What does a good market need?

To actually work well, a market must have:

Openness

• Anyone with better products should be able to enter.
• Can't let only old players (elites) control everything.

Institutional Support

• Contracts must be respected.
• Rules need to prevent cheating.

Civic Norms

• People must treat strangers & friends the same in business.
• No "I know him, so I'll give a better deal" logic.

How does it all connect?

Openness

↓

Institutions → Rules enforced

↓

Civic norms → Trust & fairness

↓

Healthy Markets

How does it all start?

To kickstart market development, we usually need:

Two Big Conditions:

1. Incentives to Break the Status Quo
   • Elites don't give up easily.
   • People need strong reasons ($$$, opportunity) to challenge them.
2. Mass Formalization
   • Set routines & rules for everyone.
   • Keep records. Be transparent.
   • Treat every customer the same — not just people you know.

Uber Example

• You book, it's recorded, driver is rated, ride is tracked.
• Everyone behaves well → system works.
• Old-school taxis had no such checks → got disrupted.

Other Examples:

• Travel bookings (IRL agents - apps)
• Shopping (local shopkeepers - e-commerce)

Why doesn't this happen everywhere?

Even if it sounds easy, many places still struggle. Here's why:

• Elites resist being disrupted
• Institutions are weak or corrupt
• Civic norms take years to build
• Formal systems aren't widespread yet
• People don't always have strong incentives

Why Some Markets Just Don't Take Off:

Why is economical development not uniform in all regions ?

Recap - What is Hockey Stick Growth?

• Sudden, sharp rise in economic development
• First seen in England, then: → Western Europe → North America → East Asia → Now: China & India → Hopefully Africa in the future

Problem #1: Uneven Development

Even within regions, we see gaps:

So... despite having similar "ingredients" (like openness, institutions, civic norms), not all areas develop the same way.

Friction Points – What's stopping growth?

• Elites may block change
• Institutions may stay weak
• Civic norms take years to build
• Some regions lack the push or pull to grow

Problem #2: Growth ≠ Forever

Even when growth starts, it may not last.

Example:

• Russia (Soviet Union) grew fast initially
• But growth slowed & then stagnated

India's Case

• 6%... 7%... 8%... even 10% growth
• BUT it's not guaranteed to continue
• We can't take it for granted "Just because Bangalore is growing now... doesn't mean it will become New York tomorrow."

Sustained Effort is KEY

To keep markets & cities thriving, we need:

• Long-term planning
• Support from govt, business, & citizens
• Environment that attracts: → Entrepreneurs → Investors → Skilled Workers

Growth Isn't Automatic:

What steps can be taken to ensure market development ?

What do markets need?

1. Strong Incentives → To disrupt traditional elites → So new players can enter the game
2. Formalization → To ensure fair, open, rule-based systems → So transactions can happen between strangers safely

Garden Analogy

Problem: New Elites = New Weeds

• Even after old elites are removed... → New elites might take over → They gatekeep markets and monopolize opportunities → This chokes innovation and openness So, just like a garden... Markets require regular cleaning + care

Joel Mokyr's Insight:

"Progress is not natural." It needs sustained, deliberate effort.

Historical Reminder:

• Until 1500, most regions saw similar levels of economic growth
• Growth started to vary afterwards
• BUT — market progress is not one-directional

Development is NOT a Straight Line

Example: Kolkata Once: A major financial & commercial hub Now: Lost much of its economic vibrancy

Why do Setbacks Happen?

• Brokers / Elites hijack market access
• Profit gets captured by a few, leaving little for others
• Markets lose their openness & vibrancy

What's the Fix?

We need:

• Sustained, long-term effort
• By multiple stakeholders → Government → Entrepreneurs → Institutions → Citizens

Aren't elites always dominating in capitalist market?

When we talk about markets, we are essentially talking about capitalism. However, there is a complicated relationship between capitalism as a system and the capitalists who dominate it. Imagine two different roles:

• A market planner who wants to ensure open, free, and healthy markets.
• A business manager who wants to maximize profits for their firm. Both are part of the market, but their incentives are not aligned.

