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Friday, March 29, 2013

Capacity constraints in public policy

India's failures in defence and international relations

The Economist has a great article about Indian strategic / defence thinking, in which they say:
Strategic defence reviews like those that take place in America, Britain and France, informed by serving officers and civil servants but led by politicians, are unknown in India. The armed forces regard the Ministry of Defence as woefully ignorant on military matters, with few of the skills needed to provide support in areas such as logistics and procurement (they also resent its control over senior promotions). Civil servants pass through the ministry rather than making careers there. The Ministry of External Affairs, which should be crucial to informing the country’s strategic vision, is puny. Singapore, with a population of 5m, has a foreign service about the same size as India’s. China’s is eight times larger.
With the army training for a blitzkrieg against Pakistan and the navy preparing to confront Chinese blue-water adventurism, it is easy to get the impression that each service is planning for its own war without much thought to the requirements of the other two. Lip-service is paid to co-operation in planning, doctrine and operations, but this “jointness” is mostly aspirational. India lacks a chief of the defence staff of the kind most countries have. The government, ever-suspicious of the armed forces, appears not to want a single point of military advice. Nor do the service chiefs, jealous of their own autonomy.
Instead of clear strategic thinking, India shuffles along, impeded by its caution and bureaucratic inertia. The symbol of these failings is India’s reluctance to reform a defence-industrial base that wastes huge amounts of money, supplies the armed forces with substandard kit and leaves the country dependent on foreigners for military modernisation.
Since independence India has got away with having a weak strategic culture. Its undersized military ambitions have kept it out of most scrapes and allowed it to concentrate on other things instead. But as China bulks up, India’s strategic shortcomings are becoming a liability. And they are an obstacle to India’s dreams of becoming a true 21st-century power.

The malaise is deeper

I think the malaise that is described here is a reflection of something deeper: a failure of capacity in the public policy process, across the board. This is not just about defence or international relations; it's a gross mismatch between what is required of the government, and the capability of the government, across the board.

In the field of economic policy, we have much the same story. We have multiple squabbling government agencies, all of which are less than capable, and failures of coordination are the norm. We know that the old statist policies are broken, but there is a vacuum in its place. Most persons in the policy process do not have an instinctive ability to focus on the market failure and thus the intervention, when faced with new situations.

India is now a $2 trillion GDP. Macro policy should now be about business cycle stabilisation. The old focus on agriculture and monsoon shocks is a useless way to think about the economy. However, we have simply not reconstructed our economic policy apparatus to reflect these new issues. The Ministry of Finance is not organised as a Treasury should be, and the RBI is not organised as a central bank should be.

Examples of this malaise are plentiful. We made great progress on the political challenges of pension reform, but we have fared poorly on the institutional capacity within government to follow through, to convert the courage of the political leadership into gains on the ground.

Underperformance is writ large across the landscape of the government. The school teachers are missing in action in schools; the police in Bombay was missing in action when the shooting started on 26/11; the central bank was missing in action in the inflation crisis. Consider a mundane problem like surveying the country, i.e. the Survey of India. How hard can it be, to walk around the country with GPS handsets, make map datasets, and release them on a website for download? We in India do a terrible job of this.

How would we make these things work properly? How do we construct agencies that have punch in execution, that are held accountable for delivering results? This public administration question is our problem #1 in India.

Why does the private sector renew itself, but the government does not?

In the private sector, as a thumb-rule, across every doubling of firm revenues, a ground-up rethinking of the organisation is required. The firm has to be re-organised, and brand-new process manuals have to be written. In my intuition, this thumb rule applies in public administration also. Across each doubling of GDP, we need to rethink the block diagram of how government is organised, and write fresh process manuals. At roughly 7% growth, this means we have to do such an exercise roughly every decade. But we in India find it phenomenally difficult to modify the process manuals and boundaries of agencies. This inability to change is a serious bottleneck to achieving competence.

The HR function has just not kept up with the demands. The sheer number of skilled professionals that we have, manning important functions in economic policy, is abysmally small. As an example, you may have heard a lot about the Financial Stability and Development Council (FSDC). It will come as a surprise to you to know that for all the sound and fury surrounding FSDC, at present it has no IT systems and no staff.

Suppose a private firm grew by 2x, 4x and 8x, and it was fossilised and did not re-org. Suppose it clung on to the old organisation chart, old staffing and old process manuals. The mismatch between the organisation structure and the requirements of growth would worsen through time, and exert a negative impact upon the success of the firm. In similar fashion, I believe that every day, as India becomes bigger and more complex, the mismatch (between the requirements of public goods versus the organisation of government) worsens, with increasingly harsh consequences for growth.

Re-organising a firm, rejuvenating the workforce, rewriting process manuals: none of this is fun. It is very comfortable for any group of humans to put off this hard work, to perpetuate the past into the future. Why do private firms not suffer such organisational death? What keeps them moving forward? The external impetus of competition! Private firms do not reinvent themselves because it's fun: the market economy kicks them into shape. Those that won't reinvent themselves tend to fade away.

In similar fashion, left to themselves, government agencies will wallow in the warmth of the past. Strong accountability mechanisms are required in order to make every arm of government uncomfortable in the mere perpetuation of the past. Every time we see a fossilised government agency, we should go to the root cause: A failure of accountability.

Fixing one area: Finance

FSLRC is unique in constituting a full rethink of the landscape of law and agencies in one field (finance). Reasonable men can disagree about what is the ideal legal framework for finance. But all of us can agree that the Indian Financial Code is a quantum leap compared with the present arrangement.  It is the much-needed reorganisation of government agencies that gets them going with sensible role definitions.

It is one thing to make a nice block diagram, but it is another matter to make each agency perform. This requires two elements: empowerment of the board, and enough pressure on the board to perform. For each of the seven agencies, the Code has empowered boards who would control their own organisation design and HR policy. The Code embeds strong accountability mechanisms, which would push the board and the chairperson to improve organisation design and HR policies. These accountability mechanisms would make it costly for the chairperson and the board of any agency to limp on under present conditions of performance.

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