Column | Govt Needs to Invest in Institutional Trust to Achieve Viksit Bharat: D. Subbarao

Why are some countries rich and some poor? This question has engaged—and frustrated—generations of economists. Some point to geography; others to natural resources, education or technology. Over the past three decades, however, another explanation has gained prominence: countries prosper because they build institutions that earn people’s trust. Nobel laureate Douglass North argued that good institutions reduce uncertainty. People save, invest and innovate only when they know that contracts will be honoured, property protected and rules applied fairly. More recently, Nobel laureates Daron Acemoglu and James Robinson used the Korean experience to illustrate this thesis. When the country was divided in 1948, the North and the South shared the same history, language and culture. Today, South Korea is one of the world’s richest and most innovative economies, while North Korea remains poor and isolated. Geography did not change. The people did not change. What changed was institutions. One built systems that rewarded enterprise, protected rights and encouraged innovation. The other concentrated power and stifled initiative.

Francis Fukuyama captured this developmental challenge through a famous shorthand: the quest to “get to Denmark”. By “Denmark”, he meant an imagined society that is prosperous, democratic and secure, resting on three institutional building blocks: a strong state, the rule of law and democratic accountability.

Four distinguished scholars and one conclusion: strong institutions inspire trust, and trust creates prosperity.

When I first encountered these ideas, they resonated deeply because they explained much of what I had observed over four decades in public service—first as an Indian Administrative Service officer, and later as governor of the Reserve Bank of India (RBI). Over 50 years ago, on my posting as sub-collector of Parvathipuram, a small town in north-coastal Andhra Pradesh, I found that during my first week, the dozen or so office staff were quietly sizing up their new boss. My appointment order gave me authority, but whether my staff trusted me depended entirely on whether I exercised that authority with fairness, openness and consistency. The lesson I learnt early in my career was that authority comes with the office. Trust, on the other hand, must be earned.

That lesson returned with even greater force in September 2008 when I took over as RBI governor, just as the global financial crisis erupted. The global economy was spiralling into a ferocious downturn, and the global financial system came perilously close to collapse. Financial markets around the world were seized with fear and panic, and the public everywhere was worried and anxious.

The crisis affected every country, including India. In our case, there were initial doubts about whether a first-time governor could lead the economy through this extraordinary crisis. No speech or assertion could assuage those concerns; the only option was to earn the trust of the markets through swift decisions, transparent actions and honest communication. As the crisis unfolded, I realised that a central bank’s greatest assets are not its balance sheet or its policy instruments. It is trust. When people trust that an institution is competent, independent and is guided only by public interest, panic begins to subside. During a financial crisis, as indeed in normal times, trust becomes a potent policy instrument in its own right.

After I stepped down from the RBI, I was invited to deliver the keynote address at a conference of the Fiji Bankers Association. At the final-day dinner, the organisers announced a lottery for the delegates. The winning ticket was mine. As I went to collect the prize, everyone laughed because the organisers had rigged the draw as a harmless joke on the keynote speaker. The episode reminded me of another lottery that had made headlines. In Zimbabwe, the winner of a bank’s promotional lottery with a huge cash prize turned out to be President Robert Mugabe. Nobody laughed. Most people internalised that the draw had been manipulated. In a society where institutions have lost trust, people despair. That is what the absence of trust looks like. The same principle applies to governments. They need to earn trust —not through slogans and speeches— but by being fair, competent, honest, responsive and predictable. Citizens expect governments to listen, to act transparently in public interest and treat everyone equally before the law.

Trust is built when governments honour their commitments and ‘listen’ to people; when the bureaucracy responds promptly and fairly; when civic services are reliable; when courts dispense justice swiftly and impartially; when the police maintain law and order while treating every citizen with dignity and when public institutions act with accountability. When the public trusts institutions, they save more readily, invest with greater confidence, obey laws more willingly and take entrepreneurial risks. Trust is therefore not merely a moral virtue; it is a vital economic asset.

India has made remarkable progress in building physical infrastructure. Highways, railways, ports, airports and digital public infrastructure have transformed the economic landscape. But the next stage of our journey to Viksit Bharat requires investment in the invisible infrastructure of strong institutions. We need faster courts, more capable local governments, predictable regulators, credible statistics and a civil service that is competent, politically impartial and uncompromising in its integrity. Nothing erodes trust faster than the perception that public office is being used for private gain. Enduring trust comes from strong institutions, not strong individuals. Individuals can inspire confidence for a while, but institutions sustain confidence across generations.

As India approaches the centenary of Independence, we will rightly celebrate faster growth, better infrastructure and technological progress. But the true test of a developed nation is deeper. Do citizens trust their institutions? Do businesses trust the rules? Does the world trust India as a responsible global citizen? A necessary condition for Viksit Bharat is building and nurturing institutions that inspire trust.

(Views expressed are personal)

Duvvuri Subbarao Fmr. Governor, Reserve Bank of India (2008–13)

(This story appeared in Outlook magazine’s August 31 issue, 'Whose Idea of India?', in which India’s noted public intellectuals, policymakers, cultural practitioners, political leaders, scholars and economists write in detail about the idea of India they believe can best secure the nation’s future as we celebrate 80 years of independence.)