13 and 14 April 2013, New Delhi
India Policy Institute
Hyderabad
Indian Institute of
Public Administration
Delhi
GOVERNANCE REFORMS
CONFERENCE
INTRODUCTION TO THE
CONFERENCE
Sanjeev Sabhlok
Root cause of misgovernance:
Policy/system design failure
Policies are badly designed
Policy frameworks are not used
System’s incentives are flawed
Inevitability of corruption
Modern thinking (including Arthashastra) not used
Politicians make policy on whimsy, not analysis
Bureaucrats are totally unaccountable
This Conference is about changing the system
व्यवस्था परिवर्तन
We should not hesitate to adopt the
world’s best ideas
World best practice governance frameworks
Evidence-based economic/regulatory policy
Public administration frameworks
In 1970s/80s, the world discovered economic
and regulatory reforms
In the 1990s, the world discovered
governance reforms
India has adopted neither
HOW WE - TOO – CAN GET
WORLD CLASS GOVERNANCE
Sanjeev Sabhlok, former IAS (1982 batch)
A bit about me
IAS 1982 batch, PhD Economics from USA
Taught at Lal Bahadur Shastri National Academy
Resigned in January 2001 to reform India – from outside
15 years of reform work
Preliminary work in February 1998 (India Policy Institute)
December 2000: Moved to Australia after finding unresponsive bureaucracy/politicians/ citizens
Joined National Executive of Swatantra Bharat Party (2004)
Started Freedom Team of India (December 2007)
Wrote Breaking Free of Nehru (2008)
Organised National Reform Summit at Haridwar on 5-8 April 2013
This talk is:
A distillation of key learnings from over 30 years of experience in the IAS and Victorian Public Service
Given limitations of time I will focus only on key frameworks (systems):
Public administration system
Economic policy system
Regulatory policy system
Plan of my presentation
Part 1
1) Theory of good governance
2) India’s system compared with Australia’s
3) Public administration reforms for India
Part 2
4) Economic policy reforms for India
5) Regulatory policy reforms for India
6) Transition from India’s system to world-best system
1) THEORY OF GOVERNANCE
What’s our policy about policy?
Think from the highest level first: what is
policy and what should it consider?
We need a policy about policy
Frameworks and systems
Without good frameworks, bad policy is
inevitable
Two main questions to ask
What should a government do?
Are there limits to what a government can do?
How do we arrive at these limits (eg. net benefit test)
How should it do it?
How can a government comprising self-interested
politicians and bureaucrats do what we want it to do?
(public choice theory)
Policy that doesn’t consider both these
issues will be fundamentally flawed
The “What” must be well thought out
“Bad administration, to be sure, can destroy good
policy, but good administration can never save bad
policy.”
- Adlai E Stevenson Jr
The “How” must also be well thought out
Policy that is unable to pierce the veil of incentives
during implementation is bad policy
Good policy necessarily considers
implementation issues
This is what we want
Goal
This is what we get
Our
Goal Bureaucrat
(black box)
…. by failing to think about the politician’s and bureaucrat’s incentives
Bureaucrat’s
goal
Sequencing of my talk
I will discuss the “How” first
Public administration (delivery) reforms
Then I will discuss the “What”
Policy framework and gatekeeping
Economic policy
A word re: Arthashastra
Arthashastra underpinned India’s past
success
For 12 out of the past 20 centuries India was the
world’s wealthiest, and 2nd wealthiest in six out of
the remaining eight centuries
Due to the public policy stance outlined in Arthashastra
Let’s put Arthashastra squarely into the
centre of public policy discourse
Most analysts of Arthashastra have missed its
point
its insights are extremely modern
we should read between the lines to understand what
Chanakya is trying to tell us
All about INCENTIVES
(including disincentives)
Chanakya wanted a strong, minimal
state, with control over incentives
Two axes: liberty, incentives
Liberty
Ince
ntives
Reminder: incentives
include disincentives!
Key dimension #1: Liberty
Liberty is an end in itself. But also necessary for people to do their best
Lao-Tse’s advice to the king: “Win the world by doing nothing. How do I know it is so? Through this: The more prohibitions there are, the poorer the people become… The greater the number of statutes, the greater the number of thieves and brigands.”
