Citizenry vs Customer Centric Approach in Public Management

(This paper was made as a response to a case called 'The busted DMV')

Dear Mr. Chief Minister,

I would like to thank you for your trust by reappointing me as the Director of Division of Motor Vehicle (DMV) of the ACT. I understand that my greatest challenge is to please all stakeholders and citizens of the DMV. The immediate concern that I have to deal is the various complain from different stakeholders; for example: the length of queue line and the unpleasant officers on handling the angers of our customers and citizens. These have been attracting media attentions and led to some political issues.

My assessment concludes that one important weakness at the moment is the quality of our communication to our stakeholders. We have been good so far with technological innovations such as information technology and credit card payment which have been running well. Although they were useful for customers, they did not entirely resolve the problems. Our core work, however, is human-to-human interactions which require different kind of innovation.

The key issue here is how we identify our stakeholders and define their values. The weakness in communication will never resolved unless we understand to whom and for what we should interact. Similarly, we will never make everybody happy except we know who they are and what would make them fulfilled.

Stakeholders are those outside of but are affecting or can affect the organization (Freeman 1991, p. 5). A public organization, such as the DMV, must deal with different kinds of stakeholders with 'very different statuses in terms of their moral right to make claims' (Moore 1994, pp. 300-301). A failure on understanding the DMV stakeholders would lead to a mishandling. For example, those who supposed to be the highest status to make claims—i.e. either because they sacrifice their liberty and privacy for government/public or because they have authority to make the claims—become the least to be listened. This may induce some ethical issues.

In the quest of maximising values, any organizations must satisfy the interests of its stakeholders (Jensen 2000). But for public organizations 'safeguarding interests' is not enough, they must 'adding values' actively (Alford & O'Flynn 2009, p. 176).

In short, understanding stakeholders is a key to be able to deliver values for stakeholders and citizens. But there are many kinds of them with different kind of preferences. The ability to distinguish them in creating values is crucial for improving the DMV's performance.

In response to the key issue, there are two alternative solutions:

Option-1: The DMV must focus to customer. I should perceive 'customer' as citizens the DMV encounters as its business end (Moore 1995, p. 37). Therefore, the motorists are the customer. In more precisely, they are our ‘client’ because they are ‘paying customers’ (Alford 2002, p. 340).

I will start by doing a client survey to understand the motorists’ preference of what things they would value. The survey should cover information on client’s current perception to the DMV’s performance, and what things should be achieved or done for improvement. I will also ask our clients to compare the DMV’s performance with other similar organization in other states or country. This is called ‘two-dimensional survey’ to benchmark our performance with respect to our “competitor” (Jablonski 1992, p. 113).

The understanding on the DMV’s clients that gained from the survey will be used to redefine our strategy. The strategy should cover vision statement and goal, policy, and operational plan which includes communication plan (Allison 1982, p. 17; Jablonski 1992, pp. 75-83). The strategy must guarantee the achievement of client satisfaction. The change in strategy should lead to the adjustment of the internal organizational components. This should include, when necessarily, the changes in organization structure (units and positions), procedure, and staffing (Allison 1982, p. 17). I will reassess our business processes to find out how we can make it shorter and simpler but still able to achieve our clients’ desires. That would change our working procedures which may lead to a modification of units and positions. I will review the staffing to ensure that all job descriptions and the staff capability support our clients’ expectation and to make it in line with the new organization structure. These changes should shorten the processing time to cut the lengths of the queue line. The improved staffing and provision of needed trainings will create capable staffs to handle the angers' clients. Parallelly, I will review our financial plan to secure the implementation of the new strategy and the changes in the internal organizational components. Finally, I will figure out if I need more authority and budget from the ACT government.

Although this option looks likely will lead us to have better client satisfaction, I will rely on you to resolve any bottleneck I may find such as need for more authority and fund.

