1. In Service of the Republic
2. What objectives of public policy are appropriate?"
   1. Traditional Thinking:
   2. Proposed thinking
3. People respond to incentives
   1. Deploy incentives with care - caution in setting up high-powered incentives”
   2. Caution in setting up incentives around statistical measures
   3. People’s responses to incentives can be wonky
   1. cost of acquiring and processing information
   2. thinking across long time horizons
4. Price System
   1. Four forces of stabilization —
5. More competition Always
   1. Creative destruction and the death of firms - needed
      1. Business cycle fluctuations and firm failure
   2. The government as a source of market power
6. General Equilibrium Effects
7. Go to the root cause, use the smallest possible force
8. Redistribution is fraught with trouble
   1. Difficulties with paternalism
   2. Poverty will not be solved by redistribution
      1. Loss of focus weakens accountability
9. Private Solutions for Market Failiures
10. Calculations in Public Policy
11. Ask the right question
    1. Tax
    2. Deficit
    3. Formal process helps
12. Decentralisation
    1. Where to be careful about decentralisation
13. Evolutionary Change for the society, revolutionary change for the government
14. Cross the river by feeling the stones
15. be careful of isomorphic mimicry
16. Free-riding on state capacity outside India
17. Public policy work is a test match, not an IPL.
    1. Policymaking on the election clock”
    2. Playing the long game
18. What is hard and what is easy
    1. Four dimensions of complexity
    2. Solutions that reduce complexity in some dimensions
    3. Learn to walk before you run Once
19. Confident policymakers work in the open
    1. The under-supply of criticism
20. System thinking
    1. This is what is required to scale back the administrative state.
21. The public policy process
    1. The policy pipeline
22. Do fewer things
23. Rolling up your sleeves to build state capacity”
    1. Clarity of purpose of the agent
       1. Establish a leadership
          1. Containing discretion
          1. Government departments in India are overloaded with many tasks and it is hard to reform this.
24. Information
25. Knowledge

In Service of the Republic

What Objectives of Public Policy Are appropriate?"

Book is grounded on "appreciation of 'self-organizing systems', of the uncoordinated decisions of individuals left to themselves, that discover order by themselves"

"The state is the most powerful actor in society. The state has the capacity to coerce, the capacity to inflict violence upon private persons"

"A state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory". #MaxWeber, The Vocation Lectures, 1919"

at the heart of the state, there is violence. The state acquires a monopoly upon violence

"The individual has a soul but the state is a soulless machine. The state can never be weaned away from violence to which it owes its existence. #MahatmaGandhi"

"The big idea of liberal democracy is to limit state violence into a controlled, predictable and just form"

"The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all. #JohnMaynardKeynes"

"Where the free market fails to deliver efficient economic outcomes, this is termed Market Failure'. Market failures come in four kinds:

• Externalities,
• Asymmetric Information,
• Market Power and
• Public goods

1. Traditional Thinking:
2. Proposed thinking

"Externalities are the situations where persons impact upon each other in ways that are not intermediated through voluntary agreements between these persons, where people impact upon each other in ways that were not negotiated."

"Whether positive or negative, externalities involve gains or harms that are imposed upon bystanders, which do not directly feed back upon decision makers through the normal market process"

"A high degree of asymmetric information can create conditions under which voluntary or market-based transactions become infeasible"

"Market power is found when a few firms achieve a dominant position in a market."

"public goods such as clean air are underproduced by the free market."

"public goods are things that are 'non-rival' and 'Non-Excludable'."

Excludability is essential for firms to obtain a revenue stream"

"The free market does not, on its own, solve these four kinds of problems. The interventions by the state should be primarily located around these four problems."

When market failure is not present, we should be sceptical about state intervention

All activities of the state are grounded in coercion: either

• directly (The state can demand certain behaviour, and threaten violence against private persons who refuse to comply.) or
• indirectly (The state can demand tax payments from the populace, backed by threats of violence against people who do not comply)."

Private persons overproduce things that impose negative Externalities as pollution and underproduce things that impose positive externalities;
modifications to tax rates can help improve the outcome.

The state can choose to spend tax revenues in two ways.

1. It can run state organizations such as the police, which produce certain public goods.
2. Or, it can transfer money to private persons All states do some amount of redistribution

For example, relief work done by the government after a natural disaster is a case of transferring the money obtained in coercive ways (through taxation) from the populace to the affected people." Subsidies can be unconnected to externalities; they can be pure redistribution."

These transfers can be linked to market failure (e.g., using education vouchers to address the externalities in education) or they can be pure redistribution

"The world of public policy is about these three levers: rules about behaviour, taxation, and spending money."

The state is supposed to be a machine that converts coercive power into human welfare. A coercive agent is poorly placed at solving failures of negotiation.

The essence of market failure is the channels of influence between two persons which are not governed by negotiations and choice:

• Market power: One party in the negotiation has little power and experiences a loss of choice.
• Asymmetric information: The process of negotiation works poorly as there is a lack of information.
• Externalities: There are channels of influence between two parties that are not negotiated.
• Public goods: The individual is not given the opportunity to negotiate and choose."

The state is a coercive agent. At the heart of market failure is a failure of coordination, of a lack of negotiation. There is a tension at the core, where problems of coordination are not easily solved through the tool of coercion.

Some people might like to have a paternalistic government. Coercive power gives the state the ability to take from one and give to another, and this will make some people happy at the expense of others. State paternalism can then only be in favour of some and not all.

Traditional Thinking

"First, there is the political economy problem, and governments are hijacked by special interest groups to aim for the wrong objectives. And then, there is the state capacity problem, where government fails to achieve the objective that it seeks to solve."

Proposed Thinking

• Situations where freedom works well:
  where the right thing for the government is to do nothing but the government is doing something
• There is a market failure, but the politics goes wrong:
• There is a market failure, and the objectives of policymakers were sound, but the design of the intervention was wrong:
• There is a market failure, the correct intervention was attempted, but the implementation failed:

This four-part thinking is more useful than the more conventional classification scheme of 'political economy problems' versus 'state capacity problems

The three key steps in policy thinking are:

1. Are we facing a market failure? If not, there is no role for the state.
2. Does the proposed intervention address this market failure? Sometimes, we see proposed solutions which do not address the claimed problem.
3. Do we have the ability to effectively implement the proposed intervention? Many times, an idea might be sound but, under present capacity constraints, the implementation of the proposed intervention may be infeasible

In an ideal world, the state is a benevolent actor, which establishes the right priorities, and is able to marshal the resources to achieve good outcomes. This is not the world that we live in. Public policy in India is characterized by a great deal of failure. We tend to establish the wrong objectives, and then we tend to fail on achieving these objectives. What are the sources of state failure in India?

1. The information constraint
   What you measure is what you can manage.
   Policymakers mostly lack high-quality data about the society in which they seek to operate.
2. The knowledge constraint
   Public policy is a research process, and we in India lack the foundations of knowledge for operating this research process.
3. The resource constraint
   As a thumb rule, it is useful to reckon that the cost to society for every rupee of public spending is around Rs 3.
   In the best advanced economies, the numerical value for the Marginal Cost of Public Funds is from 1.5 to 2."
4. The administrative constraint
   1. Principal–agent problems
      Government organizations contain the hardest management problem. How do we obtain good behaviour from employees that wield coercive power, while lacking good measures of performance, and having no threat of organizational extinction?
   2. Three cross-cutting problems that are found in all organizations are human resource management, the financial process and the procurement process.
      In Indian system these are not established
   3. In every organization, there are front-line producers and then there is an enormous overhead of monitoring, measurement, management and strategy."
      A low teeth-to-tail ratio is required for the organization to work well. Too often, in India, we have organizations which are all teeth and no tail.
   4. Politics without romance
      we used to think of the state as a pristine, benevolent actor who would work for the best interests of the people. Now we think about the incentives of politicians and officials, who pursue their own personal objectives.
      This intuition was formalized in the field of 'Public Choice Theory' which used economic analysis to think about the objectives of politicians and officials
   5. The yearning for heroes
      The objective of reform is not to hire saints, but to achieve a state which yields good outcomes when each actor is self-interested.
      Example: The fruit of the poisonous tree - The lack of this doctrine in India—the implicit belief that policemen are benign persons who mean well—is a major source of arbitrary power and thus the abuse of power by enforcement agencies in India.
   6. Who will mind the minder
      Public choice theory encourages us to think that all officials and all politicians are cut from the same cloth. We have to construct systems of checks and balances, that will work through rational incentives of all parties, and without assumptions that any one person is a saint."
5. The voter rationality constraint
   1. Incentives of voters: the average person does not have the incentive to invest in learning about policy problems.
   2. The limits of voting systems
      The great economist Kenneth Arrow proved an 'Impossibility Theorem', which shows that voting systems are not able to consistently aggregate the preferences of voters. 5 Specifically, Arrow defined three sensible criteria that a reasonable voting system ought to simultaneously satisfy, and proved that no voting system could achieve all the three at the same time. This emphasizes how voting and elections are less useful than meets the eye, in finding the right pathways for policy
   3. Populism
      the collection of popular policy ideas. judging a policy initiative by its popularity among the masses is unwise.
   4. Representative democracy - An alternative that works
   5. Incentives, not technology
      Technologies to allow every person to vote on policy questions are designed - but they are not incentive compatible.

