Tag: EconomicPolicy

Public policy work is a test match, not an IPL.

Clicked by a Friend

The pursuit of happiness by each person is best achieved when the State creates conditions of stability and vanishes into the background.

It was a cold winter evening in Gurgaon. I was lying on my bed wrapped in a blanket, leisurely watching some YouTube videos. The video was interrupted by some Twitter notifications concerning Prime Minister’s address to the nation. I started watching Prime Minister’s All India televised address where he declared 1000 and 500 notes as demonetised. . My first reaction was to check how much cash I had at home. Seeing only 1500 rupees cash at home, I felt relieved. Like other people on WhatsApp groups and Twitter, I also believed for a few days that this was a master-stroke by the then government. This step is going to eliminate the black money available in the country. However, later on, like most other people, I had seen the suffering common people had to go through standing in the queue for long hours just to exchange their old currencies. My domestic help came next day crying that she has no bank account here and she doesn’t know how she can replace her old notes. I also remember following the everyday newspaper headlines on this issue and how the government everyday shifted the goal-posts of this policy decision saying that it is going to increase digitisation in the country.

Was demonetisation a good policy decision? Why did the BJP government take such a drastic decision without having a broad base consultation? Why there was no consultation from the public before taking this decision? Did it make any impact on curbing black money in the country? What were the consequences of this decision? How it has impacted the common people in the country?

I bought this book-In Service of the Republic: The Art and Science of Economic Policy last year after many episodes on The Seen and Unseen podcast recommending it a must-read for all those who are interested in policymaking. Vijay Kelkar and Ajay Shah, former bureaucrats are the authors of this book. This book not only makes us understand why demonetisation was a disastrous public policy decision but also makes you understand the nuts and bolts of policymaking, execution, and implementation. Insights and the wisdom mentioned in the book make it a rule book for all public policy practitioners. It gives you all nuggets on policymaking. The book is quite comprehensive consisting of 40 chapters. The book answers many important debated questions: what objectives should the State pursue? What is the purpose of the government? I felt like noting down each and every line of this book.

India i.e. Bharat: A Union of States

“A State as a human community that claims the monopoly of the legitimate use of physical force within a given territory” – Max Weber, The Vocation Lectures, 1919

Why State is needed? What is the main responsibility of the State? What are things State is supposed to do or not do? How State’s different actions have farreaching consequences not only for the present generations but also for the future generations. The authors list the various conditions when State’s actions are legitimate and justified. The state should not do anything except address market failure. Market failure happens when the free market fails to deliver efficient economic outcomes. Market failures happen in four kinds:

  1. Externalities occur when some of the costs or benefits of a transaction fall on someone other than the producer or the consumer. Pollution is an example of negative externalities. IT companies in Bangalore led to more parents providing computer education to their kids so that they can get jobs, is an example of positive externalities.
  2. Asymmetric Information refers to a situation where one party has more or better information. For instance-when a customer is buying medicines at a shop, she has no way of knowing if the medicines are adulterated.
  3. Market Power is established when a few firms achieve a dominant position in a market.
  4. Public goods are goods that are available to anyone. They have two characteristics: non-excludable and non-rivalrous. Roads and clean air are public goods.

India a low capacity State

Indian State works through panic, package, and neglect“- Harsh Vardhan (Financial Economist)

Many authors Indian and Western have shown that the Indian State lacks capacity. It can organise a humungous Kumbh Mela where crores of devotees come to take a dip in the holy Ganga. It can successfully conduct elections for such a huge electorate spread across and length and breadth of this country. However, the Indian state has continuously failed to deliver basic health, education, and sanitation services even after decades of independence. Why do Indian Institutions lack capacity? Because building a high capacity State takes time and consistent effort by policymakers, politicians, and bureaucrats.

Building a high capacity State takes time

“Where we do not have high intellectualism, we get raw power play”

Building the republic takes time. It will take many decades of hard work by the policy community for India to rise to the ranks of the advanced nations of the world. Policy reform is slow, hard work, and not amenable to quick wins on social media. There will be no sharp impact, no human interest angle. There will be small changes spread all across the economy, which can add up to substantial impacts.

Independent judiciary is an essential foundation of the market economy because it helps in the contract enforcement between the government and private firms. Poor contract enforcement leads to market failure. Different types of private solutions(contracts, torts, class action lawsuits, and private enforcement) can flourish when and only when the courts are swift and competent.

The need of the hour is to have an institutionalised application of mind. It is a way of ensuring that the right questions are asked, and alternatives evaluated before a decision is made. This helps avoid impressionistic and casual approaches to policy formulation and reduces the extent to which sectarian considerations dominate. In India, we have some irrational decisions because one section/caste group/pressure group is lobbying for it. Sound policy decisions require a lot of background research work, consistent probing, and also a feedback loop.

The Rhine river was not cleaned in a day. Rhine Action Plan was drafted in the year 1987 and it took many years of implementation and actions which led to the cleaning of the river. The hardest problems in state capacity are the criminal justice system, the judiciary, the tax system, and financial regulation. The best way to make progress is to take small steps and listen to the statistical evidence.

