Great men versus well functioning institutions

Financial Express, 1 July 2009

Discussions about governance in India repeatedly turn into discussions about individuals. The Delhi Metro happened because of E. Sreedharan; SEBI works well because of C. B. Bhave; education malfunctioned under UPA-1 owing to Arjun Singh. Why did urban governance in Surat or Nagpur work well? A few key individuals fixed the problems. If this is the core issue, it puts a huge burden on the appointments process.

Economists are trained to be unsatisfied with explanations based on individuals, and like to understand the deeper sources of dysfunction. The story of India's failures in elementary education that an economist would tell is one where Sarva Shiksha Abhiyan has basic design mistakes.

How would we make drinking water in Bombay work well? An emphasis on personalities would demand finding the right person to run it. How does this happen in good countries? The typical small town in an OECD country -- and in many developing countries -- has 24x7 supply of clean drinking water in the taps. This isn't done by having a miraculously effective appointments process. There is a fairly humdrum process of recruiting fairly ordinary bureaucrats into water utilities, or contracting-out to private utility companies, and the job gets done. In OECD countries, 24x7 clean drinking water in the taps is not exotic rocket science. It happens all the time, because the deeper institutions are structured correctly.

This is the scalable path. A few good successes in the appointments process might achieve 24x7 drinking water in a few towns. But the real story is clearly deeper. It is about getting to an institutional mechanism which can be rolled out all across the country, which will deliver 24x7 clean drinking water in 5,000 towns.

Institutional change is hard, and all too often, there is a temptation to paper over a dysfunctional institutional mechanism by demanding top quality leadership, which will produce good outcomes despite the bad institutions that they man. A good judge will overcome all the problems that beset the legal system and still work hard, processing a large number of cases per month, delivering good judgments against the odds. The good doctor will rise above the terrible problems of a government hospital and heal patients all the same. These individuals are revered, and rightly so.

Each good judge and each good doctor deserves the gratitude of society for being useful against all odds. But, at the same time, these are drops in the ocean. Good governments are not built out of good individuals. They are built out of good laws and good incentive structures. The men who will heal health policy are more important than the men who will heal patients.

Keynes once wrote "If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid". Mervyn King of the Bank of England famously said that the purpose of monetary policy reform is to make it boring. This is all about removing the `mystique' from central banking, about depersonalising it so that the identity of the governor does not matter. Instead, central banking should be based on transparency, predictability, accountability. A good central bank is one which delivers the same correct reaction function across changes in staffing.

An informal slogan at the `Water and Sanitation Program' (WSP) was: "Don't fix the pipes. Fix the institutions that fix the pipes." What we need today is not a leader who will properly run an organisation that repairs water pipes. What we need today is the leadership that will change laws and incentives so that we achieve good institutional arrangements on water supply.

A useful analogy is the role of T. N. Seshan in building the election commission, which is now one of India's great institutions. There is now a striking gap between the performance of two constitutional bodies: the election commission as opposed to the judiciary. We respect Seshan today not because he ran one or two elections well, but because he was an important actor in institution building. An equally great contribution was made in recent years with the implementation of electronic voting machines. This field has been successfully depersonalised: the performance in conducting elections has held up despite occasional dubious staffing choices at the election commission.

So do we hire great men or do we build great institutional arrangements? We hire the great men who will do institutional reform. As long as we are a third world country struggling to get ahead, we will remain vulnerable to the vicissitudes of the appointments process. But the recruiters should not look for the right person to man the system. His job should be to fix it. The interesting candidate is not someone who knows how to make decisions on raising or lowering interest rates. He is someone who knows how to setup a central bank that knows how to raise or lower interest rates.

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