Saturday, February 19, 2011

Cricket, capitalism and efficiency in Governance

Just watching Sehwag and Kohli perform yesterday made me think yet again about the superlative wonders of capitalism. Both these cricketers looked driven....motivated well beyond what any boss or leader could ever make them. It was sheer capitalism that was driving them.

Compare their performance with that of government officials. IAS officers are very intelligent and competent.....but their performance leaves so much to be desired. In fact, the most common descriptions of babus are that they are inefficient, corrupt and slow. This is what you get with Socialism; which in some ways is the opposite of capitalism. What a contrast our babus are to our cricketers! What a contrast Socialism is to capitalism.

The reasons for the differences between the two are not difficult to find. In a capitalistic model, the rewards for performance are very high. The CEO of a successful Americal company could make $25-50 million in just salary. Top it up with grant of shares and the annual income could cross $100 million. This is an extremely high amount of motivation for talented people and it pushes them the way nothing else can. Because of the very high monetary incentives, any job or industry that practices capitalism attracts the very best talent. Look at investment bankers, or private equity fund managers, even brokers at an Indian or global brokerage or management consultants.....some of the finest managers from the best B-schools will be found working in these sectors. I am not sure if its the work that pulls them there.....even if it is, surely the money plays a big role. I am not saying that money is everything; but it surely is at least 90% of everything!

Capitalism punishes the inefficient; inefficient people are thrown out in the cold. It is said that nearly 40% of the CEOs of the Top-500 companies in the US lose their job within 2 years. That's how demanding capitalism is. Its the same with our cricketers. There are only 15-20 cricketers who make the moolah. They make the money as long as they perform. If they dont perform, they are out. There is no social security sympathies for losers. Its the same with film stars and film directors. A few good performances and their rates go up meteorically. A few bad performances and they are soon forgotten! Akshay Kumar is a prime example. He was reportedly charging Rs 75 crores a film after Singh is he's happy to get just 25 (I dont mind either number though really!).

In contrast, Socialism appears to have much higher tolerance for poor performance. It rewards loyalty. It distributes poverty equally and fairly. The question is: if everything is so bad about Socialism, then why is it still a popular form of economic model. Frankly, I dont know, but I guess its because it is seen as being more "egalitarian". There are'nt too many ultra-rich people in a socialistic society. A lot of the people are poor, but they dont feel that way about being poor because they are surrounded by many others like them. Economic poverty exists, but economic disparity does not. And since in any developing country, the number of have-nots is always larger than the number of haves, a socialistic model is more acceptable to them.

So what system should a country adopt for business and governance? Capitalism, which leads to efficiency and results, but is exclusivist, demanding and punishing? Or Socialism, marked by inefficiency and poor results, but which is seen as being more socially acceptable? My own feeling is that a country has to evolve from one to the other. Early in the growth cycle of a nation, its better for it to be socialistic. After all, you need peace in society and the people to believe in the rulers. However, once a country passes a certain critical stage, it needs to switch to capitalism. Capitalism is like that booster rocket on a satellite provides that extra fillip that an economy needs once its crossed the threshold. Failing to switch could cause major problems as people become more demanding and want better governance. Failing to switch is one major reason for Tunisia and Egypt to go the way they have.

India has crossed that threshold. It's economy is nearly $1.5 trillion; its exports more than $200 billion. It's made deep inroads in several sectors around the world.....outsourcing, IT and software, engineering design, precision manufacturing, pharmaceuticals, banking and many other similar industries. The world believes in India's capabilities. It now needs a booster dose. We need to attract the best talent from all over the world. We need a lot more talent in governance. Paying right is the starting point. A Nandan Nilekani who is personally rich and has achieved a lot professionally may not need monetary motivation to join the government. But that's not the case with most professionals. They need the money. I think India should move gradually but surely towards capitalism. It must start by increasing the salaries of babus and politicians. Salaries cannot rise to market levels immediately, but it must start at say....20-25% of market levels. It must reach about 60-70% in the next 20 years. It has to be gradual to avoid societal wrath. But it must be steady and continuous. Higher salaries must however be accompanied by other changes.....sacking for underperformance should be the rule. Head-count must be reduced so that overall salaries are somewhat containable. Technology must be upgraded so that the best tools are available to the managers. And training is critical. Training that keeps a manager up to speed with the best practices around the world. In short, we need to make the government work like the private sector.

So where does India stand on this right now? Well, we have adopted capitalism as an economic model in business but we have not done so in Governance. A top level IAS officer earns less than 1% of what his  comparable private sector CEO earns. But he controls far higher budgets that the private sector CEO does. This is the starting point of corruption as well. After all, who doesnt want the high life. Media also plays a silly role in this. Recently, when the babus got a small lift in their salaries (from some Rs 25K a month to some Rs 45K), media went hammer and tongs after the babus. Media mixed up issues. It said the babus did not deserve the money because they were inefficient and corrupt. Media missed the point. Its the other way around. To attract and motivate the best, the pay hike is a must. Media should have supported it. Media could have demanded that many perks were free air travel to family members, unlimited phone and electricity budgets etc. But media should have supported the salary increase.

The real truth is that no one in our political system has the guts to bring capitalism to governance. And no one in media.....or the public at large....the sense to support this. This is a real challenge for India. If it does not overcome it, its babus will function like the Indian cricket team of yore. Plodding along somewhere at the bottom of the pile. And if it does, it will become #1 or #2 in any worldwide ranking that you can think of......which model do you support now?

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