Some basic assumptions have been at the core of the thinking on poverty reduction and developmental assistance during the past 30 years.

There have been few voices of dissent to the dominant logic of the development community. Hernando De Soto, in his path-breaking book, The Mystery of Capital, challenged the assumption that poor countries are poor.^[3] Poor countries could often be asset-rich but capital-poor. Assets cannot become capital unless the country guarantees a rule of law—primarily the law of contracts—whereby the ownership of assets is clear; and because of clear legal title, these assets can be sold, bought, mortgaged, or converted into other assets. It is this concept of legal ownership that converts assets into capital. This is a compelling argument. De Soto also demonstrated in his work that the trapped resources—assets that cannot be converted into capital because of underdeveloped legal framework and institutions—can be significant. For example, he estimated that the trapped resources of Mexico are about $300 billion. In Egypt, the estimate is about $198 billion. This perspective suggests that poverty is, at least partially, a self-imposed problem in most of the world. Local capital formation and the functioning of markets are stymied by the lack of appropriate institutional arrangements.

We can derive several conclusions from this:

This is the ultimate paradox. Poor countries might be rich if we consider trapped assets. They might have a vibrant private sector and a market economy, although this private sector is informal, fragmented, and local. Ironically, these economies tend to be high cost with poor access to credit and inefficient systems of management.^[5] However, not all poor countries have a poor legal structure. Some merely lack the ability to enforce the laws. India, for example, is not Congo. In India, contract law is well-developed but enforcement mechanisms are not. What, then, is the problem?

The consultants from McKinsey & Company believe that the laws on the books are not enough. It is how laws are implemented at the ground level through a system of microregulations that matters. In a study jointly conducted with the Confederation of Indian Industries (CII), the McKinsey consultants found that the cost of microregulations in the areas of import–export, labor laws, and transactions involving land can be as high as 2 to 3 percent of GDP growth.^[6] Microregulations result from bureaucratic interpretation of the laws. The proliferation of regulations can make the system opaque to anyone but the very savvy. De Soto argued that his country, Peru, enacts more than 28,000 pieces of legislation per year at the rate of more than 100 per day. No one can keep pace with that rate of change.^[7] Interpretation of the regulations can compromise the timely execution of contracts and the clear establishment of ownership. As a result, corruption at all levels of bureaucracy can become endemic. The consequence of proliferation of microregulations can be the same as not having laws in the first place. An informal sector emerges outside the law of the land. The private-sector businesses remain small and local. For large firms, corruption becomes the cost of doing business.

Yet another variant of the same phenomenon is that the laws are underdeveloped. As a result, bureaucrats have a significant influence on the interpretation of the law (or the desires of the state). In spite of this, business can flourish. China represents a case in point. Oddly enough, in China, the bureaucrats are also the entrepreneurs. It is in the interest of the bureaucrats to guarantee a level of “certainty” in the interpretation of the contract—implicit and explicit. In the absence of laws and institutions that govern contracts, aligning the interests of the private sector and bureaucracy seems to have worked in building a vibrant economy in China. However, the poor in villages might be paying a price. For example, in the absence of institutions and laws, farmland can be appropriated for other uses by bureaucrats without a legal recourse for the farmer.

Given these variations, what is the secret for the evolution of a market economy in the BOP markets? What are the essential requirements for active private-sector involvement in development? I believe that the key lies in a nation’s TGC.

Fundamental to the evolution of capital markets and a vibrant private sector is the need for a transparent market for capital, land, labor, commodities, and knowledge. Transparency results from widely understood and clearly enforced rules. Transactions involving these rules must be clear and unambiguous. Ownership and the transfer of ownership must be enforced. Under such a system, assets can become capital. Investors will seek the best opportunities. TGC is the capacity of a society to guarantee transparency in the process of economic transactions and the ability to enforce commercial contracts. This is about reducing uncertainty as to ownership and transfer of ownership. Transparency in the process reduces transaction costs. Clearly developed laws, transparent microregulations, social norms, and timely and uniform enforcement are all part of TGC. My argument is that TGC is more important than laws that are not enforced.

BOP consumers live in a wide variety of countries with varying degrees of TGC. Consider the spectrum:

We can look at the spectrum of TGC as shown in Figure 5.1.

