The lack of mobility hinders the India story
How to facilitate mobility, where your birth doesn’t determine your education and occupation, is India’s core economic challengeUpdated: Oct 09, 2020, 18:10 IST
There has been a lot of discussion in the public domain lately about dynasties and nepotism in fields ranging from the film world to politics. Let’s look at nepotism. What is wrong with people going into a family business or following the family tradition into professions such as medicine, acting, or politics?
The obvious answer is that this gives the person an unfair advantage because those with similar abilities and who have put in as much effort could have very different outcomes, depending on their background. One could argue that while this is true, those who get an opportunity through family ties still have to perform well. So, from a broader perspective, isn’t there a zero-sum aspect to this? One person getting a favour deprives another person, but the total gains and losses cancel out, don’t they? This is not true.
Nepotism imposes not just individual costs but wider social and economic costs. Those with family connections don’t face the same level of competition as outsiders, exactly as domestic companies face much less competition when there are import barriers. Breaking in is much harder for an outsider than it is for an insider as the pool of outsiders is much wider and those who have the talent may never get the opportunity to showcase it. Therefore, there is a loss of potential output or value to society because of the resulting misallocation of talent.
That is a direct negative effect. There is comprehensive evidence that family firms are often beset by inefficiency, with bad management affecting the productivity of the entire organisation. There are further indirect negative effects of nepotism on efficiency. If it is known that rewards depend on connections and not on effort and initiative, it would divert people’s efforts away from productive work to networking and lobbying.
So, how does nepotism persist? Why aren’t there some corrective forces at work that would chip away at the inefficiencies and let talent blossom? Standard economic logic would imply that market competition would push out bad products and bad performers. After all, talent is a resource and if it is inefficiently deployed, it should be in someone’s interest to exploit a market opportunity — exactly as we would expect land that could be prized real estate not to remain unused. There are two main reasons why this may not happen.
First, there are often explicit barriers to competition. This gives incumbent groups monopoly power and enables inefficient practices such as nepotism to flourish. Examples of such entry barriers include economic institutions such as monopolies, syndicates and cartels; social institutions such as the caste system and patriarchy; and policies that prevent the inflow of workers, goods and services from outside, such as anti-immigration laws and protectionism. Here, potential competitors are explicitly excluded and, therefore, insiders get undue advantage because of restricted competition. However, the losses of outsiders and the gains of insiders do not cancel each other out. Because of restricted competition, there is a loss to society from lack of access to the best technologies, products, skills and services.
Second, a less open and subtle channel of nepotism has to do with the fact that in certain domains, it is not easy to come up with an objective measure of quality. It is hard for a bad mobile phone to survive in the market or a mediocre sportsperson to survive international competition. The ordinary consumer can separate the good from the bad and the marketplace would tend to weed out the bad. But for many professions, quality or performance is not that visible or cannot be readily and independently verified. In the case of research, for example, evaluation of quality is based on peer-review. By their very nature, these opinions are based on information and judgement that outsiders cannot hold up to scrutiny. Therefore, to the extent the opinions of experts, referrals, reputation, endorsements, and networks are necessary to certify quality in any field, they become a potential breeding ground for nepotism.
Of course, nepotism is just one of the symptoms of a much of broader issue — the lack of mobility. In a mobile society, where family background does not determine what occupation someone enters or where one is located — a lot of the kind of conflicts (pro-farmer vs pro-business, pro-worker vs pro-industry) we see around us would be less relevant. Even though average levels of income and educational outcomes have improved following economic liberalisation, mobility remains low overall, whether in occupation or educational attainment.
How to facilitate mobility is the real challenge, not the stale debate about redistribution versus growth. Policies that reduce the barriers that the less-advantaged face usually come from the Left, while reforms that facilitate greater competition are advocated by the Right. These are, in fact, complementary as far as mobility is concerned: The greater the competition in product and labour markets, the higher the demand for talent and skills, and policies helping the disadvantaged but meritorious acquire necessary skills and training will push up supply.
How to design such policies and whether we will have the political will and the State capacity to implement them, as always, are the main challenges.