Sclerotic states need startup rules and institutions
Governments shouldn't have to rely on genius reformers for things to improve.
This was my Editor’s Letter in issue 21 of Works in Progress, which came out last month. To get the full print edition, including my future letters, you can subscribe here for $100 or £75. We also do gift subscriptions, in case you have any last-minute Christmas shopping left to do!
Corporate turnarounds are notoriously difficult. Even when companies become bureaucratic and offer substandard products, some people inside and outside the company still benefit from them being that way. CEOs who succeed in the face of these interests, like Microsoft’s Satya Nadella or Chrysler’s Lee Iacocca, become legendary.
We normally rely on a form of natural selection instead. A startup that is more efficient or offers a better product enters the market and gradually wins customers from the incumbent, which eventually dies. Only 60 of the 500 companies in the S&P 500 in 1980 are still in that index today.
Public policy relies almost entirely on the public sector equivalent of the corporate turnaround. Reformers focus on fixing broken laws or making government agencies work better.
As in the private sector, this rarely works. It is hard to do anything substantial in secret, and the people who lose out from the reforms fight back. Their benefits are too dispersed or immaterial for enough people to fight for them. Mancur Olson feared that only war or revolution could overcome this dynamic. Geniuses like Satya Nadella are just too rare.
Reformers should pay more attention to the other way markets improve: competition and choice. France in the 2000s liberalized childcare not by changing the rules that applied to every childminder, but by creating new, more permissive categories that childminders (and their customers) could opt in to. It worked, in a particularly tricky area of policy.
To deliver new homes, Israel’s government created new mechanisms that allowed apartment residents to bypass existing rules and replace their buildings with bigger, denser ones – but only when the residents of a building explicitly opted in.
Rather than trying to reform the country’s scientific research agencies, Britain’s government set up a new organization run along different principles, ARIA, that coexists with those other agencies. This allows us to see which models work better, and perhaps to make more substantial reforms easier in future.
These approaches have their drawbacks. Multiple organisations are more expensive than one, and different sets of rules can complicate things. New systems may be taken up slowly, especially if their benefits are not concentrated on those who adopt them.
But as a way to replace sclerotic rules and organisations, building new institutions in parallel to the existing ones may be surprisingly effective, avoiding the equal and opposite reaction that end up scuppering many attempts at reform.