People Respond to Incentives

People respond to incentives. Human behaviour is not fixed; it changes when the incentives change. When policy changes, human behaviour changes.

Politicians and officials also respond to incentives

A government organization that is riven with corruption is not one which was unlucky to get a lot of corrupt people. It is one where the rules of the game facilitate corruption."

The task of public policy research is to identify the formal rules which have incentive implications for the behaviour of officials and politicians. When the rules change, the culture will change. Politicians and officials respond to incentives. This has a big and optimistic implication. Changes in the rules of the game will generate behavioural changes on politicians and officials also. The behaviour of politicians and officials is also malleable. The puzzle of policy design is that of finding the checks and balances, and the rules of the game, through which politicians and officials will generate good outcomes for society when they pursue their own self interest.

Deploy Incentives with Care - Caution in Setting up High-powered incentives"

When 'high-powered incentives' are set up, the agent single mindedly focuses on achieving that measure, and sacrifices everything else.

This proves to be particularly important when transplanting ideas from advanced economies into India

Caution in Setting up Incentives around Statistical Measures

When a measure becomes a target, it ceases to be a good measure. Goodhart's law, 1975

#CharlesGoodhart

People's Responses to Incentives Can Be Wonky

"Liberalism—the respect for the values, beliefs and decisions of others—is integral to economics as it is to no other branch of human knowledge."

While human beings mostly do well in understanding incentives and doing the best for themselves, the new field of 'behavioural economics' has documented many kinds of mistakes that human beings make in understanding information, risk and time.

Cost of Acquiring and Processing Information

In practice, obtaining and processing information is costly. Humans are rational in choosing where to expend such effort

Thinking across long time Horizons

The field of behavioural economics has emphasized that humans seem to exhibit a very low regard for events deep in the future. There is a certain kind of short-termism that is wired into us; we tend to make decisions based on outcomes nearby in time.

These concerns have gone from novel criticism of the mainstream, with the 'bounded rationality' of Herbert Simon of the 1950s, to becoming the mainstream, with the 2002 Nobel Prize in Economics.

The optimal stance of policy is not obtained if we think of human beings as perfectly effective at understanding information and making sound decisions."

Price System

Rules of Public Policy

1. Supply and demand make the price,
2. Demand curves slope downward and supply curves slope upward,
3. There is a law of one price,
4. The policymaker should have no opinion on the price, and no tools to directly control it."

A gap between supply and demand is a problem. Prices move in order to remove imbalances between supply and demand. The movement in price solves this problem by inducing changes in both supply and demand. Every time a government interferes in the movement of a price, it hampers this adjustment process.

When the price goes up, less is demanded ('demand curves slope downward'). When the price goes up, more is supplied ('supply curves slope upward'). People are rational and change their behaviour. At a higher price, there is more supply and less demand.

Policymakers of a socialist vintage are hostile to the word arbitrage. However, arbitrage is the basic human instinct of removing the difference between two different prices for the same thing, and earning a profit while doing this.

The correct price is the one made by supply and demand, untrammelled with political influences.

The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization. - #MikhailGorbachev

Controls on prices are illegitimate and do not work.

"How do we break out of the cobweb model (decisions made based on past data)?

Storage (also called 'hoarding') is the technique through which goods are transported from a time point where they are cheap to a time point where they are expensive. Futures trading looks into the future, and produces a forecasted price at the harvest date which can be used for sowing decisions or storage decisions. Free trade (within India and across the border) generates arbitrage, where cheap goods are taken away and additional supply brought in when prices are high."

Four Forces of Stabilization —

1. warehousing
2. futures trading,
3. domestic trade and
4. international trade

The best functioning economy is one in which changes in supply and demand rapidly result in a change in the price

Supply and demand make the price. When prices go up, demand goes down. When prices go up, supply goes up. Free men and women will buy things where they are cheap and sell them where they are expensive, and thus arbitrage away pricing discrepancies. When there are large changes in a price in a short time, this can be disconcerting and impose problems upon some people. But if the government forces the price to change slowly, this makes things worse.

Prices are the mechanism through which the market economy adjusts to shocks; by hindering price movement we postpone adjustment. In India, the legislature, the executive and the judiciary have all repeatedly undertaken actions which go against the grain of the price system. These actions are doomed to failure. When the policymaker tries to control the price, this is harmful, and the greatest harm is done when the policymaker tries to control both the price and the quantity. The policymaker should have no opinion on prices and not try to control prices. Policymakers must strengthen their intuition into the working of the price system, and go with the grain. The field of public policy is about identifying and addressing market failure, not controlling prices.

More Competition Always

Competition pushes firms to cut costs, to innovate, and to deliver the best bargains for customers.

All across the economy, we require a progressive outlook supporting entry and competition. Policymakers must constantly use the power of the state to prise open closed systems, to create conditions of extreme competition, and to see the bright side of firm failure.

Creative Destruction and the Death of Firms - Needed

The prolonged survival of a weak firm, based on artificial life support, induces negative externalities upon healthy firms. The exit of these 'zombie firms' is a positive for the economy.

For this to work properly, we require a well-functioning bankruptcy process. In this, the key distinction is between firms with valuable organizational capital and those without.

The lingering presence of these firms increases the cost of Inputs for healthy firms, and reduces the profitability of healthy firms. When a policy framework encourages the lingering survival of failed firms, this harms healthy firms in that sector.

This is one reason why public sector companies are a problem for the economy: there is a greater risk of them becoming zombie firms backed by the exchequer. This is bad for public finance and bad for the economy.

Economic dynamism requires closure. When business failure turns into investigations, there is no closure.

A society that pillories entrepreneurs, and turns business failure into protracted disputes or entanglement in agencies, is one which will have less entrepreneurship.

Business Cycle Fluctuations and Firm Failure

Consider a future date when the bankruptcy process works well. Under such conditions, when a business cycle downturn commences, weak firms will go into the bankruptcy process and get rapidly processed, their swift exit will improve profit margins of the survivors, and the resource reallocation will generate GDP growth. Faster that this process can play out, the shorter the downturn will be. A sound bankruptcy process gives less severe business cycle downturns"

The Indian economy features the coexistence of high-productivity firms that abide by laws with low-productivity firms that violate laws. When law enforcement improves, and weak firms exit, GDP growth will be obtained through reallocation of labour and capital.

The Government as a Source of Market Power

Market power results in bad outcomes, regardless of whether the actor in question is public or private. We should be as zealous about dismantling state-induced barriers to competition as we are when attacking market power created by private persons.

Creative destruction is not alien to India: for small firms, it is the everyday reality. It is only with the large firms, and the areas connected with government, where competitive dynamics is poor."

General Equilibrium Effects

The effects of a given policy change may not show up in a concentrated fashion. But if small changes are spread over a large number of economic agents all over the economy, they may add up to a substantial impact (whether benign or malign) even if they are not sharply visible at any one place

By default, we are wired to look more narrowly. For reasons of functional specialization, the lines of turf, and the limitations of our minds, it is easier to look at one firm or one sector at a time. This is 'partial equilibrium' thinking. But every policy thinker must maintain a general equilibrium perspective in the back of her head.

There is a relationship between the short run vs the long run, and partial equilibrium vs general equilibrium. In the short run, we see the first effects of a policy change, which are smaller in their scope. But with the passage of time, all parts of the system adjust, and we achieve the full general equilibrium effects. Conversely, to think about the long run requires general equilibrium thinking.

