by
Robin Johnson2
Murray Horn is possibly less well-known for his work on transaction cost models of public administration than his work in the Treasury. He posits a transaction cost model of the political and administrative process consistent with parliamentary democracy. The transaction costs arise from the difficulties of getting agreement to lasting arrangements for legislation. The model is driven by self interest and agency theory and is somewhat different from 1980s Treasury orthodoxy. I am comfortable with it and I believe it permeates the civil service to a greater extent than is recognised. It is when I apply it to developing countries that it unravels a bit particularly with regard to failure of agents, conflicting objectives, and various brands of dishonesty and corruption.
The public choice view of political decision making and administration has the self-interest of politicians, bureaucrats and interest groups at the centre of its constructs. Altruism is excluded from public decision making. Politicians want to be re-elected, bureaucrats want to enlarge their budgets, and interest groups have to pursue their private objectives. In New Zealand, Treasury widened the scope of the criticism of national interest models by including elements of agency theory and private management models.
These discussions were conducted in a policy delivery framework determined by the Westminster parliamentary system as practised in New Zealand. Political parties vied for voter support at election time, successful parties then dominated cabinet decision making and parliament, and bureaucrats fell in behind at crucial moments when the parties changed. In this framework, Cabinet determines the policy of the day and the bureaucracy carries out their instructions. But in the Westminster system, the framing of policy is a shared responsibility between politicians and bureaucrats. Framing policy requires knowledge of what went before and systems of choosing between alternative courses of action. The balance of power in this respect lies with the bureaucrats. This is a particularly sensitive matter at election time as recent mutterings about whose head will roll indicate.
Now Murray Horn has developed these ideas still further, and put forward a coherent structure of political decision making that incorporates self-interest on the part of politicians, problems with the civil service carrying out the intentions of those decisions (agency theory), a political desire to have some effect on future events, and the desire to be re-elected. Re-election is interpreted to include pleasing enough constituents that they will not distribute their votes elsewhere. The role of the bureaucracy is down-played in this framework, as their role is to support the political decision making and do the leg work that gets the politicians re-elected.
I find this a pretty good description of what goes on in Wellington. I ran into difficulties when I tried to apply it to other administrations and political systems. So I discuss below some of these difficulties and the problems that arise in the aid area.
The paper first sets out what I believe to be the Horn hyptheses about public administration and decision making. The next section comments on what goes on in New Zealand. The third section discusses some experiences in developing countries and what that means to the delivery of aid to those countries. The paper ends with general comment on the application of models of public administration and policy making.
This model focuses on how governments are and should be organised. It deploys the rationality hypothesis and a theory of transaction costs to explain how government organisations work. It posits that effective public administration requires that transaction costs be minimised in determining and pursuing society's goals (Zeckhauser 1995). Legislators are regarded as self-seeking in their use of legislation to increase their net political support (Horn 1995, p.13). Their opportunities are limited by a number of `transaction costs'. These are the time and effort it takes to reach agreement on legislative refinements and any time and effort that affected private interests have to subsequently devote to participating in implementation and administration; political uncertainty that the legislation will last; uncertainty that the legislation will be administered as intended; and, uncertainty about the distribution of private benefits and costs.
The legislators who are most likely to remain in power are those who are most successful in overcoming these transaction problems, such as those who are best able to reassure their supporters that the benefits of legislation will not be lost to administrators in the implementation, or undone by subsequent legislatures (Horn 1995, p.14). In this context, Horn draws on agency theory in his discussion of implementation of legislation. As he sees it:
These problems create agency costs - that is the costs incurred to induce administrators to implement faithfully what was intended in the legislature, and the losses legislators and constituents sustain by being unable to do so perfectly. They include the costs associated with selecting administrators and monitoring their compliance, the costs of using ex post corrective devices [rewards, sanctions, and legislative direction], and the cost of any residual non-compliance that produces a difference between the policy enacted and what is implemented (ibid, p.19). There are a number of administrative mechanisms that legislators can draw on that minimise these costs: contracting out versus in-house delivery, tax-funded bureaux [departments], non-profit tax-financed regulatory agencies [as in the US], and revenue-earning state-owned enterprises [as in the British system]. Each has its advantages and disadvantages (ibid, pp.9, 40, 170).
Private interests have a definite interest in implementation (ibid, p.13).
