Rule of Extractive Informal Institutions in Democracy: Implications for Regional Disparity in Odisha

Abstract

The institutionalists acknowledge the role of formal institutions such as the market economy and democracy while explaining cross-country differences in prosperity. While the formal institutions are same for all regions within a country, development outcome varies substantially across regions. Considering the regional differences in development outcomes, this article aims to explore and discuss the roles of informal institutions in explaining regional development disparity within democratic nations. We have examined the historical roots and prevalent characteristics of the formal and informal institutions in democratic states. We argue that the development outcomes of different regions depend on the interaction of formal and informal institutions. The best development payoffs are enjoyed when both formal and informal institutions are inclusive. The worst comes when both the formal and informal institutions are extractive. We observe that at the initial stages of democracy, extractive informal institutions rule over formal democratic institutions. As a result, democratic institutions fail to bring drastic changes in the institutional order. We hypothesize that with the improvement in education and economic indicators and the maturity of democratic institutions, formal democratic institutions will gradually rule over informal institutions. The rule of democratic institutions would establish the rule of law and provide equality of opportunities for development to all sections of society and all regions.

To make our case, we have taken the case of Odisha, a low-income state within the largest democracy of the world, India. The state has approximately 45 million population with an average per capita income of $ 1835 in 2023. Odisha reports wide development disparity across 30 districts and various social groups. The prevalence of wide development disparity amidst democratic institutions and political stability makes it a special case for inquiry.

Keywords: Regional Economic Growth, Development, Regional Disparity, Extractive Institutions, Informal Institutions, Economic History, Democracy

JEL Classification: R11, R12, O18, B52, N90, K00