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Poor public sector

Poor public sector
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First Published: Sun, Jul 27 2008. 10 12 PM IST
Updated: Sun, Jul 27 2008. 10 12 PM IST
India’s poor public sector performance, whether measured by outcomes such as provision of basic health and education, or by processes such as regulatory procedures or freedom from corruption, invites analytical questions about causes.
One might argue the problem is simply the nature and extent of public sector (over-) intervention in India’s economy, or the (archaic) structures of its civil service, or the baleful influence of its politics. But there is at least a superficial puzzle in considering these explanations. Consider France. It has a large and seemingly efficient public sector. Its top civil servants (graduates of the École Nationale d’Administration) are selected competitively, much like the Indian Administrative Service, and also have key government positions reserved for them. Can India’s public sector problem then simply be traced to political corruption, rather than bureaucratic inefficiency?
In fact, broad international data offers some clues to understanding this. Surprisingly, perhaps, France does not look quite as good according to hard data. Antonio Afonso, Ludger Schuknecht and Vito Tanzi systematically measured the input and output efficiency of public sectors in 23 industrialized countries. The top scorers are Japan, Luxembourg and the US. The lowest relative efficiencies are 57% for the input measure (Sweden) and 65% for the output measure (Greece). France is near the bottom of the group on both measures. Efficiency is not the same as “performance” here — for example, Sweden does well on outcomes, but uses more resources to achieve this. With this methodology, smaller governments have more efficient public sectors — diminishing returns seem to be at work.
A follow-up analysis by the same authors extends to 15 European Union (EU) or potential EU countries and nine others — the entire sample may loosely be classified as emerging markets. The non-European countries are Brazil, Chile, South Korea, Mauritius, Mexico, Singapore, South Africa, Thailand, and Turkey. While India is not in the sample, the included developing countries invite comparisons. Again, smaller public sectors seem to be more efficient. Higher per capita incomes also seem to support greater efficiency (perhaps there is two-way causality) — the spread of incomes and efficiency is also greater. Singapore is a strongly positive outlier, but Korea and Thailand also do well. Mexico and South Africa also do surprisingly well in these rankings, better than many of the European countries. Brazil and Turkey are among the worst.
Without detailed data, but based on a scan of the variables used in the analysis (including health, education, income and governance quality indicators), my conjecture is that India would do very poorly on relative public sector performance, but perhaps a bit better on efficiency (since its public sector is smaller), if subjected to this approach. A casual comparison of outcomes suggests that India’s public sector performs worse than China’s. I think China’s more effective decentralization contributes here — the theoretical rationale is based on greater competition among local governments, and more refined incentives for government decision makers. Certainly, the evidence for India suggests that decentralization here has provided some benefits for public sector performance.
India’s size, heterogeneity and social stratification present challenges for governance and public sector performance. On that basis, one might rate it relatively high on those fronts — it has survived intact, without serious internal conflict, and incomes and human development indicators have improved over time. But, I think even allowing for initial conditions, India’s public sector has done poorly. More effective decentralization, a better-structured civil service, and modernized judicial institutions would all have led to improved public sector performance. Efficiency has been negatively affected by policies that stifled competition (foreign and domestic) and innovation; that spread public enterprises to sectors where they had no theoretical rationale for entering; and that created soft budget constraints for the public sector.
So despite the superficial attractiveness of the French statist model, or Sweden’s social democracy, my reading of the comparative evidence is that India’s public sector needs to further narrow its focus. It is too small to shrink, but it is spread too thin. Producing goods and services that the private sector can provide competitively should not be the realm of the public sector. Even higher education could do with a good dose of private entry and competition. India’s public sector should get right the core tasks of basic health and education, and minimal and equal justice for all. In turn, this requires some fundamental civil service reform. Countries such as Singapore, New Zealand and the UK have all shown that such reform can be feasible and effective. The models are different across countries, but they focus on greater transparency and accountability, and well-structured incentives for good performance at the individual and team level. Whether politicians and civil servants can be pushed in this direction by the collective action of India’s citizens remains to be seen. It is not a foregone conclusion that this will happen, but will need debate and concerted effort.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at eyeonindia@livemint.com
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First Published: Sun, Jul 27 2008. 10 12 PM IST