State Capacity, Priority, and why we shouldn't mix up the two!
In this post I dive into the review of the new book by Professor Karthik Muralidharan "Accelerating India's Development: A State-Led Roadmap for Effective Governance"
Professor Karthik Muralidharan, who holds the Tata Chancellor’s Endowed Professorship in Economics at the University of California, San Diego (UCSD) and is the Founder of the Centre for Effective Governance of Indian States (CEGIS) has recently written a book called Accelerating India's Development: A State-Led Roadmap for Effective Governance. You can order the book on Amazon here and read the book review on The Economist here or from the image below.
As per the review, Professor Muralidharan in the book argues for increasing the State Capacity of India. The book, again as per the review, “argues that the crucial barrier to faster development is a lack of state capacity” and that “throwing money at a state lacking capacity is like adding fuel to a car near a breakdown: it won’t get you very far.”
First things first;
While I have ordered the book, I have not read it yet, so please take the rest of the article with a pinch of salt, as it’s based on the review of the book and not the book itself.
I love the line - “throwing money at a state lacking capacity is like adding fuel to a car near a breakdown: it won’t get you very far.”
However, with the first point in mind, I would like to argue that perhaps the review has slightly misunderstood the argument by Professor Muralidharan (or equally possibly, I am misreading it). My belief (subject to my reading the book and/or getting corrected) is that when Prof Muralidharan argues for increasing State Capacity, he is not arguing for giving the State more money or the State hiring more government servants, but for fixing the institutional issues which lead to an inefficiency in the State’s delivery of services.
That is, the problem is not with the State’s capacity per se, i.e lack of resources or people with the State, but the incentive and institutional structure set up. Economist Bryan Caplin calls it a problem with State Priorities and not State Capacity.
Hypothetically, if the Government increases its resources in terms of taking over private industries, increasing taxes, hiring new bureaucrats etc, it isn't going to automatically become less inefficient. For example, a "wealth tax" arguably would not automatically solve poverty in India. The Government has money to launch welfare projects to lift people out of poverty, if only money was the problem. When the Government gets more money what is to stop them from going about with their renovation and beautification projects, instead of using it for welfare?
The review goes ahead to state;
“Currently, the Indian state succeeds when on “mission mode”, achieving clearly defined goals. In April it should pull off the largest democratic exercise in history, as voters pick a prime minister. At the same time, it struggles with mundane, everyday aspects of governance, such as education and health.”
This in itself shows that the Government cares more about its priorities, i.e. ensuring elections take place so that they can get a mandate for another 5 years, than what is good for people. The State can get things done, but only utilizes it when they stand to gain from it.
Government schools generally see high absenteeism from teachers. The paper by Professor Muralidharan shows that increased investment in public education does not reduce absenteeism and loss of learning in Government schools. The paper shows “that reducing inefficiencies by increasing the frequency of monitoring could be over ten times more cost-effective at increasing the effective student-teacher ratio than hiring more teachers. Thus, policies that decrease the inefficiency of public education spending are likely to yield substantially higher marginal returns than those that augment inputs.”
Institutional and structural changes create a greater impact than throwing more money and people at the problem, i.e don’t put fuel in the broken car expecting it to go further or faster.
A lot of people in the public policy sector think that the problem in India is that the government isn’t big enough and it should be bigger and have more staff and more money We should understand that if a small government can’t operate itself effectively, there is no reason to assume that a bigger government magically would.