The re-reorganization of central government ministries has emerged as a political issue ahead of the Liberal Democratic Party's election for party leader. The breakup of the Ministry of Health, Labour and Welfare was already proposed by a committee comprising junior Liberal Democratic Party Diet members in May 2016. As we come to the end of the Heisei era, we will re-examine the reorganization of the central government ministries, which was undertaken in 2001, especially the consolidation of ministries, from an economic perspective.
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In the analysis of government organizations from an economic perspective, the contract theory, the theory of information asymmetry and the game theory, which have been developed as tools over the past 50 years to explain corporate behavior and organization, will prove useful.
In terms of government behavior and organizations, also, it is possible, for example, to understand government officials as "Agents" who have been commissioned by the public (including politicians), or the "Principals," to maximize social welfare. In other words, we can utilize the perspective of how to incentivize the government and government officials so that they will act in a desirable manner for the public.
The problem of incentives for government and government officials have several distinct characteristics compared to that of private companies. For example, 2014 Nobel Prize winner in Economics, Professor Jean Tirole of Toulouse 1 Capitole University, France, in his dissertation which became a starting point for such an approach, stated that (1) there is a multiplicity of goals pursued by the government, (2) it is difficult to assess government performance not only against absolute criteria but also on a relative basis and (3) the government is widely and tenuously owned by the public with heterogenous tastes.
These characteristics, in fact, make it difficult to provide high incentives to the government and government officials. For example, 2016 Nobel Prize winners in Economics, Professor Bengt Holmström of Massachusetts Institute of Technology (MIT), et al. emphasized that in the case of agents with multitasks and multi-principals, they tend to devote themselves to tasks with clear criteria for judging performance and lean towards principals that favor them, giving rise to a bias that makes them negligent of other tasks and principals.
Consequently, if we were to demand government officials to execute their tasks in a well-balanced manner, it follows that their incentives would be lowered.
Furthermore, if we are to assume that it is difficult to measure the performance of the government and government officials from both absolute and relative perspectives, then, as Holmström theorized, the incentive system must become a system based on the "career concern," in which capabilities are assessed as an accumulation of "reputation" and reflected in future promotions and reassignments to the private sector, rather than a system where present performance which cannot be accurately measured is directly linked to monetary compensation.
However, in such cases, the multitasks, described above, give rise to even trickier problems. In understanding the problem of incentivizing multitasking government officials, the aforementioned Professor Tirole provided a theoretical framework for the phenomenon in which the greater the number of tasks assigned to a government official, the greater the margin of error in the outcome, i.e. the sum total of such tasks, and accordingly in the performance measurement, which, in turn, lowered the sum total of effort levels devoted to each of these tasks. In other words, if the "career concern" is a priority, giving multiple tasks will result in the government official becoming less and less motivated.
From the above analysis, Tirole, et al. concluded that individual government organizations should have a "mission" rather than having multi-objectives. In other words, Tirole claims that government organizations should specialize in a single culture that is widely and enthusiastically supported by its members, which will make it easier for the government organization to be evaluated in its performance and will enhance accountability.
The most serious situation stemming from the multitasking by the government and government officials is generated when the tasks of the government officials mutually pose conflicts of interest. In another dissertation, Tirole considered, in decision-making, the task of collecting pieces of evidence favoring a decision and evidence against a decision, and what type of mechanism would optimize the efforts for evidence-collecting.
Tirole indicated that generally it is preferable that two separate persons rather than the same person engage in the two conflicting tasks just as the roles of the prosecutor and the defense attorney are taken by separate persons in a court of law. In other words, Tirole proposes to solve this problem by having the parties that advocate with specified positions. This is because one person collecting both pieces of evidence would be a waste of efforts on either side, and the person would no longer make efforts to collect evidence from both perspectives.
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In light of the above, how are we to assess the Central Government Reform, which took place in 2001, especially the emergence of the mega-ministries which were born through the consolidation of the ministries (Refer to the diagram)? The idea behind the consolidation of the ministries may be summed up by the phrase, "a breakup of bureaucratic sectionalism." It is undeniable that the public held a perception that underlying the numerous scandals involving government officials was the problem of government officials only thinking of the interests of the ministry to which they belonged rather than the interests of the people.
However, when we consider the above theories, there is a possibility that the consolidation of the ministries may have adversely impacted the incentives of the government officials, given that each ministry has had to take on a multitude of objectives and tasks to the point where they can no longer be prioritized and each policy must be dealt with in a superficial way. In such cases, breaking up the ministries in order to clarify each organization's "mission" is worth considering and will aid in re-examining the raison d'être of each organization.
If the consolidation of the ministries had any significance at all, it would have been in cases where synergy was demonstrated such as when rather than each ministry pursuing policies independently cooperation was strengthened through consolidation and policies were implemented more efficiently and effectively.
However, as in the mergers of private-sector corporations, such synergies do not necessarily work. Various recent experimental studies have shown that even within the same industry, when companies with different corporate cultures merge, integration takes immense efforts and it becomes difficult to achieve high performance post-merger.
Therefore, very little synergy can be expected from consolidating ministries with widely differing cultures that have little in common in terms of operations. The key to confirming the possibility of integration, which is a prerequisite for generating synergy, is human resource (HR). If, after the consolidation, HR continues to be completely "segregated," as same as prior to the consolidation, no synergy can be expected.
Another problem with consolidation is that prior to consolidation any conflicts of interests between the ministries would have been solved as soon as they became public through adjustments by the budget authorities or the prime minister's office, but post-consolidation such conflicts have become internalized within each ministry. In such cases, the speed of decision-making may have been accelerated but, in the absence of a potent arbitrator and without the conflict of interest ever becoming public, conflicts of interest are likely to be resolved in a way that is inefficient and lacks transparency.
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With the rapid pace of technological progress including Artificial Intelligence (AI) and information-communication technology, changes to the economic society are also taking place far faster than anticipated. Under such circumstances, unless a company can accurately grasp the changes in its production and sales sites, it cannot overcome its competition, and an organization that can engage in decision-making near its production and sales sites, and is quick to adapt to changes will be an advantage.
Meanwhile, we are in an era where government ministries, like corporations, are also required to respond quickly to changes and where government officials are required to demonstrate greater professionalism. We have reached the stage where we need to re-examine whether the mega-ministries, like the Battleship Yamato, is capable of boldly grasping the helm and meeting the demands of the times.
* Translated by RIETI.
September 18, 2018 Nihon Keizai Shimbun