“I love quietude and the people are righteous of themselves. I deal in no business and the people grow rich by themselves.”
India was much wiser in ancient times
कहावत
जहााँ का िाजा हो व्यापािी वहााँ की प्रजा हो भिखािी
Government should not engage in business Free markets
Free enterprise
The natural effort of every individual to
better his own condition is so powerful, that it
is alone, and without any assistance, not only
capable of carrying on the society to wealth
and prosperity, but of surmounting a hundred
impertinent obstructions with which the folly
of human laws too often encumbers its
operations.
- Adam Smith 1776
“Any restriction on liberty reduces the
number of things tried and so reduces
the rate of progress”
- H.B. Phillips (mathematician)
1
2
3
n
Two obstacles to freedom
Opportunity (technical
frontier)
Governance must
enable liberty (social reform is not a government’s job)
Ideas don’t
come from
governments
People create ideas, and wealth Growth = f (freedom, opportunity)
Innovation pushes
out the
frontier 2) Social control
• interfering religious beliefs
• science and critical thinking
insufficiently valued
People innovate
better if the
government gets
out of their way
1) Government
Nanny, paternalistic state:
• interfering policies and laws
• “Food police”
Injustice
• contracts not enforced
Key dimension #2: Correct incentives
Chanakya thoroughly understood incentives:
Best talent in government
High salaries for top officials and Ministers
But vigorous checks/ audits (even spying)
Instantaneous dismissal and severe punishment for non-performance/corruption
Today we have the OPPOSITE incentives in India!
The results achieved today are inevitable
Singapore follows Chanakya’s principles and succeeds
The problem of government failure
Policy makers typically focus on market failure
But the real elephant in the room is government
failure
“Power corrupts, absolute power corrupts
absolutely”
Politicians lavishly spend taxpayers’ money
Bureaucrats maximise their empire
Understanding incentives
Institutions (rules)
Incentives
Endowment
Local circumstances
(beyond the control of the policy maker)
System
Created
by policy
maker }
Examples: Incentives explain behaviour
Disposing personal rubbish
The same Indians don’t throw rubbish on the roadside in Singapore
Tenure
Without job tenure an IAS/IPS officer will focus on delivery, for fear of losing the job
Corruption
Indians were incorruptible when British merchants first came to India. (They were astonished at such integrity!)
But today Indians are world-famous for corruption. Why?!
Incentives are at work 24-7
We ask our politicians to lose crores of rupees
during elections.
Then we pay them very low salaries.
Question: Will such people serve us or loot us?
=> Conclusion: our system guarantees corruption.
Chanakya would have understood
But we don’t care to see the world scientifcally
Burying our head in sand won’t make
incentives disappear
Incentives are at work even in our dreams!
Incentives are as powerful as a
physical force
Gravity pulls downwards, hence water flows downhill
Incentives drive human behaviour and almost
entirely determine what someone will do
But incentives are difficult to analyse
Invisible, complex, layered, and conditional
Despite this difficulty, we ignore incentives at our peril
Example of the power of incentives
I offer you Rs. 100 or Rs.200. Which will you pick?
Rs.200
Always.
Incentives may be invisible but have REAL,
PREDICTABLE EFFECTS
Incentives need not only be economic
But economic incentives usually overwhelm others
Myth: that Indians are somehow
“different”
Apparently we have a natural tendency to be corrupt
Not true
Indians respond to incentives EXACTLY as predicted
Chankya predicted it
Modern economics predicts it
New public management predicts it
China has moved toward incentives
and markets-based governance
Teachers are dismissed in China if a
class’s academic results are below par
While in India some teachers get paid even
if they don’t ever go to school!
Naturally China does better than OCED in
PISA, India is at the bottom of the world
Results exactly as predicted
Half of Class 5 kids in India can’t read Class 2 texts
The incentive (principal-agent)
problem
Agency theory
Company owners motivate managers through incentive
contracts so manager actions (which are unobserved)
can be aligned to owners’ goals.
Usually:
1. Base salary (for participation) plus
2. Performance pay (incentive compatible wage)
Plus hire/fire instantly based on performance
Controlling bureaucrats is very hard
Citizens, the masters, have to solve a TWO STAGE
problem:
1) First controlling representatives (politicians)
2) Second, how politicians can control bureaucrats
Citizen
How to
control?