We normally see a few firms or an industry at a time. But actually, all parts of the economy are connected together in 'general equilibrium'. Every change in one firm or one market induces ripples in every other market. The full general equilibrium effects play out slowly. In areas like tax policy, globalization, agriculture, or universal basic income, general equilibrium thinking has a lot to offer in understanding the policy issues.

Go to the Root Cause, Use the Smallest Possible Force

When two alternative tools yield the same outcome, we should prefer the one which uses the least coercion.

"The two objectives—reduced use of coercive power and solving a problem at the root—are related."

Criminal penalties in economic law should be viewed with great suspicion

We should solve the disease and not the symptoms. This calls for an analysis of the root cause of market failure."

Redistribution is Fraught with Trouble

Difficulties with Paternalism

There is an ever-present danger of paternalism, of policy thinkers who feel they know how poor people should lead their lives. Poor people have their own tastes and their own budget constraints. We should respect what they are doing. Poor people have minds and preferences and pursue their own objectives

It is hard for the state to be paternalistic as it does not know enough about individuals. Each person is different, and only the individual can choose what is best for herself. When the government tries to be paternalistic, value judgements are made by policymakers which are not amenable to rational discourse.

In addition, public choice theory encourages us to be sceptical when a politician or an official engages in paternalism. In addition to the lack of empathy (i.e., the policymaker is unable to step into the shoes of a poor person, and see the world from her eyes), there may also be self-interest at work.

Poverty Will not Be Solved by Redistribution

No country solved poverty through redistribution. The first priority of policymakers should be to establish a vibrant market economy, through which the size of the pie grows strongly. After this, taxation can be used to obtain budgetary resources which are then redistributed.

Prioritization of growth oriented policies.

Growth is the most powerful, and only effective, anti-poverty weapon.

Poverty is not a market failure.

Govt has a role for one lean redistribution and disaster relief.

Distortions of the market economy, induced in the pursuit of redistribution, hinder GDP growth. That is tantamount to killing the golden goose.

Subsidies distort behaviour of recipients. The marginal cost of public funds in India is high. The cost imposed upon the economy for Re 1 of public expenditure is about Rs 3. This implies that subsidy programmes induce a large adverse impact upon the GDP. It is easy to build state capacity for paying out subsidies such as the NREGS; it is hard to build state capacity for public goods such as the police. Competing political parties tend to enlarge subsidy expenditures as a way to win elections. The establishment of large subsidy programmes and the sense of entitlement that tends to arise around them create fiscal risk.

The cleanest way to do redistribution is to pay out cash. We should let the price system do its job of effectively allocating resources, so as to obtain high GDP growth. The market economy would grow the pie, the government would tax a slice of the pie, and use this money for redistribution.

Loss of Focus Weakens Accountability

The assignment principle teaches us that one tool of policy should be devoted to one objective.

Fighting poverty should be the clear objective of one or two anti-poverty programmes. The objective of the remainder of government should be to address market failure, without bringing distributional considerations into the picture.

Policy thinkers were attracted by three key features of workfare programmes. They are self-targeting:
Only the poorest would utilize them.
They are self-adjusting: When there are remunerative activities, e.g., associated with an agricultural cycle, there would be an automatic reduction in workfare.
Finally, they are self-liquidating: Once incomes in a certain region go up, through economic growth, nobody would want to do manual labour at Rs 100/day. Over the years, these programmes would tend to fade away on their own."

the best-thought-out redistributive programmes often go wrong. Successful redistribution makes great demands upon the capabilities of the policy process.

Private Solutions for Market Failures

#RonaldCoase brought fresh insight into this field, with what is called the 'transaction costs perspective' Coase Theorem
As long as property rights are clear, both sides will be brought to the table to negotiate

Before Ronald Coase, economists viewed negative externalities as a story with a perpetrator and a victim.

The Coasean approach requires the state to play a role in clearly defining property rights

Traditional community solutions to the tragedy of the commons

We should have greater respect for self-organizing systems that do not require state capacity.

When property rights and contract enforcement work well, private persons will negotiate their way to many good solutions. And even in the extreme, where large numbers of people are involved, some traditional community solutions achieve optimality. When feasible, these pathways are superior to the traditional toolkit of state intervention, as they involve less coercion.

Calculations in Public Policy

Toting up the costs and benefits

Accounting for the interests of persons not in the room

Long-term thinking

Combating sunk costs

Ex post review

An institutionalized application of mind"
Cost–benefit analysis is thus about creating an institutionalized application of mind. It is a way of ensuring that the right questions are asked, and alternatives evaluated, before a decision is made. This helps avoid impressionistic and casual approaches to policy formulation, and reduces the extent to which sectarian considerations dominate.

Going beyond the qualitative recognition of a market failure, it is important to quantify the benefit that would be obtained for society by addressing the market failure. If the cost–benefit analysis shows that the costs imposed upon society, by the best solution, outweigh the prospective benefits, the cure is worse than the disease.

The formal process of cost–benefit analysis helps avoid emotion, respects the interests of persons who have not mobilized to campaign or lobby for their own interests, helps bring long term considerations into the picture, and combats the sunk cost fallacy.

Every new policy initiative should be launched with a clear statement of the problem that it seeks to solve, the demonstration that there is a market failure, and the cost–benefit analysis that was used to discover the best intervention. After a few years, it is useful to engage in ex post review, and change course if the original objectives were not met.

Cost–benefit analysis is not a science, and there is a significant imprecision in all such estimates. We always see things more clearly in hindsight. The idea of ex post review is not to pillory the people who looked at the information at a certain point in time, e.g., in a moment of crisis, and made a decision.

It is to establish feedback loops through which a process of iterative refinement sets in. Cost–benefit analysis is required for government intervention into society. It is not essential when doing internal reorganization of government organizations. The laws that give power to government agencies to intervene in society must codify the processes of cost–benefit analysis and ex post review. Through this, it induces an institutionalized application of mind, and improves the quality of work."

Ask the Right Question

The first stumbling block in the policy process is posing the right question. When a policymaker wants large resources in order to run subsidy programmes, the right objective to pursue is tax revenue and not the tax/GDP ratio.

Tax

Faced with a choice of a GDP of Rs 100 and a tax/GDP ratio of 20 per cent, vs a GDP of Rs 200 and a tax/GDP ratio of 15 per cent, we should prefer the latter. A single-minded focus upon the tax/GDP ratio is inappropriate; we must see the larger picture

Deficit

The legitimate concern about the import of capital lies in ensuring that there is a high degree of diversification. Capital should be coming into the country from a heterogeneous class of players, through many different financial channels, into many different kinds of domestic assets. This diversification will generate sustainable financing of the current account deficit. Once this is achieved, there is no difficulty associated with investment that is larger than savings

The field of economic policy is littered with analytical fallacies that have set off entire policy communities in the wrong direction. #JanTinbergen's 'assignment principle' teaches us that one policy instrument can only be used for one objective.

A great deal of policy confusion in India stems from placing multiple objectives upon policy initiatives.

Why do organizations find themselves in situations with more objectives than instruments?
Public choice theory predicts that public organizations will favour multiple objectives as this gives reduced accountability. Clarity of purpose is efficient for the principal and not the agent. It is our job, as policy thinkers, to hold the metaphoric feet of every agency to the fire, and hold it accountable for a narrow set of goals associated with a narrow set of powers. This requires drafting modern laws that clearly articulate objectives and establish commensurate accountability mechanisms.

Formal Process Helps

Formal documentation is required, before every move in public policy, which conducts such analysis. Without such formal statements, we run the risk of degenerating into shifting goalposts: An objective is stated, it fails to work out, the authorities then claim that the true objective was a different one.

Decentralisation

The heterogeneity of economic and social development, across the regions of India, generates heterogeneity in the public policy pathways desired by different groups of people
Decentralization of government helps produce local answers to local problems.

1. The first involves reducing the extent to which decisions are taken in the Union government.

2. The second involves creating structures that favour migration.

3. The third involves fiscal transfers through which the per capita resources available to the state government in poor states are higher than the per capita taxation that is done in those states

The Subsidiarity Principle asserts that a function should be placed at the lowest level of government where it can possibly be performed

State-level politicians, who preach the cause of greater autonomy from the Union government, need to consistently carry this through and devolve full powers to the city governments within their states.

