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Sunday, May 06, 2012

Insourcing vs. outsourcing government functions: A setback for public sector production of elementary education

A recurrent theme in the field of public administration is the appropriate separation, between things done within government qua government, versus the things that are best contracted out.

Example: A fascinating question in finance is the supervisory role of exchanges. Do we want exchanges to be rule makers and the front line of supervision, or do we want them to be mere profit-maximising IT companies who run trading systems, with all regulatory/supervisory functions being performed by SEBI? Is the exchange a public utility or a mere business?

In the field of education, the question is: Should government be the producer of education services (building schools, worrying about drinking water at the school, hiring teachers etc.) or should the actual production be done by private schools, with government giving money and decision making power to parents (through vouchers) and working on the public goods of education (measuring what children know, establishing curriculum, releasing information about each school into the public domain so as to assist the decision making of parents).

Our thinking on these boundaries is critically related to our views about the capabilities of government and the complexity of the problem.

How should we think about complexity? Problems that are hard, in the field of public administration, have three characteristics: large number of transactions, high discretion in the hands of the front-line civil servant, high stakes. (On the first two, see Pritchett & Woolcock, 2004). Under these conditions, production in government is hard.

How should we think about capability of government? When the government is fluently able to reorganise agencies, shift functions from one government agency to another, achieve cooperation between multiple government agencies, hire and fire civil servants, and pay market wages, then the government is going to be a capable one. A government that is weak on all these attributes is a low-capacity one.

Our views about the appropriate separation between in-sourcing and outsourcing would thus vary by problem and locale. For some problems, production in government is easy, and we'd be less emphatic that contracting-out should be done. E.g. monetary policy is easy, and there is no big problem with keeping it inside government. In some places, the government has high capacity - e.g. public schools work relatively well in Sweden. In other places, when the government has low capacity, we'd be more keen to contract things out.

Turning to the Indian setting, there are two huge problems that hold back the possibility of building high quality public schools. First, civil servant wages are set to 2x to 3x higher levels, when compared with market prices, thus inflating the cost of government schools. If you took the same money and gave it to parents, who chose a private school on their own, the private school would be recruiting much better teachers. Second, civil servants can't easily be fired, thus reducing the incentives of teachers to teach. Teaching is a transaction-intensive discretionary public service. When the front-line provider has no incentive to work, the quality of teaching will collapse, as has been seen with schools in India.

Some states in India had, appropriately, tried to fight these problems by going to the basics: by bringing in non-tenured staff at lower wages. By recruiting these "para-teachers", we improve production of education in the public sector. These two issues are of essence. By removing tenure, we increase the incentive of teachers to teach. By bringing wages in line with market conditions, we bring public sector production closer to the cost efficiency that can be obtained by the private sector.

This line of attack may now be torpedoed by the courts. The Gujarat High Court sees to have ordered the government to pay para-teachers full wages and give them tenure.

If this goes through, and if this creates a precedent for the rest of India, then this pretty much closes off these avenues for strengthening public sector production. It would, then, emphasise vouchers as the only way to go.

There is one important slip between cup and lip. The Right to Education (RTE) Act, one of the less impressive legislative achievements of the Indian Parliament, asks state governments to write rules about salaries paid by private schools. RTE was an attack by the public sector education providers against the private sector: so they wanted to kill off the ability of the private sector to pay market wages. Some states have written rules under the RTE which force private schools to pay civil servant wages. For these states, the gains from private production of education services will be smaller. Other states have been silent on this, and there is then a possibility of reaping the full superiority of private production.

I am grateful to Jishnu Das, Lant Pritchett, Parth Shah and Jeff Hammer for useful discussions on this.


  1. Why isn't this in the news in India? Khaleej Times, of all places!

    Secondly, the state govt has appealed to the SC, so lets be hopeful that the decision will be overturned. I hope the state govt runs a PR campaign in the media educating the masses.

  2. Hi Ajay,
    This applies to New Jersey in the USA as well. Property taxes are sky high, mostly because spends about US$20,000 per student per year, mostly going to unionized teachers and administrators, most of whom have only incidental interest in and few incentives to provide customer satisfaction.
    Government run schools provide low productivity at high cost just about everywhere.

  3. Dear Ajay,

    This is an excellent discussion. I want to add two perspectives to it:

    1. Just what is good education is very hard to define and measure -- we can often say what is perhaps necessary but what is sufficient is much harder. Concepts such as good citizenship, tolerance for differences, and a deep understanding of history in my view would also need to be added to the frequently mentioned need for proficiency in basic mathematics. Unfortunately the parent and the private sector (in response to parental demands) takes a very vocational, immediate job-oriented, Lord Macaulay style view of education which I feel could be very detrimental to a the long-term evolution of the country as a whole.

    2. It is indeed true that thus far the government as a provider has been unable to deliver on both the narrow goals and the broader goals but what about twenty years from now? A paper by Monica Dasgupta discusses the issue of accountability and suggests that demand led approaches (such as vouchers) may not produce first-best outcomes and that there may still be hope within traditional hierarchical structures for improving the performance of government providers: One direction that a recent report on Universal Healthcare has gone is to recommend the creation of an independent regulator that can hold the government provider to account combined with the freedom at the district level to contract out service provision to the private sector if it is felt that the government (or the private) provider is not up to scratch (

    Directional change is a very difficult thing to accomplish and while the private sector does have an efficiency appeal in education, I worry that if we head off in the direction of demand-led financing we may end up with an educational system that is very efficient at producing very narrow minded but very high quality clerical and technical staff.

    Best regards,

    Nachiket Mor

    1. Dear Nachiket,

      I also periodically get qualms about where this will take us. The key factor which, under our conditions, tips the balance (in my mind) is the abject failures of the government in building and running anything.

      We are not comparing a high quality public education system (e.g. Sweden) against a high quality voucher-led system. That would be an interesting choice, and the result there is not an obvious one. E.g. in Chile, there is a full voucher system, but the bulk of the market share has been retained by public schools. In India, what do you think would happen if the government gave parents a choice of taking their Rs.8000 per child per year of public expenditure and doing what they like with it?

      I think parents are very well incentivised to look out for the best interests of their children. In a situation like Chile, parents have chosen to take that money and give it back to a public school. If public sector production works well, parents will see that and respond to it.

      The real source of `clerical and technical staff' that is being churned out in India today lies in a different set of failures of the government: on the problem of curriculum and examinations. There is a lot of merit in retaining these as government functions - they have public goods characteristics in a way that running schools does not. At present, GOI is an abject failure in defining high quality curriculum and sophisticated examinations. To address this, it is very important to have free competition. Schools (and thus indirectly parents) should be able to choose from a non-government-controlled curriculum+examination system, such as ICSE or IB. One would like to also believe that CBSE / etc. will improve themselves over the years. But that's a separate debate.


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