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The rules of the game matter
Sound regulatory design can help states achieve greater prosperity
Haryana and Punjab, contiguous states in India, are similar in many ways. In 1980, Haryana’s per-capita income was 6% lower than Punjab. By 2001, Haryana had caught up with Punjab, and in 2022, Haryana’s per-capita income was 49% higher than Punjab.
What explains the rise of Haryana, relative to Punjab? Two explanations are usually posited by development literature—initial conditions and government spending. The first explanation states that the starting point of the states matter (Barro, 1991). A state will do better if it starts with better education, health, or other socio-economic indicators. The second explanation attributes success to efforts of the government in improving services, especially in health and education (Maddison, 1991).
This literature fails to explain the Haryana v. Punjab story. The states started with similar socio-economic conditions and spent similar amounts on health and education. However, the results (as above) are very different. In contrast, the states did differ in the levels of economic freedom they granted. Haryana has been more friendly to employment opportunities, when compared to Punjab. This friendliness is exemplified in the services sector and rules on employing women.
Haryana’s success adds weight to a different explanation of economic prosperity— economic freedom rather than the initial conditions or government expenditure in the social sector.
Theory predicts that states with initial advantages may be able to capitalise on the lead to grow faster. However, Haryana’s indicators in the 1990s do not predict the state overtaking Punjab a decade later. Take the example of the number of graduates. In 1991, Haryana started with a lower number of graduates than Punjab. Haryana only overtook Punjab, in the number of graduates, after it became richer than Punjab. Similarly, Haryana was worse than Punjab in terms of infant mortality, total fertility and literacy in 1991.
Like initial conditions, Haryana and Punjab governments spent similar amounts on health and education, especially in the decade before Haryana overtook Punjab. Both states spent an average of Rs 75–115 per person on health, and Rs 350–400 per person on education, in the decade before 2000. Today, Haryana spends more than Punjab on both health and education. However, this is after Haryana has become richer than Punjab. Therefore, government expenditure (for health and education) does not fully explain Haryana either.
Haryana’s success over Punjab is not explained by either the initial conditions, or government spending on health and education. The states are quite similar in these aspects. However, the states do differ in one aspect—economic freedom, particularly the freedom to work.
Take for example, the issue of employing women at night. Haryana was one of the first states to liberalise restrictions on women working at night. In 2003, Haryana allowed women to work in three types of business at night—IT/ITeS, hotels (3-star and above), and export-oriented units (Notification No. 6/35/2002-1Lab). In contrast, Punjab would allow women to work at night only in 2014 (Notification No. 21/66/2013-4Lab/325324).
Even after 2014, it is easier to employ women at night in Haryana than in Punjab. In both states, businesses need to comply with conditions when employing women at night. However, in Haryana, these conditions are easier to comply with than in Punjab. For example, in Haryana businesses can employ even one woman at night. However, in Punjab, businesses need a quorum of five women in the night shift.
Take also for example, opening and closing hours of establishments. Haryana also allowed businesses to operate throughout the day, and operate on a Sunday, before Punjab. In 2009, Haryana allowed all establishments to operate throughout the day, and operate on a Sunday if they so wished. However, Punjab would only grant this freedom in 2018 (Notification No. 21/08/2017-4Labour/1272654).
Even after 2018, it is easier to operate an establishment throughout the day in Haryana than in Punjab. To operate throughout the day, a business in Haryana only needs to register with the state’s labour department and specify the number of employees and working hours. However, a business in Punjab must hire separate staff to operate beyond regular opening and closing hours, and must make adequate security arrangements if the business operates beyond 10 P.M.
The present literature on development emphasises the importance of state investments in health and education and initial socio-economic conditions. Some recent literature has also highlighted the importance of regulatory freedoms for economic development. (Heritage Foundation, 2022 : Levy-Carciente and Montanari, 2023). However, the literature is still scarce when it comes to explaining development through economic freedom. Haryana’s case is an opportunity to investigate the role of economic freedoms to bring about prosperity.
Barro, Robert J. “Economic Growth in a Cross Section of Countries.” The Quarterly Journal of Economics 106, no. 2 (1991): 407–43.
Angus Maddison. “Dynamic Forces in Capitalist Development: A Long-run Comparative View.” (1991)
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Bloom, David E., David Canning, and Jaypee Sevilla. “The Effect of Health on Economic Growth: A Production Function Approach.” World Development 32, no. 1 (2004): 1–13.
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World Bank. “Determinants and consequences of high fertility.” (2010).