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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