“Legislators and their constituencies [Horn's term for private interests] are seen as engaged in a form of exchange. Legislators want electoral support and constituents want private benefits - or reduced private costs - of legislation. The amount of net electoral support legislators receive from promoting a piece of legislation depends on the flow of benefits and costs that private interests expect it to generate over time. The implementation features of the legislation bear on this calculus because private interests are sufficiently forward looking to anticipate how decisions on implementation will affect the flow of benefits and costs. That is why there are often heated disputes over decisions on matters like the scope of delegated authority, the form of organisation charged with implementation, and the procedures administrative agents must adopt. These factors affect ‘who’ ultimately ‘gets what’ out of the legislation”.
Thus the design of legislation reflects the interests of the different groups taking part in the political process and this may well have little regard for equity and efficiency considerations. Most important is what Horn calls the `commitment ' problem. The flow of benefits to legislators is often much more immediate than the flow of benefits to constituents (ibid, p.16). Constituents run the risk that the present or subsequent legislative coalitions might undermine the benefits of given legislation. This is a problem for legislators because forward-looking constituents will assess the durability of future legislative benefits and costs and reflect that assessment in the degree of electoral support they are willing to offer. Thus legislators cannot guarantee constituents durable benefits but they can make binding arrangements that might tie down future legislators 3. Constituents respond by seeking guarantees that these bindings will be entered into at the design stage, if, and when, they are consulted.
Choice of administrative instruments: Other things being equal, the national interest would be best served by governments choosing the most efficient instruments available to accomplish any given policy objective (following Trebilcock 1995, p.25). The argument is that, whatever the policy objective, it ought to be achieved at the lowest social cost: nobody gains by needlessly dissipating resources. The above considerations, among others, suggest political behaviour axioms like the following:
It is said that these axioms ‘explain’ the widely expressed perception of a mis-match between policy instruments and ideal policy objectives (Trebilcock, op cit ). Such mis-matching is unlikely to be the random product of mistakes, ignorance or stupidity on the part of collective decision makers says Trebilcock, but in many cases is likely to reflect systematic incentive structures that the community has built into political institutions such as one man-one vote and regular cycles of elections!(ibid, p.27).
From the above discussion, it is possible to derive a useful evaluation schema based on the structure-conduct-performance paradigm (Koch 1980). Such a schema asks the right kind of questions for ex post reviews of policy programmes and implementation. Horn's model of government processes suggests that any review takes account of institutional structures along the following lines:
From the author's experience, the task of ex post policy evaluation is a job most civil service organisations should be engaged in but very often are not! Analysts would be considerably aided if they were provided with a set of key questions to ask. Civil service managers may have their attention directed elsewhere. Judgements on the need for change in a policy programme may come from both the political clientele and/or the bureaucrats who manage it.
The information balance is heavily weighted in favour of the bureaucrats, especially where they have monitoring systems in place. In forming policy proposals, the economist's contribution is diluted by other generalists and legal people who actually write the parliamentary bills. The bills themselves are then subject to political compromises which further confuse the original economic aims. The choice of instruments is extensively debated by bureaucrats but may be changed in the final decision making process after further political consultation. A pure economic approach is not possible, hence the political preference function is not clearly expressed in economic terms.
In recent years, formal proposals for evaluation and review for policy programmes have been systematically introduced in New Zealand 4. While introduced in the name of increased accountability, there is also increased concern for [private] compliance costs and distributive effects of policy change. There has also been a political interest in the permanency of policy change with the introduction of the Fiscal Responsibility Act and other longer term policy issues such as the funding of old age pensions 5.
New Zealand developments might be compared with Australia in this respect. In 1973, the Industries Assistance Commission was established, on the recommendation of Sir John Crawford, to advise the Federal Government on assistance which should be given to, or withdrawn from, industries in Australia. Crawford identified the following reasons for establishing the Commission (Uhrig 1983, p.4):
The Commission was to report back on matters referred to it but could also initiate enquiries under certain circumstances. The Commission later became the Industries Commission and then the Productivity Commission. While the focus was on the need for industry assistance, there is an implication in the aims of the legislation that the implementation of the policy and the suitability of the instruments should be assessed 6.
Australia introduced Regulatory Impact Statements (RIS) earlier than in New Zealand. A RIS must be prepared for all new or amended regulations that directly or indirectly affect business, or restrict competition. A RIS should be prepared early in the policy development process, and should set out (among other things), the options (regulatory and/or non-regulatory) that may constitute viable means of achieving the desired objective[s], an assessment of the impacts (cost and benefits) on consumers, business, government and the community of each option, and a consultation statement (Productivity Commission 1998). According to the Productivity Commission report, compliance with RIS requirements for Bills introduced into Parliament in 1997-98 was mixed. An Impact Statement was tabled in most cases where required, and generally the level of analysis was adequate. However, the requirement to provide a RIS to the decision maker was complied with in only about a third of cases (ibid, p.33).
