If the bureaucracy wants to be innovative, it has to be smart

The pandemic crisis is an opportunity to rethink the role of the state in the economy. Professor Rainer Kattel, an economist from University College in London, argues that administration can foster innovation and that the state can be entrepreneurial.
If the bureaucracy wants to be innovative, it has to be smart

(©Private archives of R. Kattel)

ObserwatorFinansowy.pl: Should the state intervene in the economy? Libertarians would say “God forbid” but you take the opposite position: that we should make the state entrepreneurial. Why is that?

Professor Rainer Kattel: Are you asking about the pre-pandemic or post-pandemic world?

I’m asking about the best possible argument in general.

In the pre-pandemic world the internet was a proof that the state can be entrepreneurial. Its creation and development were financed by the governments. In the post-pandemic world the proof for that is provided by the governments’ response to the threat. Without it, many more people would have died from COVID-19.

Do you believe that the state can be as creative as Marianna Mazzucato laid it out in her famous book “The Entrepreneurial State”?

Yes, I do. By the way, I have conducted research projects together with Ms. Mazzucato. Nevertheless, we should keep in mind that the state is not the only actor in the economic arena. We also have companies and non-governmental organizations. When we talk about an entrepreneurial state, we talk about a state that has a good understanding of its role in this ecosystem. My research goes a step further than Ms. Mazzucato’s proposal: it focuses on how we can organize the state after we have already decided that it has a certain role to play in the economy.

So, what is the most effective tool of the government’s pro-innovation policy?

Investments. The typical European government spends around 20 per cent of the GDP on public procurement. We should be constantly analyzing whether it is spending these funds in a way that actually promotes innovation, or whether it is simply delegating tasks to large companies. Let’s take the United Kingdom, where very positive developments have occurred. Ten years ago, most government contracts in the field of IT were implemented by 7 largest companies like IBM. Today, the government is guided by the principle of cooperation with smaller companies, and the same orders are carried out by as many as 3,000 enterprises.

That’s a pretty big change, but what are the practical benefits?

Pretty big? That’s huge. Firstly, it allows the government to save money. Secondly, it increases the state’s flexibility, enabling it to act more swiftly. Thirdly, it increases the quality of the services, because these 3,000 companies compete with each other.

Would you advise the governments to apply the principle of cooperation with small companies as a general rule of public policy?

It depends on the field in question. In certain industries, such as the energy, we only have large entities, although this is also changing, because along with the green revolution there is more room for larger numbers of companies. The general principle that I would suggest to governments is decentralization, which allows for more efficient use of resources.

When the concept of an entrepreneurial state is discussed, people’s understanding is that the state should undertake entrepreneurial tasks starting from the initial idea and all the way through to the practical implementation.

And in reality, it’s about something entirely different! The idea is that the state should provide incentives for companies to pursue concrete activities. As in the case of IT services in England: the fact that the old, public procurement system was wasteful — and the waste reached into millions of pounds — did not mean that it should be nationalized, but that it should be improved, i.e. that the market should be shaped in a different way. The government is just one of the economic actors and it should be a smart one.

Should its role be limited to designing appropriate incentives?

No. After all, there are some areas where the government provides goods and services on its own, i.e. education or health care. If we run out of masks during the crisis, then it’s the government’s role to secure them. Understanding market incentives is an important thing, but it is even more important to understand the weaknesses of the economy, to recognize the areas where it is vulnerable to shocks, and to build resilience. This is where the government should direct its investments, although these investments can be implemented by private entities. The question of how many and which tasks will be undertaken by the government should depend on its specific circumstances. The government of Norway, with its oil resources, can do more in the area of health care or education than a government which does not have such resources. Of course, there are some areas that even the Norwegian government will not touch, such as design – this will be supplied much more effectively by the market.

In Sweden, which is a wealthy country, a lot of space was left to private companies both in the area of education and in health care. Is this in line with the idea of an entrepreneurial state?

It all depends on how efficient the government is and what it wants. If something can be decentralized with the help of the private sector, then that should be done, and whether a hospital or a school is officially owned by the state, the company or the local community is an entirely separate matter. We are stuck in a debate focused on public ownership versus private ownership, and this is no longer the most important issue today. Today, we need to focus on ensuring that the government understands the market and is able to create the right conditions, to sign good contracts, etc.

When talking about innovation, we’re often looking for solutions that can be copied from one country and pasted in another. Let’s reverse it. What are the most common mistakes that governments make when developing pro-innovation policies?

One of the common mistakes is a rash decision that the government should produce or control the production of a particular commodity, which, for one reason or another, is deemed necessary. This could lead to a situation where politicians become fixated on this particular idea, product, or service, and forget about the need it was initially supposed to meet. Let’s say that the society needs batteries for electric cars. If they were manufactured by the government, it would probably produce something inefficient. By leaving the decisions concerning the fulfillment of a specific need to the private sector we are able to limit this risk. On the other hand, a frequent mistake made in economic policy is when the government is somewhat afraid to formulate priorities and to implement them, thereby allowing the private sector to take the initiative. So, we’re going to the other extreme. That’s why we need people in government who understand the market, technology, science, who can identify challenges — and not just “project managers”.

But this is where the government has a problem. The most talented people usually choose to work in the private sector.

