Weekend reading links

1. The Kenyan Supreme Court's decision by a 4-2 verdict to overturn the just concluded Presidential election results in favour of incumbent President Uhuru Kenyatta is hugely significant. Kenyatta had been declared winner over long-time opponent Raila Odinga, winning 54% of the votes in the elections held in early August. Odinga had contested the results claiming massive fraud in the electoral process. The Court nullified the results and has directed another vote within 60 days.

The decisions comes as a massive surprise given the generally subservient nature of courts across African countries, especially since Kenyatta has been President since 2007. The unprecedented nature of the decision elevates the Supreme Court's institutional credibility. Adding to the good news and signalling a maturity in Kenya's democratic polity, Kenyatta has said he will accept the verdict and abide by the Court's decision. 

Interestingly, foreign election observers and western officials had declared the elections mostly free and fair and found no signs of "centralised manipulation". They had also called on Odinga to accept the electoral verdict. This decision of the Supreme Court should raise questions about the credibility of such observers.

2. It is reported that the All India Council for Technical Education (AICTE) wants to close down about 800 engineering colleges across India as there are no takers for their seats. AICTE has closed down more than 410 colleges across India since 2014-15.

In all the wailing about the poor quality of school education, we overlook the equally dismal standards in higher education. Sample this from Devesh Kapur, 

Look at the way our vice chancellors are selected. Many of them would not get a job as a lecturer in a decent college. There are reasons to believe that at least in some cases, they have paid their way there. Between 2000 and 2015, we set up almost six new colleges a day, every single day over 15 years including weekends. At its peak, the U.S., with way greater resources, set up one new college a week. And this, when we have the most regulated higher education system… the UGC (University Grants Commission), AICTE (All India Council for Technical Education), etc.

3. I will blog separately about the recently released RBI report on financial savings of Indian households. This graphic shows that capital market savings, insurance and pension products are really tiny proportion of aggregate household savings.

4. Nice Economist article on the profitability of India's formal sector firms,

Just as investors talk about a “Korea discount”, to describe chaebols’ lousy profits, so there is an “India premium”... Since 2001 the return on equity (ROE) of listed Indian firms has averaged 19%, eight percentage points above the figure for companies in rich markets and five percentage points above those in emerging ones... The leading private lender, HDFC Bank, has an 18% ROE, ranking tenth among the top 100 global lenders. Hindustan Unilever, a consumer-goods firm, has a 77% ROE, over twice that of its parent, Unilever. Even in basic industries, such as cement, returns have been relatively high.

The article talks about the scale of informality and the potential of reforms like GST to increase the formal sector market,

For big companies, formalisation could boost profits in the short term. They may take business from smaller firms: at least 40% of India’s tea, 85% of its jewellery and 70% of its dairy products are sold in the grey economy.

Couple of observations. One, the biggest impact of GST is most likely to be in contributing to formalising economic activities than increasing tax-to-GDP ratio, which is unlikely to rise by much. Second, the shift to formality will be gradual and take several years if not decades. 

5. Livemint has a good article on the data mapping done in the 83 villages of Jiwati taluk of Maharashtra's Chandrapur district. Financed by Tata Trusts and implemented by NGO partners, the initiative has surveyed 160,000 households and collected 6.9 million data points covering demographics, status of access to various utilities and welfare services, human resource needs etc. The information has been collected through an one-time survey exercise. The captured information is apparently rendered in simple dashboards to facilitate officials use it as decision-support.

While this is all good, I have two concerns. The most relevant concern is how the data collected will keep getting updated. The similarity with GIS mapping cannot be missed. For sure, with persistence and effort, it may be possible to ensure that the data on government benefits and services delivered can be captured. But even this is tricky. For example, gas connections can be given and the household may use for three months and then relapse. Similarly electricity connection status can easily revert back after a big rain or thunderstorm. In neither of these cases, the data is likely to get updated. Then there are other data like skill acquisition and so on, where the individuals may be accessing them separately and may not get updated. So, over time, the baseline data available becomes dated and useless as a decision-support. 

The other concern is on how actionable this information is. For example, information on people without ration cards or skill training or housing is no guarantee for provision of those. That is a function of budgets, state capacity, and other factors, most of them beyond immediate systemic solutions. 

But all these cannot be a reason for not encouraging such data collection since it is the first necessary step in any meaningful planning and decision-making which is based on evidence and other objective considerations. 

