Monday, July 29, 2013

Government Failure: The Problem Many Academics Ignore

Old Paradigm

The old paradigm is characterized by approaches and polices that have two underlying problems.  These are, distorted incentives and the corruption of power. Existing systems have distorted the incentives for working efficiently & productively and for investment & entrepreneurship.  In the case of Public servants (bureaucrats & politicians) the dis-incentive is compounded by the imbalance of Power between the State and the Public:  Power corrupts and absolute power corrupts absolutely.[1]  As the systems of governance deteriorated under rent seeking, rent creation and corruption, the power to do good fell relative to the power to harm.  The result is that today, the latter is much greater than the former, so that the rare employee wanting to do good has the dice loaded against him/her. We are now faced with comprehensive failure of governance.

Government Failure

There are four related and interconnected dimensions of this government failure that are important in determining a new approach to development policy.  These are monopolisation of power, employee privatisation of public services, Over-extension of government and Fiscal mismanagement.

Monopolisation of Power

                        Though the monopolisation of economic power started from the 2nd Plan, the peak period of monopolisation was from the mid-sixties to the mid-seventies.  By the eighties it covered every area of economic activity as well as the related institutions and social activity.  It involved excessive and oppressive interference in all areas of private activity including for instance ‘co-operatives’ that were supposed to be an alternative form of private activity. As a consequence the innovative potential and productive genius of the people has been stifled.

Employee ‘Privatisation’

                        Employee Privatisation of Public Services is an extreme form of the principle-agent problem that has been known to economics for some time but has been largely ignored in India.  This is the problem of how large institutions, including the political system and government bureaucracies, can ensure that the workers in these institutions follow the goals of the institution.  This problem has reached epidemic proportion with perhaps 80% of ‘public servants’ maximising their own personal interests,[2] rather than working for the professed goals of the organisation in which they are employed.[3]  The proportion of such people in the upper bureaucracy, which generally constitutes about 2% of the total, may be around one-third and perhaps fall even further in the top most reaches which are much more in the media spot light.

Leviathan Spread Thin

Buchanan’s analysis of government warned us that the government was a Leviathan whose interest was in expanding and spreading over more and more areas.  The Indian government is over extended & spread thin over too many areas and doing things that are beyond its capabilities.   While extending itself to newer areas of activity, the government took the basic functions of government for granted, giving progressively less attention to them.  In a country that invented planning in a market economy in the fifties, this is best illustrated by the absence of even the most elementary planning in digging & re-surfacing of municipal roads. As a result the provision of public goods & services has suffered and their quality has deteriorated.  The untreated sewage pouring into lakes in Nainital & Srinagar and the rivers in Himachal Pradesh and other tourist havens, open sewers running along the roads in towns across the nation, the pathetic state of the sewerage system in the cities (even Delhi slums) are only a few examples.

Fiscal Crisis

Occasional largesse is Populism, continuing largesse is Fiscal crisis. 

Corporate Failure?

Our arguments about government failure should not be taken to mean that those who run and work in the government are morally inferior in any respect to those who run private companies or work in the private sector.  By the same token corporate malfeasance and siphoning of investor’s funds cannot be used to justify misuse of public power and money for personal ends.  These arguments buttressed by examples of fraud by Indian tycoons are particularly ironic in the Indian context, where the Department of Company affairs (DCA), the Controller of Capital Issues (CCI) and Government owned/managed monopoly financial institutions (UTI, IDBI, IFCI, SBI, Nationalised Banks) had complete and absolute control over private (public limited) companies till the early nineties.  Any indictment of the private sector managers under these conditions is an even stronger indictment of the pervasive and smothering system of government controls that cocooned them.
The government and its regulatory agencies can and must act as a direct check on corporate fraud, private corporations cannot act as a check on government malfeasance.  Thus there is a basic asymmetry: The State has absolute power to control and coarse private business, while the latter has none vis-à-vis the State.  Such awesome power is best kept in reserve as a check on private behaviour rather than used for muscling in on the production and supply of goods and services that the private sector is equally (even if not more) competent to produce/supply. Government should focus on good policy and effective law enforcement a much more effective & efficient method of reducing corporate fraud.

Extract from, "A New Development Paradigm: Employment, Entitlement and Empowerment,"  Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. [  NewParadigm4nf ]

[1] These are a modification of the famous remark by Lord Acton that, “power tends to corrupt..”
[2] This is a guess based on conversations with knowledgeable people including IB officers.
[3] ‘Public servants’ covers the entire government system including the police & the semi-autonomous agencies of the govt.

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