Option-2: The DMV must focus to the citizenry. The fundamental difference with the first option, in terms of actions, is on redefining the strategy and managing the external constituency. Instead of doing client survey, I will do an integrated stakeholder communication. This should include citizens who do not need any DMV’s products and services. That is because government, particularly public manager, must help stakeholders and citizens at large to define and produce values (Moore 2000, p. 190). But the values must be in the form of 'shared values', rather than an aggregation of individual self-interests (Denhardt & Denhardt 2000, p. 555).

In the communication with all motorists in the ACT, I should understand how they can be more motivated to register their motor vehicles and making—or renew—their license in timely manner beside the fact that they are obliged to do so by law. It is also important to understand how they can cooperate better by being well-prepared for the required paperwork and payments before coming to the DMV office. Customers in public sectors are often clients and obligatees at the same time where we need their support not only for their compliance but also for their cooperation (Alford 2002, p. 341). In addition, the complaint-handling system must be improved to be more proactive and transparent.

I will talk to the Police Department to make them aware that their enforcement function is very important for the DMV. The motorists would have more motivation to comply their obligation on registering their vehicles and updating their license if the Police Department enforce the rules properly. I must advocate that to be the value of the Police Department. In social exchange theory, the coercion transaction—such as what happened in the DMV—will be more effective when the punishment administered contingently and consistently (Molm 1997, p. 269).

Tax payers, politicians and media are also important stakeholders to be engaged with. For example, if the only solution to improve the satisfaction required more resources and authority, instead of relying on you, I will take a role to convince them to provide support. For example, citizens may need to sacrifice their liberty more by bestowing their private money for taxes. Alternatively, I would ask for legitimacy from politicians, citizens and media to increase the payment rate of our service to be charged to our clients. This is my role, as a public manager, to mediate the collaborative efforts to achieve the shared values (Denhardt & Denhardt 2000, p. 555).

All of these efforts—on improving the management of external constituency to gain more supports and legitimacies from more stakeholders other than clients—will help to redesign the DMV's strategy and reshaping the internal component of the organization. The actions to do should be similar to the option-1, the difference is that the basis of the redesigning strategy and reshaping the internal organizational components should not based only on the clients' aspiration, rather according to different stakeholders and citizens at large as elaborated earlier.

Although this approach would be more successful due to the better civically engagement (Putnam 1995, p. 66), this will increase the potential of organizational instability due to the wider exposes to the outsiders.

Assessing the two solution options by applying the following criteria: (a) political equality, and (b) time-wise, option-2 is the most plausible solution.

The DMV, as a government organization, must not only provide private value to its customer but also public value to the citizens (Alford 2002, p. 340). The client-focus approach will create private value only. Moreover, public organizations must create both instrumental and intrinsic values (Moore and Braga 2004, p. 4). The instrumental value is more meaningful for citizens. For example, Although citizens without motor vehicles do not served directly by the DMV, they still expect the DMV acts justly to its customers. Citizens do not only concern to their self-interest but also to the ‘concern for the whole’ (Denhardt & Denhardt 2000, p. 552). Customer-oriented approach applied by government may lead to increased political inequality (Fountain 2001, p. 54); that is because the clients are the only to be served (as external constituency) while other stakeholders are mistreated. Option-2 could create a better political equality because the DMV will engage more stakeholders in defining and creating the shared-values.

Option-2 is more possible to resolve the DMV's problem within one year period. The citizenry-focus would attract more cooperation from the clients. They will be well-prepared as they come to the DMV office, for example. That could happened not only because they aware that they are obligatees but also because the DMV communicate better to clients and citizens (which includes motorists who have not become the DMV's client yet). Other stakeholders, such as the general citizens, media, and politicians, would be more fulfilled—at least for some instrumental values—because they engaged on defining values to be created by the DMV.

In conclusion, by applying option-2, we will make the stakeholders and citizens fulfilled through the improvement of our communications and other operational capabilities and a better management on external constituencies.

Sincerely yours, Ade Cahyat

References

Alford, J 2002, 'Defining the client in the public sector: a social-exchange perspective', Public Administration Review, vol. 62, no. 3, pp. 337-346.

