Who Should Get the Centre's Money?

From Financial Express, October 3, 2013

Who should get the Centre’s money?

 A government is ideally supposed to use tax revenue to provide public goods and services to its citizens, goods that the market cannot do a good job of providing. Tax revenue can also be redistributed to make poorer citizens relatively better off than before government intervention. In a federal country like India, there is the complication of different levels of government, each with its own responsibilities and loci of authority. Because the Centre is more efficient at raising tax revenue, there are provisions for sharing central tax revenue with the states. The 14th Finance Commission is now hard at work on making those sharing decisions. Like its predecessors, it will use a formula justified according to a mix of economic and political logic and of precedent. The Finance Commission is an explicit creature of India’s Constitution.

Less firmly founded in constitutional directives, but more in the middle of political bargaining, the Planning Commission (along with various central ministries) also makes transfers to the states. These are based on more varied and discretionary criteria, with its own modified Gadgil formula playing a relatively small role. The Planning Commission introduced the concept of Special Category states, and has given them a healthy share of the pie that it disburses. These states have been, as a natural consequence of the criteria used, mountainous border states with populations whose ethnicity or religion are not part of the “mainstream” Indian identity. They were ostensibly compensated for having high cost structures for public good provision, but I have always thought of their shares of the pie partly as payments for sticking with the rest of the nation.

The Special Category designation has bothered the leaders of some bigger, poorer states, which have been demanding to be included in that classification, therefore getting more central money. Many committees have looked into the criteria to be used for such transfers (which are broadly thought of as promoting “development”) but not made much headway. Hence, a new committee, headed by the ubiquitous Raghuram Rajan, was formed, and has just given its report to the Finance Minister. This committee has created a new index of underdevelopment, combining 10 indicators into this index. In addition to the index, the report also suggested a classification based on levels of development. Indeed, Bihar and Odisha, left out of the Special Category pot, show up as the least-developed. Headlines trumpeted the ranking of Gujarat as “less developed,” despite its apparent economic success.

As anyone knows, and as a dissenting note in the committee report elucidates, the ranking can be very sensitive to how the index is constructed, and it is not clear that the committee has got everything right, from the point of view of what it was trying to achieve. A detailed conceptual discussion of the index is beyond my scope in this column, but I want to point out a couple of things about the report. First, the report is clear that it is not proposing to replace the entire current system of Centre-state transfers with the new formula, but to add another formula for making such transfers —presumably under the existing Planning Commission channel. To my mind, this just adds complexity to an already messy situation. Better to edge the Planning Commission out of this role, let ministries make explicit specific purpose transfers, and give the Finance Commission a bigger role. Better yet, allow states the freedom to piggyback on central taxes such as the individual income tax (this will need a constitutional amendment, of course).

Second, the report notes that Finance Commission transfers are only 54% of total Centre-state transfers (another source says 57%), but of the rest, only a small fraction is governed by the modified Gadgil formula and the boost for Special Category states. But the new index would give much less to the Special Category states, and more to the least-developed states. If this new index is heavily used, it represents a big change. If it is not going to govern a major portion of transfers, then why all the effort? To my mind, the new index is trying to make a major conceptual change in how state shares of transfers are done, without adequate contextual positioning.

To sum up, I don’t think the new index provides a superior guide for Finance Commission transfers (and is not meant to). But it is also not clearly the right way to go in guiding “developmental” transfers either. Those should be simpler, project-based, with measurement of concrete outcomes, not based on composite indices. Finance Commission transfers should do a better job of improving horizontal equity across states, but that also should be based on a small number of criteria—states like Bihar and Odisha would still benefit. And Special Category states should stay what they are—a politically sensitive group of smaller, mainly border states. For rethinking Centre-state transfers, I say, “back to the drawing board.”

How Can Indians Be Happier?

From Financial Express, September 30, 2013

How can Indians be happier? 

 The most obvious aspect of the Bhagwati-Sen debate on Indian economic policy is the question of trade-offs between growth and redistribution. A subtler and deeper issue, central to Amartya Sen’s work, is that of goals. Gross domestic product (GDP, or its cousin, GNI—gross national income) per capita provides a single number, capturing purchasing power, and therefore a sense of the standard of living that people can afford. But this misses many complications, having to do with the imperfections and gaps in the ability of markets to value what we really care about.

The UN Human Development Index (HDI) creates a different numerical measure of well-being, including GDP, but also other dimensions of our lives, such as how healthy and how educated we are. But it is still somewhat arbitrary in its weightings of different outcomes, and it still misses some things that matter to us for our well-being. Can we do better in tracking average well-being?

