#26 Mere Paas Permit Hai

License Permit Raj, Prisoner's Dilemma, Multilateralism, and more

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

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Lights, Camera, (Policy Precedes) Action: License Permit Raj

Public Policy via Bollywood

— Raghu Sanjaylal Jaitley

(2-min read)

There are many Rajs in Shyam Benegal’s criminally underrated Kalyug (1981), a modern adaptation of Mahabharat set in the Mumbai corporate world of the late 70s. There’s a detached Raj Babbar as Dharam Raj (Yudhisthira) with a weakness for racehorses, a pugnacious Kulbhushan Kharbanda as Bal Raj (Bhima), the delightful Anant Nag as Bharat Raj (Arjuna) and, a seething but understated Victor Banerjee as Dhan Raj (Duryodhana).

But the real scene-stealer on whose machinations the story pivots is a different Raj.

It is the License Permit Raj.

Losing out on a license kicks off a trail of internecine strife that consumes everyone in Kalyug. It turns out to be the most powerful Raj of them all.

For those who came in late, you only need to know this. License Permit Raj at times made Indians long for British Raj. It was that good. We got into this Raj because of our touching belief in central planning (Mahalanobis model) and in the salient role of government and state-run enterprises (“commanding heights of the economy”) in driving economic growth in the country. The government became so obsessed with controlling private sector that it sat on judgment on everything – what to produce, how much to produce and what price to offer to customers. A license or a permit from the government became the single biggest competitive strength. The path to growth for an enterprise wasn’t scale because there were quotas on how much you could produce, but diversification through new licenses and permits in unrelated sectors.

Lack of scale and lack of specialisation meant a private sector that couldn’t compete in the global market. The government was miserly in granting licenses and permits. There were intense bidding wars to get hold of one between enterprises. Public servants indulged in rent-seeking and managing government was the primary focus for many industrialists. Everything needed a license. Even Govinda needed one for doing this. 👇

The consumer received the short end of the stick. There was long waiting list for most products (TV, scooters, telephones etc), the quality was mostly pathetic, and the prices were high. Everyone suffered.

Our obsession with import substitution (a topic for another day), running inefficient and loss making PSUs, a lack of fiscal discipline, keeping the rupee overvalued and a dependence on oil imports meant a balance of payment crisis was brewing all through 1980s. Things came to a head in 1991 when we had only 3 week of forex reserves remaining for critical imports and we had to physically pledge our entire gold reserves to survive. Then, Manmohan Singh made that famous budget speech on July 24, 1991 and changed India. The Raj was dismantled.

Apart from a stellar cast, Benegal and Shashi Kapoor (as producer) orchestrated the coming together of some the finest talents to have graced Hindi cinema in Kalyug – Girish Karnad (story and screenplay), Satyadev Dubey (dialogue), Vanraj Bhatia (music), Kersi Lord (conductor) and Bhanudas Diwakar (editing). One of the great pleasures of watching modern adaptations is to connect characters and events to the original text. Kalyug doesn’t disappoint with key plot points reinterpreting the great events of the epic often in oblique avant garde manner. My favourite is the last scene of the film – a young Parikshit (Urmila Matondkar) returns from boarding school to the silence of death and destruction shrouding the home.    

Kalyug has one key character missing though. The one who instigates and poisons the mind of Duryodhana in the original epic. The one who starts the chain of events leading to the great war. Benegal didn’t need a character to play Shakuni. The license-permit-quota Raj of the state filled in more than adequately.  

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A Framework a Week: Making prisoner’s dilemma a part of the Policy Engineering toolkit

Tools for thinking public policy

— Pranay Kotasthane 

(3-min read)

In any field of public policy, we come across an omnipotent implementation challenge: effecting a policy change requires you to get a section of stakeholders to do something that is against their own interests. What makes the problem even more challenging is that more often than not, this opposing section of stakeholders is also the most powerful one.

Take the example of scarcity of doctors in India. We have 0.725 physicians per thousand citizens (2014), way below the WHO recommended number of nearly 3 physicians per thousand. Changing this status quo requires the regulator of medical education in India — the Medical Council of India — to liberalise medical education in India. But it is in the interests of the Medical Council of India — a professional body of doctors themselves — to restrict the supply of doctors. Lesser the number of new doctors that come into the system, the better it is for doctors who are already practicing. So, any policy change to liberalise medical education would meet this implementation challenge: how do you get the Medical Council of India to act against its own interest?

The traditional way to tackle such an implementation challenge is to develop a strategy to address this stakeholder. The problem is wicked because this stakeholder has strong reasons to preserve the status quo and there is no frictionless way to effect a policy change without getting this powerful stakeholder onboard.