The five pillars of checks and balances—

• data,
• intellectuals,
• media,
• legislature,
• judiciary—

all work poorly upon state governments."

Where to Be Careful about Decentralisation

The appropriate role of the Union government lies in coordination problems (e.g., the design of infrastructure networks that cut across states) and in addressing poverty traps where the conventional feedback loops of liberal democracy have broken down.

1. The first issue is about problems that require coordination between states
2. The second issue is about the possibility of severe capacity constraints in a state or a city

Evolutionary Change for the Society, Revolutionary Change for the Government

A good society is one in which individuals plan and live on their own terms, in a state of confidence over long time horizons. The purpose of public policy is to create the enabling conditions for such a life.

In public policy, we should not undertake actions that will disrupt the lives of the people on a large scale

This pursuit of non-intrusiveness, stability and order has one powerful implication: We should favour small impacts upon the lives of the people over large ones. Social engineering, even if for ostensibly noble goals, should not be attempted

We know too little in order to safely meddle into human society in most areas other than market failures.

This pursuit of non-intrusiveness, stability and order has a second implication: a bias in favour of communication.

The best framework of public policy is one in which the state impinges upon the lives of individuals as little as possible. This is not a defence of the status quo. Society can and should evolve, gradually, through the thoughts and actions of the people. The state should not engage in social engineering, i.e., it should take no leadership role in the evolution of society. Non-intrusiveness, stability and order is fostered by better communication. The government must say what it will do and then do what it just said. There should be no surprises.

As a thumb rule, each doubling of GDP (in real terms) calls for a fairly far-reaching change in the organization structure of government."

"Within the structures of government, however, it is permissible to undertake large-scale reorganizations. We do not need to bring stability to the life of a civil servant."

We should pursue revolutionary change for government structures, but evolutionary change for the people.

Cross the River by Feeling the Stones

No problem is susceptible to a big one-time policy effort.

Wider participation, from experts and from practitioners, improves policy work.

Small moves coupled with feedback loops

The word ShiDian is used in China for 'Policy Experimentation' or 'Policy Piloting'."

Abhijit Banerjee, Esther Duflo and others have emphasized the importance of 'randomized control trials' in learning about economics. We see this as being a key part of the economic policy toolkit, in the process of iterative refinement.

Irreversibility is thus inherent to some things (e.g., death of a person), is greater when measurement is lacking, and is greater when the action involves establishing an implementation structure in government. These are the areas where greater caution is required in state intervention.

There are no silver bullets. The reforms that matter are complex multi-year journeys that require a large policy community. Participatory policymaking works better than small groups working in secret. The ideal mechanism is to have measurement systems, and make small moves. Based on the feedback from the measurement, the small moves can be refined and modified as part of a larger strategy. Do things that you can undo. Beware of the things that you cannot undo.

When the measurement is weak, mistakes will not be caught, and there is a need for greater caution.
Stroke-of-the-pen reforms are easier to reverse, but
when a government organization has been set up, it is hard to undo, and there is a need for greater caution."

Many a mistake will not be undone, so there is wisdom in intervening less.

Be Careful of Isomorphic Mimicry

Enlightenment values port across the world, but tangible policy designs do not.

Practitioner knowledge has limited value in policy thinking"

Policy institutions in advanced economies have been refined for hundreds of years, and most people in close proximity to those institutions lack an awareness of why things work

A great deal of what happens in advanced economies relies on an 'invisible infrastructure' of state apparatus and checks and balances that is not immediately within view when focusing on a narrow problem of policy.

Envisioning how a given policy initiative will work in India requires deep knowledge of the local context. We need to visualize all the moving parts and think about how one proposed piece will fit into the larger context. This requires knowledge of history, institutions and politics.

The international experience is a valuable source of knowledge about higher design principles. Concepts like freedom, the public discourse, human rights, the rule of law, dispersion of power, negotiation, scientific inquiry, etc., are all drawn from enlightenment values. These are universal principles. It is when we come down to practical problems (e.g., how to organize the agricultural spot market) that the portability of ideas across countries breaks down.

understand local conditions, and engage in first-principles problem solving.

process of envisioning that is deeply grounded in the Indian context

"Sound policy analysis in India requires authenticity. It calls for deep experiential local knowledge (metis). The most valuable people in the Indian policy story are those who have authentic knowledge of India, and are able to imagine and envision how policy choices will play out in the Indian setting"

We would be fully able to debate with policy thinkers elsewhere in the world, and present Indian solutions as optimal pathways under Indian conditions, while carefully warning other countries that they have to think for themselves.

Free-riding on State Capacity outside India

In the field of drugs and food, the US and EU authorities run active inspection programmes through which certain factories in India obtain the rights to produce drugs or food products which can be exported to the EU or the US. There is a natural opportunity for public policy in India to freeride on this work. When this can be done, this is welcome, as it reduces the requirements of building state capacity in India."

Public Policy Work is a Test Match, not an IPL

Lags of policy impact The most important reforms impose pain that is concentrated upon a few people, and gains that are diffused over the entire country. The pain comes early and the gains come with a lag. The political puzzle of reforms lies in managing these two tensions. The art of politics lies in understanding the map of interests and pulling off such reforms. This involves understanding who will lose in the short run, negotiating with them and influencing their view of the world, modifying the reform in non-fundamental ways so as to reduce the pain upon these persons, and sometimes compensating them through other instruments. It involves harnessing the support of the gainers from the reform.

When a policy reform takes place, the full gains are obtained through the reallocation of resources in the economy. Policy reform requires private persons to fully internalize the new environment, and re-optimize for it.

Many policy reforms require the construction of institutional capacity within government and in the economy. These adjustments take time.

For this reason, the pain is front-loaded and the gains come with a lag. Policymakers need to understand who will lose in the short run, negotiate with them, and find compromises with them.

Policymaking on the Election clock"

"The clock that counts the years to the next elections weighs heavily upon this thinking. The art of politics lies in thinking through these time horizons,

• launching a portfolio of reforms in year 1 and year 2,
• which induce pain (attenuated by specific transfers to affected parties) in year 2 and year 3, and
• yield overall gains by year 4 and year 5.

This requires extreme capability in the team that wins power. The incoming team cannot just land up in power, take control of the levers of power, and wield power in random ways based on political compulsions and ideology. They need to have a portfolio of policy proposals, backed by teams of experts, with fully articulated planning of actions, anticipated impacts, design of the measurement system to monitor the process on an ongoing basis, identification of the persons negatively impacted, and possibly the design of compensatory transfers to defuse the unhappiness. There is a crucial role for the communication strategy that is put into play from the date the cabinet is formed. In this age of Twitter, 'communication strategy' consists of catchy slogans and choice abuse. The true role of communication, however, lies in improving coordination on an economy scale.

The political and technocratic leadership must have a shared strategy and shared messaging, through which the full picture is consistently and strongly communicated. This would help align expectations and ensure that private persons change their strategies in ways that are coherent with the strategy of reforms. If there is no strategy in reforms, or if it is not properly communicated to the private sector, businesses and financial investors will make mistakes in the formulation of their strategies, which will result in reduced economic performance. This will increase the time lag between the policy change and its full beneficial impact.

Running an election campaign is analogous to the sales and advertising problem. To win power, this is essential. But if this is all that is done, sustained voter satisfaction will be elusive. Political parties need to prepare to govern, alongside campaigning to get elected. Once the election results are in, every day lost in establishing the team and kicking off a portfolio of reforms is a costly delay. We are doing too little transition planning in Indian politics.

When out of power, political parties should have a shadow cabinet. There should be a sustained process of engagement with think tanks, academic institutions, data sets and intellectuals, in order to cogitate about what is going wrong. The emphasis in an opposition party should be not just on criticizing what the ruling party has done, but on developing a set of plans for what would be done when in power. The incumbent ruling party equally faces this problem. At year 5, a successful ruling team is jaded, and an unsuccessful ruling team is demoralized. Yet, it needs to think through the possibility of re-election, and find the energy for transition planning. This preparatory work would be particularly valuable when it is fed into the manifesto of the political party and, when coalition governments are formed, the negotiation for a common minimum programme. The paragraphs in such documents matter disproportionately, but receive inadequate attention ahead of time. Long-range thinking and capacity building are required in each political party to develop the capability to succeed in the event of winning elections. When such developmental work is not done, ahead of time, we translate remarkable election outcomes into failures on policy.