The World Happiness Report (WHR) is precisely designed to get a better understanding of how well off people are in different countries, and what contributes to their sense of well-being. The data comes from asking people carefully calibrated questions about how they evaluate their own life circumstances, with answers chosen on a numerical scale. “Happiness” may be a fuzzy concept, difficult to pin down, but, on average, people can give an accurate sense of how they view their lives. Different surveys can distinguish between temporary and transitory feelings and emotions on the one hand, and an overall, longer-run evaluation of life conditions.

The latest WHR is the second annual effort in what may be a major step forward in understanding systematically what contributes to our overall well-being. In turn, it may help policymakers do better in setting their priorities and choosing policies. To make this concrete, look at where India stands. First, the facts. In the 2013 WHR, India ranks 111th out of 156 countries surveyed. For comparison, the US is 17th, China is 93rd, Bangladesh is 108th and Pakistan is (a surprising) 81st. The IMF GDP per capita rankings out of 187 countries, on the other hand, are: US (6), China (93), India (133), Pakistan (141) and Bangladesh (154). And the HDI rankings, also for 187 countries, are: US (3), China (101), India (136), Bangladesh (146), Pakistan (146).

Note that, unlike the HDI, the happiness ranking does not directly include GDP/GNI per capita—it is based on asking people directly how well off they feel. Hence, by comparing the happiness ranking with GDP per capita, one can get a better sense of the importance of material conditions. For the world as a whole, and for most regions and countries, GDP per capita is the most important variable in explaining happiness (there is a larger, unexplained residual). But “social support” is a very close second. Social support is measured by yes-no responses to the question, “If you were in trouble, do you have relatives or friends you can count on to help you whenever you need them, or not?” The remaining four important, identifiable variables that seem to explain happiness are, in order: healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.

The initial take on the data does not provide anything new or surprising for India: material conditions (GDP per capita) matter, as does health. This is in concordance with our familiar indicators of progress. But there is one interesting nugget: India was significantly less happy in 2010-12 compared to 2005-07, despite being richer. What happened? The measure of perceived social support fell dramatically between the two periods. And this happened in a situation where the perception of social support in South Asia is far lower than in any other region of the world.

The data need further investigation and understanding before policy implications can be drawn from them. But the happiness index and its explanatory variables provide some beginning for possible policy innovations. If India’s lack of social support is a consequence of social fragmentation, low trust or erosion of extended family support structures, will government transfer programmes address it, or are deeper changes needed? Indeed, is government action the place to look for possible improvements in societal structures that will increase perceived well-being? The WHR finds that trust in national government is not correlated with happiness (subjective life evaluations), but that government effectiveness, reflecting aspects of honesty and effective delivery of public services, is strongly correlated with life evaluations.

Perhaps the preliminary lesson of the WHR for India’s policymakers is therefore the following one. Before trying to fix problems that have deeper social causes, stay focused on the basics, these being material well-being as measured by average income and by healthy lives; and before doing anything else, figure out how to make the government itself more honest and effective in whatever it needs to do most.

From Financial Express, September 13, 2013

Getting India back on track

 In my last column (An Indian Spring? FE, August 22, http://goo.gl/hwW9cw), I raised the possibility of India descending into an Egypt-like situation. It probably will not get that bad, since India’s recent history and its societal makeup are sufficiently different. But there is one large commonality—a surplus of young people relative to decent jobs. That basic mismatch between demographics and economic opportunity can drive substantial waves of social unrest. One only has to think back to the early and mid-1970s to realise that India, for all its democratic resilience, is not immune to severe social and political instability. In an earlier column (Can India grow faster again? FE, August 19, http://goo.gl/8E9iwS) I listed some steps that India’s leaders need to take in the medium run: effective vocational training, removing constraints on electric power generation, and more devolution to the states and to cities. But before that, there is a short run crisis facing the country. Here are my thoughts on how to turn things around quickly and effectively. 

The immediate problem is a crisis of confidence. This is partly what has driven the plunge in the rupee, although the strength of the US and European economies has also contributed to the rupee depreciation. The erosion of confidence has been gradual, with multiple instances of government corruption and fiscal and monetary policy mistakes over the last couple of years. Fixing this will not be easy. The measures undertaken so far have smacked of panic: sudden promises of relaxing foreign direct investment caps, a grab bag of import controls, and derailing financial markets to curb “speculators”. All these measures, in my view, simply reaffirm the view that the government is adrift and that troubles will continue. The latter two types of measures also go against the basics of a coherent economic reform strategy, which should be built on promoting well-functioning markets in a global setting. 

