This year’s winners of the Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel, usually called the Nobel prize in economics, have brought renewed focus on the role of institutions in determining the prosperity of nations. This reflects themes explored in Why Nations Fail by Daron Acemoglu and James Robinson, where nations falter not simply because of individual leaders’ greed, selfishness, and ignorance of history, but due to deeper systemic factors. Nations with extractive institutions concentrate wealth and power in the hands of a few, enabling corrupt leadership and undermining long-term development, while inclusive institutions foster shared prosperity and political stability. These insights are highly relevant to the case of Jammu and Kashmir (J&K), a region with a complex history of political instability, strategic importance, and economic potential, yet constrained by institutional fragility.
Jammu & Kashmir-A unique case study:
Jammu and Kashmir’s geopolitical and historical context makes it a unique case when studying the impact of institutions on prosperity. During the colonial period, unlike much of India, J&K was not directly under British control. This meant that many of the institutional legacies that shaped the rest of India’s development were not directly applicable to the state. Instead, J&K remained under the control of rulers, whose policies ranged from inclusive to extractive. Besides, political trajectory of Jammu and Kashmir has been one of significant challenges, shaped by periods of unrest, cross-border tensions, and an intermittent absence of elected governments. These factors have, over the decades, had a profound impact on the region’s institutional development. A pertinent example of how extractive institutions can hinder local development and perpetuate inequality is found in the management of Jammu and Kashmir’s hydroelectric potential. Additionally, the Indus Waters Treaty of 1960, which governs the use of water resources between India and Pakistan, has further constrained the state’s control over its natural wealth. While the treaty stands as a significant diplomatic achievement, it has limited J&K’s ability to fully exploit its rivers for hydroelectric purposes, as most of its water resources are regulated under this agreement, leaving the region at a distinct economic disadvantage. Despite contributing significantly to the national power grid, the state has seen minimal returns in terms of revenue sharing or economic empowerment. This dynamic reflects institutional frameworks that direct the benefits of natural resources outside the state, rather than reinvesting them locally. This mirrors the broader argument that “Nations fail because their leaders are greedy, selfish and ignorant of history”. One key insight from the laureates’ work is that the development of institutions is not necessarily tied to the political regime in power, but rather to the nature of the institutions themselves—whether they are inclusive, fostering broad participation, or extractive, benefiting a narrow elite. In J&K’s case, political instability has often allowed for extractive institutions to dominate.
Opportunities for Institutional Reforms
The formation of a new government in Jammu and Kashmir, following years of political uncertainty, presents a critical opportunity to reshape the region’s institutional framework. To foster sustainable development and inclusive growth, the government could benefit from prioritising decentralisation efforts. A reassessment of economic policies governing key resources, particularly hydroelectric projects, is a new subject for discussion. By revisiting the terms of these projects, the government might consider integrating revenue-sharing agreements or local employment clauses to ensure that the benefits of natural resource exploitation extend directly to the communities most affected. Investments in public services, particularly in education and healthcare, remain essential for laying the groundwork for more inclusive public institutions. In parallel, the tourism and horticulture sectors, both of which offer significant untapped potential, could lead to economic diversification through targeted infrastructure and technology investments.
Lastly, enhancing transparency and accountability in public institutions will be vital for rebuilding trust among the population. Establishing robust oversight mechanisms and promoting good governance practices would not only improve the effectiveness of public services but also ensure that institutions serve the wider public interest. Building inclusive institutions—marked by transparency, broad participation, and equitable benefit-sharing—presents a viable pathway for the state to overcome the institutional challenges that have historically constrained its development.
Dr. Shakil Bhat, Member, Jammu & Kashmir Administrative Services/2019