Playing the long Game

A cult of jald baazi is taking root in India. This is the notion that a problem can be understood in a few days, and solved in a few weeks. Powerful policymakers tend to whip up a frenzy of getting things done quickly. Every expert in India has gone through the surreal experience of being ignored for years, and then asked to deliver a reform document overnight.

You rush a miracle man, you get a rotten miracle. The Princess Bride, 1987 film"

In some rare situations, a team is available in India, which is fully imbued with a problem, has the right understanding, has the right human networks in the country, has learned how to work with each other, and can move at high speed in executing a reform.

Even under these conditions, drafting laws and building state capacity takes a long time. In most situations, there is a starvation of intellectual capacity in the country. We lack data, knowledge, experts and teams that know how to work with each other.

There is thus a slow process of understanding problems, designing solutions, going up from individuals to teams with esprit de corps, and implementing reforms. The cult of speed yields failure in both cases. Even when the best teams are assembled, if the work which requires two years is compressed into a few months, this will be done badly. With weak teams, the pressure of solving a problem in a few months surely yields failure.

There is a pipeline in the policy reform process: data to research to policy proposals to consensus to government decisions to policy implementation. It is not possible to short-circuit this process. Some fields are at a weaker stage, where the basics of data and research are not in place. In these fields, the only horizons over which meaningful policy reform can be achieved are a long time horizon. The cult of speed is ultimately derived from management failure in government. We are faring poorly on establishing institutions which contain harmonious teams that impound information and expertise; we are unable to make long-term plans and stay focused on them. We suffer from a strong pace of personnel changes, which prevent the development of knowledge and rapport within policy teams. We suffer from three-page notes of individual reform measures, typically written by interested parties, which lack strategic thinking. We fluctuate from one topic to another, based on the crises that engulf us each day. When a government flits from one issue to the next based on the news cycle, there is no strategy. It would behove the policy process to be sceptical about the solutions that are hawked in three-page notes, to be slow and cautious.

We should set a high bar on the minimum level of knowledge and evidence required before embarking upon even a modest intervention into the lives of private people.

Policymakers in India now understand how to build a bridge. They know that building a bridge is expensive, that it requires professionals to build, that there will be a project plan, that many steps have to be undertaken, and these take time, and only then can a bridge be inaugurated.

The same approach is required with state capacity! When a new government organization is required: (a) It will be expensive; (b) It requires professionals to build it; (c) There must be a formal project plan in order to build the organization and its capabilities; and (d) Implementing this project plan will take time. Only when the project is completed, can a new organization be declared open for business.

We have repeatedly seen new organizations being launched in the Indian state in a casual and informal way. The present ways—of hiring a few people and declaring a government agency open for business within a very short time horizon—are downright harmful. Right at the outset, the organization is crushed with demands that it is ill-prepared for. The fledgling organization is underfunded and under-resourced in every possible way. It gets into a firefighting mindset, makes mistakes, and generally never recovers from the early failures.

We in India have learned how infrastructure projects require time and money. We need to carry this professional approach into building state capacity in government organizations.

the importance of building stable teams which are able to engage with the reforms process over long time horizons. - Institutional Memory

Each area of work is a complex problem with many moving parts. As policy projects unfold over long time horizons, we require teams and policy continuity over long time horizons.
The institutional memory of each field is contained in a community of intellectuals and policy practitioners.

When staffing is unstable, and when institutional memory is lost, we lose ground.

Building the republic takes time It took hundreds of years to build the US, the UK and the other mature liberal democracies of the world. As an example, the US Constitution was written in 1776, but the 'fruit of the poisonous tree' doctrine—which is absolutely fundamental to limiting the power of investigative agencies only came together in the early twentieth century, i.e., 154 years after the"

These are long and slow journeys. We should not look for the newspaper headlines, the quick wins, the buzz on social media. We should instead dig into the long and slow process of genuinely building the republic.

What is Hard and what is Easy

When we think of a given government intervention, we need to judge how hard it would be for successful implementation. When we face a problem in public policy, it is important to assess how difficult it will be, to build the requisite state capacity.
What are the general principles through which we can engage in such reasoning?

Four Dimensions of Complexity

#LantPritchett and #MichaelWoolcock first posed this question and offered elements of the answer.

1. They predict that implementation is hard when there is more discretion and
   Discretion: If something involves more discretion in the hands of the civil servant, it is harder.
2. when there are a larger number of transactions.
   Transaction intensity: If something involves a large number of transactions, by a large number of front-line civil servants, it is harder.
3. implementation is harder when there is more at stake for private persons, and
   Stakes: If there are high stakes, it is harder.
4. when there is more secrecy.
   Secrecy: When there is greater secrecy, it is harder.

Solutions that Reduce Complexity in Some Dimensions

"There is a great deal of optimism about the extent to which modern IT solves problems of governance. We are able to see one zone where IT systems are truly transformational: in the removal of discretion. =

With the benefit of hindsight, we see that PPP contracting is hard, as the stakes are high.

The four hardest problems The criminal justice system, the judiciary, the tax system and financial regulation suffer from the problem of high discretion, high number of transactions, very high stakes and varying amounts of secrecy.

Learn to Walk before You Run Once

we see that high stakes harm the construction of state capacity, a natural tool for sequencing is to initially start at low stakes.

When we are at the early stages of learning how to be a state, it is wise to start out at low stakes (e.g., low tax rates, low punishments). Once capabilities are fully established, there can be a mature debate about whether the right policy pathways involve higher stakes (e.g., higher tax rates, higher punishments). "

If a government organization is asked to suddenly achieve capability on a difficult problem, it will collapse in an organizational rout.

A natural way to sequence the construction of state capacity is to first start with an easier problem, to achieve success, and then escalate the complexity.

At an early stage in the republic, it will help to reduce discretion, reduce secrecy and most importantly, reduce the stakes.

Confident Policymakers Work in the Open

There is a long tradition of secrecy in public policy in India. As the complexity of the economy has grown, and as Indian democracy has matured, it is increasingly unwise to maintain this level of secrecy.
Secrecy harms planning and execution
Exposing early drafts to the persons who have a lot at stake may often yield improvements in the work.
Particularly when we have low state capacity, the most well-meaning reform is often marred by technical mistakes in the execution.
A more open policy process catches more errors and it improves the resulting work.

The policy process is one of negotiation There is a valuable political economy perspective upon this question, where we see all reforms as a process of negotiation. Healthy democracies are those where various interest groups are able to sit together, engage in discourse in good faith, and emerge with reasonable compromises. The essential foundation for the democratic process of negotiation is trust—a certain presumption of good faith. We as a society need to experience decades upon decades of decent behaviour with each other, in order to learn how to trust each other to"

"Every reform hurts certain firms and certain persons. With more advance warning, they can plan their life better. This would reduce the costs for the economy as a whole"

"Give people time to change behaviour"

The participatory policy process, grounded in intellectual debate, generates a better reforms process. It helps avoid a policy process that is pure power play. The work is better rooted in the landscape of people and institutions. The mistakes are more likely to be taken out. The negotiations and compromises create support and legitimacy. Policy implementation works out better.

The best policy teams in India are well connected into intellectual capabilities, are comfortable with criticism, and are able to debate with their critics as part of the public discourse.

Good debate to good debate, knowledge grows.
In a liberal democracy, the relationship between the policymaker and the individual is not the relationship between a ruler and a subject. The policy process is a process of negotiation. The losers from a reform require fair warning.

When there is ample warning, the adaptations of the private sector kick in early, and the gains for the economy are obtained in a shorter time. Confident policymakers work in the open. Working in the open signals capability. The most harmful events are those where a policy announcement shows up on a website in the evening, without any prior warning, and is effective next morning. The best episodes are those with an open consultative process, where the legal instrument showing up on the website is a non-event, and there is ample lead time between the date of announcement and the date effective.

Criticism and conflict have great value
This policy process is a world of ideas and rational thinking, and not merely an exercise in power play. The continuous debate in an environment of dispersed power is the reason why democracies work well. The continuous process of criticism and debate finds and solves mistakes.