With respect to the rupee, the Reserve Bank of India’s (RBI’s) initial response of trying to reduce speculation by making short-term borrowing harder simply sabotaged the working of short-term credit markets, and had no effect on offshore traders. Markets became thinner and more volatile. Instead, if RBI wants to prevent further overshooting downwards of the rupee’s value, it should follow an assertive and transparent (but feasible) intervention policy (something along the lines suggested by Kaushik Basu, announcing a schedule of intervention). Given what has happened, it may be mostly too late. One thing RBI should do is to raise its policy rate, as other emerging economies have been doing. Yes, this could further slow down growth, but the short run benefits of an interest rate hike, in terms of stabilising expectations about inflation and currency depreciation, seem to make this a worthwhile option. Reversing such rate hikes is easy and quick, and they do not have the deleterious impacts of unexpected changes in the rules governing the functioning of markets. 

With respect to the current account deficit, what the government needs to do is to use the opportunity of the rupee depreciation to push exports. The obvious areas are in information technology and related services, tourism, and possibly some kinds of consumer goods (including apparel, health and beauty items, and processed foods). Essentially, India’s products are suddenly a bargain, but some rapid and concerted marketing efforts are required to make sure that rich world consumers take advantage of these bargains. India’s embassies and missions abroad should be going into overtime, working with Indian businesses to seize the opportunity presented by the fallen rupee. Promoting exports, while more work and slower to take effect than restricting imports, will have a much larger medium term benefit. One of the easiest, most immediate opportunities is promoting foreign tourism, since the supply constraints are less problematic. 

On the domestic front, the politics of the looming national election make progress difficult, but if the government were to push harder to reach a grand bargain on the goods and services tax (GST), convincing the array of opposition parties that they will all benefit from a broader, more robust tax system, this would provide the prospect of a corrective on the fiscal front. My reading of some of the crisis of confidence is that it was driven by the government’s attempts to raise revenue through ad hoc, discretionary and retroactive measures, in turn driven by the need to reduce the fiscal deficit. But those policies hurt confidence, growth and government revenues, just the opposite of what was desired. 

The three examples I have suggested are policies that signal that the government is in charge, and is capable of providing leadership to the country. In contrast, most of the governmental responses to the crisis so far have seemed to signal desperation, weakness and lack of control. Much of the recent Indian policy debate has been reduced to finger pointing (evil speculators, heartless global capitalists, incompetent and venal politicians) and crying over spilt milk. It does not have to be so, and India’s leadership has to act as if it is worthy to lead in these challenging times.

Financial Express, August 22, 2013

An Indian Spring?

In my last column, I ended by suggesting that India can either have a true Indian Spring, with its economy and society blossoming, or instead something that veers toward what has happened in Egypt. What are the factors that will determine where the country goes? First, I want to emphasise that the current economic debate (now and perhaps forever labelled as “Sen vs Bhagwati”) has tended to miss the interaction of economics and politics. Prescriptions are sometimes offered as if by wise philosophers or technocrats, with the only issue being a sorting out of the facts of the growth process, or agreeing on the relative weighting of the welfare of different segments of society. How does politics enter into the evaluation of different policy options? 

The most obvious political process is the use of government transfers to buy votes. Empathy for the poor may matter for many of those involved in the intellectual debates, but a good first approximation to reality is that India’s politicians care most about getting re-elected. The policies that get implemented, in this case, are the ones that maximise the chance of winning the next election. India’s voters have to keep making it clear to politicians that subsidies and transfers are not going to be enough to secure their votes. There have been signs of this shift (rewarding performance over populism) in how Indians vote, and one has to hope this trend will continue.

But politics is also more complicated than that. Take Egypt, where democratic elections failed to lead to a stable, popular government, and the country is close to descending into chaos or repression. The winners of the election lost support not just, or even mainly, because they failed to deliver economic betterment. Instead, they were criticised for undermining the people’s recently-won freedoms. Basically, people want dignity and freedom as well as material improvement.

Economic reform in India has delivered an uneven mix of material and non-material benefits. For example, Dalit entrepreneurs seem to have gained on both fronts. Some of the middle classes have seen material gains, but erosion of their status and of traditional certainties. The upper crust of society has benefited disproportionately. And at the other extreme, many people in rural areas, especially in tribal regions, have seen their exploitation increase. This is a complicated story, with perhaps a couple of clear lessons. First, a majority of the population is frustrated with the corruption of, and exploitation by, those with political and economic power. Second, doling out money to win votes will not work as well as it used to, and will not stop the pot from boiling over. Social conflict in India will increase unless there is a quantum improvement in the quality of governance.