Figure 5.1. Transaction Governance Capacity (TGC).

TGC captures the dilemma that the BOP consumers and the private sector face. A country like Congo will have a long wait before an active private sector will propel the economy. However, both China and India are growing rapidly. They are the only two large countries showing more than 5 percent GDP growth over a decade. Both countries have significant corruption. Estimates of nonperforming assets on the books are as high as 50 percent of GDP for China and 20 percent for India. However, they have to travel different roads to become full-fledged market economies. As commercial transactions become large, complex, and multiyear, traditional approaches to bureaucratic interpretation and enforcement in China become problematic. China must develop laws and institutions. India must become more aggressive in enforcement. Political and bureaucratic intransigence will hurt investments and growth.

There is a need for us to recognize that economic growth fueled by the market economy around the world is not a single, monolithic problem. Each country has its own road to travel. Easy prescriptions that suggest that enacting laws will suffice are as naive as suggesting that contract enforcement even without laws provides adequate protection. The migration path toward the goal of a fully functioning market economy will be different depending on the point of departure for each country. Private-sector investors seek certainty—enforcement—over laws on the books. Enforcement allows firms to compute the cost of doing business in a system. That is the reason that most MNCs continue to prefer China over India: a clear preference for enforcement capacity over the legal system on the books. In China, corrupt as they are, the bureaucrats and politicians can enforce a contract. However, the corrupt in India cannot necessarily enforce contracts consistently. The checks and balances built into the Indian polity, especially the press and the multiparty political system, continually unearth corruption in contracts.

TGC is about creating transparency and eliminating uncertainty and risk in commercial transactions. The specifications for TGC are fourfold:

TGC is more than laws or regulations. For example, de Soto found that there are 71 procedures and 31 agencies that are involved in legally acquiring and registering land in Egypt. The situation is no different in other developing countries. However, to come to the conclusion that microregulations are the problem would be premature. The United States is full of microregulations, as anyone who has tried to build a new factory can testify. The regulations are even more complex if it happens to be a chemical factory. In addition to regular procedures involved in building a factory, additional regulations for a chemical factory can add to the difficulty of getting a license. Microregulations are an integral part of any complex legal system.

TGC consists of laws, regulations, social norms, and institutions. We need to think of the various components of TGC as a portfolio, shown in Figure 5.2.

Figure 5.2. Components of TGC.

Each country and economy might need a different portfolio of the elements of the TGC: One size might not fit all. The goal is to increase the TGC of a society in such a way that a vibrant private sector can flourish. We need to recognize that each country is at a different starting point.

I believe that the real problem is how bureaucracies deal with citizens. Consider a farmer in India, a semiliterate person approaching government officials to register his land. He will be approached by “brokers,” who are the facilitators of the transaction. They fill out the forms for the farmer, lobby with the authorities, and ostensibly make the process easy. The total cost of the transaction for the farmer consists of the fee paid to the broker for his services (an uncertain percentage of the value of the transaction), the registration fee, and the bribes paid to corrupt officials. The process is so opaque to the farmer that the broker and the officials have opportunities to be arbitrary about the quality of the title and the value of the land. More important, they have the ability to decide how long the process will take. They can give this particular case the level of priority that they think is appropriate. Corruption is about providing privileged access to resources and recognizing the time value of money. Corruption is a market mechanism for privileged access. Bureaucrats use microregulations to control access, transparency, and therefore time.

TGC is about eliminating the opaqueness in the system and providing ease of access. Changing laws and regulations does not help the ordinary citizen if the system is not transparent or if access is not easy. From the point of view of the citizen, TGC must fulfill four criteria:

I prefer to start with building ease of access and transparency, even before the regulations and the laws are changed to reduce selective interpretation. How?

Let us look at one bold move by the Chief Minister of Andhra Pradesh, Nara Chandrababu Naidu. Andhra Pradesh is a state in India with 75 million people, 48 percent of whom are illiterate. Seventy percent are involved in agriculture. The GDP per capita is a low $600. Fifty percent have no electricity and 69 percent have no running water. Five distinct languages are spoken in the state. There are an estimated 15.6 million households and 2 million farms. Citizens depend on the state for a wide variety of services, from admission to schools to birth and death certificates, paying utility bills, taxes, driver’s licenses, and registering property. The role of the government is pervasive. Therefore, a large bureaucracy has evolved to administer the various laws and regulations. There are more than 1 million government employees servicing 75 million citizens, a ratio of 13 to 14 government employees per 1,000 citizens. The system is opaque and the opportunities for corruption are high. This appears to be an unlikely place for a world-class experiment to develop good TGC.

