Unfortunately, the last hurdle in that education is to survive my speech. Worse still, I have a monopoly over your time conferred upon me by the school, where I can say what I want and you have no choice but to listen.
Chicago Nobel Laureate, Ronald Coase, would say that if we could create a spot market where you get together a collection to bribe me to cut my speech short, and I left with the money, the world would be a better place for both of us.
However, there are transactions costs in setting up that market, including the possibility that I might still inflict the speech on you even after you pay me, simply because I am attached to my duty as speaker, or because I love the sound of my own voice. We need an outside enforcer for the contract – perhaps Mr. Godrej might consent to step in?
Before the murmurings about crass economists willing to sell their souls for money get too loud, and before journalists with their great originality in inventing names start writing about ISBgate, let me tell you the serious point in all this.
Markets and competition don’t appear by magic, they have to be nurtured through appropriate regulation and enforcement. And because self-regulation by interested parties is ineffective in a variety of situations, it is appropriate for an outsider to undertake the regulation and enforcement. Typically, that outsider is the government. And the central focus of my talk will be on whether the government in India is performing its appropriate role.
India has achieved much in the two and a half decades or so since you were born. There is so much to celebrate, whether it is that we appear to have moved away from the Hindu rate of growth of 3.5 percent or whether it is that so many millions of Indians have moved out of debilitating poverty into a life of modest comfort – and yes, despite all the furor over the Planning Commission’s poverty line, we have brought down poverty.
You graduating students have far more opportunities, a much wider choice of careers, and far better salaries than we had when I graduated 25 years ago from a Well-known Institute of Management in Western India. India has come a long way, and we should justifiably be proud.
Just look around you. I was involved with this school right from the very cold February in Chicago over 15 years ago when it was first conceptualized by Rajat Gupta. Success has many fathers and I am proud to claim some portion of paternity, however small it may be.
The dedicated top-notch global faculty, the excellent staff, the magnificent architecture, the superb facilities, they all come together in the quality of education the ISB has imparted, as evidenced by you students, who are second to none in the world. All this was made possible by a small dedicated band, many of whom are on the board today. This school is an example of what we can do as a nation when we put our minds to it.
But even though there are many more such examples of achievement in India today, such as the New Delhi Metro or India’s success in milk production, we should also be realistic about India’s deficiencies. Even as the world becomes more competitive, India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated.
Our politicians seem unable to come together to vote for growth-enabling reforms, even while they are willing to join hands in every populist vote. Coalition dharma seems to fail us only when steps to sustain growth have to be taken. Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad.
We must remember that the history of development is replete with countries that grew strongly for a while, only to stutter and stop as their government and their people started taking growth as their birth-right. Somewhat paradoxically, it is only when we are paranoid about sustaining growth that we will continue achieving it.
A key factor in our ability to rebuild business confidence and resume growth will be the quality of our regulation and our governance; our soft infrastructure so to speak. And the deficiencies here are even more alarming than the inadequacies of our roads, rail, ports, and airports that we are in the process of addressing.
The government does too much of what it should not do, too little of what it should do, even while being capricious and unaware of its limitations. Unfortunately, the private sector has not earned the trust of the broader public, so it is hard to make a strong and persuasive case for change to the voters. This is where you, tomorrow’s leaders of our country, can help.
Let me elaborate. Start first with what the government does too much of. In the early post-independence years, with private sector capacity limited, government forays into steel making, heavy electricals, and even electronics may have been useful, and even critical for our subsequent growth. Some of the top talent in our private sector firms today began in public sector entities like Bharat Heavy Electricals or State Bank of India.
Yet given the growth of capabilities in the private sector, there is really no reason for the continued government presence. Indeed, government ownership hurts public sector firms – low salaries at the top and continuous interference impedes the ability of these firms to attract talent in an increasingly competitive environment, while over-employment at the bottom hurts efficiency.
The natural reaction of the government is to protect its progeny by giving them special privileges. But this tilts the playing field against the private sector. An Air India, which is on continuous and interminable life support from the taxpayer can charge whatever prices it wants and offer whatever service it has the inclination to provide for it has no need to make a profit.
State ownership in many areas no longer serves the public interest, and the only reason it continues is because it serves the many vested interests that benefit from the status quo – the public sector workers who have cushy undemanding safe jobs, the unions who enjoy the power, the occasional corrupt executive who rakes in bribes, and the minister who enjoys the patronage.
Incumbents in the private sector are not blameless either; It is no secret that for a long time, the government’s willingness to keep air fares high so that inefficient Air India would lose less money, allowed private competitors to make a killing even while they could rely on the government to keep out entrants. It is only recently that they have begun complaining about a more aggressive state airline driving them out of business.
