governance, political economy, institutional development and economic regulation

Saintliness versus efficiency

BJP winner

The BJP can put India on auto-pilot over the next eighteen months and probably still win the next general election, principally because, things are going well and the combined opposition has still to acquire the characteristics – leadership, resolve and broad agreements – of credibility. This high probability of winning in 2019 should push the BJP to evolve strategies, rather than tactics, particularly for the economy.

The key decision – morality or results

The key decision is to choose between prioritising morality or efficiency. The former entails more public delivery, the latter more private enterprise. Going down the moral route, say “zero tolerance” for corruption, has severe consequences – continued economic dislocation over the next two years; losing out on economic growth and inhibiting the availability of jobs. In a largely informal, cash based economy, like India, putting anti-corruption first, requires the private sector to reorganise, become more efficient and profitable, other than, by just avoiding tax. Whilst this adjustment plays out, the state – despite it being more inefficient than private enterprise – would need to step in with an enhanced role. The moral choice puts us on the long route to efficiency, which could last, well into the second term of the government starting 2019.

Corruption has its uses

The “amoral” choice is to junk the fundamentalist approach to anti-corruption, fix one’s eyes on the objective of high growth and navigate the waters by feeling the stones underfoot, to avoid deep pools, where corruption and inefficiency, overlap the most. Some examples of such action are – sticking to a reasonable “real” interest rate rather than go for an artificially “low” interest rate. The latter may enhance investment. But it comes at the cost of possible future stressed assets via “gold plated” bank-financed projects. Similarly, choosing Direct Benefit Transfers rather than the physical provision of subsidised public goods of indifferent quality is another example, which reduces corruption and enhances efficiency. But, in many other cases, the choice is not so obvious.

Corruption can be functionally efficient. Consider the case of information asymmetries – shorn of jargon, this simply means that it is not easy to know how or why government acts in a certain manner – whilst awarding contracts; appointing employees or allowing its assets – like land, to be misused.

Democratising access to information

If I bribe an official to understand the politics around a pending economic decision, corruption ends up “democratising information”, which is what a perfectly “transparent” system would achieve in Norway or Sweden. Consider, that prisoners in Indian jails bribe guards, merely to get minimum sanitary and nutrition conditions. Turning a blind eye to such “corruption” is “amorally pragmatic” till prisons become more acceptably habitable. After all, prison is meant to reform not penalise prisoners through health hazards. Petty corruption is the common persons way of dealing with administrative inefficiency.

Morality tends to exclude private enterprise

So, why does morality and a “big” state go together? Consider a government, which is stuck with a poorly motivated; inadequately qualified and shoddily managed workforce. Suppose it chooses to bypass public inefficiency by outsourcing public service delivery to the private sector. How will they oversee the private provider? Poor drafting of agreements and enforcement of contractual obligations generates corruption or delays execution. This is what took the fizz out of the juggernaut of Public Private Partnerships. Why for instance, did Mr. Piyush Goyal, the minister of railways decide to call in the Army to repair the collapsed pedestrian over-bridge at Elphinstone Station, Mumbai? Could it be that, contracting private parties, on an emergency basis, inevitably has lags and creates opportunities for corruption? We saw a lot of this in the run-up to the Commonwealth Games, New Delhi in 2010.

Preferring to work in-house is the obvious safe, default option for an executive which is capable and willing to work 24X7. The downside is that extensive use of state enterprises crowds out the private sector, which is hard put to better the riskless cost of finance available to the public sector. If publicly managed service delivery is sustainable, there is no harm in that. But not every public leader is an efficient “saint” and public systems, set-up by them, revert quickly to the mean, once the leadership changes.

How many Saints do we have?

Saintliness, humility and frugality make great copy and attract votes. The problem lies in scaling up a system based on virtue and otherworldliness. It is not for nothing that the competitive spirit -so important for sustainable efficiency- springs from the basic “killer” instinct to be numero uno. Saintliness is also rigid in adapting to the world. Effectiveness – getting results on the ground,  requires flexibility in implementation.

“Jhooming” can’t generate shared growth

closed market

A tax system with high nominal tax rates, which is efficiently oppressive can reduce supply because producers and service providers will shut shop, rather than risk getting their personal assets forclosed. This is worse than a tax system, which is not completely evasion proof but encourages growth in value addition. Black money, in progressively, smaller doses over time is better than a clean but scorched economy. Unlike in nature, “jhooming” may not generate shared growth.

Also available at TOI Blogs November 15, 2017 https://blogs.timesofindia.indiatimes.com/opinion-india/saintliness-versus-efficiency/

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