Understanding why states are (in)effective shows us how to target reforms and tailor policy design to the implementing bureaucracy’s capacity

States around the world play a large role in almost every aspect of the lives of their citizens. According to World Bank Open Data, in low- and middle-income countries, 79% of children who are enrolled in secondary school attend a public school and over half of all health spending is by public healthcare systems.1 But while some states are effective, many are not. Strong tax enforcement means that the informal sector is only 15% of GDP in rich countries, but the median amongst low- and middle-income countries is 37% (Schneider and Enste 2002). Over 25% of teachers fail even to show up at schools in India (Chaudhury et al. 2006).

Why are some states so much more effective at implementing policy than others? Is it the people who work for the state (Jones and Olken 2005, Finan et al. 2015)? Or is it the organisations and institutions that make up the government (Bloom et al. 2015, Bertrand et al. 2016)?

Measuring state effectiveness

If you were the incoming CEO of a large, underperforming business and wanted to improve your bottom line, you might first want to know whether the bottleneck was an unskilled workforce or the way that the existing workers were managed. This kind of diagnostic is often overlooked in government (Rodrik 2010). Instead, governments, especially in low- and middle-income countries, face a constant barrage of advice on how to reform government, but little guidance on what is likely to work in their setting.

A better understanding of what the sources of state (in)effectiveness are would allow civil service reformers to target their efforts where returns are highest, and enable policymakers to align the design of public policy with the capacity of the bureaucracy to implement it. If we were considering restructuring a business, we would study the drivers of sales, costs, and profits. However, the state usually provides services for which markets don’t provide reliable prices, and bureaucrats’ salaries are not usually set to reflect their output. How, then, can we measure the performance of the state?

One answer lies in focusing on particular types of state tasks that lend themselves more easily to performance measurement. A prime example is the purchase of inputs – i.e. public procurement. The goal of public procurement is relatively simple: to purchase high-quality inputs at low prices. As a result, a growing number of researchers are using public procurement as a laboratory in which to study government effectiveness (e.g. Bandiera et al. 2009, Lewis-Faupel et al. 2016, Coviello and Gagliarducci 2016, Banerjee et al. 2017).

In a recent paper, we use this laboratory to study the drivers of state effectiveness and explore the scope for tailoring policy design to the capacity of the implementing bureaucracy (Best et al 2017). We analyse detailed data on every procurement purchase in Russia between 2011 and 2015. In Russia, a vast and diverse country, each public agency makes procurement purchases independently and procurement officers typically work for multiple public agencies. Our data therefore contain tens of thousands of public agencies and bureaucrats all performing the same task independently. We also have a way of making clean comparisons between them: we focus on purchases of off-the-shelf goods and apply machine learning methods for text analysis to the detailed product descriptions in procurement contracts to classify purchases into comparable groups.

The performance of individual bureaucrats and organisations is key

We find that individual bureaucrats and organisations together account for 60% of the differences between the most cost-effective purchases and the least effective ones. Of this, at least half comes from the impact of individuals on the prices paid. Figure 1 orders all the procurement officers by their impact on prices – the bureaucrats further to the left pay low prices, while those on the right overpay for the items they purchase. If the government were able to take the worst-performing 20% of bureaucrats and make them as effective as the median bureaucrat, this would save the state 9.7% of its procurement costs. Since procurement spending totals around 10% of the Russian economy, the scope for savings through improvements to the effectiveness of the bureaucracy is enormous.

Figure 1 Moving worst 20% of bureaucrats to the median

How policy design can help

In the short term, it isn’t always possible to create big improvements to the effectiveness of a large bureaucracy like Russia’s, even when the potential benefits are large. So we might instead look for levers that policymakers can pull to improve state effectiveness while taking the capacity of the bureaucracy as given. To do this, we study a series of policy changes in Russia and ask whether the accompanying changes in prices are systematically related to the effectiveness of the bureaucrats and organisations making the purchases. If they are, then it suggests that the right type of policy to use in a given setting will depend on the capacity of the bureaucrats and organisations charged with implementing it.

In Russia, procurers have to use different rules to make purchases depending on what they are buying and when. In particular, as part of a range of efforts to boost domestic manufacturers, the central government ordered that auctions for purchases of certain products feature a 15% bid penalty for the supply of foreign-made goods. By comparing each bureaucrat’s and organisation’s purchases under the two regimes, we construct estimates of how bureaucrats and organisations affect prices under each policy.