How to
control?
Black box
of incentives
Black box
of incentives
Lots of hidden actions & complex incentives!
Politicians’ interests are totally
different to ours
Politician’s goal is to get re-elected
He knows that citizens can’t agree on anything
Impossibility theorem
He can game the system by catering to a niche
Median voter theorem
Lobbying/ pandering (subsidies/loan waivers)
In addition, he must necessarily be corrupt in India,
it being a mandatory requirement of the Indian
electoral system
How we can force politicians to look
after our interest
Meet the participation constraint
Partly fund elections by the state to reduce use of black
money and allow good people to contest
Australia pays about $2 per valid vote cast
High salary to attract good people into politics
Pay incentive compatible wage
Salary high enough to prevent incentives for corruption
Link pay with performance
Reduce tenure (from 5 to 3 years) to keep them on toes
Singapore and Australia pay politicians well, thus attracting top talent
and reducing incentives for corruption – Chanakya would have approved.
Bureaucrats’ interests are different to
ours, too
“Lurking below each public servant is a full-fledged human being
with predictable self-interested behaviour” (Sabhlok,BFN)
His goal: to expand his empire (importance)
Obstacles/ inefficiency/ symbols, not real work
Solution:
Meet participation constraint
High salary to attract good people
Incentive compatible wage
Performance based reward/pay
Tenure totally abolished at executive levels
Stern punishment for underperformance/ corruption
Consider Chanakya’s wisdom re:
incentive compatible wage
"the highest salary paid in cash, excluding perquisites,
was 48,000 panas a year and the lowest 60 panas a
year. The ratio of the highest salary to the lowest,
was eight hundred to one.” (Balbir Sihag)
If lowest salary is Rs.4000 per month, then highest
should be Rs. 32 lakh per month (or Rs.3.8 crores per
year)
Even a top salary of Rs.1 crore will go a long way.
But there must be ability to instantaneously fire.
India’s bureaucracy: The current
situation
Salary is not high enough to:
A) attract demonstrated high quality talent
B) prevent corruption
Indeed, there are rewards for corruption
No punishment for non-performance
Tenure is particularly insidious
Articles 310,311
=> Our politicians can’t control bureaucrats
Paying in “patriotism cash equivalent”
is not always a good idea
Market rate for a particular skill
Australia pays market rate
+ incentives
India pays 1/3rd market rate
+ nationalism
Sacrifice
“for the
nation”
Incentive to
perform and be
honest, else will
lose job – and
money!
Incentive to be
arrogant (doing
“sacrifice” for
country) and
unaccountable
Minimum conditions must be met
Pasteur: Milk must boil before bacteria die
Participation constraint
AND
Incentive constraint must be met
To kill incentives
for corruption
What about transparency?
Can transparency (by itself) eliminate corruption?
No.
Easy for corrupt officials to provide “transparent reasons”
for awarding large government contract to bribe-giver
We can have all the transparency we like, but the corrupt
will find a way
We must attack INCENTIVES, and must not PREACH
Unless participation and incentive constraints have
been met, other factors don’t have any effect
What about Lokpal?
Can punishment (by itself) eliminate corruption? (eg Lokpal)
No.
Low possibility of detection: When 95 per cent are corrupt, chance of getting caught is small, so why worry?
Risk premium on corruption: Lokpal will allow corruption “rates” to increase on due to increased risk of punishment
Unless participation and incentive constraints have been met, other factors don’t have any effect
Commonly advocated anti-corruption
solutions can work after basics are met
Transparency CAN work
Lokpal CAN work
Basic conditions will make 95 per cent people
honest
After that remaining 5 per cent corruption can
be eradicated by transparency and lokpal
Where will money to increase wages
come from?
