Thursday, July 10, 2008

An economic analysis of populism

Assume Mr Average Voter living in Populismland is given the straight choice between two voting alternatives on spending the same amount - a cell phone or a television! Now imagine the same Mr Average Voter living in Propserityland and facing a choice between two voting alternatives - a school building or a road connecting the neighbouring village. Much as Mr Average Voter would covet the cell phone or television, the prospect of a school building for his daughter or a road to transport his agriculture produce cheaply would appear more attractive. Yes, I made up this story. But the first story increasingly represents the choices facing the median voter in many developing countries and the the second... well we dream about that!

A cursory glance across the horizon reveals that populism is spreading fast and threatening to become a cancer engulfing the polity. It is widely perceived across the political class, and also by sections of the bureaucracy, that providing individual benefits are the surest way to the hearts and minds of the voters. This logic draws its sustenance from the history of our political process, which has been directed more at the individual voter than interest groups. There have been numerous examples of competing political parties jostling with each other in promising freebies like Rs 2 rice, old age pensions, loan waivers, housing for homeless etc. The list is looking increasingly impressive with the recent trend of promising modern consumer durables like television, cell phones and refrigerators.

In many respects, this is a natural progression from the well documented practice of purchasing votes by allurements like liquor and cash. The allurements and incentives are now becoming more formalized and institutionalized. Political parties see the median voter as a commodity to be purchased in the political market place, and rightly so. In the absence of more informed analysis and projection of alternatives, this involves pandering to the lowest common denominator. Therefore we see an ever increasing trend of competitive populism, targetted at the individual voter.

It is facile to imagine that populism can be just assumed away. Political commentators and opinion makers who express righteous indignation and public anger at this phenomenon, are surely ignorant of the incentive dynamics that drives political process. The challenge should be not to eliminate populism, but to channelize it towards achieving socially and economically desirable objectives. In other words, it is imperative that we have populist policies that marry the objectives of both the political parties and the larger society and economy. And there are no dearth of such policies.

Much like the market in goods and services, the political space is also a fiercely competitive marketplace, and cannot be regimented through something similar to old-fashioned command and control policies that seek to outlaw populism. Populism is the well established process through which political parties signal to their voters, and is the political market's equivalent of a price discovery mechanism. We need to channelize the benefits of populism to social common good.

The populism that panders to individual welfare suffers from many problems. In an extremely diverse and heterogenous society like ours, satisfying individual desires with our scarce public resources is difficult, even impossible. Individuals have varying needs and wants and hence specific forms of individual assistance may end up satifying the few, even that only partially, while leaving the rest disgruntled. Therefore government programs which promise individual benefits generate substantial deadweight losses. Such programs are by their very nature top-down and universal, and thereby fail to take into account the differential needs and demands of the beneficiaries. The scarce resources and huge demand, when coupled with the electoral dynamics, means that we invariably end up dividing the pie equally among the large constituents, thereby achieving neither our objective nor satisfying the recipients. Spreading ourselves thin in an effort to cover as many people as possible, we give too little help to anybody to actually achieve our objective.

What do the poor really want? The popular stereotype would paint a picture of him/her queing up for individual dole like subsidized goods, loan waivers, free services, and so on! But a more critical analysis of what most immediately and profoundly ails our citizens tells a different story. Indian villages and cities experience severe infrastructure deficit and these deficiencies directly and immediately affect the quality of everyday life in these areas. Besides keeping living standards low, the absence of ciritical community and infrastructure assets, stunts economic growth, lowers the incomes and imposes significant opportunity costs on the residents. It therefore makes eminent sense for political parties and electoral candidates to promise important connecting roads, treated water supply, sewerage and drainage facilities, agriculture products storage and marketing facilities, community halls and libraries, school and hospital buildings, irrigation channels and check dams, extension services and market information, .

Unlike individual benefits, by their inherent nature community assets are public goods, enjoyed by everybody in equal measure. In contrast, given the massive infrastructure deficiencies and the severe handicap it imposes on the local residents, fulfilling atleast a few of them are likely to leave everyone satisfied. After all every villager or slum dweller, rich and poor, benefits from the new road or cold storage. Unlike individual benefits, community and capital assets are easier to monitor and deliver and suffers from less leakages. Such policies are most likely to be demand driven and not top-down.

Competitive populism can be an effective method for identifying the long-felt, infrastructure and other communal deficiencies and wants of the residents of a village or slum. Like supply and demand in a market helps in price discovery, the dynamics of competitive populism operating in a political marketplace helps in allocating scarce government spending among competing demands. The collective goodwill that gets generated by fullfilling a long pending demand for, say, a major connecting road, is enormous and remains for a long time. The impact of this investment on the local economy and the economic opportunities for each resident is immediate, significant and long-lasting.

Community needs being area specific, political parties and candidates will need to pay careful attention to studying and identifying local problems. This will also make elections issue oriented and more meaningful for citizens, thereby ushering in more participation. Democracy will become more vibrant and responsive.

Besides satisfying the felt needs of the citizens, these assets are capital investments that help improve the productivity and living standards of the local residents, stimulates the local economy, provides jobs, encourages further investment, and expands economic and commercial opportunities. Such investments are what economists call capital expenditures, or those creating present and future benefits for the economy. Eco 101 teaches us about the importance of the economic multiplier effect of Government investment. It is argued that investments in capital assets, or those assets which can be used to generate productive assets, should be encouraged. They expand the production possibility frontier of the economy, and generates a substantial economic multiplier of the local economy.

The collective goodwill generated by the bridging of a critical and long-felt infrastructure deficit, is most likely to be much more that the sum of the goodwills generated by the individual benefits conferred. Community and capital assets provide more bang-for-the-buck than individual benefits, for both the politician and the citizens.

All this is not to say there is no place for individual-centric welfare programs like pensions, housing, self-employment schemes, agriculture and food subsidies, etc. They will continue to remain critical components of the social safety net and poverty alleviation programs of any Government. But these programs are inherently complex and difficult to both tailor and administer, and should be done so taking into account the varying needs and problems of different areas and communities. Their designing cannot and should not be left to the political marketplace.

Ultimately the politician is only spending our money, and it is only appropriate that we demand that it should be spend on those activities that generate the biggest bang-for-the-buck.

In fact, Indian polity will be much the richer if the Election Commission of India (ECI) prohibits populism that caters to individual benefits. Only then will we able to re-align the incentives and harmonize the political marketplace with our society and economy.

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