Criticism of the stated position of an agency generally strengthens the hand of the reformers within the agency. An environment where all criticism is attacked or proscribed is a recipe for policy paralysis.

The really important initiatives will never achieve traction without an extensive reshaping of the larger discourse, in which criticism of the status quo is of central"

The protagonists of a conflict criticize each other. The media creates rancour by playing up conflict. We should disagree in polite language, maintain good personal relationships, and work through formal procedures for resolving conflicts. But we should be comfortable with conflict as the normal state. In fact, it is only in an authoritarian regime that conflict is squelched, as persons are too fearful to speak up.

The Under-supply of Criticism

We must recognize that in every society, there is a market failure in the form of an under-supply of criticism. Criticizing the government imposes costs upon the critic. The gains from criticism are diffused; the entire society benefits from the criticism. The self-interest of the critic leads her to ignore the gains for society at large, and thus to under-supply criticism.

Formal voting systems, backed by transparency, provide a powerful mechanism for aggregating knowledge and resolving political conflicts. Particularly in an early-stage liberal democracy, where the art of give and take in political negotiation is only weakly understood, formal voting systems can often mark a big step forward from the autocratic ways.

We should recognize the scarcity and value of criticism, and create an environment where we disagree without being disagreeable. Every critic is engaged in altruism, and harming her own self-interest, by speaking truth to power. There is a market failure, in the form of an under-supply of criticism owing to positive externalities. It is in the self-interest of the policymaker to engage with critics, so as to improve by discovering areas of weakness in the policy work. When the policymaker is short of time, meeting the critic is more useful than meeting a supporter. Conflict and negotiation is the healthy normal state of a liberal democracy. Liberal democracy is the endless search for a middle road."

To solve public policy problems, and build the republic, requires taking actions that involve risk. Real-world policymaking is extremely complicated. If we are very risk averse, and move only when we are absolutely sure, this will generate excessive conservatism. What is normal in the field of public policy is 'complex systems failure'—where there are many moving parts and they came together in an unexpected way. Failure will happen, and when failure occurs, there is no simple concept of identifying the decisive mistake and the key person who made that mistake.

This requires creating an environment that is more supportive of failure. The best management culture is one in which we get credit for not taking credit. This helps create a healthy environment of trying things, accepting that some did not work, and abandoning or fixing the troubled ones.

need to recognize the trial and error that is required of any successful policy process. We start on a journey, and improve things based on criticism and empirical evidence. Bona fide errors are an integral part of any sound policy process. A policymaker who is not making mistakes is not trying hard enough.

It is better for the policymaker to honestly depict the lack of knowledge, to speak openly about all policymaking as a research process, and to embrace the process of crossing the river by feeling the stones.

When we insist that no mistakes were made, the process of learning stops.

Wherever humanly possible, new policy initiatives should first be rolled out on a small experimental basis. This will create experience based on which we can make more rational moves in the future.And, if something does not work too well, we can back away from it without having suffered too high a cost. This is connected to an open and participatory process.

If the policymaker claims to know how to cross the river, there is the danger of mistakes or inaction. If, on the other hand, the policymaker only claims to know how to feel the stones, and approaches the larger community with a sense of humility, this gives an environment that is more conducive to taking risks, learning from mistakes, and refining policy strategies based on evidence. The capability of the policy community is a resource, that needs to be nurtured. An approach of acknowledging the uncertainties, and discussing and drawing lessons from failure is the key to obtaining improvements in the capability of the policy community over time.

Most public policy work is characterized by failure, and we would all be better off by discussing this in a comfortable and realistic way. When a policymaker lays claim to omniscience, it is difficult to admit that a mistake was made. It is better to honestly speak about the uncertainties that are being faced, and embark on policymaking as a process of discovery."

The skill and rhythm that is required in the public policy landscape is different from what works in for-profit firms. Government lacks feedback loops There is thus no information system that generates feedback loops for government, in the way that accounting data and stock market data generates feedback loops in private firms.
Government agencies are monopolies The customers of private firms generally have choices about whom they buy from. State agencies are generally monopolies. The only place that you can get a driver's licence is a government office; the customer has no choice. This diminishes organizational performance.
The leadership of a private firm fears financial non-performance, which will ultimately lead to the loss of jobs and empire. Persistent weak performance can induce a sale of the firm to a new shareholder, who can impose painful changes upon the firm. Private firms face the threat of a bankruptcy process where the firm can be shut down or fundamentally reorganized. None of these possibilities influence employees in the government.

There are rare events where a government agency is closed down. Politicians fear losing elections. Officials have no fear.

In government, in contrast, the oldest agencies are likely to have the most outdated internal arrangements. Government's coercive power is qualitatively different In a private firm, the levers controlled by the management cover products, production processes and the internal organization of the firm. In government, there is similar decision-making power about the internal organization of government. But the surpassing feature of government is the monopolistic power to coerce. The state has a monopoly on violence. It is able to coerce private persons, either to pay taxes or to change behaviour. This yields a fundamental arrogance about state organizations, that private organizations do not suffer from.

The puzzle of public policy lies in reining in employees who have the power to coerce, to prohibit, to raid and to imprison. Government has greater complexity

"The state has a monopoly on violence. It is able to coerce private persons, either to pay taxes or to change behaviour. This yields a fundamental arrogance about state organizations, that private organizations do not suffer from. The puzzle of public policy lies in reining in employees who have the power to coerce, to prohibit, to raid and to imprison.

The public policy process plays out not just through employees but through everyone, as coercive steps by the state induce changed behaviour by the people, which feeds back into the working of the state, and so on. This further increases the complexity of decision making. Policy decisions have to take into account the internal behaviour of large complex government organizations, and then the responses of the general public which in India's case is above a billion people.

Government has to prize rules over deals. In government, this evolution towards rules is carried forward to an extreme extent. Given the unique features of government, it is pragmatic to work through policy frameworks and not tactical actions.

We establish sound general frameworks, and work within them for a long time. We avoid transaction-specific decisions, even when we see a particular situation where the general policy is yielding the wrong answer."

"Government has to prize rules over deals"

"Governments must disperse power Public policy requires dispersion of power. The job description for a role in public policy is a package of policy knowledge, team building and nuanced negotiating ability. Successful governments feature a long and slow process of debate, negotiation and compromise. The leadership in the world of public policy requires the traits of listening, respecting and negotiating middle roads.
Governments operate on longer horizons

Big sudden phenomena in the world of policy are generally harmful and/or failures."

System Thinking

When a government gets involved in the working of society at the level of detail, this tends to go wrong.

Social engineering works badly as the real world is too complex, intervention is ridden with unanticipated effects and state capacity is limited. The most advanced economies do the least industrial policy. The government should restrict itself to addressing market failure, while being mindful to only pick a few battles given its low capabilities.

The economy and society should evolve as a self-organizing system, driven by the innovations of free men and women. Solving coordination problems There are, however, some situations in which there is a cautious case for 'system thinking' in public policy.

System thinking addresses traditional market failures, in the form of asymmetric information, externalities and market power. In fields such as healthcare and pensions, where consumer behaviour may suffer from limited rationality, there is a greater case for system thinking. But it involves a new and daunting level of intrusive intervention, which goes well beyond the main work of public policy."

In general, the coercive power of the state should not be used to hamper firms that exploit economies of scope. In some situations, however, bundling and tying raises concerns about a market failure in the form of market power. As an example, consider the Life Insurance Corporation of India (LIC), which has a dominant position in the brand awareness and distribution of insurance products. Suppose a new firm is born, with high skills in the production side of insurance products. This firm would not be able to reach consumers, as LIC has a lock on distribution and sales. LIC can get away with very poor manufacturing, as it owns the distribution. Using state power to force an unbundling, between manufacturing and distribution, can solve this problem.

When state capacity is low, simple and transparent interventions are favoured. A simple unbundling rule is easier to articulate and enforce, when compared with the complexity of fighting with an integrated utility that is trying to hamper access to a new entrant.

"When state capacity is low, simple and transparent interventions are favoured"

thinking is very attractive to engineers. Every engineer feels she can redesign society in certain ways that are good for everyone. But system thinking is fraught with danger. It is important to underline the use of state power, of the monopoly of violence that the state possesses, when policymakers do system thinking.

when system design is done in public policy, the citizenry has no choice, the solution is forced upon them backed by threats of violence, and there is a limited chance of discovering that the design was a mistake."

