GOVERnance reforms conference

2. DRAFT SLIDES FOR PUBLIC CONSULTATION 26 March 2013 GOVERnance reforms conference 13 and 14 April 2013, New Delhi

3. Welcome address SanjeevSabhlok

4. Objective of this Conference • To identify reforms to governance frameworks that will lead India to world-class governance • Public administration framework • Economic policy framework • Regulatory policy framework • The Conference will not identify policy reforms to specific sectors, eg. Education, etc.

5. Structure • Two part presentation by SanjeevSabhlok • Will be uploaded later on Youtube • Detailed workshops by participants on key topics • Some papers to be presented and discussed • Action plan/ recommendations prepred for use by: • Government of India • Major political parties • Future political parties and reform movements • Conference Report to be published

6. Inaugural address Gurcharan Das

7. Inaugural Address: Gurcharan Das World renowned author India Unbound and India Grows at Night

8. Chairman’s remarks T N Chaturvedi, Chairperson IIPA

9. How we - too – CAN get world class governance SanjeevSabhlok, former IAS (1982 batch)

11. Distillation of key learnings from over 30 years of experience in the IAS and Victorian Public Service Given limitations of time I will focus on frameworks (systems): • Public administration system • Economic policy system • Regulatory policy system

12. Plan of my presentation • Part 1 1) Theory of good governance 2) India’s system compared with Australia’s system 3) Public Administration reforms for India • Part 2 4) Economic policy reforms for India 5) Regulatory policy reforms for India 6) Transition from India’s system to world-best system

13. 1. Theory of governance

14. Crucial importance of meta-policy: policy about policy • We need to start at the highest level of thought • What is policy and what should it consider? • We need a policy about policy • Frameworks and systems • Without clarity on the policy concept and policy process (frameworks) bad policy will invariably emerge

15. Two main questions to ask • Whatshould a government do? • Are there limits to what a government can do? • How do we arrive at these limits (eg. net benefit test) • How should it do it? • How can a government comprising self-interested politicians and bureaucrats do what we want it to do? (public choice theory) Policy that doesn’t consider both these issues will be fundamentally flawed

16. Good policy necessarily considers implementation issues The “What” must be well thought out • “Bad administration, to be sure, can destroy good policy, but good administration can never save bad policy.” • Adlai E Stevenson Jr The “How” must also be well thought out • Policy that is unable to pierce the veil of incentives during implementation is bad policy

17. This is what we want Goal

18. Bureaucrat’s goal This is what we get OurGoal Bureaucrat (black box) …. by failing to think about the politician’s and bureaucrat’s incentives

19. Sequencing of my talk • I will discuss the “How” first • Public administration reforms • Then I will discuss the “What” • Policy framework and gatekeeping • Economic policy

20. A word re: Arthashastra

21. Arthashastraunderpinned India’s past success • For 12 out of the past 20 centuries India was the world’s wealthiest, and 2nd wealthiest in six out of the remaining eight centuries • Due to the public policy stance outlined in Arthashastra

22. We must put Arthashastrasquarely into the centre of public policy discourse • Most analysts of Arthashastrahave missed its point • its insights are extremely modern • we should read between the lines to understand what Chanakya is trying to tell us • All about INCENTIVES

23. Chanakya wanted a strong, minimal state, with mastery of incentives

24. Two axes: liberty, incentives Incentives Liberty

25. Key dimension #1: Liberty • Liberty is an end in itself. But it is also necessary for people to do their best • Lao-Tse’s advice to the king: “Win the world by doing nothing. How do I know it is so? Through this: The more prohibitions there are, the poorer the people become… The greater the number of statutes, the greater the number of thieves and brigands.” • “I love quietude and the people are righteous of themselves. I deal in no business and the people grow rich by themselves.”

26. India was much wiser in ancient times कहावत • जहाँकाराजाहोव्यापारीवहाँकीप्रजाहोभिखारी • Government should not engage in business • Free markets • Free enterprise

27. The natural effort of every individual to better his own conditionis so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations. - Adam Smith 1776

28. “Anyrestriction on liberty reduces the number of things tried and so reduces the rate of progress” • - H.B. Phillips (mathematician)

29. People create ideas, and wealthGrowth = f (freedom, opportunity) Two obstacles to freedom 1) Government Nanny, paternalistic state: • interfering policies and laws • “Food police” Injustice • contracts not enforced People innovate better if the government gets out of their way 1 Opportunity (technical frontier) 2 Innovation pushes out the frontier 2) Social control • interfering religious beliefs • science and critical thinking insufficiently valued Ideas don’t come from governments 3 n Governance must enable liberty (social reform is not a government’s job)

30. Key dimension #2: Right incentives • Chanakya thoroughly understood incentives: • He wanted the best talent in government • He wanted high salaries for top officials and Ministers • But vigorous audits (even spying) • Instantaneous dismissal and severe punishment for non-performance/corruption • Today we have the OPPOSITE incentives in India! • The results achieved today are inevitable

31. The problem of government failure • “Power corrupts, absolute power corrupts absolutely” • Politicians lavishly spend taxpayers’ money • Bureaucrats maximise their empire • Policy makers typically focus on market failure. • The real elephant in the room is government failure.

