Wednesday, January 14, 2015

The challenge with transactional reforms

In about a month, the government in Delhi would be presenting its first full budget. In the seven months, it has had some notable achievements. It has restored macro-economic stability through fiscal prudence - decontrolled diesel price, limited LPG subsidy through introduction of cash transfer, and restrained the increase in Minimum Support Price (MSP) - and by allowing the central bank to pursue an inflation targeting monetary policy. Favorable external factors have doubtless helped.

It has also initiated reforms aimed at improving the ease of doing business, including amendments to the Land Acquisition Act and liberalization of labor markets. It has also accelerated long-delayed reforms like harmonization of indirect taxes and liberalized foreign equity participation in many sectors - insurance, defence, and railways. Encouraging has been its intent on collaborating with state governments and reforming governance standards in public sector banks.

But the expected rapid return to high-growth rates has not materialized. As the economy shows little signs of regaining the momentum of 2003-08, the government's exuberant supporters appear to be losing patience and no day passes without pressure mounting on the government to do more. So what is missing?

Commentators point to the vaguely phrased "second-generation reforms" as the solution. Whatever its constituents, these reforms are unlikely to be big-bang and generate immediate results. Two reasons stand out. One, by nature, most of them are diffuse, incremental, and long-drawn. Two, most of them have to be implemented by state governments.

The first generation of reforms were about changes like elimination of licensing and easing of entry barriers, opening markets and lowering tariffs, and repealing restrictive and distortionary regulations. For most part, these reforms involved one-off regulatory decisions, whose effects were immediately felt. Such reforms were, unsurprisingly, the low-hanging fruits that yielded immediate results. For lack of a better word, let us describe them as decisional reforms. In fact, many of the reforms implemented by this government are, in some sense, the remainders from the first phase of reforms.

In contrast, the second generation of reforms are less about one-off decisions and more about transactional improvements. Consider getting an electricity connection or procuring a property. The former requires the applicant to apply; an estimate to be made; payment to be remitted; tenders called, work contracted, and work executed; and supply to be connected. The latter needs inquiring with multiple agencies to verify the reliability of land title and encumbrances, getting the property registered and mutated, and obtaining land-conversion certificate (if agriculture land). The human interfaces and legacy problems in these transactions cannot be avoided by computerization or automation, or even standardization. Much the same could be said about improving school education, delivering universal health care, and reducing skills-deficit among workforce.

All of them require transactional interventions, often recurring, whose effectiveness is intimately dependent on the quality of human interface. The systemic legacy problems - poor state of records, woefully inadequate infrastructure, untrained and over-burdened personnel etc - are profound and not easily addressed. They are not amenable to one-off decisions and require continuous engagement between the applicants and public systems. It is here that the much-debated state capability problems surface. Even with state-of-art governance frameworks and incentive compatible policies, you still need public officials to transact and translate them into actual outcomes.

Whatever the hype surrounding these reforms, those expecting immediate and big-bang results are likely to remain disappointed. Unfortunately, by raising the expectations through high-profile slogans and media campaigns, the government may be limiting the political space available for it to pursue these reforms. 

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