Alford, J & O'Flynn, J 2009, 'Making sense of public value: concepts, critiques and emergent
meanings', International Journal of Public Administration, vol. 32, no. 3, pp. 171-191.

Allison, G 1982, 'Public and private management: are they fundamentally alike in all unimportant respects?', in FS Lane (ed.), Current issues in public administration, St. Martin's Press, New York, pp. 13-33.

Denhardt, RB & Denhardt, JV 2000, 'The new public service: serving rather than steering', Public Administration Review, vol. 60, no. 6, pp. 549-559.

Fountain, J 2001, 'Paradoxes of public sector customer service', Governance, vol. 14, no. 1, pp. 55-73.

Freeman, RE 1992, Business ethics: the state of the art, Oxford University Press, New York.

Jablonski, JR 1992, Implementing TQM: competing in the Nineties through total quality management, 2nd ed., Pfeiffer, Amsterdam.

Jensen, M 2000, 'Value maximization and stakeholder theory', HBS Working Knowledge, viewed 21 February 2011,

.

Molm, LD 1997, Coercive power in social exchange, Cambridge UniversityPress, Cambridge, UK.

Moore, MH 2000, “Managing for value: organizational strategy in for-profit, nonprofit, and governmental organizations.” Nonprofit and Voluntary Sector Quarterly, vol. 29, no. 1, pp. 183-204.

——1995, Creating Public Value: Strategic Management in Government, Harvard University Press, Cambridge, Mass.

——1994, “Public value as the focus of strategy.” Australian Journal of Public Administration, vol. 53, no. 3, pp. 296-303.

Moore, MH & Braga, A 2004, “Police performance measurement: a normative framework.” Criminal Justice Ethics, vol. 23, no. 1, pp. 3-19.

Putnam, R 1995, “Bowling alone: America's declining social capital.” Journal of Democracy, vol. 6, no. 1, pp. 65-78.

New Public Management vs Public Value Management

(This paper was made as a response to a case called 'The education of the police police commissioner')

Introduction
The most obvious result to be expected from a police department is to have a reduced number of crimes. That was also what expected by the President to Mayerbeer who appointed to become the new Chief Executive Officer (CEO) of the National Police Force (NPF) in 1997. In addition, the new country's constitution demanded for improvement of political accountability of the NPF and to make it subject to government and civilian oversight.
Mayerbeer brought his knowledge and experiences from his previous assignment in a brewery company called NAB which was moving to be the second largest brewery in the world. The new assignment was a great challenge for him, not only because he came from private sector but also because the NPF was in a transition of a major organizational reforms. Unfortunately, at the end of his term in office, he was end up with a failure. Number of serious crime was significantly increased. But the most shocking one is that he even failed to improve the operational capacity of the NPF. Many police stations were running with insufficient facilities and resources such as pen and papers and patrol cars. Operational capacity is something that Mayerbeer should have as his strength as a former CEO of a success big company.


Critical issue

The critical issue of the failure of the NPF under Mayerbeer's leadership is a lack of public sector management and leadership approach.

The public administration has been evolved from the ancient kingdoms with increasing demand for reorganizations following the changes on jurisdiction, functions, and political civilization which led to the transformation from the kingship to the traditional model of government administration in the 19th century (Caiden 1982, pp. 7-11). In the early 1980s, the bureaucracy reform began and developing what we now know as New Public Management (NPM) (Hughes 2003, pp. 2-4). Among of major characteristics of the NPM are performance based and customer-centred (Stoker 2006, p. 50; Borins 2002, p. 191).