The particular work I am engaged on involves aid programmes given to countries by international organisations like FAO and the World Bank. It is very common for such programmes to fall short of their aims and objectives. I have been using the above framework to set up evaluation procedures for policy/programme reviews that might avoid some of the pitfalls encountered in practice.
It needs to be pointed out that within country administrations the policy and implementation processes might conform reasonably closely to Horn's model. This would depend greatly on whether we are talking of parliamentary democracies or other kinds of political systems like monarchic regimes, authoritarian regimes, or post-colonial regimes. The key point is whether democratic elections are in place and the political elite are susceptible to regular electoral pressure and are supported by responsive administrative mechanisms.
In the case of aid programmes, it is not the aims of the enacting legislation which are important but the aims of any agreement made between donor and donee in terms of designing and carrying out a defined [policy] programme. This is thus one step removed from Horn's legislators being clear about what they intended to achieve. But it essentially brings the agency problem into focus at an early stage. The donor always funds the programme but the donee is responsible for implementing it. In a case study in Kenya, Anderson noted that Bank-supported agricultural projects had passed through several stages; export industry development, integrated rural development, structural adjustment, infrastructural assistance, and professional assistance. “Most of these projects had unsatisfactory outcomes. Some notable failures resulted from a combination of poor design, and inadequate ownership among shareholders including some in government service” (Anderson 1998, p.1).
The need for consultation at the enactment phase involves issues of design in a programme and also co-operation in carrying it out among administrators and beneficiaries. It appears from the documentation that considerable effort goes into Bank plans for lending to individual countries. Projects develop out of country policy reviews and may involve large teams of experts. Government departments and research institutions need to be consulted and political input sought. The theory says constituents should help shape policy/programme proposals, not only to benefit themselves, but to avoid implementation difficulties later on. In the Kenya case study, the report says “An inadequate understanding of beneficiary situations has meant systematic ignorance of real needs and of effectiveness of local institutions....Ownership of Bank assistance needs to occur at several levels from Bank staff to senior government officials in the negotiations, from civil servants concerned with implementation to the intended beneficiaries and those indirectly affected by an intervention” (ibid, pp.2,16)
The choice of instruments can be interpreted fairly widely. Theory suggests that efficiency and effectiveness criteria should direct policy/programme designers to the best instruments for a given objective. At a broad level this may involve choice of agencies (budget supported, fee charging etc, public v private agents), or in other contexts, use of grants v loans v subsidies in a given assistance programme. In the Kenya case study, it concludes that “[priorities] will combine several key elements, including consulting widely with stakeholders (especially during implementation), addressing the unfinished policy reform agenda, supporting a more efficient extension service, and fostering the continued privatisation of those services that lend themselves to this” (ibid, p.2).
In this area, conduct of delivery agents is seen to be crucial. Aid projects are administered by the donee country and are liable to perverse behaviour not to mention waywardness in using external funds. In the Kenya study, it was found “special-purpose project implementation units and operations project implementation units outside the normal public service structure cannot make up for weak local and central administrative capacity” (ibid, p.18). In the wider political context, there is no tradition of political responsibility for the results of internal or externally funded programmes. As another author puts it “The Moi era has been characterised by the systematic looting of Kenya by a corrupt administration...amounts in numbered foreign accounts ...exceeded the total of Western investment and aid over the period in question” (Kimenyi and Mbaku 1999, p.251). More generally these authors state: “In recent years, many economists now regard poor economic performance in developing countries as due primarily to the absence of laws and institutions ....massive state intrusion in private exchange has, however, facilitated bureaucratic and political corruption, nepotism, and clientelism, and made it much more difficult for countries to develop viable and sustainable infrastructures” (ibid pp.405-6).
