Indian State has struggled for a very long time to decide the When, What and How's of creating an effective public policy. More often than not the State tends to overestimate its capacity or overuse its powers. The result? A long series of policy interventions that are either not needed or not backed by enough data or are outright failures in implementation.
The brilliant book - " In The Service of Republic" by Vijay Kelkar and Ajay Shah is aimed at bridging this major gap in our ecosystem - a formal guideline for State intervention in Markets or Society. Vijay Kelkar and Ajay Shah bring their vast experience in economics and public policy domain to create this masterpiece.
While every politician, civil servant, academic and any policy wonk should have this book by her bedside, I am trying to capture a quick gist of this book here. Again, this is just a trailer and may not do a complete justice to the fantastic movie that this book is!
A. Foundations - Ground Truths about State Apparatus
An individual (Citizen) interacts with 3 entities (forces) at various levels - State, Markets and Society. Out of these, State has the most coercive power and has monopoly of violence. State should use this power with utmost care. State should let the individual deal/transact with markets and society and interfere only if and when necessary.
Indian State tends to do too many things with very less efficiency. Instead, State should focus to do fewer things with maximum efficiency/ability.
Primary Focus Areas of State should be: Criminal Justice System / Judiciary/ Tax Systems / Financial Regulation.
Primary job of State is to create a robust and efficient "Invisible Infrastructure" in above areas. This invisible infrastructure becomes the backbone of state capacity and makes the state efficient/agile for implementing/responding to planned/unplanned policies/events.
State should intervene only in case of a Market Failure from below categories:
Externalities - When benefit of one is causing intended/unintended harm to other.
Asymmetric Information - like quality control of food and drugs.
Market Power - When monopolies in market are harming an individual's right.
Public goods (Non rival, non-excludable) - areas like defense, public roads.
Every State Policy gets channeled through only one of these broad-based actions:
Coercive threat to modify public behavior
Coercive threat to collect taxes from Public
Public spending to run programs
Public spending to pay subsidies
Always keep in mind the Law of unintended consequences: Any public policy initiative may end up producing totally unintended and unanticipated outcomes. Any policy intervention should try to thoroughly brainstorm all possible unintended consequences.
There are 4 broad stages of a public policy implementation, and a state intervention can go wrong in any of these 4 stages.
Market Failure Decision - Doing interventions without a market failure
Place of Intervention - Choosing intervention at wrong place in the ecosystem
Action Selection for Intervention - Choosing wrong set of intervention actions at right place
Action Execution of Intervention - Failed execution of right set of chosen actions
Sources of State Failure:
Resource Constraint: Policy may fail if doesn't consider the cost of intervention. A Rupee of State expenditure in India comes at a cost of 3 rupees to society
Information Constraint: Policy may fail due to lack of high-quality data to make decisions.
Knowledge Constraint: Policy may fail due to lack of knowledge foundation (expertise) required for planning and implementation.
Administrative Constraint: Policy may fail if does not document explicit details, checks and balances in policy doctrine by wrongly assuming it will be implemented by well-intentioned and/or knowledgeable actors.
Voter Rationality Constraint: Policy decisions done via direct democracy /Opinion Polls/plebiscite/referendum have greater chance of failure as the voter does not have adequate information to decide on a policy issue.
B. Stages of Public Policy Process
Stage 1 - Establishment of Statistical System
Stage 2 - Descriptive and Causal Research
Stage 3 - Propose New Policy Solution
Stage 4 - Public Debate
Stage 5 - Decision Making by State
Stage 6 - Translate Decisions into Legal documents
Stage 7 - Construct Administrative Capacity for Implementation
C. The Science - Key Considerations for State Intervention
Take into account the Incentives for all stakeholders - People respond to incentives. Politicians, officials, judges and common people all have their own set of incentives. The incentives around every policy intervention should be chosen in a careful way such that they motivate the players, but incentives don’t become the end goals. Any incentives based on a statistical measure carries a risk of statistics getting distorted by the actors for their benefit.
Respect the Price System of markets - State should NOT play with price system in markets as price system is the best self-governing and self-correcting mechanism. Any interventions by state into it eventually end up with negative consequences.