Policymaking is a process of trial and error

When getting hold of a larger object, don’t discard the smaller object. Don’t use a sword when a needle will suffice”.

Public Policy is a process of hypothesis testing, of forming a theory about the world and experimenting with interventions that are thought to help. This testing should go through a policy pipeline where the first data is gathered. Research is conducted which led to policy proposals, creating consensus among the public and policymakers. Finally, the government takes the decisions and implement the policies.

Created on Canva

Why do public policies get failed? There are various reasons behind it:

  1. The information constraint: We don’t have enough data because government itself does not collect the data with transparency and fairness. There are various other issues with data collection in the country. Policymakers just do not know what is going on. For instance- recent data about people died because of COVID has so many discrepancies.
  2. The knowledge constraint: We don’t understand the real problem because of a serious lack of social science research in India.
  3. The resource constraint: The government spends more than we think and know. The marginal cost of public funds (MCPF) is much larger than Re 1 in India.
  4. The administrative constraint : Public administration is harder than management in the private sector.
  5. The voter rationality constraint: Voters have no incentive to know about public policy.

Public Choice Theory: A Guide to Public Policy Making

……No matter how famous or well-reputed a person is, when she is hired as an official in the government agency, we are aware of the gap between her personal interest and the public interest. Public Choice Theory encourages us to engage in “politics without romance”. The objective is not to hire saints but to achieve a state which yields good outcomes when each actor is self-interested. Public Choice Theory predicts that public organizations will favor multiple objectives as this gives reduced accountability. Clarity of purpose is efficient for the principal and not the agent. A publicly stated and clear objective, on each policy initiative, improves the policy process. Public choice theory encourages us to think that all officials and all politicians are cut from the same cloth. We have to construct systems of checks and balances that will work through rational incentives of all parties and without assumptions that any one person is a saint. The puzzle of policy design is that of finding checks and balances.….

However, this theory also has its limitations. In reality, every individual in public life has a mixture of personal and altruistic elements. The State is not a benevolent actor, it is formed of self-centered persons. To create checks and balances, citizens, policymakers, and politicians can use these five pillars: data, media, intellectuals, legislature, and judiciary.

Strong Institutions are need of the hour

The policymakers should prioritise institution-building over just GDP growth. In the book named “Why Nations Fail”, the authors have given a ‘theory of institutions’ where they argue that institutions decided the destiny of the country. Institutions can be of two types: Political and Economic Institutions. The authors also add that poverty and prosperity of nations is the interplay of economic and political institutions. A complex modern economy only works when it is a self-organising system. It has to have the creative efforts of a larger number of individuals, all working in their own self-interest. There is no one measure of institutional quality but the authors have listed a few measures that can be used as a benchmark to understand the quality of Indian institutions:

  • Extent of perceived safety of women and functioning of the criminal justice system
  • Flight of millionaires
  • Flight of India-centric firms
  • Flight of India-centric trading
  • Flight of India-centric contract enforcement
  • Freedom of speech to comedians

Appreciation of ‘self-organising system’

The authors reiterate that State machinery should appreciate and facilitate the self-organising system. For instance- local problems should be solved by local people who are on the ground since they understand the problem better. The authors talk about Coasean Approach(Transaction Costs Perspective) to deal with market failures. The key concept of this perspective is that when property rights are clear, both sides are brought to the table to negotiate. However, this approach also requires the State to play a role in clearly defining property rights and judicial infrastructure that can help in enforcing contracts.

One of the best solutions mentioned in the book is an approach by political scientist Elinor Ostrom. She was the first woman to get a Nobel prize in economics. She discovered that many practical arrangements established by traditional communities over very long periods of time achieve good results. An example of this is declaring a moratorium on eating fish during the month of Shravan. Though this step seems religious, it leads to saving fish counts in the river.

Social engineering is inappropriate

Social systems are very complex and outcomes are generally greatly different from those that the planners may have desired. The values and imagination of the people should drive the changes in the world, rather than the values and objectives of a few central planners. Society can and should evolve gradually through the thoughts and actions of the people. The best framework of public policy is one in which the State impinges upon the lives of individuals as little as possible.

Policymakers need to be aware of the knowledge constraint, biases, implementation constraints, and most importantly every individual, official, and politician responds to incentives. We all remember how the sterilisation scheme launched during emergency miserably failed despite having a good intention of population control. Rather than State giving surprises, implementing stringent policy measures, policymakers should nudge the people through signaling or incentives towards the social change. As the authors of the book added, “we should pursue revolutionary change for government structures but evolutionary change for the people”. The best thing I gained from this book is that I should never see even policymakers as someone who knows everything. They are also working in unknown territories. Better policymaking requires a lot of effort and commitment from all stakeholders including civil society organisations, NGOs, politicians, and the common people.

If you liked reading this post or gained something from it, please buy me a coffee:

Buy Me A Coffee