It is a well established fact that institutions affect the growth of a country (see Acemoglu et. al. 2001, 2005; Knack and Keefer 1997). In developing countries, it is observed that the requisite formal institutions are inefficient. These inefficiencies, which often arise due to the un-adaptive nature of formal institutions and their incongruence with informal institutions, perpetrate institutional lock-ins, having a detrimental impact on the development of the country. A nuanced understanding of the role played by institutions in affecting outcomes would require one to choose a unit of analysis that is smaller than a country. Hence, the essay focuses on the persistence of slums in India�s premier metropolis � Mumbai.
Formal institutions mainly refer to rules of interactions among people and organizations that are sanctioned by law. From the works of North (1990), Ostrom (1990) and Grief (1993) we know that there also exist informal institutions, which structure interactions and enable contracting, pointing to the significance of private ordering. The relationships between the formal and informal institutions are often complimentary or substitutable in nature (Williamson 2009). When formal institutions of contract enforcement present a �credible threat� it compliments private contracting between parties. This is because disputes between the parties can be settled privately and efficiently as both parties are aware of the existence of an effective formal system to which they take recourse. In such cases, as articulated by Dixit (2004), private ordering successfully takes place in the �Shadow of Law� leading to efficient economic outcomes[i].
However, when formal institutions lack credibility, there develop informal mechanisms for contract enforcement, which could be detrimental for the overall outcomes. The ineffectiveness of the legal system in being a threat enables the more powerful party in a bargaining game to extract all the gains for itself. Thus weak formal institutions give rise to the possibility of the emergence of informal institutions that would only benefit the �elite�. Such a situation calls for reforms in the formal system. However, the elites would face high potential losses from a change in the situation. Hence, they re-position themselves in a manner that nullifies the effects of the reform, ensuring institutional persistence or �lock-in�. They do this by manipulating the weak underlying political institutions in a way that maintains the economic outcomes in their favor. Thus, political institutions � both formal and informal � adapt with the changing economic institutions, thereby playing a crucial role in determining the success of reforms (see Acemoglu and Johnson 2005). These processes of institutional change are investigated for the case of India�s financial hub – Mumbai.
Mumbai is a city of paradoxes. It is home to some of the richest families in the world and also some of the largest slums. Currently, a large proportion of the city�s population lives in slums. Despite various attempts, slums persist in the city. This incapacity is due to policies or regulations, which are driven by the inefficient political institutions. The following three supposedly pro poor reforms and their failure will lend support to this argument.
Urban Land (Ceiling and Regulation) Act was passed in 1976 authorizing the government to acquire vacant land in excess of 500 sq. meters for developmental purposes such as providing affordable housing. The government acquired a lot of land in Mumbai from private owners but the owners approached the court claiming that their land was applicable for exemption. This led to vast tracts of land being stuck in litigation making them unavailable for the market and to the state, leading to soaring property prices in the city. This increase was exploited by a few powerful groups of politicians and builders for personal gain. Thus, the Act failed to meet its objectives and was repealed in Maharashtra in 2007. It was expected that the repeal would lead to an increase of land supply in the market, which would ultimately lower property prices and make housing affordable. However, this would have hurt the interests of politicians and builders. So as not to be adversely affected by the new situation, they ensured that land was released gradually in the market in a manner that did not have a major impact on property prices. Thus, they secured their position in the transition period. The resultant outcomes worked in favor of the elite both, when the Act existed and even after it was repealed while adversely affecting the majority of the citizens in Mumbai (see Pethe 2010).
Development Control Regulation 58 was implemented in 1991 at a time when textile mills were closing down in Mumbai. The policy was meant to enable the government to acquire two-thirds of land from owners of defunct mills to provide low-cost housing and open spaces. However, it was later amended in favor of private developers by the state legislature through consent by all political parties. This amendment led to only 6 percent of the total mill lands being acquired by the government. At present, the mill lands are being used for constructing commercial offices, which would not have been possible without this amendment. Thus, one can clearly infer that all political parties colluded with each other and with the private sector so as to make gains at the cost of the social welfare.
Slum Rehabilitation Scheme implemented by the Slum Rehabilitation Authority (SRA) was introduced in the late 1990s. The mandate of SRA was to incentivize private developers to rehabilitate the slums and provide them free housing by allowing the developers to build houses for sale on the same land. This scheme seemed to be a win-win for all. However, this scheme has not been able to deliver on its promises and has instead been compromised by the slumlords, politicians and builders at the cost of the vulnerable slum-dwellers. This scheme not only enables the politicians to reap the benefits of �vote-bank� politics but also enables them to collude with various private entities for their own interests.
The policies discussed above validate the fact that political institutions and economic institutions are inherently intertwined. Whilst promising property rights to the lowest income groups � in various forms � one sees that actors in powerful positions only serve their own interests. In spite of there being a legal system in India, approaching the court has rarely been an option for the vulnerable class owing to prohibitive costs. Thus, with no credible threat of the legal system to the elite, there exists no shadow of law. The private ordering that takes place between the politicians and the builder lobby hampers equitable development of the city. Hence, although reforms are being undertaken, there is no perceptible change in the realities. Slums, which are an institutional arrangement providing shelter to the poor, benefiting politicians via vote-bank politics and builders who reap enormous gains under the pretext of redevelopment, have remained �locked-in� in Mumbai for many decades.
[i]Within the shadow of law, net benefits of approaching the courts are always positive.
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