Introduction
The role of government must be redefined to abandon the many
functions accumulated over decades where the government adds no value (even
theoretically under ideal conditions) and focus on the basic functions of
governance that only the government can perform, but have been neglected. Right sizing of government requires both
downsizing and re-focussing of government attention on essentials.
Down Sizing
Downsizing of the government requires privatising of production,
shutting down of control department and ministries and eliminating producer and
middle class subsidies. All these add to
the power of government and thus undermine the power of the public and
accountability of the elected representatives to the people. This is particularly so when the power to
harm is so much more than the power to do good. Use of such production units
and producer & middle class subsidies for personal vote yielding populist
measures is one of the reasons for fiscal bankruptcy.
Privatise production
The government must get out of the production of (what are
technically defined as) “private” goods and services, i.e. those that can be
sold to and consumed by individuals on an exclusive basis. These are not “Public goods” in the sense that
consumption by one individual does not diminish the consumption by another
(non-rivalry) or are non-excludable, or they are “Quasi-Public” in that they
meet the criteria approximately and have some element of externality. For instance even though urban piped water
& education are ‘private” good/service, I would define ‘clean drinking
water’ as a “Quasi-public” good as consumption of dirty water can lead to
public health epidemics. Similarly
literacy & primary education have externalities in that the entire society
(including the educated) benefits from the expansion of the pool of literates.
Further, in rural areas, even piped water and primary education may not be
private good/service.
There are several reasons for this.
Firstly they can just as well be produced and sold by non-government
(commercial, co-operative or non-profit) organisations, so there is no positive
reason for government to produce them.
Their production has been usurped by a ‘Leviathan’ government in its
unquenchable thirst for power.
Secondly, the incentive structures in government are not
conducive to efficient commercial operation.
The rigid financial rules (e.g. sale by auction) do not allow even the
honest and sincere public servants to run producing enterprises in an efficient
manner.[1] The layers of government hierarchy (PSU/DPE,
concerned ministry, cabinet & parliament) as well as the CVC and CAG system
is not conducive to making management decisions in a complex economy or to risk
taking in an inherently uncertain world.
Thirdly, the rate of return on the assets employed in these units is
less than the interest rate that could be earned on the sale value of these
assets and much less than the rate of return of similar units in the private
sector. Note however, that the “resource rent” on natural resources such as oil
that have scarcity value can & should be mopped up by government through a
royalty or other resource rent tax, whether the producer/user is a government
or private company. The proper
comparison for oil producer/user companies is therefore net of oil resource
rents.
Privatisation of competitive and contestable goods
(including units producing civil & dual use items for defence forces) can
be done with all deliberate speed, while that of natural monopoly (such as
power distribution) must be accompanied by setting up of appropriate regulatory
systems. Regulators already exist for
the financial system (RBI & SEBI), so privatisation of banks & other
financial institutions (e.g. UTI) can be initiated without delay.[2]
Eliminate Departments
Many areas have been de-controlled and de-licensed; yet the
staff, divisions, departments and ministries set up to implement such controls
and licenses continue. These must be
eliminated to remove the threat of ad hoc interference and red tape and root
out the control mentality that has wormed its way deep into the
government. Similarly, there is no need
for ministries and quasi-public institutions dealing with ‘private’ goods &
services such as steel, sugar, fertiliser.
Phase-out Non-Poor Subsidies
Subsidies must be targeted on the poor, which for this purpose
should include the less well of half (50%) of the population. Impact studies show that the poor benefit
less then or at best proportionately to the middle-upper income groups. Better targeting requires a systematic effort
to eliminate both producer and middle
class subsidies and search for channels that can be used to focus subsidies
on the poor.
The origins of many subsidies have long been forgotten and they
continue because large subsidies always build strong vested interests. The fertiliser (Urea) subsidy is a good
example. Its original justification was
to induce small and marginal farmers to adopt new HYV technologies, as higher
fertiliser usage was an inalienable part of the HYV package. Over the years it became a subsidy for large
surplus farmers, particularly those producing food grains for the market. More recently it has become a subsidy for
fertiliser producers as the gap between farm price and world prices has
disappeared. This subsidy can be eliminated by complete decontrol of fertiliser
with the subsidy phased out over 3 years (say).
This will allow the fiscal deficit to be reduced and larger funds to
become available for irrigation & rural infrastructure that helps all rural
poor including small & marginal farmers.
Refocus Government
Broadly speaking the government has three broad functions that it
must perform for the economy and society.[3] This is the provision of “Public” goods and
services, the correction of “externalities” and “social welfare.” The former has been most neglected over the
past three decades.
Public Goods
‘Public good,’ is an economic concept with a precise technical
definition, one element of which is “non-excludability” and another is
“non-rivalry.” The classic ‘public good’
(actually service) is ‘defence’ where exclusion is literally impossible and
once provided everybody shares in it.
Other services that meet the definition are general administration, the
judicial system, police, roads & prevention/control of communicable/epidemic
diseases. Though in principle government
could charge individuals for the use of local roads it is prohibitively
expensive to do so (economic non-excludability). Rural roads, once built satisfy the
non-rivalry condition in that they the traffic is very light (and they are thus
empty) most of the time. Inter-city
roads have very strong element of externality (marginal cost ~ zero
relative to average fixed cost), so that they are also considered ‘public
goods.’ Similarly public health measures such as public (not individual) supply
of clean drinking water, sanitation & sewerage, population control and
public education about nutrition, cleanliness etc. correct negative
externalities and are accepted as ‘public’ goods. Similarly literacy & basic education have
positive externalities for other educated people and can be similarly
classified even though it does not meet the exclusion criteria in urban areas.[4] Because of limits to divisibility and the
sparseness of population, many basic infrastructure services (drinking water,
primary education) in rural areas have very high average fixed costs relative
to marginal costs and can be classified as ‘public goods.’[5]
Fifty years after independence the population coverage and the
quality of supply of these basic services is pathetic and globally embarrassing.