First, we must remember: “penny wise pound
foolish”
If the top levels can become honest, the rest will follow
Singapore PM is paid $2 million
Government should stop doing things it should
not be doing in the first place
That will give citizens the freedom to produce =>
greater revenues
2) INDIA’S SYSTEM COMPARED
WITH AUSTRALIA’S SYSTEM
Flexible control over bureaucracy
Bureaucracy is controlled by Acts of parliament
Public Service Acts of 1902, 1922 and 1999
In Victoria, recent Public Administration Act 2004
This, being flexible, allows continuous improvement
Agile system. Empowers but demands
total accountability
Secretaries appointed by Prime Minister/Chief Minister
Contractual, with clearly defined KPIs
Secretaries empowered to hire and fire other staff
Hire and fire option with 4 months notice
Secretary appoints Deputy Secretary
who appoints Directors, etc. down the line
Open market recruitment by application for each position
Remuneration parity with private sector
Contractual service at all executive levels
Portability of employment contributions for retirement
Australian government doesn’t dabble
excessively with the economy
Extremely limited role of government in
managing economic activity (in comparison with
India)
Almost no administered price, including in the
utilities sector
Targeted subsidies to the poor
Freely floating currency
Very low duties (free trade)
Almost no subsidies for any sector
=> Starkly different governance!
Superior management (including project management) skills
Self-actualising organisational culture
Strong performance management system
Diverse background of government employees (most with private sector experience)
Head of civil service often in mid-30s
Good performers are rapidly promoted
Extensive delegation of responsibility
Free and frank policy advice
Significant use of modern IT
Strong system for accountability
KPIs and performance contracts for Secretaries
KPIs flow into performance plans of lower officials
All executives are fully accountable for contracted
results
Independent review of Secretaries’ performance
Performance bonus contingent on performance
Not uncommon for executives to be demoted or
dismissed for non-performance
Organisational culture
Blue culture on the
"circumplex“
Self-actualising
No one is called "Sir",
only first names.
Everyone equal as a
person
India's culture is very red
in comparison!
(Aggressive/Defensive)
Staff are expected to:
show concern for the needs of others
involve others in decisions affecting them
resolve conflicts constructively
be supportive of others
work to achieve self-set goals
help others to grow and develop
point out flaws (ie not just accept low standards)
be a good listener
give positive rewards to others
Staff are not expected to:
do things for the approval of others
"go along" with others
win against others
accept goals without questioning them
be predictable
never challenge superiors
do what is expected
oppose new ideas
Focus on world-best policy products
Policy officers conduct world-class research
Short, crisp, professional briefings for Ministers
No “peons”/clerks
Officers organise everything themselves
Rapid turnaround of documents/emails
Independent Board (with non-departmental
directors) provides high quality corporate
governance
Productivity tools extensively used. And
experts/ academics consulted
All documents dealt with electronically
Key documents auto-scanned at time of receipt
TRIM to store documents including emails
Govdex to share confidential documents across Federal and State governments
Telepresence (Huge TV screens)
No unnecessary travel for meetings
Constant interaction with OECD, other international jurisdictions and world-best academics
Eg. Centre for Market Design in University of Melbourne
3) PUBLIC ADMINISTRATION
REFORMS FOR INDIA
Political incentive reforms
As discussed: key reforms could include
State funding of elections
High salaries but no perks
Performance bonus based on
increased GDP
reduced corruption, etc
Lokpal to deal primarily with corrupt Ministers
Bureaucratic system reforms
As discussed:
Eliminate tenure
Contractual appointments (Under Secretary and above)
Salaries comparable with private sector
Performance pay related to outcome
Ability to dismiss without notice for non-performance
(with 4 months salary in lieu)
Reduce clerical staff and hire policy experts
But this is "not practical”!
Good policy maker must design transition path.
Eg. Following steps
0: Stop deputations to centre for two years
Ask an HR company to advertise all Secretary
positions
Month 3: Prime Minister and Ministers appoint New
Secretaries on 2-year contract based on merit
Secretaries not successful in getting these job sent to cadre
New Secretaries then advertise Addl and Jt Secretary
positions and hire in next three months
Month 6: Those not successful return to cadre
Transition contd.