There is also another danger lurking. The growth-redistribution debate has only tangentially addressed India’s macroeconomic and financial sector policies. Here, the spectre of corruption also raises its head in the form of the government’s push to give new banking licences to powerful industrialists. But many of the problems have arisen from failure to execute the basics of macroeconomic management. The central government has not done a good job of managing its fiscal deficit, while the Reserve Bank of India (RBI) has gone backwards in managing inflation and the currency. RBI has failed to control inflation effectively, even as economic growth has not been protected. Government mismanagement of food and oil policies has contributed to the problem. Most recently, RBI’s attempts to control the exchange rate have ranged from pointless to damaging, undoing a longer-term program of creating a deeper and more robust financial system. The danger is that macroeconomic conditions will deteriorate rapidly, dealing a severe blow to the economy that will further increase social conflict.

RBI could have used earlier benign economic circumstances to push financial sector reforms that would have improved the functioning of a range of financial markets, improved financial access, and helped capital to flow to more productive uses. It did a little, but not enough, and the futile attempt to defend the rupee has undone some of the certainties of financial sector policy that should have been maintained. Confidence—a valuable commodity itself—has been eroded.

The incoming governor of RBI has a track record of speaking up for the right policies. Not long ago, he authored a vital report on financial sector reform, covering the issues from top (macroeconomic management) to bottom (financial access at the grassroots of the economy). He does not have to stand for re-election, and he does not have to rely on reappointment for his livelihood or prestige.

Raghuram Rajan has an opportunity to determine the nature of an Indian Spring, both through his immediate decisions on macroeconomic management, and through his shaping of financial sector reform over the next two or three years. What he says and does is what will matter much more for India than the shadings of the Sen-Bhagwati debate. He even has the potential to overcome the economic policy missteps of India’s politicians. Let us see what happens.

Financial Express, August 19, 2013

Can India grow faster again?

India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest that India can grow at 8% a year, even in the current economic climate. 

 

India’s growth has slowed dramatically from the global boom years. What can it do to recover? Was the period before the financial crisis just a temporary, lucky window for India, now gone forever? The rich world is saddled with debt. An emerging market slowdown, partly a result of the industrialised countries’ own slowdown, and partly due to internal structural issues in China and elsewhere, is the latest shadow looming over India’s growth prospects. Is the gloom escapable?

There are possibilities for hope. Much as I dislike the idea of Indian exceptionalism, in this case it may be warranted to some extent. Most importantly, India is by far the poorest of the BRIC group, and probably one of the poorest of the more amorphous “emerging market” designation. That means it has more room to grow. It is quite far from having to worry about any so-called “middle-income trap,” that might be an issue for China and Brazil. Secondly, India’s demographics give it an opportunity that does not have to be sabotaged by a global slowdown. Thirdly, India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest to me that India can grow at 8% a year, even in the current economic climate. How can this be achieved?

The need to create productive employment at a very large scale is obvious. This is more complicated than just giving away money for rural make-work programmes—that is just a transfer scheme for redistribution-cum-income insurance. India needs to create more new businesses and allow existing ones to expand more easily, and in employment-friendly ways. Clearly, labour market reform is needed, and it is not as difficult as it is made out to be. The core problem is political acceptability, and a grandfathering scheme, where existing employees are protected, but new ones in new firms, or certain classes of old ones, are allowed to be employed under more flexible conditions.

Next, the focus of new business creation should be in second and third tier cities and towns. These are best placed to absorb rural labour most efficiently and flexibly. To make this work, strengthening urban infrastructure at this level is critical—this means empowering urban local governments, increasing their capacity and incentives to raise revenues and build and manage new infrastructure. It also needs continued development of rural roads.