Two Opposing Objectives:

• Market planners aim to:
  • Keep markets open.
  • Encourage competition.
  • Allow newcomers and outsiders to challenge incumbents.
• Businesses and firms aim to:
  • Reduce competition to protect market share.
  • Increase profits by building barriers to entry.
  • Maintain dominance in the market. This creates a fundamental tension between those who want more competition and those who benefit from less of it.

The Risk of Market Capture

If left unchecked, powerful firms can slowly dominate a market, reduce competitiveness, and turn open markets into closed ones. Over time, this leads to fewer players, higher prices, and less innovation. This is why market development must be actively managed—it is not something that continues on its own once started. The idea that markets self-sustain without intervention is misleading.

Insights from Economists

Economists Raghuram Rajan and Luigi Zingales capture this conflict by stating that we must:

"Save capitalism from the capitalists." They argue that while capitalists benefit from capitalism, they can also work to shut down competition once they dominate a market.

Historical Evidence

• In 16th-century Northwestern Europe, real market capitalism only emerged after powerful merchant guilds were dismantled.
• The destruction of such elite groups allowed new entrants and innovators to participate in the market, fueling genuine competition and progress.

Which policies are adopted for the efficiency of business and market?

While business development and market development might seem similar, their goals are actually quite different. Businesses typically aim to maximize profits, whereas the goal for market development is to increase competition, transparency, and fairness. This creates a tension between what benefits businesses and what benefits the market at large.

Two Types of Policies

1. Pro-Business Policies

• Focus: Supporting existing businesses
• Make current companies more profitable
• May allow more freedom with less regulation
• Often reduce oversight (can lead to pollution or opacity)
• Might limit competition (protect incumbents)
• Useful when:
  • Supporting infant industries that need protection (e.g., Indian EV startups)
  • Trying to attract or stabilize big businesses
  • Encouraging domestic champions

2. Pro-Market Policies

• Focus: Making the entire market healthier and more competitive
• Increase transparency
• Attract new players and startups
• Reduce entry barriers and transaction costs
• Lower negative externalities (like pollution, monopolies)
• Useful when:
  • You want long-term efficiency and innovation
  • You aim for fairness and customer welfare
  • Building open, resilient markets

So, What Works Best?

• For long-term market efficiency → Pro-Market policies are essential
• For short-term business support, especially in early-stage sectors → Pro-Business policies may be needed

When does government choose pro market policies ?

Role of Government and Non-Market Actors in Market Development

• Government and Business Influence: Governments often favor incumbent businesses due to political funding, making it difficult to adopt Pro-Market policies that encourage competition.
• Pro-Business vs. Pro-Market Policies: Pro-Business policies prioritize incumbent businesses, while Pro-Market policies aim to increase competition and market transparency. The former may hinder market growth and efficiency.
• Crony Capitalism: Close ties between businesses and politicians can protect elites, making it hard to disrupt monopolies and foster innovation.
• Encouraging Competition: Governments adopt Pro-Market policies to increase competition, making it easier for new businesses to enter and challenge incumbents.
• Market Transparency: These policies aim to boost transparency, ensuring consumers have more information to make informed choices.
• Reducing Negative Externalities: Pro-Market policies help reduce harm like pollution and unethical practices by holding businesses accountable.
• Protecting Consumer Interests: When consumer welfare is prioritized, governments choose policies that limit the power of incumbent businesses and ensure fairness.
• Supporting Emerging Industries: In some cases, governments protect infant industries while encouraging market growth and innovation through Pro-Market policies.

Can you elaborate on the role of media in market development ?

Role of Media in Society:

• Informing the Public: Media's primary role is to inform the public about events, issues, and developments in society.
• Uncovering Facts: Journalistic practices help uncover facts and expose malpractices. Without a functioning media, many issues might remain hidden.
  • Example: Bhopal Gas Tragedy
    • If media had been more developed at the time, it could have exposed the unsafe conditions in chemical factories, potentially preventing the Bhopal Gas Tragedy.
• Impact of Underdeveloped Media: Both the Chernobyl disaster and Bhopal Gas Tragedy occurred in economies with underdeveloped media, highlighting its importance in preventing disasters.