This problem is partly due to the image that governments project. If it is widely believed that governments must be bad and corrupt, then no one who is honest and capable would want to work for them. However, if governments are seen as an institution that can do something good, then we could attract people for whom the sense of public service is more important than money. It is also worth keeping in mind that work for the government does not have to be permanent. Many people, engineers or scientists, would be happy to cooperate with the government on individual projects, for a year or two, without actually being a part of the government — precisely because of the need to be involved in public service. A well-functioning government knows how to utilize this tendency. In the United States, the Defense Advanced Research Projects Agency (DARPA) employs many entrepreneurs on a temporary basis, they work for the agency for half a year and then they go their own way.

It’s funny that the proponents of the entrepreneurial state always mention the example of DARPA and the US, even though this country is regarded as somewhat resistant to any interventionist ideas. Would you call it an entrepreneurial state?

I would call it a “covert” entrepreneurial state, which mainly exercises its entrepreneurship through the military sector.

Looking at the world, which country is the closest to the ideal?

I think that countries such as Denmark, which are able to maintain economic dynamism while simultaneously ensuring the stability of development, are close to that ideal. We also have the Asian countries: South Korea, Singapore, Taiwan — they have all had their share of success. Asian governments are actually more active in the economy than European governments. This means that by their very nature it is easier for them to realize the ideal of an entrepreneurial state.

They are more active because we have a system of liberal democracy, and they don’t. In Asia, even when something is called a democracy, it isn’t in the Western sense of the word.

I would mainly focus on the cultural differences, the different understanding of the role of an individual and of authority, rather than the political differences.

In order to build an innovative bureaucracy, we need to give it more power. More public funds will be channeled through. Aren’t you afraid of increased corruption?

I don’t think there is any need to give governments more power, because they already have it and they are spending billions of euros from taxes. Today, however, they are often doing this inefficiently. An innovative bureaucracy would simply mean a rationalization of what the governments are doing anyway. In addition, as a result of such changes the government would no longer be associated with low quality. This approach rejects the idea that everything the government orders should be as cheap as possible. How can you recognize a government office? It has the cheapest furniture. When you buy cheap things, you end up looking poor.

Is the government supposed to be characterized by Byzantine opulence?

No, but it has to take into account the quality of what it does. That’s why I mentioned workers who would be able to assess what and how should be done, who would be able to identify problems. Of course, this isn’t about buying the most expensive furniture for the offices. But maybe — sticking to this example — it’s about buying furniture from the most innovative, promising companies, rather than those providing low-quality mass market products? Every government expenditure should be passed through a pro-development filter.

This is a beautiful vision, but isn’t it the nature of bureaucracy to resist change and novelties? Isn’t it conservative by nature?

This is a matter of the shape of these institutions. It’s impossible to function without a government, so we have to do everything possible in order to ensure that its institutions work efficiently.

But the reality is that they don’t. In my opinion, the issue of the pandemic is the best example. Not a single Western government took the threat of the pandemic seriously at first, and all of them responded too late. However, the catalog of government failures is much longer. Shouldn’t the natural conclusion be as follows: since the government is failing, let’s abandon our illusions, let’s treat it as a necessary evil, but instead of using it to solve the world’s problems, let’s take care of them ourselves, at the grassroots level?

Today, some of the tasks could certainly be entrusted to the private sector, as I have already said. Some tasks can simply be automated, for example, by digitizing the tax collection process. In this way, we would also enable people to take up more creative work with greater added value. However, some problems can only be solved through coordinated actions that the private sector will not pursue on its own. Let’s keep in mind that public bureaucracy does not work in the same way as private institutions for certain fundamental reasons — no private company is obliged to take into account all the citizens in its activities. No private company could be burdened with such a task because it wouldn’t be able to perform it well. Getting back to the pandemic — it was the role of the government to ensure that the supplies needed to fight the virus are replenished, and if some government failed in this respect, then it was precisely because it was not entrepreneurial.

Fine. But how and with which tools can we determine the competences of the state? If we adopt the principle that the government can be innovative, and if we give it the space to act freely, then its appetite will continue to grow. We have to set some boundaries.

This is less about setting boundaries than it is about the means by which the government operates. Our thinking about the government is 100 years old. We believe that whatever the government does, it does so in the same way, and hence we see similar problems in every area of its activity. Meanwhile, collecting taxes is one thing, and managing the health care system is an entirely different thing. The former is a pretty predictable and relatively simple activity, while the latter involves operating under an extraordinarily complex system. The state should primarily engage in areas it understands well and for which it is appropriately equipped. In a certain sense, it is the potential for effective action that determines the scope of the state’s activity, and this potential is relative, depending on how the state is structured. Moreover, just because the government becomes involved in activity X doesn’t mean that that it will have to carry it out forever, and especially as a monopolist. Let’s take education. The pandemic will lead to changes, a shift towards remote teaching, which means that the role of the government in this area must be reconsidered.

So, you’re not saying that we should have absolute confidence in the power of the government?

No, of course not. A critical approach and vigilance are always advisable. Because of that there is a need for the government’s actions to be balanced out by the actions of non-governmental organizations, the judiciary, religious institutions, so that someone is always keeping an eye on its activities. However, this does not mean taking away competences and agency from the government.

Will the governments have more or less of them as a result of the pandemic?

Well, I would like them to build an entrepreneurial bureaucracy, but I’m afraid they won’t. The governments have spent so much money on anti-crisis programs that they will be paralyzed by the possible consequences of excessive debt and will not be willing to take on new tasks. On the other hand, every crisis creates a certain opportunity for changes.

The so-called Overton Window…

Exactly. It’s possible that some will be able to make good use of it.

Rainer Kattel is a professor at the University College of London and co-authore of the book “Innovation Bureaucracies: Let’s Make the State Entrepreneurial”.

(©Private archives of R. Kattel)

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