Once established, projects/programmes should be subject to review. Developing country practise is well behind that of western countries. Nevertheless, without monitoring and evaluation, no programme can be measured, evaluated and modified or discontinued as the case may be. In most countries, bureaucrats are resistant to programme evaluation and review, and the political drive is often absent as well. In terms of the transaction cost model, monitoring and evaluation need to be built into the design stages of a project so that the necessary disciplines are there from the beginning. In Australia and New Zealand the introduction of Regulatory Impact Statements implies a periodic revisitation to the assessment of benefits and costs. In the Kenya case study, the author concludes “While about one half of the Bank's projects had a satisfactory outcome, too many were less than satisfactory. Borrower performance considering its broken or unmet conditions and poor commitment, has been unsatisfactory” (Anderson 1998, p.3).
Commitment conveys the idea that legislative arrangements should be lasting and durable, not least because constituents won't supply their votes unless some permanency is assured. In the case of aid programmes there are two parties to each deal and constituents come a poor third. It looks to me that the incentive to do good on a permanent basis gets lost in the wheeling and dealing for aid, and permanency is one of the casualties. The case study demonstrates that the Bank, as major lender, thought it had commitment from the donee country in agreeing to the proposed programmes. It suggests that the bureaucrats concerned believed that they could promise to implement the proposals as planned. The experts had reported. But the report makes clear that the infrastructural arrangements in Kenya with regard to land tenure, credit, extension supervision, and political willpower, among other things, were not sufficient to ensure at least reasonable implementation in a lot of cases. Recent Bank arrangements for Kenya duly reflect a new appreciation of these factors. Further study is probably required of how to secure the necessary commitment in such circumstances 7.
These remarks are fairly tentative as they reflect one person's experience in a very wide field. They tend to reflect the experience of someone who has dealt in economic policy rather than social policy. I have considerable difficulty in making judgements about the quality of social research in the preparation of policy papers in this area and making recommendations that depend on human responses to decisions that affect their lives and livelihoods.
On the other hand, many of the key features of the Horn model can be observed in day-to-day reporting of parliament especially where conflict is present in the House or in Select Committees. Such openness tends to obscure the background work that goes into policy preparation and exploration of alternative courses of action. Bureaucratic initiatives are not always identified when they could be. In terms of Trebilcock's model, political initiatives and changes often obscure quite well designed policy and delivery.
I am not particularly experienced in proposals for choosing alternative delivery agents, but I observe some inconsistent policies from time to time from the sideline. Recent publicity in the qualifications area supports this. There also seems to be something wrong with the selection of administrative agents. Shirking and dishonesty seem to be alive and well in a number of agencies
I support the intent of the Regulatory Impact Statements. Indeed, RIS could be upgraded further with stricter criteria for cost benefit analysis, monitoring and evaluation, and reporting back.
With regard to developing countries, I have not much experience of domestic policy delivery. I presume that the bureaucrats do their best in pretty awful circumstances. Work I have been doing mainly concerns aid delivery and here there are real agency problems. Social and political conditions prevent the emergence of a clear unambiguous contract between aid donors and donees. ‘Shirking’ is probably a pretty mild word for what goes on.
Overall my work induces a hearty respect for constitutional economics. Successful aid policies depend on administrative stability and a respect for the law. There has to be respect for property rights and the law of contract. Studies need to focus on the role of institutions and the rule of law in developing countries in both aid assistance and private investment initiatives.
Anderson J. (1998), The World Bank and the Agricultural Sector in Kenya, Unpublished MS, Washington.
Auditor-General (1998), Annual Report 1997-98, The Audit Office, House of Representatives, B28.
Corkery J., Land A., and Bossuyt J. (1998), Minding one's own business: institutional dimensions of management for capacity development (with particular reference to Sub-Saharan Africa), International Review of Administrative Sciences 64, 531-551.
Crown Company Monitoring Advisory Unit (CCMAU)(1998), Optimising performance through accurate, expert and timely reporting and advice, Wellington.
Horn, M. (1995), The Political Economy of Public Administration, New York, Cambridge University Press.
Kimenyi M.S. and Mbaku J.M. (1999), Institutions and Collective Choice in Developing Countries, Ashgate, Aldershot.
Koch J.V. (1980), Industrial Organisation and Prices, (2nd ed), Prentice-Hall, New York.
Ministry of Commerce (1998), A guide to preparing Regulatory Impact Statements, Wellington, October 1998.
Prime Minister (1997), More Time for Business, Statement by the Prime Minister, the Hon. John Howard MP, 24 March, AGPS, Canberra.
Productivity Commission (1998), Regulation and its Review 1997-98, Annual report series, AusInfo, Canberra.
Trebilcock, M.(1995), Can Government be Reinvented?, in Boston, J. (ed), The State Under Contract, Bridget Williams Books, Wellington, 1-35.