Importance of Media in Business and Governance:

• Business Accountability:
  • Exposing Malpractices: Media plays a crucial role in revealing business malpractices such as food adulteration or environmental pollution.
  • Promoting Responsibility: When media is active, businesses tend to be more responsible, as they are held accountable for their actions.
• Political Accountability:
  • Checks and Balances: Media also ensures politicians remain accountable, especially those with close ties to businesses.
• Consumer Awareness:
  • Customer Discontent: Media can expose dissatisfaction among customers, leading to businesses improving their services or products.
  • Opening Markets: Media exposure may allow outsider companies to enter markets, creating competition and innovation.

Media's Role in Business and Society

Introduction to Institutions, Culture and Technology

• Evolution of Business:
  • Initially, businesses were relationship-based, power-based, and socially embedded.
  • Over time, they became more formal, contract-based, and market-oriented.
• Market Development Needs Nurturing:
  • Markets don't develop spontaneously.
  • They require systematic support and nurturing, like a gardener cultivates a garden.
  • Crony capitalism and powerful incumbent groups often hinder true market development.
• Objective of the Current Session:
  • To summarize the systematic factors that drive economic and market development.
  • Integrate and organize the fragmented discussions from previous weeks.
  • Understand these factors to apply them in developing economies like India.

What kind of institutions regulate the functioning of business ?

Formal Institutions?

• Examples: Courts, governments, legal systems.
• These are official structures that guide behavior and decisions in a society.
• They help in creating trust, reducing uncertainty, and protecting rights.

---

Why Formal Institutions Matter:

1. Constrained Executive Power

• Governments should not have unchecked power.
• Even courts and legislatures sometimes fail to check the executive.
• A "constrained executive" means the government follows rules and guidelines.
• This ensures policy certainty, which businesses need to plan and invest confidently.

2. Protection of Property Rights

• Businesses must feel secure in owning and using their assets.
• If property can be taken away suddenly, businesses will be afraid to grow or invest.
• Strong protection of property rights leads to faster economic development.

Real-World Example: The Zamindari System in India

• Zamindars (landowners) had huge control over land, often exploiting local farmers.
• Areas with exploitative systems (like Zamindari) show low agricultural and economic growth even today.
• Other research shows that weak or unjust institutions in the past continue to harm local economies.

What is the impact of law on business ?

Beyond Formal Institutions (like courts/governments), the legal system itself plays a big role. This includes how contracts are enforced and whether laws treat everyone fairly.

1. Contractual Infrastructure:

• It's the system that ensures contracts are honored and businesses are protected from fraud.
• A strong legal system supports trust between businesses, especially in case of disputes.

2. Legal Origins Theory:

• Some researchers argue that the type of legal system a country inherits affects its development.
• Two Legal Systems:
  • Common Law (e.g., India, USA):
    • Based on court decisions and legal precedents.
    • More flexible and responsive.
    • Better protection for small investors.
    • Encourages capital accumulation and business growth.
  • Civil Law (e.g., France, Germany):
    • Based on codified laws written by legislatures.
    • Courts cannot easily reinterpret laws.
    • Can become more bureaucratic, which slows business activity.
• Note: This is a debated topic—some support this view, others oppose it.

3. Danger of Particularistic Laws:

• When laws favor a select group (certain businesses or elites), they:
  • Reduce fair competition.
  • Discourage investments from outsiders.
  • Create an unfriendly business environment.
• What's Needed?
  • Generalized laws: Apply equally to all businesses.
  • Impartial legal systems: Laws should not discriminate or benefit just a few.

4. Case Study: China

• Despite being autocratic and having weak formal institutions, China has:
  • Stronger legal institutions (laws applied more uniformly).
  • Trusted courts by businesses.
• This has helped create a friendly environment for business, enabling rapid economic growth.

Were there any areas where informal institution prevailed for business ?

What are Informal Institutions?