Naidu decided in 1998 to make his state the model state in India. His approach was unique: He wanted to use digital technologies and the Internet as the basis for making his government responsive and citizen-centric. The goal was to reverse the process from an institution-centric civil service (citizens adjust to the requirements of the bureaucracy and government) to a citizen-centric system (a bureaucracy that is accountable to the citizens who elect the government). This concept was a 180-degree turn from the prevailing norm. The intended transformation is visualized in Figure 5.3.

Figure 5.3. Intended transformation to citizen-centric governance.

Over a period of five years, a wide variety of governmental systems and services was brought online. Let us continue with the land registration process as an example. What has changed? The work flow has not changed. However, the quality of interaction between the citizen and the system has changed in the following ways:

No laws have changed here and no regulations have been eliminated. However, the transparency, access, and time to transact business have changed dramatically. Andhra Pradesh has more than 2.8 million land records on digital files that can be accessed by citizens on the Internet from their homes or through Internet kiosks set up by the government.

Land registration is one of the key areas in which TGC can help. However, the transition to an all-digital, Internet-enabled system will not be without glitches. Actually, it might increase corruption before it reduces it dramatically as shown in Figure 5.4. The logic is fairly straightforward. E-governance^[9] requires the education of the citizen as well as bureaucrats and politicians. Citizens who have grown up with a system of bribes to get things done are unlikely to believe that this is different. They need to experience the difference. Officials who recognize that this will dramatically alter their ability to wield power and extract “speed money” will extract bribes to get the records properly digitized. The opportunity for altering the records before digitizing is high. Finally, all officials do not see that the system will be reducing opportunities for corruption immediately. Some will persist and must be prosecuted. Therefore, in the initial stages of implementation of the system, we should not be surprised if the level of corruption increases. However, the shape of the corruption curve, over time, is not in question.

Figure 5.4. Corruption and e-governance.

This schematic is important to bear in mind as countries move toward e-governance as a way to improve the TGC. For example, the initial reaction to the e-governance in Andhra Pradesh is best captured in the following excerpt taken from the original case study (available in its complete form at Whartonsp.com).

The survey confirms the logic of the corruption curve; corruption is bound to increase in the near time, peaking and then steadily declining to near-zero levels. Once the system is fully operational, it is difficult to change the data in the system. Further, all entries will leave a trail, indicating who as well as when. This level of scrutiny and openness will reduce the opportunities for corruption.

TGC is not just about large, one-time transactions that people engage in, such as buying land or property. Every citizen depends on the government for much of his or her day-to-day existence. Paying utility bills, getting a license for opening a shop, and getting admission to a college using birth and caste certificates are all part of a citizen’s dependence on government. That is where the government of Andhra Pradesh turned next.

The government of Andhra Pradesh has now set up eSeva (literally, “e-service”) to provide ease of access to services from the government and its agencies. eSeva centers are operated through a public–private partnership model. This is outsourcing of government functions to the private sector. The government of Andhra Pradesh is trying several models, including build-own-operate (BOO) and build-own-operate-transfer (BOOT).

eSeva can be accessed via the Internet or through the kiosks^[10] set up by the government. Citizens can pay water and electricity bills through eSeva. They can get their driver’s license. They can pay their property taxes. There are more than 45 integrated state and federal services currently available to citizens through this system. The list of services is given in the Appendix. Imagine the losses that this approach to government service can eliminate. It used to take a minimum of half a day for a worker to go to the Electricity Department and pay his or her monthly bill, and 3.5 million bills are paid per month in the city of Hyderabad alone. If we compute the frictional cost at a meager wage rate of Rs. 50 per half day (U.S. $1.00) per person, it totals a staggering Rs. 2.1 billion per year. The cost to the citizens of just paying electricity bills is a staggering collective wage loss of about U.S. $45 million in one city. There is also a host of other bills to be paid and services that require the citizen to go to government offices and wait. Again the paradox is that the poor pay a heavy price for basic services. In the eSeva system, a citizen can, in one trip to the kiosk, transact all routine business with the state at the same time without “speed money.”