"system thinking is fraught with danger."

It is very difficult to think about design questions on the scale of society. Human systems reflect the interactions of a large number of sentient persons, and attempts at intervention are plagued by the law of unintended consequences. We may emphasize that social systems involve the interactions of many people, and envisioning these complexities requires knowledge of the social sciences and humanities, and not just engineering. Hence, the policymaker can easily be wrong.
In addition, public choice theory reminds us that policymakers are just people, and are likely to pursue their own personal objectives, which may or may not align with welfare of the public.
For these reasons, it is useful to approach system thinking with high scepticism, and use the coercive power of the state in reshaping society only rarely.

For most situations, the self-organizing system that is the market economy works better. When state capacity is low, there is a greater chance that state power will be used to impose the wrong designs upon society. There is a greater chance of this power being hijacked to serve an agenda other than public welfare. Hence, while mature market economies avoid system thinking, we in India should avoid it even more. How to do system thinking"

If system thinking must be done in the public policy process, how should it be organized?
The first threat is that of the designers within government having the wrong design. To avoid this problem, a strong policy pipeline is required, with evidence, debate and the development of consensus in the expert community.

Each policy thinker should permit herself a budget constraint of supporting no more than one policy proposal, that involves system thinking, in her life.

When contract enforcement is weak, firms would specialize less, there would be greater internal production and reduced use of contracting. This would adversely impact upon transactions and thus productivity. These effects are present, but they are not particularly large. In this first cut of the analysis, the adverse impact of poor contract enforcement is relatively limited.

Economists have emphasized the role of the judiciary in contract enforcement, which enables the market economy. While contract enforcement is important, the more important role for judicial capacity lies in private solutions to market failure. Negative externalities can be solved through the law of torts, as long as litigation is efficacious. Many classic problems of asymmetric information, where we do consumer protection, can be addressed through torts. When many people are adversely affected in a problem like pollution from a factory, the collective action problem can be solved through class action suits. When private people are able to sue, and state agencies do not have a monopoly on enforcing laws, this reduces the reliance on state agencies for enforcing laws. The agenda of economic freedom in India is ultimately about scaling back the administrative state. This journey runs through great improvements in the courts."

In this book, we have emphasized the power of private negotiation, as envisioned by Ronald Coase, for arriving at private solutions to many externality problems. These private solutions can flourish when, and only when, the courts are swift and competent.

A great deal of market failure can be addressed through contracts, torts, class action lawsuits and private enforcement.

This is what is Required to Scale back the Administrative State

The agenda of liberalization and economic freedom requires going back to the foundations of common law: to a world of contracts, torts, private enforcement and class action lawsuits.

We need to push back on the new central planning system, this administrative state, and graduate to a world of much greater reliance on the judiciary, a world of contracts, torts, class action lawsuits and private enforcement.

The 'administrative state' is the rule of bureaucrats. This is a state where the officials manning the executive creep into controlling legislative and judicial functions. In the administrative state, politics—the process of negotiation between interest groups—has a limited role. The Indian approach to central planning of the economy, where officials have considerable control over the life of private persons, is uncomfortably close to the administrative state."

"When the courts fail, we get the rule of officials."

The Public Policy Process

The public policy process requires a siege-style assault.

The Policy Pipeline

Stage 1 of the policy pipeline is the establishment of the statistical system. Facts need to be systematically captured. Without facts, the entire downstream process breaks down. Our only hope for truth to matter is for truth to be recorded and widely disseminated. In the modern world, few actors in the economy have an incentive to do a good job of measurement. As an example, academic economists are quite comfortable doing research with faulty data, because the academic"

Stage 2 of the policy pipeline is descriptive and causal research. This requires a research community which will study the data, establish broad facts and regularities, and explore causal connections. This work should be primarily grounded in the Indian locale.

Stage 3 of the policy pipeline is the creative phase of inventing and proposing new policy solutions. A large menu of choices needs to be at hand, for possible policy pathways. The republic is always short-changed when 'there is no alternative' (TINA) to one mainstream idea. At present in India, there is no community which systematically looks for fully articulated solutions.

Stage 4 of the policy pipeline is the public debate where rival solutions compete with each other. This requires a vigorous process of debate and discussion, in writing and in seminars. A broad consensus needs to come about on what will work, within the analytical community. In the Indian context, this is often assisted by the expert committee process. The purpose of the expert committee process is to sift through an array of possible policy pathways that are in the fray at the end of stage 3, and filter down to a few which make sense. The best expert committee reports help mainstream novel ideas in policy reform, and pull together the state of the art into a report. As Isher Ahluwalia says, nothing gets done by writing it in a government committee report, but nothing ever got done without it being repeatedly written into multiple government committee reports.

Stage 5 of the policy pipeline is the internal government process of decision making. This is where ministers and senior bureaucrats take stock. This is the zone of political economy, and the creative trade-offs that make progress possible.

Stage 6 of the policy pipeline is the translation of the decisions into legal instruments.
Most policy decisions must be implemented through law that is enacted by the legislature, or subordinate legislation in the form of rules or regulations. High technical quality, and subtle detail, of this drafting process is of great importance. In India, all too often, the drafting of law is done by persons who have a superficial understanding of the prior stages of the policy pipeline, which leads to poor drafting of law.

Finally, stage 7 of the policy pipeline is the construction of state capacity, in the form of administrative structures that enforce the law.

The economist #SatyaPoddar thinks in terms of a four-part story:
1. Defining the future state, or the preferred policy outcome,
2. Preparing a blueprint for the design and specification of the future state,
3. Defining the transition path from the current to the future state, and
4. Building political consensus or garnering public support for the change."

The US politician, #RahmEmanuel, famously commented that 'a crisis is a terrible thing to waste'. Crises are important events where the 'Overton window' is enlarged, and there is a larger zone of possibility in stage 5 of the policy pipeline. Policymakers should be alert to these opportunities.

"weak institutions in India, we should dread a crisis."

If we use the key '|' to denote a pipe then the policy pipeline is data | research | proposals | debate | decisions | legal instruments | implementation. This is a slow, siege-style assault. There is a widespread beliefs that crises are an ideal opportunity for reforms. However, crises are difficult times. If the pipeline is not mature, ahead of time, in the heat of the crisis it is not possible to overcome the gaps in knowledge and human capacity. When crises enlarge the range of possibilities, this includes some harmful ideas. Checks and balances are less effective in a crisis. Things can more easily go wrong. Institutions that are weak in normal time

States are generally able to intervene in society in three ways.

1. Coercive power can be used to modify the behaviour of private persons, which constitutes regulation.
2. States can produce certain services. Finally,
3. states can finance the purchase of certain services by private persons from private producers.

The policymaker has to do many things. In what order should they be done? Too often, in India, policymakers pick one of two easy things, 'the low hanging fruit', and after that the reform peters out.

Sequencing discussions in India often degenerate into choosing low hanging fruit to begin the work, and proclaiming that an important reform has begun.

Sophisticated thinking on sequencing involves five elements:

1. Capacity building in the policy process: We have shown seven elements of the policy pipeline. There is a natural sequencing, going from left to right, of the order in which actions should be undertaken.
2. Prerequisites: When x is a prerequisite for y, we have to get x in place before y.
3. Learning by doing: Start with simple problems, learn public management, and gradually escalate complexity.
4. Political economy considerations: Weigh the gains and the costs imposed by various alternative components, and take the ones with high economic gain but low political cost first. Early moves should create a constituency for the late moves. Early moves should not walk into a political economy trap.
5. Stinginess: Start on a low scale on coercive power and spending, escalate only when capabilities are proven.

Simple problems are those that involve a fewer number of transactions, less discretion, low stakes and less secrecy.

In India, we are often seeing a negative spiral. An agency has excessive coercive power, and so it fails in its work, but the political response to failure generates greater coercive power for the agency, which further reduces capability. The right response to failure by an agency should be a reduction in its coercive power.

The deeper question lies in how to increase state capacity. How can a country put itself on the journey to increasing state capacity, so that over time, the cost of undertaking a certain activity goes down, and the aggregate resources available to the state go up?"

We would try to go after a smaller set of market failures, where the welfare cost of the free market outcome is particularly large, and where the state capacity required in addressing the market failure is relatively small. Given our capacity constraints today, to quote Kaushik Basu, we have to engage in 'libertarianism of necessity'.