A payoff matrix for the well-known prisoner’s dilemma game (Source: Wikimedia)

What then should such a stakeholder strategy entail? I found an interesting answer in an old book, The Art of Strategy, by Avinash Dixit and Barry Nalebuff. They argue that you can get people to do something that is against their interest by putting them in the prisoners’ dilemma. Even though I was familiar with the prisoner’s dilemma game, I hadn’t connected it in this way to the policy implementation challenge. Dixit and Nalebuff explain this strategy using an example of electoral campaign finance reform.

In an op-ed promoting campaign finance reform, the Oracle of Omaha, Warren Buffett, proposed raising the limit on individual contributions from $1,000 to $5,000 and banning all other contributions. No corporate money, no union money, no soft money. It sounds great, except that it would never pass. Campaign finance reform is so hard to pass because the incumbent legislators who have to approve it are the ones who have the most to lose. Their advantage in fundraising is what gives them job security.How do you get people to do something that is against their interest? Put them in what is known as the prisoners’ dilemma.

According to Buffett: Well, just suppose some eccentric billionaire (not me, not me!) made the following offer: If the bill was defeated, this person — the E.B. — would donate $1 billion in an allowable manner (soft money makes all possible) to the political party that had delivered the most votes to getting it passed. Given this diabolical application of game theory, the bill would sail through Congress and thus cost our E.B. nothing (establishing him as not so eccentric after all).

The reason for this confounding outcome is:

Consider your options as a Democratic legislator. If you think that the Republicans will support the bill and you work to defeat it, then if you are successful, you will have delivered $1 billion to the Republicans, thereby handing them the resources to dominate for the next decade. Thus there is no gain in opposing the bill if the Republicans are supporting it. Now, if the Republicans are against it and you support it, then you have the chance of making $1 billion. Thus whatever the Republicans do, the Democrats should support the bill. Of course, the same logic applies to the Republicans. They should support the bill no matter what the Democrats do. In the end, both parties support the bill, and our billionaire gets his proposal for free. As a bonus, Buffett notes that the very effectiveness of his plan “would highlight the absurdity of claims that money doesn’t influence Congressional votes.”

The details of the campaign reform example aside, there’s a powerful insight for policy change-makers. What if we make the construction of prisoner’s dilemma an essential part of the policy implementation toolkit? Which means:

1. we identify the most powerful stakeholder(s) who also have strong personal interests in preserving the status quo.

2. we think of developing a prisoner’s dilemma that can persuade the stakeholder to seemingly act against their interests.

3. we embed this prisoner’s dilemma in the policy implementation rules so that we get similar outcomes over repeated games with different players.

What do you think?

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Matsyanyaaya: Going Long on Multilateralism?

Big fish eating small fish = Foreign Policy in action

— Raghu Sanjaylal Jaitley

(4-min read)

Connect the dots here. U.S. halts its funding to WHO till it concludes a review on its role in the spread of the coronavirus. A meeting of G7 foreign ministers fails to reach a consensus on joint efforts to contain the pandemic because they couldn’t agree on calling it ‘Wuhan virus’. UN Security Council could only meet as late as last Thursday to discuss a disease impacting 192 member countries. That meeting had nothing much to offer in any case. Italian PM has asked for EU to introspect on its response and support to his country while it was being ravaged by the virus. One could go on, but you get the picture. Multilateralism, which was struggling for a while, seems to be down for the count in the world today. What’s its future?

The Story So Far

Global powers over the course of history have imposed their will through force with a code or a doctrine that flowed from the seat of authority. During the high noon of the Mongol empire lorded over by Genghis Khan, the code was Yassa – a set of laws so confidential they weren’t ever published. Of course, this allowed the Great Khan to change them at his whims and stay a step ahead of everyone. Other great empires sought legitimacy through similar, if less arbitrary, means. In that sense, the rise of U.S. in post war twentieth century was unique in the way it arrogated authority to itself. Rising as a great power in a world that had seen two great wars in three decades and amidst nations armed with nuclear weapons, it had to rule out military might as a source of legitimacy. What U.S. did instead was to lead a successful alliance of multiple countries that made common cause with it on political, economic, social and cultural values. The ‘Washington Consensus’ and the multilateral institutions that emerged from it championed the U.S. worldview among its member states. The U.N. and its many organisations, the Bretton Woods institutions and the many multilateral free trade and military agreements were funded generously by the U.S. In turn, their decisions bore a deep imprint of their benefactor. Multilateralism was the veneer U.S. used to shape the world order to its advantage. It was force by other means.

