bureaucracy in development

How does bureaucracy work?

The abusive implication of the terms in question is not limited to America and other democratic countries. It is a universal phenomenon. Even in Prussia, the paragon of authoritarian government, nobody wanted to be called a bureaucrat. The Prussian king’s wirklicher geheimer Ober-Regierungsrat was proud of his dignity and of the power that it bestowed. His conceit delighted in the reverence of his subordinates and of the populace. He was imbued with the idea of his own importance and infallibility. But he would have deemed it an impudent insult if somebody had the effrontery to call him a bureaucrat. He was, in his own opinion, not a bureaucrat but a civil servant, his Majesty’s mandatory, a functionary of the State unswervingly attending day and night to the welfare of the nation. (Mises, 1994, page 1)

It may seem odd to speak of bureaucracy as efficient and responsible, but for many important functions of government, bureaucratic organization is the only way to approach acceptable levels of efficiency and responsibility. Before governments instituted bureaucracies, tasks were randomly assigned to amateurs who held positions on the basis of their friendship with a monarch or a politician. It was impossible to determine which person was responsible for which decision, and there as little specialized training. In contrast, core bureaucratic principles clear lines of specialization and the strict application of written rules enable the modern Internal Revenue Service, for example, to process millions of tax returns quickly and, generally, with considerable accuracy. A less “bureaucratic” arrangement would simply not work. (Danziger, 2008, page 274)

The bureaucratic system was one of the great inventions of humanity which granted continuity in state mechanism with every change of governments. If we take Ethiopia for example before the time of Emperor Menelik the capital city and state apparatus was changing with every change in the power structure of the country. This forced the development process to restart from scratch again and again with ever changing government. However the Emperor introduced bureaucratic system which was able to stand change of government which includes modernization of the Empeior under Haile Selase, socialism under Mingustu and the current government since 1991. The time of bureaucratic system was time in which the country is able to achieve sustainable transformation of the economy at different speed.   

The problem is when dealing with complex developmental problems, while trying to outrun the market, the bureaucratic system is less flexible to changing conditions and the incentive system of public sector needed to promote efficiency is loosely linked to efficiency (Williamson, 2000). That is why development, which needs dynamic, efficient and flexible decision making, will face rigid bottle necks from the public sector.

First, decisions will take longer time and such bureaucratic rigidity will negatively affect efficiency of the public sector (Williamson, 2000). When dealing with dynamic beast like market, which generates ever changing opportunities and challenges, a state needs adaptive and dynamic bureaucracy, who can adapt to reality as it comes. The problem is the bureaucratic system is rigid and less flexible to find local solution to local problems. Often decentralization is promoted for flexibility but this may not be perfect solution either.  

Decentralization will face problem of centralized capabilities. When capabilities are centralized, decentralization of power is simply another source of inefficiency in some cases. We should notice there is concentration economies working to concentrate human capital, resources, industries, business, goods and services and infrastructure in big urban centers (Krugman, 1991). Under such reality decentralization of power will be coupled with concentration of capability. The second problem is that the public sector facing highly asymmetric information problem will have less capable works, which normally work less than their full capacity (Williamson, 2000 and Stiglitz, 2001).

Let’s debunk the second problem clearly. There is a tendency for state to pay lower salary, in most part of the world, which will create adverse selection problem (Stiglitz, 2001 and Williamson, 2000). Only option less workers, which can’t find alternative employment, will be employed at low paying public sector. Of course given imperfection of labor market and since state is the most important employer in developing economies, state could attract more capable workers often. For example study by Tsegay (2012) in Ethiopia did found most educated people are government employee. If we take France for example the most qualified professionals are recruited from Ecole Nationale d’Administration (ENA) with higher incentive to join government and government workers are paid more than private sector workers (Danziger, 2008). Worst example can also be found in some cases. For example Danziger (2008, page 269) stated

In communist political systems, government bureaucrats are often recruited and promoted on the basis of their commitment to the regime’s ideology rather than on the basis of their technical expertise. Following the Cuban Revolution, for example, agricultural production suffered because managers of state farms (officials in the Ministry of Agriculture and bureaucrats in the agrarian reform agency) were often selected on the basis of their commitment to the revolution, even if they knew nothing about farming. In both the Chinese and the Mexican bureaucracies, young administrators wishing to advance up the organizational ladder must attach themselves to a more powerful patron within their ministry or agency. As that patron advances up the bureaucratic ladder, he or she will bring lower-ranking “clients” up as well.