What ought to be done about state owned enterprises? Some would say, “Do nothing”, there are more important problems to fix. Yet our most pressing problem is coal, and at the center of it is the public sector coal monopoly, Coal India. Similarly, we are the world’s largest arm’s importer, and one reason is the failure of our public sector defense establishments to deliver on important weapons systems despite decades of development.
Fixing the public sector – that is, making the well-performing do even better while forcing the poorly performing to shape up, even while leveling the playing field with the private sector -- has to come back on the table as a matter of urgency.
Privatization has fallen into disrepute, because the public does not trust the government to sell firms fairly to new private owners. Minority share disinvestment is no answer for it preserves all the ills of government ownership while allowing the state-owned firms more resources that the government can influence. No private owner would be allowed to get away with the kind of exploitation of minority shareholders that the Government of India indulges in. No wonder many public sector firms trade at a significant discount in the market.
We need to bring more radical solutions back on the table. For many of these state-owned firms, we need to first break them up if they are monopolies, strengthen corporate governance and oversight, then return these firms to full broad-based ownership through a public offering. I will call this “publification”, a contorted but precise term, for it puts them back to work for the public rather than for narrow interests.
Clearly, not all public sector firms need the medicine of publification, and there is a need to experiment with what works. But the sooner we stop treating the public sector as untouchable holy cows, to be tethered and milked but not liberated, the better for our growth.
Even while the government needs to get out of activities where it is holding back growth, it needs to play a stronger role in creating a fair, transparent, competitive market that will allow our citizens to make informed choices.
Take, for example, healthcare. As M.I.T researchers Abhijit Banerjee and Esther Duflo (2009) indicate , India has a public health care system that looks like a model for developing countries. The average household is within 2 kilometers of the nearest public facility, the facilities are fully staffed, and the rates they are required to charge are far cheaper than private providers.
Yet the system fails to deliver, literally – a survey they conducted in Udaipur finds that public health sub-centers were closed 56% of the time during regular hours because personnel were absent. This is not to take away from individual dedicated public servants that each one of us knows, but it is a shocking fact about the system as a whole.
Most households prefer therefore to see private providers. Private providers spend more time with patients; Even if it is an alarmingly low median of 4 minutes, this is double the time a public provider would spend, if one is lucky enough to catch them at work. The problem is that many private providers, especially the ones seen by the very poor, are quacks who tend to overprescribe so as to cover up their deficiencies.
Fully 68% of visits to a private facility end up in a patient getting an injection, and 12% in their getting put on a drip. Such over-prescription not only does the patient harm if she is misdiagnosed, it also makes antibiotics ineffective in the population. In the competition between the uncaring public sector and the unqualified private sector, it is the citizen’s health that suffers.
Would it not make sense for the government to give people more meaningful choice by forcing more transparency and disclosure on private sector providers? Should we not know if the “doctor” we go to actually has a medical degree? Should not the unqualified be prohibited from prescribing injections and antibiotics?
The government has an important regulatory role to play. Unfortunately, all too often, relying on the government to regulate simply increases bribe-taking without any improvement in quality. I will come shortly to why there is hope this will change.
But first, two other problems with government. It is capricious. The ideal government would set the rules of the game, and allow an independent judiciary to settle disputes. It would change the rules only when they are clearly broken, and rarely, if ever, with retrospective effect.
The key concern with the Vodafone controversy is not the government’s right to change the law prospectively if it believes it was poorly written and allows an unintended loophole. It is not even the government’s right to change the law retrospectively if it believes that everyone knew what was intended. The concern is that it intends to change the law retrospectively after the Supreme Court upheld Vodafone’s interpretation of the law.
What is the point of having an independent judiciary to interpret the law and adjudicate disputes between government and business if the government has no need to obey it? A government that changes the law retrospectively at will to fit its interpretation introduces tremendous uncertainty into business decisions, and it sets itself outside the law.
India has missed a golden opportunity to show its respect for the rule of law even if it believes the law is poorly written. That is far more damaging than any tax revenues it could obtain by being capricious.
And finally, our government is often unaware of its limitations. There is a lot we could learn from the rest of the world. China does not feel threatened by new information – it gets the best experts in the world to offer it advice, then it picks what it is persuaded by.
Yet Indian administrators, apart from a few open-minded ones, feel threatened by new ideas. India is sui generis they maintain – that is, it is in a category of its own. So it has nothing to learn from the outside, from the Indian diaspora, or even from its own private sector.
Whether this is a matter of convenience, allowing administrators to pursue their vested interests, or whether it is intellectual laziness, is unclear. Nevertheless, we keep repeating failed experiment after failed experiment, ignoring what has worked around the world.