32. Understanding incentives } Institutions (rules) System Created by policy maker Incentives Response Endowment Local circumstances (beyond the control of the policy maker)

33. Examples: Incentives explain behaviour Disposing our personal rubbish • Indians don’t throw rubbish on the roadside in Singapore Tenure • Without job tenure an IAS/IPS officer will focus on delivery of outcomes, for fear of losing his job Corruption • Indians were incorruptible when British merchants first came to India. They were astonished! • But today Indians are world-famous for corruption.

34. Incentives are at work 24-7 We ask our politicians to lose crores of rupees during elections. Then we pay them very low salaries. Question: Will such people serve us or loot us? => Our system guarantees corruption. • Chanakya would have easily understood why India is so corrupt today

35. Burying our head in sand won’t make incentives disappear Incentives are at work even in our dreams!

36. Incentives are as powerful as a physical force Gravity pulls downwards, hence water flows downhill Incentives drive human behaviourand predict what someone will do But incentives are hard for most people to analyse • They are invisible • They are complex, layered, and conditional Despite this, we ignore incentives at our peril

37. Example of the power of incentives • I offer you Rs. 100 or Rs.200. Which will you pick? • Rs.200 • Always. • Incentives are subtle but very real • And predictable • Need not just be economic, but economic incentives often overwhelm others

38. Myth: Indians are special • Apparently Indians are “different” • they have a natural tendency to be corrupt • Not true • They respond EXACTLY as predicted, to incentives

39. China has moved toward incentives and markets-based governance • Teachers are dismissed in China if a class’s academic results are not up to par • In India some teachers get paid even if they don’t ever go to school

40. Results of this are as predicted Half of Class 5 kids in India can’t read Class 2 texts

41. The problem of control (principal-agent problem) Agency theory Company owners motivate managers through incentive contracts so manager actions (which are unobserved) can be aligned to owners’ goals. Usually: • Base salary (for participation) plus • Performance pay (incentive compatible wage) And hire/fire instantly based on performance

42. Controlling bureaucrats is much harder Citizens are the masters in a free society but: • How to control our representatives (politicians)? • How do politicians control bureaucrats? How to control? How to control? Black box of incentives Black box of incentives Citizen Problem: Hidden actions, complex incentives

43. Politicians’ interests generally don’t align with ours • Politician’s goal is to get re-elected • He knows that citizens can’t agree on anything • Impossibility theorem • He can game the system by catering to a niche • Median voter theorem • Lobbying/ pandering (subsidies/loan waivers) • In addition, he MUST necessarily be corrupt, being a requirement of Indian electoral system

44. How can we get politicians to look after our interest? • At least meet the participation constraint • High salary to attract good people into politics • Pay incentive compatible wage • Salary high enough to prevent incentives for corruption • Link pay with performance • Reduce tenure (from 5 to 3 years) to keep them on toes • Australia pays politicians very well, thus attracting top talent and minimising corruption • Partly fund elections by the state to reduce use of black money • Australia pays about $2 per valid vote cast

45. Bureaucrats’ interests are different to ours, too “Lurking below each public servant is a full-fledged human being with predictable self-interested behaviour” (Sabhlok,BFN) • His main goal: to expand his empire So: • Meet participation constraint • High salary to attract good people • Pay incentive compatible wage • Performance based reward/pay • Abolish tenure (at all executive levels) • Stern punishment for underperformance/ corruption

46. Chanakya’s insight re: incentive compatible wage • "the highest salary paid in cash, excluding perquisites, was 48,000 panas a year and the lowest 60 panas a year. The ratio of the highest salary to the lowest, was eight hundred to one.” (source: B.Sihag) • If lowest salary is Rs.4000 per month, then highest should be Rs. 32 lakh per month (or Rs.3.8 crores per year) • Just suggestive Even a top salary of Rs.1 crore will go a long way

47. The current situation (re: bureaucracy) • Top talent not attracted to government jobs • Salary not high enough to prevent corruption • Indeed, rewards for corruption • No punishment for non-performance • Tenure • Tenure is particularly insidious • Articles 310,311 • The politician therefore can’texpect bureaucrats to perform

48. 2) India’s system compared with Australia’s system

49. Flexible control over bureaucracy • Bureaucracy is controlled by Acts of parliament • Public Service Acts of 1902, 1922 and 1999 • In Victoria, recent Public Administration Act 2004 • This, being flexible, allows continuous improvement

50. Agile system. It empowers but expects total accountability • Secretaries appointed by Prime Minister/Chief Minister • Contractual; with specific KPIs • Secretary empowered to hire (and fire) others • Secretary appoints Deputy Secretary, who appoints Directors, etc. • Open market recruitment by application for each position • Market competitiveness of remuneration • Contractual service at all executive levels • Hire and fire option with 4 months notice • Portability of employment contributions for retirement