• Informal institutions are unwritten rules, cultural norms, and social structures.
• Unlike courts or governments (formal institutions), these include:
  • Caste
  • Clans
  • Guilds
  • Ethnic customs
  • Local traditions

Why Informal Institutions Matter:

• In many developing countries (like parts of Africa or rural India), formal institutions are weak or inaccessible.
• Informal institutions fill the gap and influence how business and society function.

Key Observations from Africa:

1. Geographic Proximity to Capital:
   • Areas closer to capital cities → More influence of formal institutions.
   • Areas farther from capital → More reliance on local customs and informal rules.
2. Ethnic Fragmentation:
   • Regions with many conflicting ethnic groups:
     • Less likely to develop economically.
     • High instability, low investment.
   • Investors avoid regions with violence, conflict, or unpredictability.
3. Historical Centralization:
   • Areas that had centralized leadership in history:
     • More likely to have better institutions today.
     • These old structures often evolve into systems that support business.
   • Nomadic or decentralized societies may lack the foundational institutions for market activity.

Does the culture influence business in any way?

Summary of Institutions

1. Formal Institutions

• Examples: Courts, Constitution, Executive, Legislature
• Key Roles:
  • Enforce rules
  • Limit executive power
  • Protect property rights
  • Provide policy stability

2. Legal Institutions & Contractual Infrastructure

• Common Law (e.g., India, US): flexible, investor-friendly
• Civil Law (e.g., France): rigid, codified, bureaucratic
• Generalized Laws > Particularistic Laws
• Ensure contracts are honored
• Trustworthy legal systems enable financial growth.

3. Informal Institutions

• Examples: Caste, Ethnicity, Guilds, Clan Rules
• Role:
  • Fill the gap when formal systems are weak
  • Shape local business practices
  • Can cause conflict or cooperation
• Function stronger in rural or less-governed areas.

4. Culture & Historical Legacy

• Negative Example:
  • Slave trade → generational mistrust → low economic cooperation
• Positive Example:
  • City republics (Italy) → civic culture → higher civic capital
• Impact:
  • Affects trust, civic participation, financial habits
  • History shapes culture, culture shapes economy.

Did the values and beliefs of people also started changing as business evolved?

• Changing Roles: As more women enter the workforce, societal attitudes toward gender roles are also evolving.
• Transmission of Beliefs: Values are typically passed from parents and authority figures, but children's differing experiences can lead to changing norms over time.
• Trust in Strangers: In more cosmopolitan and diverse environments, people begin to trust beyond close-knit relationships, increasing openness and civic capital.
• Impact on Businesses:
  • In high-trust cultures, firms are more likely to delegate authority, leading to:
    • Decentralized structures
    • Greater expansion
    • Faster decision-making
    • More professionalization

What are the other ways in which culture can influence economic market development ?

Cultural Factors That Influence Business:

1. Attitudes Toward Profit & Wealth

• Historically, in many societies, making money or charging interest was considered sinful or morally wrong.
• Northwestern Europe broke away from this mindset early, accepting profit-making as legitimate, helping foster financial growth.
• Similar shifts are now evident in India, where being a businessperson or startup founder is no longer seen negatively.

2. Changing Perceptions in Pop Culture

• Earlier, businesspeople were portrayed as villains in Indian films.
• Today, entrepreneurship is celebrated, encouraging more people to consider starting businesses.

3. Openness to Exploration & Learning

• Cultural openness to discovery, innovation, and learning is crucial.
• Societies that restrict knowledge or exploration tend to limit business potential.
• Historical taboos (e.g., crossing the sea seen as sinful in India) once hindered international trade, but such beliefs have now faded with globalization.

How did technology help in evolving business ?

Positive Impacts of ICT (Information and Communication Technology) on Markets

ICT helps reduce search costs, allowing buyers and sellers to find each other easily, especially in areas where people could not previously interact freely.

