A toolkit for policymaking

B Baskar | Updated on January 13, 2020

Title: In Service of The Republic: The Art and Science of Economic Policy Authors: Vijay Kelkar/Ajay Shah Publisher: Penguin Random House India Price: ₹699

Economists Vijay Kelkar and Ajay Shah’s sage advice to policymakers: Speak truth to power

Why do policies, formulated with the best of intentions, often flounder at the ground level? This is the question Vijay Kelkar and Ajay Shah set out to answer with their book, In Service of The Republic.

The Indian economy grew at a considerable clip in the 1991-2011 period but has faltered since. What needs to be done to bring India back to the high-growth path, which lifted millions of Indians out of poverty? The authors are clear that the reforms set in motion in 1991 were not a rupture from the past, as is often perceived. In their view, the economy changed course in a small way as far back as 1977; then slowly through the 1980s, the ground was set for a more market-oriented economy.

But they say the economy had run its course by 2011 and a different ‘paradigm altering’ set of reforms are needed. In 1991, a mere dismantling of the licence-permit Raj was needed, and it was easier to put in place. But after 2011, the second generation of reforms requires a different approach. Now the economy needs better regulation, for which we need to build better institutions to deliver higher growth and ensure that the country does not fall into the ‘middle-income’ trap.

In the initial chapters, the authors dissect the anatomy of policy failure in the country. The state, which has a monopoly over coercive power, is expected to channel that for the welfare of people. But states very often fail in this task.

State intervention

The authors shun the concept of a paternalistic state. That the state is a benevolent entity designed to ensure the welfare of society is dismissed as naïve and woolly-headed, and the authors firmly believe in the ‘public choice’ conception of the state. According to them, “Politicians and officials are not benevolent; they are self-interested actors”.

This is why very often, bureaucrats block important reform measures, as they fear losing coercive powers bestowed on them by the state.

For the authors, the state must intervene in the economy only in instances of ‘market failure’, where the market has failed to deliver the desired outcome. But they rightly say that even here, state intervention can go wrong for a variety of reasons. Constraints of information, knowledge, resources and administrative capacity can often derail the best laid-out policies.

However, it is not that the authors shun state intervention, per se. Policymaking is a hard and arduous task that requires a great deal of skill, knowledge and state capacity which countries like India often lack.

Economic freedoms are as important as political freedoms. The authors firmly believe that “Government intervention interferes with personal freedom”, as it is “imperfect” and has “unintended consequences”. But here, the authors seem to stretch their case too far. Saying that economic crimes cannot be criminal and a stiff penalty is enough to deter wrongdoers seems a little naïve. But indeed, to view the entire business class with bias — as is done often in India — is wrong.

When it comes to income redistribution, the authors ironically mention that the existence of poverty itself cannot be viewed as a market failure. But what if a perfectly market-oriented economy itself perpetuates inequality? The authors’ view of seeing poverty eradication and GDP growth as mutually exclusive is problematic. Their prescription for reducing poverty is rapid growth, which cannot be faulted; but, is it enough to move people out of poverty? Is not some form of government intervention here inevitable?

Devising policy

A set of clear objectives for policy formulation is laid down; a series of questions that policymakers must ask themselves before setting about the task of devising policies. Their prescription for greater decentralisation of power to ensure improved governance, where ‘funds, functions and functionaries’ are placed at the local level, is laudable; but it is not a magic bullet, as India is replete with instances of how local governance institutions are subverted by the elites. Kelkar and Shah rightly call for more ‘political systems reform’.

Talking about the art policymaking, the authors’ advice is that, “We should pursue revolutionary change for government structures, but evolutionary change for society”.

The book’s most interesting section is where the authors talk about the contrast between first- and second-generation reforms. They say that the “irreversibility” of second-generation reforms must make us tread more carefully, as here we are in the crucial stage of creating institutions with a long-term view.

Before the state decides to intervene in the economy, either in cases of market failure or to bring in welfare measures to the people, the authors advise that governments must first work towards ‘achieving state capacity’. Policy intervention by a weak state is doomed to fail.

Reforms will always have winners and losers, so the authors suggest that, “losers from reform require fair warning”. Though this advice is sensible, what happens if the affected people are politically powerful enough to scuttle reform, as we have seen on many occasions in this country? Ultimately, “The policy process is a process of negotiation”, and many examples of where negotiation led to successful policy design and implementation are cited — such as petroleum pricing reform and inflation targeting.

A valuable suggestion present-day policymakers must heed is, “Criticism and conflict have great value”. According to the authors, “Acceptance of criticism is integral to norms of good behaviour in liberal democracy, and is a noble thing.” In the language of neo-classical economics, “There is market failure, in the form of an under-supply of criticism owing to positive externalities”.

Among the most valuable suggestions is that policymakers must never hesitate to “speak truth to power”. The contention that “Liberal democracy is the endless search for a middle road” is a soothing bit of advice in these polarised times.

In Service of The Republic not only lays bare why policies often go wrong, but also charts out a valuable conceptual framework for successful policy design. Written in a lucid and accessible style where the authors bring in their wealth of policymaking experience, it is a must-read not only for present and future policymakers, politicians and analysts, but also for lay-people to get a better understanding of the complex, arcane world of policymaking.

Published on January 13, 2020

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