"When state capacity is low, there is a greater chance of making mistakes. In this case, the damage that can be caused by a more intrusive action by the state is greater."

"When we live in a low-state-capacity environment, there is a greater chance that the government is wrong. In this case, we should favour small moves, small powers for the government, small punishments, small sums of money. The bigger and more dramatic the action, the greater is the harm inflicted upon society when government is wrong."

Do Fewer Things

There is a lot to gain by paring down to a smaller set of priorities, focusing upon them, and making genuine progress. If the scarce resources —of money and man-hours of key persons—could focus on a small set of important problems, we would get a lot more done. Along the way, we would learn how to own and operate a state.

The virtue of simplicity

Under conditions of low state capacity, If a subsidy has to be paid, it is best to do this through the expenditure programmes of government, where there will be better scrutiny of the relative magnitudes of expenditures

When state capacity is low, tax rates should be low, expenditures on public programmes should be low, the investigative powers of the agencies should be low and the punishments that are encoded into laws should be low. When state capacity is low, we should design simple interventions that are easy to implement.

The weak state has highly limited resources of money, of the time of capable staff, and the management time of the leadership. Rather than spread this widely, it makes more sense, under conditions of low state capacity, to attempt doing fewer things. How to choose these fewer things?

One useful test is whether there is a market failure. Many things should not be done, as they do not address market failure. The core of any state is four elements: the criminal justice system, the judiciary, tax collection and financial regulation. Without these, there can be no economy. Hence, these four areas should be the limited areas of focus. We should learn how to run a state by building capability in these four areas.

Rolling up Your Sleeves to Build State capacity"

"There are two temptations that need to be avoided. The first is the pleasure of solving one small problem, The second temptation that should be avoided is the great man theory of history.

It is better to have a bicameral legislature, and different clocks for the selection of representatives in the Lok Sabha and the Rajya Sabha, in order to avoid the possibility of a momentary infatuation of voters inducing concentration of power

It is better for any one industry to be answerable to many masters ranging from income tax law to competition law to sectoral regulation. If an industry is excessively dominated by one regulatory agency, this generally yields poor outcomes owing to the concentration of power.

We need to take public choice theory to heart, and thereby bring sound procedures into law where agencies and personnel are mistrusted with power, so as to produce better performance by the state apparatus.

Clarity of Purpose of the Agent

High-performance agencies are those with clear objectives, sound design of the organogram and sound processes. "However, agencies should be set up with narrow, technical and non-political functions.

Delegate whatever you can

This rearrangement is termed 'agencification' in the field of new public management. The principal should contract out everything that can be contracted out, in this fashion. After this is done, the work of the department splits into two tracks:

1. Contract management for each of these relationships; and
2. Performing, within the department, all the difficult functions which are not easy to specify, where there are political complexities, which are not mere technical problems."

The principal–agent relationship will only work correctly when the principal stays engaged in the work of the agent and engages in contract management as specified in the relevant legal instrument. This will require capacity and resourcing at the principal

Three elements of wisdom are useful in designing sound agency arrangements. The separation of powers doctrine argues that it is better to separate legislative, executive and judicial powers across three distinct organizations. To the extent that more than one of these is brought into a single organization, there is concentration of power, which inevitably leads to abuse of power.

The rule of law is also a tool for achieving state capacity. When there are failures on the rule of law, this places arbitrary power in the hands of officials and politicians. This leads to abuse of power and low state capacity.

The third element of wisdom is about the powers of an agency. At the outset, it is important to give low powers to an agency. Government agencies should have low levels of direct and indirect coercive power. This includes the power to raid a person, the power to tap phone conversations, the power to spend money, the power to punish a person, etc. Power corrupts, and the greater the power of the personnel

The law that establishes an agency requires six key elements:

1. Clarity of objective: Accountability can only come about when there is clarity of purpose. Vague, multiple or conflicting objectives cater to corruption and incompetence.
2. Formal processes for legislative functions: The law must write the due process through which the agency wields the power to write law.
3. Formal processes for executive functions: The law must write the due process through which the agency performs executive functions like licensing and investigation. This is analogous to the role of the Criminal Procedure Code in binding the police to how they function.
4. Formal processes for judicial functions: The law must write the due process through which the judicial functions are performed. There must be a hearing, the person conducting the proceedings must be unconflicted, orders and penalties must be reasoned, and an efficacious appeal must be possible.
5. Reporting and accountability: The agency must release enough information about its own functioning so as to be held accountable for its use of public resources and wielding the coercive power of the state.
6. Board: The law must write the role and structure of the board. The board must have a majority of non-government members, who must hold the management accountable; and the board must control the design of the organization. A majority of outside directors is essential in switching the strategic conversations from loyalty to voice"

the bad outcomes that we see in India flow from badly drafted laws.

Establish a Leadership

We have low state capacity when there is no leadership that thinks in this fashion, when the organization has a fixed budget year after year, and the organization is impervious to information. There are no feedback loops, and the organization has stopped thinking.

Containing Discretion

Formal processes, embedded in the law, are the prerequisites for wielding discretion, which is the prerequisite for state capacity.

When there is one practical error that has taken place in one government organization, we should generally resist the impulse of solving it. We should go deeper. Why did intelligent and well-meaning people make such a mistake? What was the structure of incentives that led them to this mistake? This leads us to the question of organization design.

Recruiting famous people or skilled people will not change the organization design. Building state capacity will not come out of hiring Indian Administrative Service (IAS) or non-IAS or private people. Government works better when there is dispersion of power. A great deal of failure comes from a few individuals controlling excessive power. Checks and balances are key.

The drafting of law involves two key elements.

• First, law authorizes the coercion of private people.
• Second, the law must address the principal agent problem between the citizen and the state. An array of checks and balances must be built in, when drafting the law, in order to address public choice concerns, to create accountability mechanisms.

Government Departments in India Are Overloaded with Many Tasks and it is Hard to Reform This

'Agencification' will help.
Establish an organization outside the department, give it a clear objective, and hold it accountable. Departments must contract out, to such agencies, all technical functions which can be contracted out through well-specified laws. Once this process is complete, the work inside the department will consist of
(a) participating in the governance of the external agencies, and solving the principal–agent problem between department and agency, and
(b) all the unexpected things and political problems, which could not be contracted out

'Agencification' will work better when there is a great focus upon rule of law, separation of powers, and low coercion. Agencies must have low powers of investigation, punishment, spending, etc.

Discretionary power is routinely abused in the Indian state. The answer is not to remove all discretion. The answer lies in establishing formal procedures with the rule of law, so that discretion is contained in checks and balances.

Information

In India, our public policy capabilities are highly circumscribed by the unavailability of data. This creates the need for informal information channels. In an ideal world, we would like to have statistics and analytical models. In our reality in India, our ability to undertake formal economic analysis on many problems is limited.
A country becomes great when men and women initiate data-gathering efforts that they will not live to enjoy the fruits of.

The only trusted measurement system is one that is continuously scrutinized, criticized and refined

Two useful principles to think about data release are:

1. If something can be obtained using the Right to Information (RTI) Act, it should be released pre-emptively. We should progressively expand the scope of items under 'duty to publish' of the RTI Act.
2. If a data set was created using public funding, it should be released into the public domain in machine-readable form, while taking care to mask identifying information that would harm the privacy of private persons.

The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence. This process requires the construction of trusted data sets. It also requires intellectual capabilities in analysing this information and feeding knowledge back into the policy process. It

Knowledge

The privilege of giving policy advice, and being part of the policy process, should be limited to the persons who achieve the status of public intellectuals, through writing and speaking in the public domain, and earning respect for honesty and knowledge.

What is the problem that we see? Is it a market failure? What is the lowest cost intervention? Do the benefits outweigh the costs? How do we build state capacity for achieving this intervention?

The ultimate purpose of an academic institution in India is to acquire metis, create authentic knowledge about India, to diffuse knowledge into India, and to be part of the process of changing India.

Financial economic policy is about addressing these four objectives: combat negative externalities, combat asymmetric information, invent money, and establish an investment banker for the government.

Dullness in matters of government is a good sign and not a bad one. In particular, dullness in parliamentary government is a test of its excellence, an indication of its success. #GeorgeOrwel

Immigration is the sincerest form of flattery, and this is where liberal democracies stand out.