Good (and not so good) to great

The year is coming to a close, with the world economy having dodged several bullets: natural disasters, terrorist attacks and spiking oil prices, all failed to cause significant problems for growth. Structural imbalances and political instability still suggest caution, but the IMF?s best guess is that global growth in 2006 will match this year?s. The IMF predicts slightly slower growth for India next year, below 7%, but India may do better: one can certainly be hopeful in the short run.

The bigger issue is whether India can add a couple more percentage points to its trend growth rate. In answering that question, I would reason as follows. Physical infrastructure and bad laws are the twin constraints holding India back. Since most people agree on these broad problems, and even on specific steps that are necessary, the failure to tackle them effectively is a failure of governance. India?s poor governance keeps its economic performance from moving from ?good? to ?great.? Why is India?s governance, to put it mildly, not so good? What can be done to make it better?

One can get a creative answer by putting aside conventional explanations of poor governance coalition politics, vested interests and corruption and learning from areas where India is doing great. In my February 24th column, I noted how the Prime Minister had praised the achievements of Infosys and Narayana Murthy, and I suggested that the internal organisation of India?s government could benefit from emulating companies like Infosys, including training its employees and setting performance standards. Jim Collins, in his book, ?Good to Great?, provides a set of common factors for great companies, based on detailed case studies. There are lessons there for improving India?s governance.

First, is ?Level 5 Leadership,? which refers to leaders with a ?paradoxical blend of personal humility and professional will.? It was reading this des-cription, which seemed to fit the PM rather well, that suggested digging deeper. The second principle behind greatness is ?First who…then what,? which refers to having the right people on board, in the right positions. This may be where coalition politics, or all politics, rears its head, saddling the leadership with people who are not able or willing to make a positive difference. But plenty of politicians are shrewd and capable, and they do have an interest in looking good for their constituents.

The bureaucracy may be the greater problem. Many have recommended reforms that will improve the chances of getting the right people in the right bureaucratic positions. Arvind Pana-gariya, in January this year, wrote, ?Any reform of the top civil service must solve two related problems: it must open the door to experts and break the current monopoly of the IAS and IFS over top bureaucratic jobs. There is a common solution to both problems: open all jobs at the level of joint secretary and up to outsiders.? However it is done, India must consistently draw more talent and expertise into government, or have their ideas incorporated into policymaking. This includes academics, business people, and NRIs, and must go beyond co-opting them with perks in commissions and committees.

Collins? third idea is almost self-explanatory, ??Confront the brutal facts (yet never lose faith).? Adherence to this has been poor in the past, but India?s current leaders have made a number of refreshingly honest statements about its shortcomings in per-formance. The fourth principle is ?The hedgehog concept,? based on the ancient Greek parable: ?The fox knows many things, but the hedgehog knows one big thing.? In Collins? analysis, great companies were ones that tried to be best at a narrow set of activities with measurable performance.

This has been India?s greatest governance failure?trying to do too many things for too many ends, including a host of activities where government could not be best, or even good. Even now, this is where government can fix itself most significantly, putting itself on a path of goodness, and setting India?s economic growth performance towards greatness. Cutting out numerous extraneous activities (Collins tells companies to ?Start a ?stop doing? list?), including commercial enterprises, unnecessary controls, unenforceable regulations, and opportunities for badly exercised bureaucratic discretion could leave room and resources for government to do better where it should, with basic law and order, health and education.

The last important greatness factor is a ?Culture of discipline,? but combined with an entrepreneurial ethic. In fact, this idea of discipline (self-disciplined people thinking with discipline) runs through the first four greatness principles. Government is not a company, but it is still an organisation, made up of people, principles and policies. There is no reason that the prescription for private sector greatness cannot light a path to improved governance.

In my earlier column, I noted that the Prime Minister does not have Mr Murthy?s luxury, of building an organisation from the ground up. But each of the 11 great companies analysed by Jim Collins existed well before it achieved a breakthrough. Some, like Nucor, which went on to be the most profitable steel company in the US, were awful. Each made changes gradually, with a long period of buildup leading to breakthrough performance. That is the long-run hope for India, that its leadership, with the right people in the right positions, facing brutal reality with focus and discipline, can change the quality of governance. The right policies and sustained economic success will then follow.

?The writer is professor of economics, University of California, Santa Cruz