Another way in which India is somewhat different is in its geography. This geography actually makes it easier to develop internal supply chain networks, again provided that the internal infrastructure is in place. Currently, a wholesale review of India’s transportation sector is under way—hopefully its recommendations will be the basis for reform, not just in physical infrastructure for internal movement of goods, but also in the institutional infrastructure of regulation and taxation that often inhibits the development of internal production networks.
India also needs to think about patterns of production. Japan certainly grew by becoming an exporting powerhouse after World War 2, but it also produced for its domestic market. Durable goods industries making appliances and cars for domestic consumers were crucial to Japan’s inclusive growth. India is poorer, bigger and more heterogeneous than Japan. On the other hand, technology has made it easier to set up new industries (smaller-scale factories, for example), to manage production, and even to innovate inside a technology frontier that has itself been pushed out at an incredible rate. The key to inclusive growth is domestic production of consumer goods that are affordable to large numbers of Indian consumers—not just watches and bicycles, but mobile phones, kitchen appliances, energy generating devices and more.

This last point suggests that the idea of Track 1 and Track 2 reforms, so clearly articulated recently by economists Jagdish Bhagwati and Arvind Panagariya, may be dominated by a reform agenda that integrates the need for growth with inclusion, and goes beyond mere redistribution or trickle down.

To support the growth path outlined above, there are three crucial areas where the national government needs to focus, beyond basic health and literacy. First is a large-scale, effective set of vocational training programs: there has been much talk on this front and little achievement. The private sector probably needs to be incentivised to make something happen quickly. Second, the government needs to fix the mess in electric power generation—this is well-documented as a prime constraint on growth. My earlier calculation suggested over a percentage point of growth is lost each year.

Third, and most difficult, the national government needs to overcome its own corruption and inefficiency by devolving responsibility and authority to the states, and from there down to cities. Old fears of national disintegration are no longer valid. Political power at the centre can be just as well sustained through sustained economic betterment, as opposed to short term handouts. Political parties at the national level need to understand that this is possible. A future Indian spring can be a true blossoming, or it can be like the Arab one so far.

Financial Express, August 7, 2013

The great rights debate

 India’s Food Security Bill has intensified a larger debate on where the country should be headed, with respect to questions of the rights of citizens. Naturally I want to weigh in as well. There are several issues, which to my mind are getting combined in ways that reduce the clarity of our thinking. 

First, there is the grand philosophical challenge of what rights are and which ones, at some abstract level, we want to protect and promote in our society. For example, the United States Declaration of Independence called out (though not exclusively) the rights to life, liberty and the pursuit of happiness.

Second, there is the question of how to translate any abstract right into practical rules for society. In the US, the right to liberty was amplified and spelled out in their constitution’s “Bill of Rights,” to include freedom of speech. How that gets put into practice (for example, it is not a right to shout “fire” in a crowded theatre if there is no fire) depends on societal norms, laws, and the interpretation and enforcement of those laws.

Third, there is the issue of the motivations and objectives of those who are pushing for amplifications or extensions of rights in India, including influential people in and outside government.

Let’s not worry too much about the third issue, since the first two are central. Of course, if the current approach to rights is wrong, understanding why it went wrong will be important for changing the process and for selecting new decision makers who can do a better job. Looking at the United Nations Universal Declaration of Human Rights, one can see that we have, in principle, agreed to an expansive set of rights, of varying character and tenor (the right to life versus the right to marry, for example), some of which are derivative of others, and some of which may conflict at times with others. It is also clear that practice in India falls woefully short of many of the ideals laid out in this document.

So, with respect to the first issue, of what rights are, and which ones are desirable, as a first approximation, we have reasonable answers, the result of considerable global intellectual effort and historical experience. The real focus, then, should be on implementation. Of course, everyone falls short of ideals in practice, so the question is how we can do better. The economist’s way of thinking is very useful here—one should establish where we are relative to a “rights frontier,” how to move closer to the frontier, and where we should be on the frontier. The latter involves tradeoffs—should we spend more on subsidised food or on access to clean water? On public health centres in villages or on subsidised health insurance? On better and more equal treatment in the justice system or on maternal and neonatal health?

Of course, we would like to do all these things, but at some level choices have to be made, and one problem with India’s government decision making processes is that they do not support good spending choices in general. How to fix that was the subject of my last column. There is a second level problem once choices have been made. If we want to promote the right to health and well-being (as articulated in the UN Declaration) by focusing on food (rather than housing or medical care), then, is translating that objective into “the right to rice at two rupees a kilo, delivered through the Public Distribution System” the best way to do it? What is surprising is that this question has not been properly addressed by many policy makers and policy advisers. This is disheartening.

Of course, it can be counterproductive to criticise without offering a better alternative. So here is my suggestion, one I have made before. Focus above all on the health and well-being of two years in the life-cycle of every citizen, from conception to their first birthday. Put marginal public resources for the broad right to health and well-being entirely into this targeted group. This includes an integrated approach to food and nutrition, health care, and information and education. This will also have a big impact on gender issues and the rights of women, though in indirect and long-run ways. It is universal and easily targeted at the same time.