• More market creation
• Lower search and transaction costs
• Better access to information
• Efficient matching of supply and demand

Contrary Effects: Centralization of Power

However, ICT can also centralize control instead of decentralizing it. For instance, in industries that require specialized equipment and coordination (like meat packing in the U.S.), ICT helped large businesses gather more control and become more hierarchical.

• Meat Packing Industry:
  • Needed refrigeration, machinery, and logistics
  • Telegraph enabled central command and coordination
  • Result: Centralized, vertically integrated firms

Different Effects of "Information" vs "Communication" Technology

Do transport advancement lead to market integration?

##Railroads

1. decreased trade costs and interregional price gaps;
2. increased interregional and international trade;
3. increased real income levels

Key Benefits of Transport Development

• Reduces isolation between markets
• Connects regions that previously had different prices and rules
• Enables trade and movement of goods
• Leads to uniform prices (market integration)
• Boosts land values near transport routes
• Creates economic opportunities in remote areas

Evidence from Research

• India: Railway development led to grain prices becoming uniform across states → indicator of market integration.
• USA: Railroad expansion increased land value in previously undervalued areas due to better market access.

Why Transportation is a Key Puzzle Piece Alongside:

• Institutions
• ICT (Information & Communication Tech)
• Cultural norms and openness

Transportation helps in:

• Enabling real markets
• Supporting economic development
• Connecting remote and rural regions

Without transportation, true market development cannot happen, no matter how strong the other components are.

Print Capitalism, Media & Nationhood

The idea of nationhood as we understand it today is deeply rooted in the concept of Print Capitalism, a term coined by Benedict Anderson.

Independent Media Growth

• Decline in Production Costs → Printing became cheaper, so media became more accessible.
• Increase in Subscribers & Ad Revenue → More readers meant more ads, making media financially independent.
• Competitive Newspaper Market → Rival newspapers pushed each other to uncover more and serve the public interest.

Muckraking Journalism (1902-1917)

Muckraking refers to a period in early 20th-century U.S. journalism focused on investigative reporting that revealed corruption, especially in business and politics.

• Exposed corruption in industries like oil, meatpacking, banking, etc.
• Focused on truth, accountability, and public welfare
• Influenced politician's voting behavior — studies show politicians from areas with high muckraking newspaper penetration were more likely to vote for regulatory laws.

India and it's economy

Current State of the Indian Economy

• India is experiencing rapid economic growth (avg. 6-8% per year).
• Growth slowed due to COVID-19 and other global disruptions.
• Economists predict India will continue on a high-growth path, similar to China's trajectory.
• Growth will improve per capita income and quality of life.

Historical Economic Geography of India

• Historically, prosperity was widespread across regions:
  • Fertile lands
  • Coastal access
  • Natural protection (Himalayas)
• Cities existed across all regions — north, south, east, and west.
• Around 1900, urban development matched population density (esp. Gangetic Plain).

Post-Independence Regional Divergence

• After 1947, northern cities like Kanpur, Patna, Lucknow began to decline.
• Meanwhile, southern cities like Bangalore & Hyderabad rose in prominence, especially after 1991 liberalization.

Metropolis Vacuum

• A large region in north-central India (covering UP, Bihar, etc.) has:
  • ~50 crore people
  • Few or no metropolitan cities
  • High poverty concentration
• Lack of urban hubs = lack of economic dynamism.

Regional Inequality in India

• Wide economic gap between states:
  • Bihar & UP = lower income, slower development
  • Karnataka & Kerala = more prosperous, faster growth
• Emerging regional imbalance in development and opportunity.

Metropolis Vacuum

Post-Liberalization India: Uneven Gains

• Liberalization (1991) opened the Indian economy to global markets.
• Some regions capitalized better than others:
  • Bangalore thrived (e.g., Infosys, tech boom).
  • Attracted foreign capital, created jobs, and boosted services exports.

Missed Opportunities in the Hindi Heartland

• States like Bihar, Uttar Pradesh, Madhya Pradesh saw limited benefits.
• Possible reasons:
  • Lack of ports for global trade.
  • Higher political uncertainty.
  • Poor infrastructure and fewer industries.
• Result: Economic stagnation despite population density.