Important Rules of Price Systems -
- Supply and Demand make the Price.
- Demand curve slopes downwards and Supply curve slopes upwards - Consumers and Producers adjust their behavior as response to price changes.
- Law of One price - Artificially keeping different price for same commodity cannot sustain long term.
- Policymakers should NOT have any opinion on price NOR have any tool to control the same.
- Price system ensure most efficient resource allocation.
Encourage Competition in Markets - State should create an environment for a non-monopolistic market. Any policy should reduce entry barriers and encourage competition.
State policies should create a fair ecosystem to make it easy to Start, Run as well as Close firms with least possible and unbiased State interference in all 3 stages. It is NOT job of State to run the firms. Let the markets decide the fate of a firm and chose winners (-in a fair environment of rule of law).
State should make it easier for the failed firms to close via a well-functioning bankruptcy process. Job of State is NOT to keep alive sick/zombie firms artificially but to provide a robust process for closure of a sick firm.
When law enforcement improves and weak firms exit, the resources (labor and capital) get reallocated at required places (with efficient use) rather than blocking them in failed firms. This helps in overall increase in GDP in longer term.
System reaches General Equilibrium in long term - Markets are integrated and any State intervention at one place will have ripple effects in other areas. The effects will be visible in short term or long term. Any state policy should consider all these impacts and aim for a integrated intervention across the ecosystem with long term view rather than doing ad hoc interventions at specific places.
State should consider the possible long term/slow ripple effects in different areas before a policy intervention and should be open to live with short term pain for a narrow segment of society to create long term gains in broader society.
Always use Minimum Force - When two alternative tools yield the same outcome, State should use the one with least coercion. Always try to address the root cause of the problem rather than addressing the symptom. The lowest cost and less intrusive interventions are most likely found by addressing the root cause and not the symptom.
State should address the root causes like road safety infrastructure (for accidents), air quality (for respiratory issues) or mosquito control (for malaria prevention) rather than addressing these symptoms by creating more hospitals in each case.
Understand Limitations of Redistribution - When State thinks itself as parent, redistribution seems the most simple and obvious solution for problem of poverty. But poverty does not get addressed by redistribution.
Only solution to address poverty of a country is via long term sustainable GDP growth. Problem of poverty is addressed by Growth oriented policies and not by redistribution. Poverty and inequality are NOT market failures for a State to address them. State should let the price system work to address the resources at right place to achieve high GDP growth. At best, it can run a lean poverty redressed program in parallel with least intervention in price system.
Encourage Private Solutions to address Market Failures - Before considering a State intervention, check the possibility of Private solutions to address market failures. When Property rights and Contract enforcements work well, private persons can find better solutions through negotiations instead of State forced solutions.
State should not take a moralistic approach while addressing negative externalities. Role of State is to create the infrastructure of Property rights and Contract enforcements which can help the parties to negotiate an optimal solution. Negotiations work better than supporting supposedly wronged person.
We should give more respect to self-organizing systems that need less State capacity.
Another extension of this approach is to give contractual regulation capacity to private players in specific areas. This approach works well in aggregation models like Uber, Airbnb where private firm enforce contracts without blocking state capacity. Another example being, the Financial Market Infrastructure Institutions (FMII) like stock exchanges which act as front line of regulations in that space.
Perform Cold Calculations (Cost-Benefit Analysis) - State should do a detailed cost-benefit analysis of any intervention. The analysis has to be backed by solid data. After this analysis, State should choose least intrusive solution wherein the benefits outweigh the costs.
The cost-benefit analysis should also take into account the impact on larger community and not just the impact to involved parties. The analysis also should help to overcome the sunk cost fallacy in any decision. The cost-benefit analysis of proposed alternatives should be published as a formal document for review.
Every policy intervention should come with very explicitly mentioned objectives that are clearly documented. There should be periodic review post implementation to review if those objectives are met without changing the goal posts. This Ext-post review should take into account the circumstances under which certain policy decision was taken.
There is a lack of respect in Indian State apparatus for through analysis and planning. We plan in haste and repent in leisure!
