Delegation and Decentralization: Reform Ideas for Bihar’s Economic Transformation

Abstract

This article proposes reform ideas for Bihar using advances in economics research on the role of institutions in economic development. Institutions—the formal and informal rules of the ‘game’ of how people interact in society—are fundamental determinants of economic activity and entrepreneurship. Historical institutions of caste-based feudalism in Bihar have been regarded as depressing entrepreneurship and encouraging lawlessness and corruption. New survey data–based evidence shows the potential of two reforms to bring about Bihar’s institutional and economic transformation: greater delegation of public policy implementation in bureaucracies and greater decentralization of public policy selection to local governments. Greater delegation means giving autonomy and discretion to agents in bureaucracies, and promoting professional norms for service delivery rather than hierarchical monitoring and disciplining to achieve performance. Greater decentralization means that more policy choices—such as on the composition of public expenditures, tariffs and fees for public infrastructure—are made by local leaders who gain the power to make these choices by winning more local elections. Communication within bureaucracies and through local media about the performance of public policies is part of these institutional reforms. Taken together, these can reduce the influence of patronage politics and enable the selection of leaders who pursue policies in the broad public interest. In turn, these institutional changes can spur greater economic activity and entrepreneurship, including all social groups in growth and prosperity.