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Former Comptroller and Auditor General (CAG) Vinod Rai's recent interviews, given in the run-up to the release of his book (Not Just An Accountant: The Diary of the Nation's Conscience-Keeper), offers us a perfect example of how principal-agent issues play out in the political arena. Serious misalignments in the interests of the principal and the agent sometimes lead to perverse results - and often scams.
The real problem is UPA-1 and UPA-2 was not just the normal principal-agent problem, but a further vitiation of the basic principal-agent relationship with the addition of yet another agent – a second agent appointed by the first agent to do the principal's job. Manmohan Singh �did not do his job because he saw his job as serving the wrong principal ( Sonia Gandhi ), or two conflicted principals (Sonia and the people of India). A double-agent cannot serve either principal properly.
Principal-agent issues� are well understood in economics and the challenge is to try and align the interests of the two as much as possible – but it is never fully feasible. For example, in a joint stock company the shareholders are the principals and the professional management is their agent. Shareholder value is maximised when professional management – in return for salaries and other incentives - works to enhance profits and share values, but professional CEOs do not always see their interests as coterminous with that of their shareholders. They may manage to optimise their own earnings or burnish their career profiles rather than just chase shareholder interests. Hence the efforts to align them further with offers of stock options, bonuses, etc. But even with all this, principal and agent may not always see their interests fully aligning.
Back to the political arena. Vinod Rai clearly implies that former Prime Minister Manmohan Singh �did not do his duty to the nation when, despite knowing what was going on in the telecom ministry under� A Raja , he refused to step in and correct things. Rai told� Times Now�in an interview �that even though Raja kept the PM fully informed about what he was up to, the PM sat on his hands. Rai concludes: "The buck stops at the PM's desk in any parliamentary democracy. He is the CEO of the country. He can stop, or he can initiate, both. I have written in the book that he probably chose not to stop (Raja's 2G scam)."
In short, the agent of the people (the PM) did not act in the interests of the principal (the nation).
Asked why he blamed the PM for the scams by� The Indian Express ,�Rai elaborated:"For taking a distanced view of subjects like spectrum and coal allocation which is a matter which needs deliberation. Whether it was conduct of the Commonwealth Games or the coal allocation process,�it is important for a leader to speak out.�He should have guided the decision-making process in a certain direction but he did not.�He was completely overpowered by the compulsions of coalition politics." (Italics mine)
Rai was, of course, speaking in the constitutional sense of where the buck ought to stop (with the PM, of course), but the real issue to be highlighted is the principal-agent problem that is in very sharp focus.
At best of times, even a politician directly elected by the people to run the country (or a state or a panchayat) may not see his best interests as the same as that of his constituents. He may see his job as catering only to those who voted for him, or even use his office to help relatives and friends make money, obtain jobs or access things they are not entitled to.
But� Manmohan Singh �wasn't the agent of the people. He was an agent's agent – twice removed from the principal. His was not just a case of misalignment of principal-agent interests, but something doubly hazardous. His was a principal-agent-agent problem. In other words, the principal voted the Congress to power, but the Congress president, Sonia Gandhi , appointed yet another agent (Manmohan Singh) to do her job.
In other words, there was a double misalignment of a principal, its agent (Sonia), and her own agent (the PM).
Manmohan Singh clearly did not see himself as the direct agent of the people, but an agent of� Sonia Gandhi . In short, he saw his job as aligning his interests with that of�hisprincipal, who was really only the agent of the people.
That Manmohan Singh did not see himself as the direct agent of the people but that of Sonia is made clear by his former media advisor's book,�The Accidental Prime Minister: The Making and Unmaking of Manmohan Singh, where� Singh confesses that he is not the final boss.� He is quoted as saying: "I have to come to terms with this. There cannot be two centres of power. That creates confusion. I have to accept that the party president is the centre of power."
Vinod Rai may be right to say that the buck stopped with the PM, but the former PM probably did not see it that way. He saw his job as doing the bidding – implicit of explicit – of his principal.
Scams can happen even if principal-agent interests are not seriously misaligned in a democracy, but when the agent appoints another agent, the second agent at the other end of the equation will see his job as not serving the real principal (the people), but the principal who appointed him.
This is the tragedy of Manmohan Singh – and India.
The writer is editor-in-chief, digital and publishing, Network18 Group
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