Ask the Right Questions to decide Policy Objective - A policy intervention consideration should start by asking the right questions about the objective (goal). One policy instrument can be used only for one goal (assignment principle). Once that goal is achieved, the instrument is used up and should not be extended for a separate goal (avoid mission creep)
The goal of a policy intervention should be formally documented. Lack of clarity on goal, choosing incorrect goal or lack of documentation of goal can result in incorrect policy decisions. Public organizations favor multiple objectives as it helps lack of accountability. Policymakers should enforce clear single objective
Take Decentralization seriously - For all practical purposes, India is a continent with very high heterogeneity. India is union of states and decentralization is only right way to manage India given its scale. Forcing centrally managed schemes down to states will not yield the required results.
India should follow subsidiarity principle - to achieve best results, perform a function at lowest possible level of governance. In truly federal structure, state and local governments should design and implement their own schemes. The job of union government is to ensure that this capability is built at those levels.
One aspect of decentralization is tax distribution. Apart from central and state component, the GST should also have a local body component where part of tax is directly transferred at the point of consumption. This will provide direct benefits to better governed places.
D. The Art of Public Policy Creation
Organization Capacity Building - State actions are taken by organizations and not by individuals. So, we need a robust organization Design. The Organization Design should be well documented with clear: Objectives, Leadership, Formal Design, Clarity on Ownership, Checks on Cursive Power, Governance Board, Feedback Loops.
It is critical to maintain continuity of Organization to not lose the continuity of knowledge.
Go for Evolution and not for Revolution - A good society lets individuals plan and live their own lives with consistency on a long-term horizon. Any public policy should work towards this goal rather than implementing revolutionary ideas. Government should avoid surprises in terms of what it says Vs what it does. The stability is needed in life of citizen, not necessarily in life of civil servant.
Cross the River by feeling stones - Reforms are complex multiyear journey and there are no silver bullets to success. Participatory policymaking works better than smaller secret groups working on something. Make small moves and good measurements in place and do things that you can undo.
Be Careful in International Experience Adaptation - Success of a policy implementation depends on the long-term invisible infrastructure on ground in a county. So, a success story in a country may not work that way in India as we lack that invisible infrastructure. We should avoid 'isomorphic mimicry' of first world policies. There may be opportunities to free ride State capacity outside India, but it should be evaluated case by case basis.
Policymaking is Test Match, Not IPL - Many reforms need building of institutional capacity, which takes time. Policy process is slow and participatory. Pain is front loaded, and gains comes with lag.
Metrics of Intervention - There are 4 dimensions of complexity that can decide if implementation is hard or easy
Number of Transactions - Easier when number of transactions involved are less
Discretion - Easier when there is no discretion needed at level of civil servant who implements a policy
Stakes - Harder to implement when higher stakes are involved by a private person.
Secrecy - More secrecy may result in poor performance due to lack of feedback loops
Work in OPEN - Secrecy Harms policy planning and execution. Confident policymakers work in open as it signals capability.
Criticism and Conflict - It is in self-interest of policymaker to engage with critics so as to discover weakness in policy work. Conflict and Negotiations are normal in healthy democracy.
Formal voting systems are good tool for improving the arrangement of power while taking decisions.
Coming out Right - We need to create a culture which accepts failures
Avoid Rule of Officials
Country is not a Company -
Running Country VS Running Company
>> Government lacks feedback loops.
>> Government agencies are monopolies.
>> The coercive power of government is qualitatively different than a firm.
>> Government is more complex organization.
>> Government needs to Prize rules over deals.
>> Government must disperse power.
>> Government operates on longer horizons.
References for Detailed Understanding -
https://www.mayin.org/ajayshah/books/isotr.html
"In Service of the Republic: The Art and Science of Economic Policy" by Ajay Shah
Ep 154: The Art and Science of Economic Policy
Metrics for Intervention | Episode 101 | Everything is Everything
Invisible Infrastructure | Episode 82 | Everything is Everything
Ajay Shah on 'In Service of the Republic: The Art & Science of Economic Policy' at Manthan
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