Month 9: Strategic plans
Month 21: Implementation of strategic plans
completed
New Public Administration Act
Any relevant Constitutional amendment
By end of 2nd year, full transition to be rolled
out in the Centre
Similar transition rolled out in the States
Within three years civil service would be fully
restructured and become agile/efficient
4) ECONOMIC POLICY
REFORMS FOR INDIA
Chanakya’s insights, once again
Chanakya does not prohibit anything
Alcohol/ prostitution/ most meats
He regulates it
He promotes trade, particularly imports
Open economy is the key to prosperity
Liberalisation does not equal deregulation
India: yet another proof that economic
freedom works
Freedom is increasing rapidly in India since 1990s
Most sectors liberalised
E.g. mobile phones
Some sectors are free because the government is basically defunct in those areas
Overall, we have very low levels of freedom
=> Need to liberalise most sectors
Education
Health
India’s output has responded rapidly to
very limited increase in freedom Table: Share of world output measured in terms of PPP
Country 1980 1990 2000 2010 2016
China 2.2 3.9 7.1 13.6 18.0
United States 24.7 24.7 23.6 19.7 17.8
India 2.5 3.2 3.7 5.4 6.6
Japan 8.7 9.9 7.6 5.8 5.0
Germany 6.7 6.1 5.1 4.0 3.4
Russia 0.0 0.0 2.7 3.0 2.9
Brazil 3.9 3.3 2.9 2.9 2.9
United Kingdom
4.3 4.1 3.6 2.9 2.6
Australia 1.3 1.3 1.3 1.2 1.1
Economic reforms needed
Review and reduce unnecessary role of government
Fiscal system reform
Financial sector liberalisation (with prudential
regulation)
Privatisation of utilities and defence production where
possible – with regulatory oversight
Open economy (trade)
Urban/regional planning reforms to allow markets to
signal demand and supply
Infrastructure reforms (PPP etc.)
5) REGULATORY POLICY
REFORMS FOR INDIA
Need for optimal (just right)
regulation
Liberalisation ≠ deregulation
We need regulation to prevent/ punish harmful
effects
But no more than that
When social marginal cost equals social marginal
benefit (SMC=SMB – equalised for ALL policies)
Can be assessed through a cost-benefit analysis
(CBA)
Many challenges in CBA but without such test we
get truly bad policy
Points to consider
Policy must not be made in response to a
particular incident
It must be evidence based (cost-benefit/
statistical analysis)
E.g. cost of saving a life must be equalised
across all interventions
Regulatory Impact Statement
Gatekeeping role, includes Cost benefit test
Public consultation (transparency)
Bad policy reduced
The basic idea applies to all projects (eg. infrastructure/ public private partnerships)
But India doesn’t have gatekeeping processes yet
Victoria’s independent gatekeeping
mechanism
Department prepares RIS
Independent Commission assesses the RIS
Minister signs the RIS and publishes for
consultation
The Treasury department advices Cabinet
(where appropriate)
Parliamentary Committee scrutinises RIS for
integrity and diligence
10 questions to eliminate bad policy
1: What would happen without any role for
government
2. Identify problem/s with the base case and explain
why these are problems
3. First principles test (should government intervene at
all)
4. What can government do about the problem/s?
5. Freedom test
10 questions to eliminate bad policy
6. Strategic gaming test
7. Government failure test
8. Real experience test
9. Cost benefit test
10. Transition path
(details in Victorian Guide to Regulation/ policy
competition held by Freedom Team of India)
Urgently needed regulatory reforms in
India
Legislate a mandatory requirement for RIS
for any public policy/ significant project
Mandate the 10 point process as the basis for RIS
Create independent Commission to assess
adequacy of RISs
Ensure public consultation so the truth emerges
Reducing red tape (costs of regulation)
Measuring regulatory costs
Standard Cost Model (European)
Regulatory Change Measurement method
(Victorian)
Reducing red tape provides significant
benefits businesses and the community
6) TRANSITION FROM CURRENT
SYSTEM TO WORLD-BEST
SYSTEM
Strategic plans and transitional
strategy
This is time to our homework
Then good results will be certain
In this conference we will specify each
step of what a good government
should do in its first six months
Transitional path
These goals of good governance are
very easy to achieve
These are PROVEN methods
These are consistent with the views of India’s
greatest economist - Chanakya
Let’s remember that Indians are the same as other
humans
Same species. No difference in behaviour.
We need to establish a Chanakya
School of Governance
India has excellent technology, medical and
management schools.
But not one good school of governance
(Note: Governance goes beyond public
administration)
We need many excellent schools of governance
Suggested: Let the private sector in India establish a
world class Chanakya School of Governance
Federation of reformers recently
created
At the National Reform
Summit in Haridwar recently,
a Sone Ki Chidiya Federation
has been created for
reformers
Vision
Agenda for Change
Let this Conference create
Strategic Plans for reform