Over the last decade or so, the NPM has been under serious attack from many scholars. Jouke de Vries concludes that NPM, although not really dead, is in trouble (2010, p. 5).
The latest, and still developing, idea on public management and leadership is public value management (PVM). One major characteristic is that the PVM encourage more public organizations and managers to get exposed to political marketplace (Moore 1994, p. 297). The aim is to maintain support and legitimacy which would help to create public value directly as well as indirectly through the improvement of the public organization operational capability (Moore 1995, pp. 22-23). Another difference is that under the PVM public manager required to be more adaptive in terms of determining the means to achieve the broader ends of public organization; that is public value (O'Flynn 2007, p. 360-363).

The pressure to public organizations to be more effective and efficient has been increasing in line with the growing of public sectors size and better quality of democracy. But at the same time people have bad perceptions on public bureaucracies such as red-tape seeker, unpleasant officials, poor service and corrupt practices (Caiden 1991, p. 74). By contrast, the private sector performance is considered to be better than public sector (Vigoda-Gadot & Kapu 2005, p. 261).


Alternative solutions

Option-1: Apply the NPM model

Mayerbeer should focus on the NPF's customers. The most obvious ‘customers’ for a police department such as the NPF are those who seek for the police assistance (Moore & Braga 2004, p. 6). He would talk to elected politicians but only to the senior ones, included the President as his boss, to help him to set the NPF’s performance targets. In order to make the targets easy to be measured, he must prefer to have outputs rather than outcomes .
Mayerbeer should concentrate on management to achieve his performance target with the available resources and authority permitted by the elected politicians. He must concern on things outside of his organization, but it should be limited to their customers, competitors and things that would shift their customer’s value in the future time (Moore 1995, p. 65-7)
Mayerbeer should charge some of the NPF’s products which are excludable, such as the driver license, to his customers. This must provide the NPF economic profit and help the NPF to get financial surplus.
He must ensure all standard procedures and expenditure plans are set to achieve the performance target. Flexibility might be possible to some extent but certainly not to anticipate the change in the political environment. All managers under him must be committed to cost-efficiency. Therefore, the structure of the organization must be slim as much as it can.
Although this approach could produce a neat strategic plan, it would lead the NPF to create things valueless to the public. Moreover, there is no guarantee at all that all activities will be implemented and all outputs will be achieved. Without sufficient political support and legitimacy, the NPF would suffer with limited resources.

Option-2: Apply the PVM model

Mayebeer must manage the NPF to provide values to the citizens of his nation. He should not limit his work in internal component of his organization, rather to expose himself to the political context of his organization. He must continuously interact not only with politicians in different levels but also with citizens from different interest groups. The interaction aims to understand what things citizens would value most—both for individual desires and political aspiration—which the NPF could or should achieve, and also to gain supports and authority for the NPF to act on behalf of the nation.
Mayerbeer must concern on performance targets of the NPF, but they must be on outcome level which meaningful for citizens. The performance target must be subject to change according to the changing environment.
Mayerbeer must define carefully who the customers, clients, subjects and different kind of stakeholders of the NPF . He should not work for citizens who seek for the NPF assistance only, but also with those who have obligations to contribute to the creation of a safe environment as well as to understand the political aspiration of the general citizens. He thus set a stakeholder management strategy to maintain an effective network to to achieve citizens' desired values.
When necessary, Mayerbeer should be able to convince citizens to pay more taxes and advocate politicians to provide more resources and authority if he believes that what currently available do not sufficient to create public values in the most efficient way the NPF could do. He must be able to make citizens understand that they still would get higher value compare to the money they should pay for taxes. It is also important to ask support from citizens to be able to sacrifice some part of their liberty and privacy for the achievement of public value.
In regard to a the driver license service, as an example, he should concerns more on the objective to have a safe traffic environment rather than number of driver licenses they produce and amount of money they collect. Therefore, he should make sure that the driver licence service works effectively which should assure that all people with the license will most likely behave well on the roads. Time to spend of license processing is important, but that is not the ultimate objective. There is no point of the NPF to produce a license for every 15 minutes, for example, if most of the drivers with license drive crazy on the roads.
Although the interactions with citizens and political actors are more intensive in this approach, the possibility of the NPF lost its way is still there. This option requires more flexibility in planning and performance targets. Therefore, without capable managers on applying an adaptive management approach, the NPF would go everywhere and will not achieve public values.


