Example: A fascinating question in finance is the supervisory role of exchanges. Do we want exchanges to be rule makers and the front line of supervision, or do we want them to be mere profit-maximising IT companies who run trading systems, with all regulatory/supervisory functions being performed by SEBI? Is the exchange a public utility or a mere business?
In the field of education, the question is: Should government be the producer of education services (building schools, worrying about drinking water at the school, hiring teachers etc.) or should the actual production be done by private schools, with government giving money and decision making power to parents (through vouchers) and working on the public goods of education (measuring what children know, establishing curriculum, releasing information about each school into the public domain so as to assist the decision making of parents).
Our thinking on these boundaries is critically related to our views about the capabilities of government and the complexity of the problem.
How should we think about complexity? Problems that are hard, in the field of public administration, have three characteristics: large number of transactions, high discretion in the hands of the front-line civil servant, high stakes. (On the first two, see Pritchett & Woolcock, 2004). Under these conditions, production in government is hard.
How should we think about capability of government? When the government is fluently able to reorganise agencies, shift functions from one government agency to another, achieve cooperation between multiple government agencies, hire and fire civil servants, and pay market wages, then the government is going to be a capable one. A government that is weak on all these attributes is a low-capacity one.
Our views about the appropriate separation between in-sourcing and outsourcing would thus vary by problem and locale. For some problems, production in government is easy, and we’d be less emphatic that contracting-out should be done. E.g. monetary policy is easy, and there is no big problem with keeping it inside government. In some places, the government has high capacity – e.g. public schools work relatively well in Sweden. In other places, when the government has low capacity, we’d be more keen to contract things out.
Turning to the Indian setting, there are two huge problems that hold back the possibility of building high quality public schools. First, civil servant wages are set to 2x to 3x higher levels, when compared with market prices, thus inflating the cost of government schools. If you took the same money and gave it to parents, who chose a private school on their own, the private school would be recruiting much better teachers. Second, civil servants can’t easily be fired, thus reducing the incentives of teachers to teach. Teaching is a transaction-intensive discretionary public service. When the front-line provider has no incentive to work, the quality of teaching will collapse, as has been seen with schools in India.
Some states in India had, appropriately, tried to fight these problems by going to the basics: by bringing in non-tenured staff at lower wages. By recruiting these “para-teachers”, we improve production of education in the public sector. These two issues are of essence. By removing tenure, we increase the incentive of teachers to teach. By bringing wages in line with market conditions, we bring public sector production closer to the cost efficiency that can be obtained by the private sector.
This line of attack may now be torpedoed by the courts. The Gujarat High Court sees to have ordered the government to pay para-teachers full wages and give them tenure.
If this goes through, and if this creates a precedent for the rest of India, then this pretty much closes off these avenues for strengthening public sector production. It would, then, emphasise vouchers as the only way to go.
There is one important slip between cup and lip. The Right to Education (RTE) Act, one of the less impressive legislative achievements of the Indian Parliament, asks state governments to write rules about salaries paid by private schools. RTE was an attack by the public sector education providers against the private sector: so they wanted to kill off the ability of the private sector to pay market wages. Some states have written rules under the RTE which force private schools to pay civil servant wages. For these states, the gains from private production of education services will be smaller. Other states have been silent on this, and there is then a possibility of reaping the full superiority of private production.
I am grateful to Jishnu Das, Lant Pritchett, Parth Shah and Jeff Hammer for useful discussions on this.