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3Es of India's growth

The Financial Express, 10 Nov 2008
By Manish Sabharwal

The biggest lesson of 18 years of reform is that growth is a necessary but not sufficient condition for poverty reduction. Poverty reduction needs access and access comes from the 3Es (education, employability and employment).

I believe that radically reforming our 3E ecosystem is stalled because of a sometimes fair but mostly unfair distrust of privatisation as a sustainable, effective and scalable alternative to public delivery. Some of the fears around private delivery are not misplaced; the private sector cannot venture into unviable territory (geographies, communities, etc) without letting down some stakeholders. Sometimes the private sector may cherry pick "customers" and this will not be inclusive. But the most dangerous argument used most often is that the information asymmetry of disadvantaged populations attracts players playing a one innings game who abuse the system. But I have no sympathy for the last argument because drunk driving is not an argument against cars. If there are drunk drivers you don't ban cars but focus on ensuring competent and certified drivers.

If we accept that the deep rooted distrust of markets (I have often wondered why the Indian mind is instinctually slightly left of centre) creates difficult optics for the private sector in areas that have traditionally been dominated by state delivery, is there an alternative? It is important to remember that the fundamental question is not private or public but competition vs monopoly. India's reform experience throws up many examples where competition accomplished the same objective without any private equity participation in public sector units; mutual funds, airlines, general insurance, telecom, etc. We also have many examples where competition policy has not worked like banking, bond markets, pensions, etc because public policy reinforced the status quo or grants a monopoly. In fact, I believe that the reform of education, employment and employability will be most effective by focusing on choice and competition rather than privatisation.

Let's think about specific examples in employability and employment. It does not matter if Employee State Insurance hospitals are owned and run by the government as long as employers have the option to pay into and use other public and private hospitals. It doesn't matter if the Employees Provident Fund Organisation is government managed as long as employers have a choice to pay their monthly contributions to the New Pension Scheme of PFRDA. It doesn't matter if Industrial Training Institutes (ITI's) are run by the government as long as public money for skill development is also available for private trainers on the same terms. Employment Exchanges are a total disaster in India; 1,100 of them across the country gave 2.5 lakh jobs to four crore people registered. It does not matter if the government runs them as long as private career centres get a level playing field. We have a successful example in the Employees Deposit Linked Insurance Scheme (EDLI) where employers were given an option to buy cover from insurance companies rather than just the government provider and this competition has led to lower prices, higher coverage and better service.

The privatisation vs choice debate has particularly important implications for education. If government spending was routed to students rather than government schools by some kind of redeemable scholarship or voucher, then parent choices would reveal preferences and create competition. Parth Shah of the Centre for Civil Society runs a campaign ( www.schoolchoice.in ) that is gaining acceptance but needs more support by states. Just like the arrival of Jet Airways forced Indian Airlines to listen, the ability of parents and students to exercise choice in using government money would force government schools to reduce teacher absenteeism, improve learning outcomes and fight for the best students.

Creating competition and choice without privatisation needs a radical overhaul of the way the government finances the social sector. Traditionally government money has only been available for government delivery so government vehicles like schools do not have clients but hostages. Getting the private and public sector to compete with each other needs the government to separate financing from delivery and develop contracting and outcome based reimbursement capabilities. Linking financing to outcomes also needs developing performance management capabilities. The frustration of many competent public officials is their inability to punish or reward. Government spending will only shift from outlays to outcomes when the government performance systems create a fear of falling and the hope of rising. Why should a teacher bother to show up at school if nobody can demand results, jobs are secure and salary raises happen automatically?

The recent global crisis creates many problems for the optics of private sector participation in many traditional areas of state dominance. After all, why bother with the private sector if the government has to bail it out anyway? But this would be a wrong lesson particularly for India's state dominance in education, employability and employment. Only a fool would argue that markets don't need regulation. But only a bigger one would argue that monopolies don't need competition.

Read the report on the Financial Express