Proposal

By applying the following criteria: (a) possibilities to meet public expectation; (b) resiliency on dealing with democracy and management at the same time, option-2 is more plausible to make the NPF works better.
The first criterion is important because the aim of public management is to meet public expectation. As a public organization, the NPF acts on behalf of public, consuming public resources, and the benefits or the losses they made would directly affect public (Rainey 1991, p. 24). Option-1 may achieve their performance targets, but it does not necessarily meet public expectation. That is because in option-1, the NPF would work mostly on its own way without continuously consulting to its stakeholders. By contrast, option-2 would have more possibilities to be in line with citizens’ aspiration because the NPF maintain the network to achieve the public expectation. The network would not only help the NPF work on the right direction but also to help the NPF to strengthen its operational capacity.
The second criterion is crucial and unique to public management. And it is particularly important because the NPF was on the process of a major organizational reforms which involve different interest groups included ethnicity. In order to achieve its objective, public management must be succeeded on dealing with both democracy and management at the same time. Option-1 tends to work very minimal in politic. This could make the NPF either as a victim of politicians (if the NPF weaker than the politicians) or take control the politicians for its own interests. Option-2 would make the democracy and management go hand in hand through maintaining the stakeholder network to achieve public values and strengthening the operational capacity of the NPF. In short, option-2 would make the NPF more effective and efficient.

References

Alford, J & O'Flynn, J 2009, 'Making sense of public value: concepts, critiques and emergent
meanings', International Journal of Public Administration, vol. 32, no. 3, pp. 171-191.

Borins, S 2002, 'New public management, North American style', in K. McLaughilin, S.P. Osborne, & E. Ferlie (eds), New Public Management: Current Trends and Future Prospects, Routledge, London, pp. 181-194.

Caiden, GE 1982, Public administration, Palisades Publishers, Pacific Palisades, Calif.

—— 1991, Administrative reform comes of age, W. de Gruyter, Berlin, New York.
Hughes, OE 2003, Public management and administration: an introduction, Palgrave, New York.

Mintzberg, H 1996, 'Managing government, governing management-balancing the private and public sectors', Harvard Business Review, vol. 74, no. 3, pp. 75-83.

Moore, MH 1995, Creating public value: strategic management in government, Harvard University Press, Cambridge, Mass.

—— 1994, 'Public value as the focus of strategy', Australian Journal of Public Administration, vol. 53, no. 3, pp. 296-303.

Moore, MH & Braga, AA 2004, 'Police performance measurement: a normative framework', Criminal Justice Ethics, vol. 23, no. 1, pp. 3-19.

O'Flynn, J 2007, 'From new public management to public value: paradigmatic change and managerial implications', Australian Journal of Public Administration, vol. 66, no. 3, pp. 353-366.

Rainey, HG 1991, Understanding and managing public organizations, Jossey-Bass, San Francisco.

Stoker, G 2006, 'Public value management', The American Review of Public Administration, vol. 36, no. 1, pp. 41 -57.

Vigoda-Gadot, E & Kapun, D 2005, 'Perceptions of politics and perceived performance in public and private organisations: a test of one model across two sectors', Policy and Politics, vol. 33, no. 2, pp. 251-276.

de Vries, J 2010, 'Is new public management really dead?', OECD Journal on Budgeting, vol. 2010, no. 1, pp. 1-5.

Oil Price Forecast (made in May 2010)

The world economy is highly dependent on oil as the main energy source. Level of accessibility to oil sources determines the strength and weakness of a nation in domestic and international sphere. Not all countries are able to produce all the oil they need. There are only thirty-two net-exporters (countries) most of which are member of Organization of the Petroleum Exporting Countries (OPEC) (Nationmaster n.d.; OPEC n.d.). Both importers and exporters depend on trading for selling and buying, and price is a key component of trading. This is because price has rationing and allocating function of the scarce resources. This paper will argue that by the end of 2010 the price of oil will reach US$83 per barrel.