A wide variety of ordinary citizens was interviewed for our research on what they thought of these services and they reacted favorably. Here are some citizens’ reactions in their own words:

“There is absolutely NO corruption in eSeva.”

“We needn’t stand in long lines in the hot sun and waste time.”

“All transactions are visible and it is easy for us to pay all bills in a single location.”

“eSeva system is beautiful.”

“We are not harassed anymore at the hands of government employees.”

“I can get back to work to earn my hourly wages.”

Unlike most government establishments, the eSeva centers^[11] are clean and citizens receive the same levels of service regardless of their economic class. The services are used by an average of 1,000 citizens per day, ranging from 400 to 2,000 people. The software system is cleverly designed to prevent corruption and create accountability at every level. More important, every detail in a transaction is permanently recorded into a database in Telugu, the local language. Of the 750,404 transactions in March 2003, the number of transactions that had a rupee value below Rs. 100 ($2.00) contributed 11 percent (presumably the poor), greater than Rs. 20,000 ($400) about 1 percent, and the middle segment, Rs. 100 to Rs. 20,000, about 80 percent. Considering the amount collected during the period, the middle segment contributed 73 percent of the Rs. 4.3 billion.

It is important to recognize that an Internet-based system such as eSeva can be of great help to a large number of educated citizens, be they rich or poor. The educated can access their own records, pay their bills online, and get the benefits of the system. How about the illiterate and poor? By providing the urban poor with access to the kiosks and help from the kiosk operators, the long waits and trips to multiple agencies can be eliminated. The intermediary is still needed. He or she is not a broker but is the operator, a private-sector employee, in the kiosk. The satisfaction scores from the citizens with eSeva services are high, even with an intermediary, with no opportunity to be corrupt. The access to eSeva for the rural poor met the goal of the government of Andhra Pradesh of 100 percent access across the state by 2005.

Although the governance initiatives set up by Andhra Pradesh are praiseworthy, it is important that the direction of change, the quality of implementation, and progress are measured. With this in mind, the government of Andhra Pradesh, in collaboration with the International Development Institute of the United Kingdom, has set up an independent watchdog agency called the Center for Good Governance (CGG). The role of the CGG is to monitor the implementation of the ICT approach to citizen-centric governance and publish independent and periodic reports of how the entire process is proceeding. The CGG is authorized to challenge the government agencies. Further, it makes recommendations to the Chief Minister on what needs to be changed.

The CGG approach is based on the simple premise that power in a democracy is derived from the people and government must be accountable to them (see Figure 5.5).^[12] Obvious as this is, the basic premise of an elected government is often lost in the bureaucratic and regulatory maze.

Figure 5.5. Good governance model.

Needless to say, good governance, as shown in Figure 5.5, cannot be achieved without a clear set of guiding principles, performance indicators and measurements, and constant attention to improvement of the underlying processes.

The guiding principles of CGG in Andhra Pradesh are listed in Table 5.1.

A performance management system (PMS) for the efforts of the government of Andhra Pradesh is introducing a citizen-centric view through a wide variety of schemes, including land registration (2.8 million records) and monitoring of public spending programs. The Chief Minister (who calls himself the CEO of the state) can directly access any village, bypassing the usual layers of bureaucracy that separated the ministers from their constituencies. The chief minister of Andhra Pradesh started town meetings (via videoconferencing facilities) with the villages randomly chosen. That further cemented the transparency and access available to ordinary citizens.

How does the performance system work? Is the transition to the system smooth and without tensions? Do bureaucrats believe in the system? What is the role of political leadership in making this system work? TGC cannot be enhanced without a deep commitment from the top. The researchers witnessed the monthly meeting of the Chief Minister (CM) with the district collectors. These monthly meetings were one of the tools used to implement the system and identify problem areas. Here is an excerpt from the case story on the government of Andhra Pradesh:

Researchers witnessed firsthand the PMS in action. The CM holds monthly, sometimes weekly, video teleconferences with all 26 district collectors. The CM is located in Hyderabad, and each district collector is located in his or her respective district headquarters. Each district collector was joined by 50 other personnel. Interesting to note was that the press was given full and open access to this meeting; in fact, they recorded the entire five-hour meeting.

