Broad review of incentives system needed

 

ONE OF the basic building blocks of economics is the idea that people respond to incentives. To guard against the kinds of policy errors made over the boom period, we need to address the system of incentives facing policy advisers and decision-makers. The recently established independent Fiscal Advisory Council is a step in this direction. Also of significance are proposals for a whistleblower’s charter and the promise to extend the inquisitorial powers of Oireachtas committees.

But a much broader review of the incentive system is warranted.

Some 10 years ago, UCD law lecturer John O’Dowd and I conducted an analysis of why Ireland appeared to be permanently bogged down in tribunals of inquiry while jurisdictions such as the US and the UK managed to complete similar investigations much more rapidly and at far less cost.

A major factor, we found, was the strength of the Irish constitutional protection of the “right to one’s good name”. This had hindered the Public Accounts Committee’s investigation of the matters behind the arms trial of the early 1970s, and more recently terminated the Oireachtas inquiry into the shooting at Abbeylara. The proposed constitutional amendment will balance the public interest with the right to one’s good name.

The risk of exposure clearly incentivises better behaviour. Would John O’Donoghue have been as flathúlach with taxpayers’ money if he knew his excesses would ultimately come to light?

But Oireachtas committees will need expert support if scrutiny is to be adequate. Committee members on their own are unlikely to know where the bodies are buried. It would help if our elected representatives were less caught up with localist and clientelist concerns. While our electoral system may play some role in this, more effective local government – with its own stable sources of finance – is required if localist concerns are to be diverted to local authorities.

A whistleblower’s charter also enhances the threat of exposure. My TCD colleague Bill Kingston has long argued that it would have made much less likely such public-service failures as the lethal blood transfusions scandal, illegal charges for long-stay institutional care, Garda impropriety in Donegal, the PPARS health-service payroll system and the acquiescence of the Revenue Service to the demands of Charles Haughey.

As the whistleblower whose revelations led to the resignation of the entire European Commission, Jacques Santer has written, “it is an illusion to think that stricter regulations and a perfect audit policy can wipe out all major irregularities . . . Whistle blowing is a guarantee against the persistence of structurally endemic fraud and irregularities.”

A more inquisitorial Oireachtas and a whistleblower’s charter may also have brought to light much earlier the abuses revealed in the 2009 Ryan report.

Lack of transparency in policymaking facilitates interest-group and regulatory capture. I quoted from Garret FitzGerald in this newspaper recently to the effect that “democratic national governments tend to be subject to such strong pressure from vested interests within their own territories that many of their decisions operate against the interests of society as a whole”.

All policy advice should be scrutinised in public before decisions are reached. As we see in recent debates, those with expertise in a field are happy to debate issues of relevance without expecting payment.

For all consultancies carried out under public contract, the losing bidders also have an incentive to rigorously debate any resulting reports. Such contestability is after all how progress is ensured in the fields of science and medicine.

Brian Cowen claimed after becoming taoiseach the economic decisions made by government over the boom period had been made on the best advice available. Many know this to have been untrue, but it raises the question of where expert advice ends and political decisions begin.

By its nature, the public sector also faces some incentives peculiar to itself. One is the incentive to avoid attributable failure. The Top Level Appointments Committee should be mandated to mark down evidence of such behaviour on the part of candidates. Another is the incentive to engage in empire building. A type of “An Bord Snip” might counteract this.

TK Whitaker drew attention in a 1987 interview to a detrimental incentive associated with the introduction of term limits for senior civil servants. Their independence is compromised since they become dependent on others for future appointments.

A UK inquiry into the Iraq War recommended the post of chairman of the Joint Intelligence Committee should never again be held by anyone other than an official “who is demonstrably beyond influence and thus probably in his last post”.

But we also need to worry about scrutiny of private-sector consultants to government. Recall the fallout associated with the failure of a major consultancy firm to highlight, in its 2009 report to the minister for finance, the €7 billion deposit that Irish Life and Permanent had placed in Anglo-Irish Bank. Was this taken into account in the allocation of subsequent contracts? This could be addressed by extending the powers of the Comptroller and Auditor General.

A strong case can be made for a much broader review of the incentive system facing policy advisers and decision-makers.


Frank Barry is professor of international business and economic development at Trinity College Dublin

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