Price is determined by demanded and supplied quantity and non price determinants. The non price determinants of demand are: income, buyer preference, price of substitutes, price of complement, price expectation, and number of buyers. In terms of income, the response of price depends on the type of good whether it is normal or inferior good, this paper assumes that oil is a normal good. The non price determinants of supply are: price of production factors, technology, number of producers, price expectation, and change in weather particularly for agriculture (Frank et al. 2009, pp. 74-77). While a change in quantity demanded and supplied will change the price along the demand and supply curve, a change in non price determinants will shift the demand and supply curve either to left or right depending on the circumstances. Shift right means quantity demanded or supplied is higher at any level of price, while shift left means at every price the quantity demanded or supplied is lower than before. In the market of one particular product such as oil, however, there will be only one price at one quantity level at a particular time; that is known as equilibrium price and quantity.

In addition to non price determinants, the price elasticity of the demand and supply curve will determine the magnitude of change in price and quantity. Price elasticity reflects the response of buyer (quantity demanded) and producer (quantity supplied) to a change in price for particular products (Frank et al. 2009, pp. 92). In the case of oil, although there is an indication that demand is elastic (The Economist 2008a), stronger evidence from an academic research shows that both oil demand and supply are price inelastic (Hamilton 2009, p. 218; Askari & Krichene 2010, p. 2013); that is what this paper will assume.

In this paper, the relationship between price (P) and demanded and supplied quantity (Q) of oil illustrated on supply (S) and demand (D) curve. The curves represent the global oil market situation during December 2008 to December 2010 where all (potential) buyers and sellers and other influencing actors have been interacting with each other. The curves assume that except oil price and relevant non-price determinants (which will be identified later), other factors that could affect the quantity demanded and supplied of oil stay the same (ceteris paribus).

The equilibrium price and quantity in the last quarter of 2008 was at E, which the price was US$54.8 per barrel (EIA 2010) at Q barrel per day. That situation is illustrated in diagram 1.

The average oil price and quantity during the first six months of 2009 fell because OPEC, which supplies around 40 per cent of world oil production, realized their intention to cut production. At the same time, the combination of the (then) current economic crisis and the growing environmental concern led to a decrease in oil demand (The Economist 2008a; The Economist 2008b; Musante 2009). The economic crisis decreased people's income, while environmental concerns had change people's preference and then consumed less petrol. This shifted the demand curve left (D'). The production cut by OPEC, because of price expectation (The Economist 2008b), shifted the supply curve left (S') which led to a new equilibrium at E'. It was where price was US$49.8 per barrel (EIA 2010) and quantity was Q' barrel per day. This change is illustrated in diagram 2.

The oil demand and supply during the last six months of 2009 was rose. The increase in demand happened because of the improvement in economy in the U.S. and China (The Economist 2009a). This increased people's income which led the demand curve shifted right (D''). Meanwhile, the supply side was relatively secured because of the sea (tanker) storage and OECD stock which was equal to 62 days of consumption. Other important factors were the fall in price of production costs and a new oil field in Saudi which will increase OPEC's spare capacity to about 8 per cent of oil world consumption (The Economist 2009a). This shifted the supply curve right (S") which led to a price increase to US$70.7 per barrel (EIA 2010) and a quantity increase to Q'' (a new equilibrium at E"). This change can be seen in diagram 3.

During all of 2010, the demand and supply of oil will keep increasing. The world economy will keep growing following the improvement of the U.S. economy (Businessweek 2010). The crisis in Greece will not spread because European Union member countries have agreed on 600 billion Euro loan (Toyer & Wissenbach 2010). This will increase global oil demand because the income of people will be increasing. As a result, the demand curve will shift right (D'''). Meanwhile, on supply side, there are two factors which will increase supply: the fall of production cost and failure of Copenhagen climate agreement (The Economist 2009b). These will shift the supply curve right (S"'). By the end of 2010, the new equilibrium will be at E"'. Oil price will reach US$83 per barrel at Q"' barrel per day. This can be seen in diagram 4.

