Lessons in Economics: Centralised Spending Power Leads to Bad Governance
Decentralise budget and day-to-day decision making for better performance.
Take a housing society, where the budget is collected at the level of housing society, and spent there. So the tax expenditure is completely decentralised. There is debate during the general meetings, criticism, fighting, arguments. Some societies also have fraud and cheating. However, the average management of cleanliness, garbage collection, water, security, invitation to society-level events is far better than anything you would get outside the housing society in the city. If a city has to do a small repair, get a new road, improve infrastructure, the budget often has to come from the state, which is often a large beast with over 5–10 crore (50–100 million) people, resulting in policy paralysis, no execution, and bad governance.
If we see the level at which budget allocation and spending happens in India, the local level government (excluding state and centre) has a budget of 3%. Whereas in China, the spending at local level is around 51%, and in USA it is 27%. One could argue, that in the US state level expenditure is similar to city-level expenditure in India, because 40 out of 50 states in the US have less than 1 crore (10 million)population, and the largest has a population of 4 crore. Also, China and US employ over 60% of government employees at the local level, whereas India employs less than 20% of govt employees at local level. Because of this the infrastructure, maintenance, etc of cities is far better in most countries outside India including US and China.
In the US, if there is bad management within a city, the mayor is afraid of losing their job. Once Atlanta responded badly to a snowstorm, and there was such a large backlash against the Mayor that next time onwards there were many machines, employees, infrastructure all on standby when there was even the slightest chance of snow. In India, the DM knows that the worse thing to happen to them would be a transfer, and the CM is too far removed from the ground level to even think about it. That is why flooding of cities is so common in the monsoons — there is no local level stakeholder involved.
The same concepts apply in companies. If there’s a manager who manages more than a 5–9 people team, and keeps the day-to-day making to themselves, the manager will often complain of a ‘culture’ where ‘people are not responsible’, and ‘don’t have the right mindset’, instead of understanding that it is the bureaucracy that leads to a breakdown of performance. The more centralised day-to-day decision making power, the more bureaucratic the organisation becomes.