Talent Drain & Capital Flight

• Educated individuals and skilled workers migrate to better-developed states.
• Migration triggers:
  • Search for jobs and better opportunities.
  • Lack of industrial and institutional pull in home states.
• Consequences:
  • Loss of human capital.
  • Investors move money to more promising regions.
  • Even top institutions (like BHU) lose appeal and effectiveness.

Vicious vs Virtuous Cycles

• GDP alone doesn't capture regional realities.
• FDI and stock markets don't reflect grassroots development.
• Must look at:
  • Education access & quality
  • Institutional strength
  • Migration patterns
  • Social indicators like female literacy and dropout rates

Addressing issues of Hindi heartland

Cities as Markets

• Cities = Natural Markets
  • People meet, exchange goods/services.
  • Secure, easy-to-navigate cities = better markets.
• Urban development = Market development.

Challenge in the Hindi Heartland

• Lacks economic hubs (metropolises).
• Brain drain: educated and unskilled people migrate out.
• Cycle of backwardness:
  • Talent leaves → Capital leaves → Institutions weaken → Growth stalls.

How to Build Market Clusters in the Hindi Belt

1. Strong Institutions

• Certainty, law & order, and effective governance.
• Problem: Hindi Heartland has fewer police per capita.
• Fix: Rule-based order, streamlined regulations, efficient judiciary.
• Examples:
  • Better policing (not political).
  • Street lights = safer cities, especially for women.
  • One-stop portals for permits, contracts.

2. Infrastructure for Low-Friction Transactions

• Transport + Communication Tech = Key
• Needs:
  • Faster railways,
  • Better highways,
  • Upgraded local transport,
  • Reliable electricity.
• Internet access & UPI = (good progress)
• Physical movement & digital connection = frictionless trade.

3. Civic Culture & Trust

• Trust = Growth
  • Citizens must trust institutions (e.g., police, judiciary).
• Two types of identity:
  • Divisive: caste, religion-based (common in Hindi states).
  • Bridging: local/city/regional identity (e.g., "We are Tamils").
• Example: Tamil Nadu built a strong Tamil identity → solidarity → progress.

Endogenous growth theory & Autonomy and Governance

Why Economic Clusters Matter

• Growth in South India = Cities like Bangalore, Hyderabad.
  • They attracted global companies due to better infrastructure and planning.
• Hindi Heartland?
  • Still lags behind. Need to create economic clusters here too!

Pearl River Delta – A Case Study from China

• 1970s: almost uninhabited.
• Today: $2 Trillion GDP (Almost = entire Indian economy!)
• Why it succeeded?
  • High regional autonomy:
    • Local tax + investment policies
    • Minimal interference from central government
    • Region could attract talent & capital freely.

Back to India: What's Our Version?

NCR – A Cluster Model That Works

• Delhi + Noida (UP) + Gurgaon (Haryana)
• Metro rails connect across cities!
• Coordination across states = better planning + shared growth.
• catch: Investment often comes because of Delhi NCR, not UP or Haryana specifically.

Economic Clusters Alone Aren't Enough

Building roads, bridges, and giving cities autonomy is not sufficient. Without investment in health, education, and skills, clusters won't last or succeed long-term.

Two Pillars of Sustainable Growth

1. Physical Infrastructure
   • Roads, SEZs, Tax Policies, Autonomy
   • = Bring businesses and investors.
2. Human Capital
   • Health, Education, Training, Skilling
   • = Brings productive, skilled workers.

Both must grow together — like two wheels of a cycle!

What Happens If Only One Side Works?

So: We must build bridges and Anganwadis — both!

Real-World Success Stories

South India (Tamil Nadu, Karnataka, Andhra)

• Invested in urban clusters + people's development
• Outcome: Educated citizens, urban jobs, high productivity

Bangladesh

• Focused on women's education, health, credit access
• Empowered women → Built a thriving textile industry

Big Idea: Capitalism and Public Investment

It's not about: "Capitalism vs. Socialism"

It's about reality:

• Create business-friendly environments
• Provide public services like health & education