In conclusion, oil price is determined by demanded and supplied quantity and non-price determinants. Both demand and supply of oil are price inelastic. While the increase of demand will increase the price significantly, there will be a smaller increase in quantity. This is because the magnitude of change in demand will greater than supply, and also because of the price inelastic. The increase of demand since mid 2009 happened mainly because of the improvement of world economy particularly in the U.S., after the global financial crisis. The increased of supply secured mainly because of the fall of production costs and additional production from the new oil field. This paper predicts that oil price will reach US$83 per barrel by the end of 2010.

References

Askari, H & Krichene, N 2010, ‘An oil demand and supply model incorporating monetary policy’, Energy, no. 35, pp. 2013-2021.

Businessweek 2010, ‘U.S. economy: unemployment unexpectedly falls to 9.7% (update3)’, Businessweek (online edition), 5 February, viewed 20 May 2010,

.

EIA 2010, ‘Weekly all countries spot price FoB weighted by Estimated export volume (dollars per barrel)’, U.S. Energy Information Administration, viewed 20 May 2010, .

Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2^nd ed., McGraw-Hill Australia, North Ryde.

Hamilton, J 2009, ‘Causes and consequences of the oil shock of 2007-08/comments and discussion’, Brookings Papers on Economic Activity, no. 1, pp. 215-283.

Musante, K 2009, ‘Oil rises as OPEC cuts production’, money.cnn.com, viewed 20 May 2010, .

Nationmaster n.d., ’Energy statistics oil exports net(most recent) by country.” NationMaster.com. viewed 20 May 2010,

.

OPEC n.d.,’Member countries’, OPEC.org, viewed 20 May 2010,

The Economist 2008a, ‘Down it goes’, The Economist.

The Economist 2008b, ‘Plumbing the depths’, The Economist.

The Economist 2009a, ’Meek oil’, The Economist.

The Economist 2009b, ’Oil to spare’, The Economist.

Toyer, J & Wissenbach, I 2010, ‘EU to fend off market "wolves" in Greek crisis’, Reuters, viewed 20 May 2010,

<http://www.reuters.com/article/idUSTRE6400PJ20100509>.

World Bank, Chad Oil Project, and Resource Curse

Introduction

Chad is one of the poorest countries in the world with income per capita in 1985 only $120 per year (Day-Viaud & Joffe 1995, p. xvii). A consortium of oil companies discovered oil field with the reserves of 917 million barrels to be last until 2032. Considering the high risk investment in the country, the consortium will not sponsor this project unless the World Bank involved providing political risk protection (Esty 2006, pp. 1-5). This indicates that both the Chad government and the consortium are highly dependent on the Bank. This is a great opportunity for the Bank to control the loan contract negotiation by enforcing conditionality to ensure the oil windfall will bring welfare to Chadians.

Key issue

The key issue is how to create and maintain economic growth during and after the oil windfall. While oil mining will increase government revenues dramatically, many evidences suggest resources-abundance countries have stagnated in economic growth and underperform the resource-poor countries. This phenomenon called ‘resource curse’ (Auty 1993, p. 1; Sachs & Warner 1995, p. 2).

Chad has serious growth impediments both in economic and institution aspects. Chad has low capital investment and improvement, low productivity labours and lack of skill improvement opportunities, low technological input, lack of physical and human capital development, inconsistent economic policies, and ‘anti-development fiscal policy’ (Azevedo 1988, pp. 68-73).

Chad's political institution is not conducive for investment. The president has excessive power with ability to control the legislative and judicative (Kneib 2007, p. 32). This is a highly concentrated decision-making power which create uncertain and potentially volatile policy environment that bad for the welfare of citizens and investors (MacIntyre 2003, p. 29). Natural resources economy without good quality institution will create negative effect on growth (Sala-i-Martin & Subramanian 2003, p. 12).