We find that the results of changing procurement policy differ starkly depending on the effectiveness of the implementing bureaucracy. When purchasers are effective, distorting competition in the procurement process lowers supplier participation and raises prices, similarly to what has been found for similar policies implemented by high-capacity bureaucracies (Marion 2007, Krasnokutskaya and Seim 2011). By contrast, when state capacity is low, tilting the playing field in favour of the weaker suppliers increases participation, and this increased competition lowers prices by up to 15%. Ineffective buyers scare away suppliers who might sell to the government, and so introducing a policy that encourages participation most when buyers are ineffective lightens the burden of a low-capacity bureaucracy. This illustrates that even when state capacity is taken as given, there are ways that suitably designed policies can alleviate the limitations of the implementing bureaucracy.

Concluding remarks: A little patience goes a long way

Our paper joins a growing body of evidence on the importance of state capacity in development (World Bank 2017). We hope that our diagnostic method for understanding its sources can be applied to a wide range of other settings. Taking the time to thoroughly diagnose the reasons why the state isn’t delivering policy as intended can seem like a frustrating delay when the need for reform is urgent, but our work shows that a little patience goes a long way. It can allow difficult reforms to the civil service to be targeted where they are most impactful and policy to be written to match the abilities of the people who will actually be doing the implementing. It allows us to build a state that benefits citizens as much as possible.

Photo credit: Isaac Brown/flickr.

References

Bandiera, O, A Prat and T Valletti (2009) “Active and Passive Waste in Government Spending: Evidence from a Policy Experiment”, American Economic Review 99(4): 1278-1308.

Banerjee, A, R Hanna, J Kyle, B A Olken and S Sumarto (2017) “The Role of Competition in Effective Outsourcing: Subsidized Food Distribution in Indonesia”, Working Paper, Massachusetts Institute of Technology.

Bertrand, M, R Burgess, A Chawla and G Xu (2016) “The Costs of Bureaucratic Rigidity: Evidence from the Indian Administrative Service”, Working Paper, London School of Economics.

Best, M, J Hjort and D Szakonyi (2017), “Individuals and Organizations as Sources of State Effectiveness, and Consequences for Policy Design”, CEPR Discussion Paper No. 11968.

Bloom, N, R Lemos, R Sadun and J van Reenen (2015), “Does Management Matter in Schools?”, Economic Journal 125(584): 647-674.

Chaudhury, N, J Hammer, M Kremer, K Muralidharan and F H Rogers (2006), “Missing in Action: Teacher and Health Worker Absence in Developing Countries”, Journal of Economic Perspectives 20(1): 91-116.

Coviello, C and S Gagliarducci (2016), “Tenure in Office and Public Procurement”, American Economic Journal: Economic Policy, forthcoming

Finan, F, B A Olken and R Pande (2015), “The Personnel Economics of the State”, in A Banerjee and E Duflo (eds), Handbook of Economic Field Experiments, Elsevier.

Jones, B F and B A Olken (2005), “Do Leaders Matter? National Leadership and Growth Since World War II”, Quarterly Journal of Economics 120(3): 835-864.

Krasnokutskaya, E and K Seim (2011), “Bid Preference Programs and Participation in Highway Procurement Auctions”, American Economic Review 101(6): 2653-2686.

Lewis-Faupel, S, Y Neggers, B A Olken and R Pande (2016), “Can Electronic Procurement Improve Infrastructure Provision? Evidence from Public Works in India and Indonesia”, American Economic Journal: Economic Policy 8(3): 258-283.

Marion, J (2007), “Are Bid Preferences Benign? The Effect of Small Business Subsidies in Highway Procurement Auctions” Journal of Public Economics 91(7-8): 1591-1624.

Rodrik, D (2010), “Diagnostics Before Prescription”, Journal of Economic Perspectives 24(3), 33-44.

Schneider, F and D H Enste (2002), “Shadow economies: size, causes and consequences”, Journal of Economic Literature 38: 77-114.

World Bank (2017), World Bank Development Report 2017: Governance and the Law, Washington, DC.

World Bank Open Data (2016) “Percentage of Enrolment in secondary education in private institutions” and “Health expenditure, public” (series accessed August 1 2017).

Endnotes

[1] “Percentage of Enrolment in secondary education in private institutions” and “Health expenditure, public” (series accessed 1 August 1 2017).

State effectiveness Civil service Bureaucrats