6. The week saw the French President Emmanuel Macaron unveil his much expected labour reform proposals, which are to be placed before the Parliament later this month. The proposals include,

The measures... will cap the damages that courts can make employers pay in cases of wrongful dismissals, except in discrimination cases. They also reduce the statute of limitations for workers to bring cases from two years to one year and make it easier for companies to close lossmaking French plants. Businesses with fewer than 50 workers — encompassing 95 per cent of French companies — will be able to negotiate specific deals directly with employees and without union representatives on areas such as working hours, pay and overtime. Larger companies will be able to negotiate ad hoc agreements with unions, instead of having to abide by more rigid sector-wide rules. Under certain conditions they will be able to organise employee referendums to overcome any failures to reach agreements. The reforms also cut from four to one the number of statutory bodies representing workers within companies... As part of the reforms, unions have secured a 25 per cent rise in the severance packages that employers have to pay. Large companies will also still need the consent of unions representing half of workers to agree deals on working hours.

The reforms take a leaf out of the German Hartz reforms by making companies the focus for negotiating working conditions, instead of the current nation-wide sectoral working conditions contracts. Predictably businesses have welcomed the proposals while unions have opposed it. This may well be France's Hartz IV moment.

7. The graphic below shows that the very richest have not only recovered their wealth destroyed by the Global Financial Crisis but also have sharply increased their wealth since.

8. Finally, the always incisive John Kay points to the financialization of global economy,

Apple’s market capitalisation today exceeds $800 billion, and Alphabet the holding company for Google, is not far behind. For both these companies, operating assets account for about $30 billion of that value. Modern businesses like these employ very little capital, and such assets as they do use mostly need not be owned by the company that operates from them and typically are not. As a source of capital for business, equity markets no longer register on the radar screen. In Britain and United States, the countries with the largest equity markets, funds withdrawn from these markets through acquisitions for cash and share buybacks have recently routinely exceeded the amounts raised in rights issues and IPOs. At the same time, savings have become institutionalised. Initially such institutionalisation took place mainly through the investment activities of pension funds and insurance companies. Today much of their activity has been outsourced and while pension funds and insurance companies are still important players, the equity investment chain is today dominated by the major asset managers – Blackrock, Vanguard, Fidelity and their competitors. And sovereign wealth funds are an increasingly important fraction of public market equity ownership. 

The paradox of modern capital markets is that although there is less and less need for market activity from the point of view of either the end users of finance, or the investors who are the ultimate beneficiaries of finance, the volume of market activity has increased exponentially. And yet policy towards capital allocation places more and more emphasis on markets.

He also has this excellent observation on the nature of people who make up today's financial market intermediaries,

An intermediary who genuinely adds value will generally be one who has some specialist knowledge of one or both of the end-users of finance – either the borrowers and the beneficiaries of equity investment, or the depositors and investors whose savings are necessarily the ultimate source of such finance. A few minutes on a trading floor today demonstrates that the principal knowledge many intermediaries have is that of the behaviour of other intermediaries. When I was a schoolboy in Scotland in the 1960s, joining the Bank of Scotland or the Royal Bank of Scotland was a career for the boys in my class who were not going to get good enough grades to go to leading universities. Even when a few years later I began my teaching career at Oxford, careers in the City of London were mostly for undergraduates who were not academically distinguished but nevertheless socially polished and well-connected. All that has changed, and not altogether for the better, as was evident when the Bank of Scotland and the Royal Bank of Scotland failed in 2008, after three centuries of prudent success, under the stewardship of able individuals with good degrees from the finest universities and business schools.

Larry Summers, former president of Harvard and US Treasury Secretary, once observed that finance had once been the preserve of people whose primary skills were those of good companions at the 19th hole of the golf course, but had become the province of people with the sophisticated mathematical skills required to price complex derivatives. Summers, with skills better adapted to solving differential equations than conviviality at the 19th hole, noted this shift with evident approval. I am not so sure.

In today's world, we wrongly consider smartness as something which encompasses every other desirable attribute - industrious, diligent, sincere, sociable and so on. The worst is of course to confuse smartness with wisdom!

India's campaign finance reform journey

The recently passed amendments to the Finance Bill 2017 by the Lower House of the Indian Parliament includes a provision to remove the caps on undisclosed donations to political parties. Critics are right in questioning the wisdom of pushing through such an important decision as part of a Money Bill. And it is most likely that this would be litigated and stuck down by the Supreme Court. 

