#9 All I Wanted was Everything
Why many government policies and institutions fail
This time around, instead of the weekly Pubic Policy Review, I have a post on a systems thinking framework to explain why some institutions and policies might fail. It is based on the intuition that policies and institutions fail when they are laden with several objectives, resulting in a system that fulfils none of them. I call this phenomenon:
Hyper multi-objective optimisation: the bane of policymaking
Multi-objective optimisation is that step in any design process which tries to make a system suitable for several objectives at the same time. This concept is applied in several branches of science like engineering, economics and logistics.
In engineering, this process of multi-objective optimisation translates into design constraints. Some common design constraints are performance, cost, reliability, and usability. The whole design problem then is about coming up with a solution that is good on all these counts. For example, a hardware engineer designing a chip tries to optimise it for higher speed, smaller size, a wide temperature range of operation, and low costs.
Often, increasing design constraints (both in terms of their number and their strictness) makes the system design so complex that it becomes impossible to construct it. This is because objectives are often conflicting and trying to optimise for one leads to degradation with respect to the other. In such a case, system design can only proceed if one objective is traded-off to some extent. In other words, for a nontrivial multi-objective optimisation problem, there does not exist a single solution that simultaneously optimises each objective.
Multi-objective optimisation applies to government policies as well. Making any government policy or institution is a mighty difficult job already. There are five ex-ante design constraints even before you begin. These are equity, efficiency and costs, political feasibility, and ease of implementation.
Now, the problem with many policies is this: governments try to optimise a policy or an agency for many more objectives at the same time. And just like an engineering system design returns a null solution when strict conflicting objectives are applied at the same time, public policies trying to optimise for several objectives end up failing.
Let’s consider a few illustrative cases:
1. India’s tax policy
India’s tax policy is extremely complicated, with several layers of rebates and raises across sectors, income levels and geographic areas. The reason behind this complexity is that India’s tax policy has been burdened with several objectives. And hence, it is no surprise that such a system does not function as desired. Dr M. Govinda Rao summarises this condition best when he says:
Although many countries’ tax policy is used as an instrument to accelerate investment, encourage savings, increase exports and pursue some other objectives, Indian’s obsession is perhaps unique. In addition to the above, India’s tax policy is loaded with objectives such as industrialisation of backward regions, encouraging infrastructure ventures, promotion of small scale industries, generation of employment, encouragement to charitable activities and scientific research, and promotion of enclave-type development through Special Economic Zones (SEZs). These objectives are pursued through various exemptions, differentiation in rates and preferences which enormously complicate the tax structure and open up avenues for evasion and avoidance of tax and create rent-seeking opportunities.
It is for the same reason that I have opposed abolishing income tax for women to increase the female workforce participation rate in India.
2. National Rural Employment Guarantee Act (NREGA)
It was originally meant to be a scheme to augment the income of households by providing wage employment opportunities in rural areas. However, several new objectives were subsequently added. For instance, creating sustainable rural livelihoods through the regeneration of the natural resource base, and strengthening rural governance through decentralisation, and processes of transparency and accountability. Thus, far from being optimised for increasing wages, this is also seen as a process of regeneration of natural resources and for strengthening rural grassroots democracy. This hyper multi-objective optimisation thus is the bane of MGNREGA.
3. Traffic Policing
The traffic police system was created with the objective of upholding the rule of law on roads i.e. ensuring that the traffic rules, whatever they may be, are adhered to on roads. But this same police force is also tasked with an objective of reducing traffic congestion i.e. ensuring a smooth flow of vehicles. Often, the two objectives of faster vehicular traffic movement and upholding of traffic rules conflict with each other. The result is that neither objectives are met.
How to Resolve this Multi-objective Optimisation?
The first approach is augmentation. This involves creating separate agencies or policies, each of which is optimised only for fewer objectives.
The second approach is that of withdrawal. This involves a realisation that a few objectives just cannot be optimised efficiently by government policies. They can be best handled by the market or by society. This would mean that policies could leave some objectives unoptimised or only marginally optimised.
For example, the traffic police can return to its original duty — ensuring that traffic rules are adhered to. The objective of managing vehicle flows can be left to automated traffic signals. Beyond that, it is for individuals to assess and build consensus for reducing travel times. Similarly, given that absolute poverty is its biggest concern, the government may choose to leave the moral question of relative poverty and the pursuit of zero inequality to a future date.
The second approach is definitely the tougher one. Not only does it require an understanding of what policies can do, but it also needs the humility to accept and explain what government policies cannot do.
HomeWork
Reading and listening recommendations on public policy matters
What is Governance?, An old paper by Francis Fukuyama which looks at governance capacity from first principles
Designing Sound Fiscal Relations Across Government Levels in Decentralized Countries, Excellent IMF Working Paper on fiscal federalism
[Podcast] The Reith Lectures series featuring former DG of MI5, Eliza Manningham-Buller on how terrorism changed intelligence
A Review of Indian Fiscal Federalism, THE paper on India’s federalism from a fiscal angle by Dr Govinda Rao
That’s all for the week, folks. Read and share. 再见 👋