Uhrig, J. (Chairman) (1983), Review of the Industries Assistance Commission, Volume 1, Report, Commonwealth of Australia, Australian Government Publishing Service, Canberra, 1984.
Zeckhauser, R. (1995), Dust Jacket: Horn, M. (1995) The Political Economy of Public Administration, Cambridge University Press.
1. Departmental. Until recently there were no formal requirements. Cabinet papers making new proposals or proposed adjustments to previous legislation required a background statement of previous enactments and cross-references. The reasons for change were expected to emerge from such a statement. Design of instruments should be addressed if relevant. Consultation was not mandatory [but see 2 below]. Background papers based on a form of structure/conduct/ performance were optional but were not a requirement. Background papers could be contracted out. Ministers seldom involved in formal consultation, but Select Committees of the House of Representatives may call for submissions on legislative enactments.
2. Regulatory Impact Statements. 8 As of July 1 1998, all policy proposals submitted to Cabinet which result in government bills or statutory regulations must be accompanied by a Regulatory Impact Statement, unless an exemption applies. The Statement should consistently examine potential impacts arising from government action and communicate the information to decision-makers. Completion will provide an assurance that new or amended regulatory proposals are subject to proper analysis and scrutiny as to their necessity, efficiency, and net impact on community welfare. The Statement should contain the following information:
[presumably the statement of net benefits could be followed up in an ex post sense at a later date and comparisons made].
3. The Audit Office. 9 The Audit Office exists as a constitutional safeguard to maintain the financial integrity of New Zealand's parliamentary system of government. The Audit Office, as an Office of Parliament, is independent of the executive branch of government. The Office's role is to assist Parliament to strengthen the effectiveness, efficiency, and accountability of the instruments of government. This role is discharged by providing reports on whether public sector organisations operate, and account for their performance, in a manner consistent with Parliament's intentions . The outcomes sought are that Parliament and the public will be confident that public sector organisations are: delivering what they have been asked to ; have operated lawfully and honestly, and have not been wasteful; and have fairly reported their performance in their statements of account (italics added).
4. The Crown Company Monitoring and Advisory Unit. Crown companies are fully owned registered companies subject to the Companies Act 1993 but where the shareholding is still held by two Ministers of the Crown. The Crown Company Monitoring and Advisory Unit (CCMAU) was established in 1993 to ensure that the investment is performing to the best of its ability, to collect information on performance of the companies, and to provide advice to Ministers. CCMAU is an independent unit attached to the Treasury department. CCMAU's approach is to maximise the performance of the individual companies in which the Crown has an ownership interest.. To meet this objective from a company-level perspective, CCMAU (1998) focuses on:
1. Contributed paper to the Annual Conference of the New Zealand Association of Economists, Rotorua, June 27-30, 1999.
2. Private consultant, Wellington (johnsonr@clear.net.nz). John Martin (Victoria) has made many suggestions to me in recent months but no blame for the resulting gaffes rests with him!
3. Peter Bushnell (New Zealand Treasury) has pointed out to me that bureaucrats have a vested interest too in the commitment problem. Policy advice is often larded with little reminders that certain steps taken will change the direction of future fiscal commitments [like tying NZ old age pensions to the cost of living rather than the standard of living!].
4. Formal review of policy is provided for by the Audit Office, Regulatory Impact Statements to Cabinet, and the Crown Company Monitoring and Advisory Unit. The Audit Office has a statutory requirement to provide reports on whether public sector organisations operate, and account for their performance, in a manner consistent with Parliament's intentions. See Annex 1 for details of these arrangements.
5. Could this be the influence of Murray Horn at the time?
6. Similar processes are carried out by the Australian National Audit Office. These are strong on administrative detail about implementation and alignment with professed objectives, but are not critical of policy per se. Since 1997, Regulation Impact Statements have been mandatory for all Commonwealth legislation that has the potential to affect business. “The costs and benefits of regulation are to be weighed up carefully to ensure that the putative [supposed] benefits are not outweighed by excessive economic and financial costs, including the compliance burden on business” (Prime Minister Howard 1997).
7. I found a very useful discussion of the development of local institutional capacity in Sub-Sahara African countries in Corkery, Land and Bossuyt (1998, pp.531-551).
8. From A guide to preparing Regulatory Impact Statements, Ministry of Commerce, Wellington, October 1998.
9. From Annual Report 1997-98, The Audit Office, House of Representatives, B28.