Policy making and accountability

Consider this. The national economy is liberalizing and individual states are competing with each other to attract private investments. They try to out-bid their competitors by offering attractive concessions - tax breaks, concessional utility services, land at lower rates or even free, and so on - to external investors.

It is that early phase of liberalization and economic growth when investors are uncertain of the area's economic potential and pro-active industrial policy is required to incentivize them. In these circumstances, any policy that seeks to attract investors through open-competitive bidding or auctions are not likely to have many takers.

In many states, the industrial or investment promotion policy itself explicitly provides policy makers the flexibility to offer concessions depending on the competition. The state governments (and its political leaders and officials) exercise discretion, on case-by-case basis, to attract investors. While there are broad guidelines, many of the decisions on concessions and preferential allotments are made based on estimates of what would be required to incentivize the investor prefer this state over its competitors. In the process, as is inevitable with such discretionary policies, especially when the stakes are massive, there are instances of excesses, corruption and nepotism in the concessions offered.

Now fast forward ten years. Large investments have flowed in, the state industrial sector has much greater depth and breadth, and its economy has taken off. The conditions that necessitated the promotional policies have changed and the state has established itself as an attractive investment destination. Many of the same promotional policies, while still in force, stand out as obvious anachronisms.

Concurrently, a few sordid tales of discretionary policy corruption emerge, wherein politicians, officials, and corporate groups colluded to cause loss to the state exchequer. The popular outrage leads to an acrimonious post-mortem and revisit of all the industrial policy decisions taken ten years back. Investigations begin and many of the discretionary policy decisions taken to attract investments, including those done in good faith, are called to question on the grounds that it caused loss to the public exchequer and therefore get attributed with malafide intent. So what gives?

Any post-facto assessment, especially given the passage of time and the dramatically changed economic environment, of such decisions are liable to be flawed unless carefully done. Most importantly, it needs to avoid getting entrapped into examining the policies and resultant decisions against the backdrop of the prevailing macroeconomic environment and the lens of regulatory governance. Such cognitive biases and investigation norms are most often difficult to side-step.

The investigations have to draw the clear distinction between the discretionary investment promotion policy decisions taken on behalf of democratically elected sovereign governments in good faith and those taken with malafide intent. Further, the malafide intent has to be established by deep scrutiny of the facts and circumstances surrounding the allotments, instead of the automatic presumption from the (now) apparent excessively generous nature of the concessions allotted.

I will go even further. If the due process has been followed and the democratically elected government has, in its wisdom (or lack of it), granted concessions to a corporate group, howsoever generous, then the investigations should be confined to examining the evidence of any malafide intent behind the decision or failure to adhere to the procedure established by law in its implementation. As to the magnitude or extent of concessions or the policy paradigm (say, auctions against the discretionary allotments) followed, I strongly believe that its adjudication should be left to an appropriate forum, say, the judiciary or the respective appellate tribunals. Atleast in democracies, any investigation by any subsequent governments, should adhere to the aforementioned principles.

In the absence of such protection, any exercise of judgement, on the part of an official or political leader, however well-intentioned, can be questioned subsequently on grounds of having caused loss to the public exchequer. All such decisions, by their very nature, incentivize and provide preferential treatment to one investor, so as to encourage them to invest in the state. Perforce they involve immediate loss to the exchequer. The trade-off is the expectation that it will set the platform for industrial growth and the recovery of the short-term loss through longer-term gains from economic growth.

If this subtle dimension to policy making is not appreciated in any post-mortem, the moral hazard generated by the apprehension of a possible future implication, will restrain policy makers from making judgement calls on such policies. An environment of decision paralysis will result.

Unfortunately, as this environment of suspicion and media trial gets entrenched into the psyche of civil society and defines the agenda of mainstream debates, policy making that involves any exercise of judgement will become a minefield. It will handcuff even those officials whose intentions are in the larger public interest.

This argument is not in anyway an approval or condonation of the obvious irregularities and corruption that have been a characteristic feature of investment promotional policies in many states and at the center in the past decade or so. Those responsible for the malafide actions and administrative irregularities that caused loss to the public exchequer should be punished and the deterrent against such actions strengthened.

However, this should not be at the cost of simplistic appraisals of complex decision-making environments that can only end up paralysing decision-making at all levels and turning the country into a banana republic. It is also pertinent to point out that the propensity for such excesses and corruption are an inevitable accompaniment to economic development in emerging markets.