For complicated reasons, India does terribly on the interval (-1, +1) in its citizens’ lives. That alone would suggest that the bang for the buck would be highest here. Indian society has too many problems to fix all at once with the resources available. Getting this one piece of our lives right would be an excellent place to start. It will make a lot of other rights easier to attain over the longer run. Articulating citizens’ rights is a good thing. Using resources intelligently to achieve these rights effectively is also good, and ultimately where the proof of the pudding lies.

Financial Express, July 26, 2013

Making government work

 India’s government works very well in some ways (functioning democracy, stability, responsiveness, and so on) but is maddeningly inept in others (improving provision of basic public services, ranging from health and education to water and electricity supplies). Lant Pritchett, formerly of the World Bank, and now at Harvard’s Kennedy School of Government, has coined a new term for this situation. He calls India a “flailing” state: “a nation-state in which the head, that is the elite institutions at the national (and in some states) level remain sound and functional but … this head is no longer reliably connected via nerves and sinews to its own limbs. In many parts of India in many sectors, the everyday actions of the field level agents of the state—policemen, engineers, teachers, health workers—are increasingly beyond the control of the administration at the national or state level.” It may be debatable whether the deterioration is in absolute terms, or relative to expectations and aspirations, but the question is what can be done to change this situation. 

Pritchett’s solution to the problem that so many have identified, and which he has so picturesquely named, is unclear. He suggests that India’s “administrative modernism” is out of step with the country’s politics and society. He argues that political competition focuses on loyalty to identity groups, rather than provision of effective public services. He suggests that India will eventually muddle through with incremental reforms and learning by doing. Here I would like to offer some different perspectives on the problem and the possible solutions.

Ultimately, as Pritchett and others have recognised, a major issue is that of weak accountability of government employees. Accountability can be internal, within an organisation (for example, to one’s boss), or external, such as to citizens as voters. There are a variety of ways in which accountability can be improved. Several years ago, OP Agarwal and TV Somanathan, themselves senior bureaucrats, suggested some structural changes for decision-making within central ministries, including letting more policy implementation be managed below the top level, providing better career incentives for performance by elite bureaucrats, and broadening the input of expertise into policy-making.

The suggested changes can, in fact, be thought of as embodying two fundamental principles, those of decentralisation and competition. Decentralisation allows for better matching of skills and tasks, at least when training is appropriately provided. Competition provides incentives, sometimes pecuniary, but sometimes non-pecuniary, for better effort. The interesting idea here is that relatively small structural changes at the very top may have significant impacts—the decentralisation envisaged is modest, just pushing some decisions one or two levels down the hierarchy. The competition envisaged is also modest—slightly more in the way of performance expectations and appraisals, plus potential and actual competition from outsiders to the bureaucracy.

Such micro reforms can, of course, be copied at the level of each state government, and would need to be. A second set of reforms, which are much more macro in nature, apply the principles of decentralisation and competition at a different scale. I would suggest that India’s so-called flailing state is very much a result of over-centralisation with respect to the different tiers of government. I would argue that more expenditure authority needs to be pushed down to the level of state governments, and from there to local governments, particularly city and town governments. Currently, the states appear to have considerable responsibilities for expenditure, and there is a view that they have failed to meet these responsibilities, necessitating more central government control through transfers with strings attached. I would argue that state governments instead need to be given more autonomy, and that more revenue authority needs to be delegated to state governments, who must then delegate further to local governments. Decentralisation is essential for creating effective external accountability, which in turn will drive internal accountability.

Of course there are issues of inequity, of corruption, and of capacity. However, each of these can be addressed directly. None of these problems is solely associated with decentralisation, and none of them should stand as a necessary difficulty of decentralisation. The initial evidence from India’s massive local government reform supports the idea that accountability and effectiveness can increase with decentralisation, even as mechanisms are needed to deal with the adverse consequences mentioned. And this has happened without giving local governments even a semblance of appropriate revenue authority.

The two suggestions for government reforms presented here—decentralisation and competition within top-level government organisations, and across tiers of government—illustrate the problem with Pritchett’s metaphor. There is not just one brain that controls nerves, sinews and limbs. Government is made of individuals with skills that can be better utilised, and that can be improved. Democratic governments ultimately serve at the pleasure of citizens, and government workers need to make that connection more explicitly. A focus on these possibilities can make government work better more rapidly than the pessimists might believe.