A convocation speech is not the place to dwell on gloom and doom, and I think there are well-grounded reasons that matters will improve. I want to focus on three: history, information and technology, and young people like you.
First, history; India is not unique, neither uniquely good nor uniquely bad. In the late 19th century, the United States was as badly misgoverned as we have been at our worst. Bankers routinely bribed entire legislatures for the licenses to set up, while businessmen sabotaged rival pipelines or steamships. Tammany Hall practices would make the Organizing Committee of the Delhi Commonwealth Games seem like the Sisters of Charity.
The United States changed – there is still corruption but it is typically not organized, in-your-face, and routine.
In part, political patronage became less important in the United States as growth created private sector jobs. But also a free “muck-racking” press exposed corrupt government and business practices, empowering progressive reformers and improving the quality of government services. And new and effective government services such as unemployment insurance reduced the need to go to one’s patron for a handout. So growth and democracy helped create a virtuous circle that improved public governance.
India seems to be poised at a similar stage, and the revelations by the CAG and in the press in recent months should be taken as a sign of the capacity of the system for self-diagnosis and healing as much as it is of the corruption within.
There are areas still immune to press scrutiny – such as the activities of powerful industrialists who can withhold advertising rupees – but even this, I am confident, will change.
Second, information and technology are making it easier to keep a check on the government. Official disclosure, as embedded in the Right to Information Act, has been an important step forward by the current government. The private and NGO sector can also get into the act.
How hard would it be to collect and publicize “reviews” of the experience patients have with different medical practitioners in a city so that the incompetent and unqualified can be shunned? How hard would it be to shame government administrators?
Indeed, Swati Ramanathan of Janaagraha has started a website on the prevalence of bribes intending to do precisely this. Crowd-sourcing monitoring can be a way of improving governance, and while there is some obvious scope for abuse, it can be controlled. The possibilities for social entrepreneurship in India are near unlimited, and I am sure many of you will play a role in such ventures in the years to come.
Similarly, the best way to empower the poor so that they can discipline government providers is to give them cash or vouchers that they can spend on the provider of choice, even while providing them more information on their choices.
And the best way to change the incentives of those manning government dispensaries or teaching in government schools is to tell them that they will not have a job if they do not attract customers. It is high time we included the poor in deciding their own destiny – perhaps that is what the “inclusive” part of inclusive growth should be about.
All this, of course requires technology. Technology to inform people about the performance of providers and to enable them to share experiences, technology to create unique IDs, technology to transfer cash directly to bank accounts, mobile payments to spend the money easily, etc. And fortunately, technology is not something we lack in.
But perhaps most important of all, we have young energetic entrepreneurial people like you, who are dissatisfied with the status quo and want change.
Today, we are probably the country with the greatest difference between the age of its political leaders, whether in power or in the opposition, and the average age of the population. This must change. We need a new generation of leaders, not necessarily just the sons and daughters of politicians, but self-made people who bring energy and ideas to leadership, leaving the old discredited slogans behind.
Nations become great when they become self-confident, when they acquire the collective belief and will to succeed. As the cities of India become the centers of its political strength, they will look to people like you. I am confident you will not disappoint.
A self-assured India, brimming with ideas and energy, can play an enormously positive role in the world. We could offer an alternative view of development, one of the first developing countries to grow rapidly even while being a vibrant democracy, with an economy that has cutting edge innovative companies even while providing bottom-of-the pyramid services.
We could teach both the West and the rest, even while learning from them, as we did in the historic past when we were a global broker of ideas. We could be a voice for good in the international arena, where all too often we are either silent or simply trot out old tired visions.
You have the capacity to make all this possible. But first you have to expand public trust in the private sector by the way you conduct business, increasing your market share by building a better, higher quality, cheaper product rather than by securing underpriced public resources through underhand means or inflicting a government protected monopoly on your customers.
Pioneers from the private sector, many of whom are on this school’s board, started on this track decades ago. You must build on their work.
This then is the message I want to leave you with. India and the world are changing, and probably for the better. You will be able to help shape the world and your place in it. By all means set yourself ambitious goals.
But remember that, as both ancient Indian philosophers and modern day behavioral psychologists say, the achievement of narrow personal goals -- greater wealth, rapid promotion, or increasing renown – rarely brings you anything other than brief pleasure.
I don’t claim to know the secret of happiness, but this seems obvious – if you like the journey, if you get pleasure from the work you do, it matters far less when, or indeed whether, you reach your destination. You have far more control over the journey you choose.
And often the most enjoyable journeys are those where your goals are broader and where you take others with you, especially others who could not make it without your help. In doing so, you will make this world a better, and more stable, place.
Let me conclude. You have been very patient in listening to me, despite your lack of choice. Thank you! I wish you good luck in your future endeavors and hope they are crowned with success.
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