that that are middle class so you know typically they used to say go get finance everybody can get access to finance in the united states should not be a problem but increasingly even that is is being questioned and they are actually reducing fees some of these ivy league schools princeton for example you get admission or harvard you get admission that should be enough to pay your way through college my question is about your the model you described before and what about all the other benefits for for poor people that not depends on the their access to extraction i mean low prices for the goods produced by the ex-monopolist and more more goods produced and so they can also choose the quality and so on um that's that's a very good point that's that's in the model that uh there are benefits from the reforms and the real question is when do the benefits get outweighed by the costs the benefits as you point out are cheaper goods being produced now that the inefficient monopolist no longer controls everything more variety if you will a whole lot of other other things like that and the basic idea of the model is to provide conditions under which the costs outweigh the benefits and typically that happens when this other's good which is inelastically supplied is produced very inefficiently and therefore the price for that goes up a lot when you have reforms and typically i have in mind non-traded goods where the world market cannot provide and so local goods such as you know medical care education so i prefer to speak italian i have a non-technical question do you think uh it uh would be necessary and also mandatory for people like you to try and get in touch with other persons uh like you to try and give an example for the first time in this history of people who through their own knowledge uh are willing to do good and to give back uh trust in persons or two persons who are much more knowledgeable than the man in the street so that the man in the street can perceive that people like you can find solutions even uh technical solutions which are generally difficult to find so that would be like what used to be in the past the role of intellectuals from many different disciplines which were spontaneously formed in europe and maybe also in your country uh today we really need that uh many uh brains to join forces uh in order to do the command but good that uh would be uh advisable uh um to uh translate into uh practice uh the the the knowledge that you have acquired through your efforts um so that you can show the citizens that you are not confined in academic circles again very good point i mean that's precisely what conferences like this are for and i would hope uh that's what somebody like paul krugman writes books for that the real idea is to translate what what we what we do in in papers that nobody reads uh to the larger public and say look here are ways that we can possibly think of of ways forward i really think it's very important for economists to communicate with the wider public i think that should be one of their important roles and i think part of the the real problem is that most solutions in economics are difficult and as soon as you say on the one hand on the other you've lost most of the public and that leaves the territory for politicians who can just forget about saying on the one hand on the other and offer simplistic solutions which often are not right so what we need is a public also that is more tolerant of the debate and we need economists to go a little beyond what they can prove in their in their classroom and in on the blackboard and say well i need to go beyond this to convince people and i'm willing to take a stance on this which may not be perfectly supported by the data as yet i know it's not wrong i think it's right but i haven't proven it and it may be very hard to prove but because i'm talking with the public and because it can affect public policy i'm willing to go beyond i think there are very few economists who feel comfortable doing that uh and i think we need more people who can say here's where the uh the sort of level of knowledge lies but it's not enough to answer the question that you've asked me and the question or the policy question requires a leap but i'm willing to make that leap based on my broad understanding often we don't make that leap we stay and because we're not willing to make that leap we stay in the in in our in us in our study in in the ivory tower but increasingly i'm hopeful that more people will make that leap and inform the policy debate and i think you're absolutely right we should be part of that debate yammer sorry there is another question now everything right now there are no other questions so thank you very much thank you very much rajan thank you and goodbye