The financing of firms and the skilling of workers are both activities that can be done more efficiently with better management, catalysing the relaxation of other constraints on the performance of the economy,
In recent columns, I have been exploring what may lie ahead for India’s economic growth, focusing, in particular, on the potential role of the private sector, and the need to remove constraints on human and financial capital for a more dynamic economy. Human capital is a very broad category, however, and it includes not only the skills that industrial and clerical workers have, but also managerial skills. India has a well-recognised elite of managers, some of whom have demonstrated their capabilities in firms such as Alphabet (Google), Microsoft, MasterCard and Pepsi in the US, while even drawing attention from Chinese policymakers in this respect.
The role of management in India’s economic performance is worth investigating, since problems in this dimension may need to be solved first, if better access to financial resources and increased numbers of skilled workers are to be put to good use. Indeed, one can understand some of the deficiencies of India’s day-to-day governance in terms of public sector management in that it is not the best it could be, just as private sector firms may succeed or fail depending on the quality of their management. But, here I will focus on the private sector.
One problem in assessing the impact of management is that it is an amorphous and multifaceted category, including a variety of possible activities. This problem has been addressed by the work of economists like Nicholas Bloom and John Van Reenen, who have been leaders in creating a survey of management practices in 12,000 firms across 34 countries, spanning a decade and a half. They have systematised, and quantified to a considerable extent, the measurement of management practices and quality.
In essence, this work allows management to be thought of as a technology, so higher quality management leads to greater output or value added. This contrasts with alternative views of management as a contingent activity, responding to particular sets of circumstances, and not something that can be reduced to a single quality scale.
Empirical work based on the World Management Survey supports the “technology” interpretation of management, and goes further, to estimate that 30% of the productivity difference across countries that is not explained by variations in labour (adjusted for skill levels) and physical capital (such as plant and equipment), can be attributed to differences in management quality. Within countries, as well, differences in management quality across firms are substantial. India has very well-managed firms, as well as poorly managed ones: the point is that this is not necessarily because of innate ability differences or external constraints, but factors that can be identified and fixed.
Several years ago, Bloom and several co-authors undertook experimental interventions for improving management practices in a small set of textile firms in Mumbai. Indeed, better management practices improved the firms’ output and productivity significantly, as benchmarked against a control group of similar firms. Recently, these authors have found a considerable degree of persistence in the use of improved management practices and of performance, and some diffusion to other plants within the same company: this was present nine years after the
Many of the management improvements in this experiment were low cost and relatively simple, amplifying the puzzle of why poor management persists. The answer to this puzzle includes lack of product market competition, which allows for slackness in management. Another factor is labour regulations that constrain management flexibility, in areas such as the assignment and compensation of employees, aside from the more extreme decisions of hiring and firing. Sometimes, managers are not even aware of the weaknesses of their practices, or if they are, what remedies are available. Matters are made worse when family or ethnic ties constrain the selection and evaluation of managers.
What does all this mean for India? One can argue that deficiencies in management in India represent a failure of its elites, whether in the public or private sector. Public policies that increase product market competition and relax constraints on the provision of training for management skills (including the nuts and bolts of operations management and accounting, and not just what constitutes an elite MBA curriculum) ought to be at the forefront of policy thinking.
Just as the World Bank’s Ease of Doing Business survey has influenced policymaking in India, so should the World Management Survey. Indeed, one can argue that the financing of firms and the skilling of workers are both activities that can be done more efficiently with better management, so that improving management practices can catalyse the relaxation of other constraints on the performance of the economy.
The poor sometimes are simply so constrained by their circumstances that they cannot escape them. But, many managers are already part of the economic elite. They have choices which they make by pursuing some version of what Sir John Hicks called the “quiet life,” or, at least an easy one. Rakesh Mohan’s complaint about “lazy banking” might even be extended to management more generally. Increased competition may not be the whole solution—sometimes culture and social norms also need to change. But, the latter are harder to affect in a short time. The point is that a greater role for the private sector is not an automatic route to economic success. Those who make the important decisions need to have good incentives and strong accountability. And, of course, this applies to the public sector as well.