As China gained strength over the last decade, it had to contend with the strength of a U.S. designed multilateral order that was deeply meshed into the fabric of global geopolitics. China benefitted from being an active participant in many of these institutions, yet it wasn’t comfortable with two key aspects of the existing order, namely, liberal and democratic values that were to be the basis for governance, and the acceptance of U.S. exceptionalism. China had three options as it rose as an alternative global power:

a.       Co-opt itself into the existing multilateral system and exert its influence on their objectives and functioning

b.       Create alternative multilateral institutions, where possible, placing itself at their poles and use them to further its geo-economic and geo-political interests

c.       Upend the existing structure because it is too inconvenient and build a new consensus with a willing comity of nations

A broad consensus had emerged over the last few years among China watchers that it would employ a mix of Option a and Option b. There was evidence that suggested that. China consistently sent its best civil servants to represent it in multilateral institutions. They learnt the workings and power dynamics of these institutions and China used it economic clout among member nations to win elections and place them at senior leadership roles there. These Chinese bureaucrats have created a new grammar for many of these organisations that’s hews close to the Chinese state policy. That apart, China set up its own alternative institutions and partnerships including Asia Infrastructure Investment Bank, New Development Bank (formerly, BRICS Bank) and Regional Comprehensive Economic Partnership (RCEP) to enable a credible exit option for its members from similar existing institutions.

The Reluctant Superpower

While China was busy establishing itself as a global power, U.S. was willingly ceding ground. Contrary to popular perception, Trump isn’t the architect of the U.S. withdrawal from an order it helped create. A groundswell of anger in the developed world against globalisation and its visible symbols has been growing since the global financial crisis (GFC). The continuing collaring of the benefits of globalisation by a tiny elite and the lack of their comeuppance after the GFC to which they had contributed significantly meant a Trump-like figure was destined to emerge as it did across many democracies over the last few years. A cocktail of xenophobia, distrust of multilateralism and anti-elitism has led to an attenuated world order that U.S. seemed unwilling to preside anymore. The U.S. withdrawal from the Paris climate change accord, Trans-Pacific Partnership (TPP), NATO leadership and reduced interest in and funding of many UN organisations have followed from there.

Many believed this course of events – the increased role of China and the U.S disinterest – seemed to be heading towards an eventual Sino-centric world order. The Belt & Road Initiative (BRI) and China’s proactive economic support across the developing world were seen as part of its grand design. The Covid-19 crisis, however, has the potential to derail its plans. Its GDP shrank 6.8% in Q1 and it is likely the full year GDP will contract too. Its debt to GDP ratio is 300 per cent and it is burdened with a weak financial system that continues to fund unviable infrastructure projects as part of BRI. The post Covid-19 reshoring of global value chains will hurt China. Unlike post war America, China is still a middle-income country with unfavourable demographics. Covid-19 is an economic blow to it at the worst possible time. That apart, its conduct during the crisis has been less than exemplary and its legitimacy as a responsible power has suffered. It will require bold leadership and a risky call on future for it to fund this crisis for other countries and emerge stronger out of this. At this moment, all bets are off.         

A Narrow Window

This is an opportune moment for the U.S. to re-establish its leadership. It should use the global institutions it helped build to lead the reconstruction efforts in the world. A re-discovery of old diplomatic and economic muscle could pave the way for another half-a-century of hegemony. The abandoning of these institutions might be populist now, but it will mean losing out on significant long-term benefits for its citizens. There is a window of opportunity available to it and it will require political vision and persuasiveness to capitalise on it. The residual power of multilateralism can still be harnessed.

Power is in perpetual search for legitimacy. This is a truism for ages. Only the foolish abandon hard earned legitimacy.  

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HomeWork

Reading and listening recommendations on public policy matters

1. [Paper] Dictatorship, Democracy, and Development by Mancur Olson argues that it’s beneficial for roving bandits to set themselves up as a dictator—a stationary bandit who monopolises and rationalises theft in the form of taxes. In other words, the State is not very different from Gabbar Singh.

2. [Article] Ajay Shah’s blogpost on four pathways to Covid-19 testing is educative.

3. [Podcast] On Puliyabaazi, Pranay and Saurabh discuss State Capacity with IDFC Institute’s Prakhar Misra.

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That’s all for the week. If you like this newsletter, please do share.

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If you like the kinds of things this newsletter talks about, consider taking up the Takshashila Institution’s Graduate Certificate in Public Policy (GCPP) course. It’s fully online and meant for working professionals and has three specialisations: Technology Policy, Public Policy, and Defence & Foreign Affairs. Applications for the May 2020 cohort are now open. For more details, check here.