The CM also used this forum to discuss public opinion numbers. Each district collector was again asked why things were going poorly in his or her area and what he or she planned to do about it. It was evident during the meeting that many of the figures that had been input in the system were not the “actual” numbers, but simply placeholders that were entered by the cut-off time, four hours before the meeting. Staff scrambled to present the CM with appropriate numbers, especially, when the new numbers were better than the fictitious ones. Transparency such as this, in front of the press, is forcing government officials to embrace the PMS. Also, they must now pay attention to the citizens and perform only actions that are really important.

During these meetings, the CM chooses a random subject to scrutinize. At this particular meeting, commodity prices were picked. The officer in charge of this was caught, and subsequently embarrassed, because he had entered data simply to enter data. Quite often his commodity prices were off by a factor of 10 or 100! There is no doubt this particular individual will input proper data from now on. No doubt seeing one’s peers publicly embarrassed will encourage district collectors to make sure that proper data are input by their staffs.

Although the systems are in place, they are still works in process. E-governance increases the TGC of a society through increased transparency, accountability, speed, and accessibility. Such citizen-centric governance creates a better economic climate by reducing risk. However, the concept, the approach to implementation, and the initial results suggest that it can lead to improved TGC. Further, improved TGC can lead to development. Conceptually, the virtuous cycle is shown in Figure 5.6.

Figure 5.6. The virtuous cycle.

One should not conclude that this experiment is a done deal. There are significant impediments to the entire process, the most important being the education of the citizen. For decades, the citizens associated corruption, sweat, long lines, and humiliation with government, so they are likely to look at these initiatives with skepticism. Only consistent performance can convince the skeptics. The bigger problem is with the employees—the functionaries within the government. Initially, they accepted these initiatives because no one was displaced by the e-governance initiatives. No changes were made to the underlying processes. As might be expected, in the initial stages, the potential for “speed money” was not severely compromised. However, in the second phase of implementation this will start to change. The regulations and governmental business processes can be simplified. Interconnected systems will be able to identify pockets of graft and corruption. Records cannot be easily altered or lost. The change will not come easily. It is the support of the citizens and the pressure from them for change that can reduce the political price for moving forward with these initiatives. The benefit of TGC is worth the risk.

There are several lessons to be learned from the experiment in Andhra Pradesh. Transformation of a well-entrenched system takes not only building an IT system, but also building trust. Citizens must feel that changes are taking place. The experience with eSeva is therefore critical. The services offered by eSeva allow citizens to experience streamlined services, not just once in their lifetimes (as in buying or selling land and property) but frequently (as in paying electricity and water bills every month). Furthermore, confidence-building requires that citizens experience a high quality of service with no corruption in a wide variety of services such as getting a driver’s license or a birth certificate. TGC is about communicating a consistency in the behaviors of the bureaucracy and governmental institutions. Citizens must convince themselves that it is cheaper to be within the system than outside it. The shift from the informal sector to the formal sector will take place if ordinary citizens can be confident that:

Ordinary people instinctively recognize that there are costs to being within the system. They have to declare their assets and pay taxes. They also recognize that there are costs to being outside the system. They have to be beholden to local politicians and a cruel system of enforcement of local practices with no legal recourse. The cost is high and difficult to predict. Bureaucratic corruption had made the cost of being inside the system too high for most citizens and the benefits too low. Poor access to the formal system and its lack of transparency compared to social norms force people to seek a higher cost option, but one where the rules are clear (even if cruel).

Corruption, as we said, is a market for privileged access. It thrives in a system that allows for opaque decision-making. The cost of being inside the system will decrease only if governments tackle the issues of access and transparency and recognize the changes needed in both the regulations and the laws. The experiment in Andhra Pradesh is one example of how digital technologies can be used to creatively enhance TGC through better access and transparency.

Building TGC is not only the job of the government. It does play a significant role in ensuring that corruption is reduced, but market-based ecosystems that large firms can create, as we saw in Chapter 4, can also increase TGC in a society. The combination of the two, with the use of digital technologies, can rapidly transform the TGC of a country.