Wednesday 16 January 2019

Frank Barry: Politicisation of public service may have been our undoing

'DEFERENCE and diffidence'. That was the description of the Central Bank's attitude in the lead-up to the current crisis.

As the Honohan report (by the now Central Bank Governor Patrick Honohan) put it in 2010, rocking the boat and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to 'spoil the party' and withstand possible strong adverse public reaction.

There could hardly be a more dramatic contrast to the actions of the first Governor of the Central Bank, Joseph Brennan, in the early 1950s. Rather than agree to moderate his blistering criticism of government economic policy, he instead chose to resign.

COMPLACENCY

Similar criticisms of complacency in the face of the impending 2009 crash were levelled at the then-leadership of the Department of Finance.

The Wright report of 2010 states that "after several years of fiscal action well above that clearly recommended by the Department, one would have expected the tone, and shape, of advice on the risks of this path to increase vigorously . . . this did not happen".

It has since emerged that senior officials of the department repeatedly excised references to property market risks from official departmental statements and speeches drafted for the minister by more junior staff.

This too stands in sharp contrast to the traditional ethos of the civil service, at least as originally conceived.

In an interview as long ago as 1987, TK Whitaker, who was appointed secretary of the department in 1956, referred to the "old principle that you were independent of ministers".

"You gave your views on any new proposals fearlessly, critically, honestly. You did not care whether your views were likely to commend themselves to the minister, whether for their own sake or politically . . . that was my understanding of the function of senior civil servants but I'm afraid it has been undermined.

"In the new world, the civil servant is all the time trying to please the minister, over-conscious of what might be politically acceptable, arranging the options so that they will appeal, rather than in strict order of eligibility."

Why might the 1950s be of particular relevance today? The recession of the time was one of the deepest in independent Ireland's history.

But the policy reforms instituted over that decade gave birth to the modern Irish economy.

The Export Board, forerunner of today's Enterprise Ireland, was established. The IDA found its mission. And in 1956 the country put into effect the IDA's plan to offer tax relief for manufactured exports – the origin of our low corporation tax regime of today.

These reforms were not so much a grand theoretical strategy, as the outcome of a 'clash of ideas' between policy advisers, senior civil servants and the smarter government ministers.

The usual articulation of the separation of powers – between executive, legislature and judiciary – relates more to the US system than to Ireland's.

BRITISH MODEL

As in the British model, our legislature plays almost no role in holding the government to account. This makes the separation of powers between government and bureaucracy much more important.

The independence of the senior civil service is a critical line of defence against vested interests.

As this column previously put it, the philosopher Plato could not explain 'where he would find the wise men who would govern his ideal state'. Experience since seems to show the best results come from the paradox of competing sources of power jockeying for their own advantage.

This is the key that draws together the findings of the three independent reports of 2010 and 2011 into the weaknesses and failures of the Department of Finance, the Central Bank and Financial Regulator.

Besides 'deference and diffidence', the reports refer to 'groupthink'.

This is less of a problem of course if the institution in which it prevails is only one voice in the mix.

So the problem of groupthink is compounded by a third – the failure of the institutions to challenge each other.

The two powerful economic departments of state in the 1950s, Finance and Industry & Commerce (the predecessor of Richard Bruton's department today), were permanently locked in battle.

Both, though, were hostile to the establishment of an independent Industrial Development Authority (IDA).

The idea was pushed through by the first inter-party (coalition) government because Industry & Commerce was felt to be too wedded to the existing industrial policy of import substitution.

The independence of the IDA would prove to be of major significance.

It allowed it to effectively ignore the demands of Fianna Fail, upon its return to office, that the new agency too should focus on import substitution rather than developing export-oriented industries.

Export profits tax relief had the support of the IDA and Industry & Commerce but had been blocked by the Department of Finance. The second inter-party government overruled Finance in 1956, and the rest is history.

What relevance might this all have for today? Groupthink is best challenged through debate. Debate is how ideas are tested and challenged. It expands the scope for good ideas to drive out bad ones.

'GROUPTHINK'

Unlike the 1950s, this crisis has not necessarily rectified the groupthink phenomenon. NAMA, for example, was opened up to outside debate only after it had been deemed to be "the only game in town".

Is it any wonder that the taxpayer now bears all the downside risks while all the upside possibilities appear to accrue to the developers?

Could the banking guarantee have survived a thorough brainstorming?

At least the independent Fiscal Advisory Council is a step in the right direction. Having institutions with overlapping areas of responsibilities might be useful, though this needs to be carefully crafted to prevent them using it to evade responsibility.

The abuses revealed in the report on industrial schools would likely have come to public attention much earlier if this kind of institutional competition prevailed.

The Mahon Tribunal recommended an independent regulator to investigate where the policy decisions of elected officials appear grossly at odds with the professional and managerial advice they received.

OVERSIGHT

Paradoxically, having such oversight bodies in place – if they are effective – should reduce the need for them.

And what of the problem of 'deference and diffidence'? The intimidatory tactics of Charles Haughey and his disciples are likely to have left a legacy. But the politicisation of the public service has less nefarious origins as well.

In that same 1987 interview, Dr Whitaker noted that independence is compromised when even the most senior civil servants become dependent on their political masters for future appointments.

One of the UK inquiries into the Iraq war recommended that a particular key post should never again be held by anyone other than an official "who is demonstrably beyond influence and thus probably in his last post".

Simply employing more professional economists will not resolve these issues.

Frank Barry is Professor of International Business and Economic Development at the School of Business, Trinity College Dublin. This article is based on a forthcoming paper in the Journal of the Statistical and Social Inquiry Society of Ireland.

Irish Independent

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