However in general, when there is low salary, low salary will create adverse selection problem for state as highly capable and highly productive individuals will go to other sectors in search of better life, despite capacity of state to keep large army of efficient workers for itself.

The problem is since reward in public sector is not directly related to productivity; there will be series moral hazard problem among the civil servants. It is not easy to measure performance of public servants as government often focuses in general goods and services which benefit the society. There is no market price or high powered incentive system that can guide performance (Williamson, 2000 and Stiglitz, 2001). Under such reality state uses proxies of performance. The most commonly noticed index of performance are education and experience (Stiglitz, 2001). The assumption of those indexes is that the more educated and the more experienced individuals are more productive. The problem is first capability is not the same as productivity. These are proxy of capability not measures of productivity. Capable individual who exerts high effort is highly productive. As the result those indexes cannot perfectly measure productivity because they don’t account for effort.

In addition they are good proxy but not perfect indicators of capability either. What we want to measure is learning by doing using experience. The problem is learning by doing is function of not only time but also speed of learning. Different people learn differently as result speedy learners will be undervalued and sluggish learners will be overvalued by such system. The same problem is observed in education where formal educational certificate cannot perfectly measure knowledge and intelligence. The best learners will be undervalued and bad learners will be overvalued under such system again.

Under such reality hard work does not pay because what matters is education and experience. Decision making agents will focus on acquiring certificate of education than knowledge and in accumulation of experience than making difference. You work hard you benefit nothing and you work less you loss nothing. In this context even more efficient workers will drag their feet to preserve effort if they are selfish. In simple words there is no adequate incentive for civil servants to be as efficient as private sector employees (Stiglitz, 2001 and Williamson, 2000).

However personal rationality is signaled and corrected by collective rationality. There is tendency in highly efficient society personal efficiency will be premium for personal success. In free riding society personal efficiency will be fetter of personal progress (Stiglitz, 2001). If everyone is working hard and someone starts free riding the society will stand against him/her to expose him/her. If someone is working hard in society which is free rider, the new agent is signaling change is possible and high productivity is attainable. In directly the worker is demanding unrewarding hard work on the rest of the workers. This is why social pressure will be exerted in hard working individuals to make the working environment harsh to live in and they will crate fetters that will chain the life progress of hard working individuals into dust bin.

Since state under adverse selection and moral hazard problem will be endowed with less hardworking individuals the culture will signal and promote inefficiency against exceptional efficiency. This is well documented in China public sector companies before introduction of market signaling with economic reform (Hayami and Godo, 2005). It is very common observation to see civil servants who use their social capital to discourage exceptional productivity by ostracizing efficient workers. Both economic and social institutions, found within the public sector, will not promote efficiency of civil servants. Observing that civil servants are inefficient, the state has rational base to pay low salary, keeping the vicious circle ongoing! This is classic example for institutional failure in which wrong institutional structure guiding rational agents into loss-loss situation. This will give us third indictor of performance that is average performance of all workers in similar task.  

Based on this Williamson (2000) insisted on the fact that the low powered incentives, complex laws and structural rigidities are introduced within bureaucracy in order for them to focus on goods and service which are highly public in nature and not easy to measure. His conclusion as the result is that they should be used as last resort when everything else does not work.

However such conclusion has limitation as it is functional conclusion (Bardhan, 1989). First human beings are not just selfish but also have tendency to have elastic identity. Culture, ideology, professional identity, professional ethics, moral duty, nationalism and religion could serve as counter check in such inefficiency related to adverse selection and moral hazard (Chang, 2001 and Stiglitz, 2001). Most importantly few centuries ago bureaucracy was not dominant mode of governance and there is always ways to find institutional structures which improve state flexibility and efficiency. Most importantly state can work in creating right identity, ethics, moral duty, patriotism and soon that could check such failures. The visit of West Point military academy by Akerlof and Kranton (2005) which express how youngsters are shaped in to functional group with different moral and identity explain a lot how far state can improve its efficiency. More will be said in this point next under socialization because state when trying to create right socialization for its inefficient structures by using its inefficient structures themselves, the result is often endless comedy which ends in sad tragedy.

Source Danziger, 2008

It is logical we have to accept the fact that all public servants are not inefficient, there are pockets of efficiency everywhere and there is chance to improve inefficiency of state as there is chance to improve inefficiency of market. The problem is the system, except in exceptional conditions, is not very reliable. This is true unless it is made to be reliable by historical accident or careful engineering. A state who try to play big role in any development need to really solve this problem by careful engineering.