Monday, August 11, 2008

Social Capital in the way of efficiency?

Social Capital is big in India. The amount of social capital here is simply amazing to observe. It jumped out at me initially when my parents refused to go to a local big store (which is a new concept) to do their grocery shopping. They still stick to the grocer we have been going to for 12 years. They have a personal relationship with him and he has certainly helped us when we went through a rough phase. My parents show their gratitude by taking their business to him and him alone. In fact they are even unwilling to move to a different locality, because of the social capital (grocer, vegetable and fruit vendors, local handy men, pharmacists, family doctor, domestic help, and odd people who live around here who are helpful in times of need even if their work is not up to mark) they have built in this area. The feeling is mutual as well. The local flower vendor bikes 2 Kms out of his way to bring us fresh flowers everyday. 
It is nice to see Social capital in action; however, there is also inefficiency in this system that is not weeded out through competition. It is well and good in a small society with a handful of people to rely on the local handy man who does everything from electrical to plumbing works. It helps people out initially when the society is starting, but the society needs to move out of its small bounds. The local vendor may be efficient when the next closest vendor is a few miles away, but when competition develops in the market and there are other more efficient players in the market that can get the job done cheaper and better there is no economic reason to use the services of the regular vendor. There is nothing personal in this arrangement. Just as the vendor is in the market to make money, so is the buyer to buy the best product he can afford. Especially in situations where the willingness to pay is high there is little reason to continue to pay high for poor services when better services can be gained with the same amount of money. 
My observation in India is that people are unwilling to cut the umbilical cord and make efficient choices, thus rewarding inefficiency and penalizing efficiency in the market. Social capital is indeed in the way of building efficiency in the market. This would explain why essential market services, such as plumbing, house construction, quality of grocery store goods, and such still suffer from basic failures. The ideas of help the small guy are also big in India. The common argument is that these small guys are really poor and need a helping hand from people who are better off so that they can come up in life. I am all for the humanitarian aspect of it, but not at the cost of efficiency. Many of these people are inefficient because these are the professions they have been driven to out of poverty. However, by not fining them for bad quality work the incentives for him to grow and become efficient are taken away and thus we observe this cycle of inefficiency perpetuating.

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