Solution options

Option-1: Non-mining industries development

The Bank must direct its loan conditionality to support the non-mining sector. The sustainable development of natural resources economies lies in successful diversification into non-mining sector (Auty 1993, p. 258).

The oil revenue allocation and economic policy should be strictly designed to stimulate the non-mining sector. The revenue management plan (RMP) must give specific details regarding permissible expenditures to prioritize improvements on growth drivers; they are: saving and investment, physical and human capital, and technological improvement (Helpman 2004, pp. 10-12). For example, Chad government must develop transportation infrastructures, free basic and vocational education and job training to be linked and matched with the need of non-mining industries. Valuable incentives must be given to private sectors to improve their productivity through technological change such as free import tax for machineries. Incentives to start-up the non-mining firms such as temporary energy subsidy, efficient entry licence, and employee trainings support would attract domestic entrepreneurs and foreign direct investments.

The non-mining industries development should focus on areas where Chad has (potential) comparative advantages—for example from the availability of raw materials, labour's characteristic and geographical position—and relatively simple to begin.

While this option could create some results in a relatively short-term period, its success rely on the commitment of Chad leaders to implement the RMP and the economic policy. However, as economic improvement will increase the president's popularity, the president would have intrinsic motivation to support.

Option-2: Change the institutional architecture

The Bank must maximize the use of its strong power during the negotiation phase by forcing the Chad leaders to democratize its state's institution and promote good governance. The combination of democracy and good governance is a significant determinant of total factor productivity (Rivera-Batiz 1999, p. 32).

The conditionality must force the Chad leaders, particularly the president, to change their constitution to balance the power structure by creating constraint on executive government and improve the bureaucracy efficiency. This will improve the credibility of the government on ensuring the quality and certainty of its policies. This can be done, for example by, (a) strengthening the power of the National Assembly to be able to monitor the president and to have more power on legislation making, (b) making the Supreme Court independent from the president, (c) preventing the involvement of military forces in civil war and politics, and (d) promoting transparency and some initial measures on bureaucracy reform. However, the idea is not to swing from the severely concentrated to the severely dispersed, rather to make it in the middle of the range. For example, the president should still have a space to respond to policy challenges which require an immediate action. Country with political power structure located in the centre of the decision-making power ranges is unlikely to suffer from significant governance problems (MacIntyre 2003, p. 36).

Although this option has potential to improve Chad's government credibility, there is no significant constraint for the president to revoke the agreement. The president will still able to maintain his strong power after the agreement and bring back the old constitution. The political leaders renege on promises once the aid is delivered and their problems are resolved (Smith 2005, p. 566).

Proposal

By considering the following criteria, (a) time to see impact, and (b) resources availability, option-1 is the most plausible solution

Time to see impact is crucial to maintain the motivation and spirit of the Chadian on supporting the solutions. Option-1 would provide tangible and visible improvements faster than option-2 because option-1 will directly increase the quality of life through better livelihood by creating more jobs and other opportunities. If the improvement takes so long, or not really tangible and visible, people will get frustrated with the reform which lead to the increase of social and political problems, and end up with lower growth.

Resource availability is a precondition to make the solution work. Chad has resources to support option-1, at least for the start-up phase. For example, Chad's productivity on cotton production has been increasing from time to time (Azevedo 1998, p. 30). This is an excellent resource to start the textile industry serving the African region. By contrast, option-2 requires relatively strong human freedom—that is the individual freedom to effectively shape his/her own destiny (Sen 1999, p. 11)—which Chad is lack of. Chad's human development index in 1995 was only 0.324 which give the country a rank of 175 out of 182 countries (UNDP 2009). It is difficult to have strong institution without human freedom because most of individual tend to rely his/her life on other person rather than on the rule of law. Human freedom development takes more times because it is not just about skills to work in a factory. Therefore, option-2 is more potential to create and maintain economic growth during and after the oil windfall.

References

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