Dismantling the License Raj

What was the effect of dismantling the license raj? A very pertinent question in which the proponents of liberalization as well as the critiques would be equally interested in!

Aghion et.al., try to answer this question in a very interesting difference in difference estimation framework. The main argument of the paper is that the response to the ending of the license raj would be different in different states as they differ in terms of their institutional set up.

One of the institutional dimension on which states differ is the labor market regulation. There are some states which have more pro- labor regulations, some which have pro-employer regulations and a few which can be categorized as neutral. The main finding of the paper is that output rose more in pro-employer states than it did in pro-worker states in response to same delicensing reform. This result stands up to several robustness checks and the delicense-labor regulation interaction coefficient is similar in size and significance across a range of specifications.

This paper could not have come out at a more appropriate time when the debates about the effect of labor regulation on industrial performance abound and have important implications for understanding India's trade competitiveness vis-a-vis China. Similarly it also sheds light on what may be one of the important factors driving the differences in regional growth rates.

Reference:

Aghion P, Burgess R, Redding S, & Zilibotti F (forthcoming), "The Unequal Effects of Liberalization: Evidence from Dismantling License Raj in India", American Economic Review.