Much more attention, time and funds need to be spent on these basic public
goods & services. Government
responsibility for supply means that government must provide the required funds
but it need not produce all these services.
Non-Governmental Producers
Private schools have played a vital role in the high educational
attainment of Kerela. Production of
services must be entrusted to those who can supply the service most
efficiently. This implies that the
poorest worst performing states have the greatest need to entrust the job to
non-government organisations.
The UP government has covered all its districts with secondary
schools for girls by giving a one time grant to any organisation that was
willing to set up such a school.
Similarly there now exist non-profit
organisations that can provide quality primary education at one-tenth the
cost of the government system. Unlike
government schools where teachers do not show up these organisations guarantee
that on completion students will be able to pass pre-specified tests. Similarly the Gujarat
government has contracted the running of several health centres to non-governmental organisations. This has solved the problem of perennially
absent staff and non-functioning centres.
Such organisations must be used wherever they are available to provide
universal primary education & primary health services.
Public-Private Partnership
There are, also specific areas within these broad public service
categories, for instance construction & management of jails, in which public-private partnership can be
effectively used to improve efficiency.
Again the key concern should be efficiency & quality of output
(“biggest bang for the buck,”) not ideology.
Institutional Reform
Defence, Judicial, Police and general administrative services can
only be provided by the government, so that the focus has to be systemic reform
and introduction of modern management practices for improving efficiency. Archaic laws have to be repealed; archaic
procedures modernised (written evidence-signed & sworn, limited
adjournments based on prior written request & notice to counter party) to
provide justice to those who have cases going on for as much as 30 years. The Police system, which has become an
instrument of political power for the ruling party has to be refocused on
providing personal security & upholding the rule of law. Its slow but
steady decline into anarchy has to be stopped and eventually reversed.[6]
Correcting Externalities
Externalities are a known form of market failure even in a
competitive economy and need to be dealt with through government
intervention. Apart from the
externalities that we have incorporated in the concept of ‘Quasi-public good,’
the most important externalities relate to Knowledge and information &
environment /pollution. The significant
areas in the former are Science & Technology, higher education in special
fields of national importance, development of strategic technology (e.g. aerospace
& nuclear)[7]
and Research & Development and the spreading of knowledge especially in
agriculture (information/extension).[8] This is best achieved through a mix of
government expenditures and tax/direct subsidies. The optimal mix can be different for
different sectors and also changes over time. The private sector can play a much greater
role in correcting these externalities at lower cost to the exchequer, but
government will also continue to be an important player in this area. Similar solutions apply to environmental
externalities, of which control of water pollution is the most important from
the expenditure perspective.
Social Welfare
The third important expenditure related function of government is
social welfare. The definition of Social
welfare has a large element of context specificity, in that it cannot be
defined independent of the average income & wealth of the country. Equally there is a basic minimum that even a
relatively poor, democratic country must ensure in the 21st
century. We cannot allow people to die
of starvation or to be chronically hungry.
Society must also take ultimate responsibility for the old, infirm and
disabled and for abandoned or destitute children. Every citizen has the right to life, physical
security, basic human dignity and equality before law and constitution. The government has the duty to eliminate
pockets of feudal oppression and bandit government that still prevail in parts
of the country.[9] Known criminals, dacoits & murderers
cannot be allowed to publicly hold the law to shame because of their muscle
power, political power or (sometimes ill gotten) wealth.[10]
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] One such secretary level officer told me of his personal experience
of being charge sheeted for selling in the market, without due auction process,
a by-product of the industry that had traditionally been dumped into the
surrounding areas.
[2] Those who genuinely believe that government is to blame for recent
financial failures, should realise that systemic tinkering or change of
government will not change the basic incentive structures. Similar, perhaps worse crisis are inevitable
in the future if ownership remains in government hands.
[3] The issue here is expenditure related functions, not macroeconomic,
tax and other policies.
[4] In general both basic public health & basic education services
are more accurately defined as ‘quasi-public’ goods.
[5] Once a primary school is built and teacher provided, or piping for
drinking water established, the marginal cost is almost zero (relative to the
fixed cost).
[6] It has already reached a point where a beat policeman in Delhi can threaten a SSI
producer with overnight theft of materials lying on his premises if an adequate
‘hafta’ is not paid to him.
[7] Technologies of power where normal commercial considerations do not
apply and availability depend on geo-strategic considerations.
[8] Thus government must provide facility grants to R&D
organisations and scholarships to PhD students in S&T.
[9] ‘Bandit’ or ‘Predatory’ government is a particular form of
pre-feudal government defined in the theory of political economy.
[10] The T&D mafia can arrange to steal half the power supply of the
capital city of Delhi, its inspectors can institute false charges of
electricity theft and set the DESU equivalent of the CBI on a doctor whose
employee inadvertently charged his relative and a government servant has to
approach the union power secretary to ensure installation of functioning
(rather than a faulty) meter at his house, while commentators still refer to
‘pilferage’ & theft of power by industrialists.
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