High-powered incentives can reform our bureaucracy

The challenge of bootstraping India from the Third World and providing one-fifth of humanity with half good living standards is enormous. It calls for a skilled, motivated and active bureaucracy. As my previous article has argued, there is a lot of serious re-evaluation on their incentives to inject Indian executives with the company and move them away from laziness.

The wealth of narrative and educational evidence supports the implementation of high-powered incentives to turn the bureaucracy into a growth engine from the albatrosses around the neck of the people. In China, the practice of joining jihai, or bureaucrats in public or private institutions, encourages them to promote the economic transformation of their regions to improve their own employment opportunities after they leave the public service. Gaining a reputation as ‘reform-friendly’ among potential private sector employers will also motivate them to promote economic growth. When making a switch, most people will find that some of the bureaucratic rules they helped maintain are obstacles to their business interests, and then hit them with an ax. Therefore, Jiahai emphasizes the power of incentives in transforming a bureaucracy.

It is recorded in the fascinating book How China Escaped the Poverty Trap, written by Yuen Yuen Ang, a great organization of Chinese bureaucrats. The author argues that the bureaucratic entrepreneurship that changed China’s economy is largely due to payment reforms. Bureaucrats’ low base pay has been replaced by higher add-on pay for financial performance. Similarly, Singapore’s bureaucracy receives high affiliate wages that promote performance. Bureaucrats in Singapore can earn four types of performance payments — non-pension annual allowance, annual variable component, performance bonus and national bonus. All of these can add up to 20 months of a bureaucrat’s regular salary.

Reforming the public bureaucracy through financial incentives? In the title paper, Susan Rose-Ackermann pointed out that the sense of professional duty is generally inadequate to motivate government employees, and that other incentives, such as plum postings, are too weak and / or randomly assigned (high error rates) to act as strong motivators. This, in addition to incentives for information production, makes executives risk-averse and productive. She argues that financial incentives can often solve these problems. Imran Rasool and Daniel Roger found in a empirical study (2018) that well-designed financial incentives have a positive impact on project completion rates for the Nigerian Civil Service.

Promoting bureaucratic performance through high-powered financial incentives has other benefits. In contrast to monitoring or control-based measures, these have the potential to reduce corruption without increasing procedural complexity and processing conflicts. Also, this approach is simpler to reform the bureaucracy. Targets and performance measures can be changed to suit the changing needs of the people / state. Incentives can be adjusted over time and done nicely. Numerous research studies have shown that officers in different duties have different risk priorities. For example, a bureaucrat in a more visible function may be more risk-averse (due to the higher cost of visible failures) in a less visible role. Financial incentives allow for different risk priorities and goals. Different functions and departments have incentives designed specifically for their performance goals.

Also, financial incentives can be given to a ‘tournament’ such as structure, which helps to maintain motivation even in situations where results are generated by uncontrolled factors. As Rose-Ackerman points out, such incentives are likely to provoke a broader catalyst for bureaucracy through the ‘reverse Greshams law effect’. Gresham’s law states that bad money pushes good money into circulation as people store good money and trade with bad money. With well-designed financial incentives, ‘good’ bureaucrats earn more, appear more and face higher demand for their skills, thereby pushing ‘bad’ bureaucrats into oblivion or reform. Finally, unlike the pay commission recommendations of India, the budget implications of the scheme can be controlled in advance by linking payments with financial performance.

Strictly speaking, implementing a system of financial incentives is not without its share of challenges. For this system to be contracted to operate in a government context, performance must be defined objectively. There needs to be a clear relationship between effort and performance metrics, and bureaucrats should be given prior knowledge of these metrics as long as they have pre-post visibility. The coincidence of the results, the risk aversion of government employees and the fact that the results may in many cases depend on inter-departmental cooperation are also reasons for the incentives. Such concerns about performance measurement are somewhat different in this digital age. Challenges such as identifying and evaluating performance through thoughtful application of technology can be overcome.

Overall, unlike the failed monitoring and control-based measures in reforming the Indian bureaucracy, the campaign activities that promote good performance are powerful, comprehensive and simple approach that will help the Babudom of India achieve its ‘Weberian’ ideal.

Director and Diva Jain Arjao at Research and Writing ‘Probability’ on Behavioral Finance and Economics. Her Twitter handle @ Divajain2

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