But their critique that this would weaken campaign finance reforms is arguable. In fact, I am inclined to argue that lifting the cap on corporate donations may be a prudent compromise, though the government may have ended up overreaching with its other elements. 

The conventional wisdom on campaign finance reforms advocate a simultaneous pursuit of transparency (limiting cash donations), competition (capping of donations), and deter cronyism (making their disclosure mandatory). 

While logically unexceptionable and intellectually laudable, I am inclined to believe that this is impractical given the political economy and the scale of transformation that it would entail. Given the prevailing nature and scale of campaign financing, the massive gap between the actual and permissible amounts, and the difficulty of cobbling political consensus on such issues, it is surely unrealistic to expect a simultaneous targeting of all dimensions with one comprehensive strategy. 

A more realistic approach to addressing campaign finance may be to take a few steps at a time. Between the three, it may be prudent to address transparency initially by squeezing out channels of cash donations and ensuring that only clean money enters the political arena. While the decision to dispense with the cap on donations may actually be a practical response, the waiver of disclosure requirements is a retrograde step. The latter becomes all the more so since maintaining the current disclosure requirements would have been politically feasible. 

Instead of the current proposal, it would have been more appropriate and practical to have a much higher cap than the (now amended) 7.5 per cent of the average net profit over the past three years and either retain the current disclosure requirement or link disclosure to the revised cap. A progressive reduction of that cap would then have become the natural phasing of campaign finance reforms. Now, anonymous corporate donations have been given a complete free pass. And future reforms have to battle insertion of the caps on both donations and disclosure requirements.  

The credibility of government's commitment to campaign finance reforms will be measured by complementary measures to strengthen the rigour of audits and tax filings of political parties as well as enforceability of their violations. 

In any case, as already mentioned, I feel that the last word on this enactment may yet come from the Supreme Court, and it is here that some of the aforementioned suggestions can be considered.

Black Money and Campaign Finance in India

It is estimated that political parties spent atleast Rs 300 bn ($5 bn) during the just concluded Indian elections, though only a very small fraction of this would be formally reported. The prohibitive cost of running an election campaign is a major entry barrier to electoral participation. It is a widely known fact, as evidenced by the several large-scale corruption scandals, that candidates view electoral expenditures as a capital investment with rewards to be reaped after assuming power. In the circumstances, it is imperative that any effort at addressing the pervasive corruption start with lowering electoral entry barriers by reforming the process of campaign financing.    

Unfortunately there are no easy solutions. A good summary of possible reforms, though all have compelling deficiencies, is here. For sure, there are some low hanging fruits. For example, it is imperative that all donations be disclosed. As proof of how the current law, which mandates only donations beyond Rs 20000 be disclosed, is being gamed, only 6.2% of Congress funding and 8.7% BJP funding comes from disclosed sources. Placing limits on general campaign spending by political parties is another issue which needs immediate action.

Another approach would be to encourage parties to solicit disclosed small donations and then let them leverage it up with larger corporate and even public funding. In the US, in the aftermath of recent Supreme Court decisions that have dented campaign finance reforms and the growth of back-door financing channels like Political Action Committees (PACs), there have been legislative efforts to introduce greater accountability and transparency into financing political parties. A common feature of all these proposals is the role of parties soliciting small public contributions, $100-150, with federal government matching it few-fold, and a $50 tax credit per voter donor per election cycle. Further, some proposals also link up large corporate donations to being a proportion of small contributions. All these efforts are aimed at both limiting large corporate influence in elections, whose detrimental effects have been well documented, as well as incentivizing candidates to solicit small contributions and thereby increase the likelihood of greater accountability and transparency into electoral campaigns.

A corporate financed election fund, created through tax-deductible contributions, matched with public contributions is another alternative, though its distribution among parties would pose difficulties.  

The difficulty of satisfactorily addressing campaign finance, itself a massive challenge given the problems faced even in countries like the US, may be compounded in India's case from the the fact that solutions lie beyond mere campaign finance reforms. In fact, the most important reforms have to come from addressing the incentives to make money from public office and by limiting the country's massive black economy. The former requires no introduction and its solutions are widely discussed. 

But in a country where black money makes up atleast a quarter of the total economy, any meaningful efforts at reforming campaign finance has to start with addressing the black money economy itself. Apart from criminal activities, a major share of black money is generated from legally permissible economic activities which are under-reported, mainly for evading taxes (eg. business profits) or avoid disclosing investment capital volume and source (eg. land registration), and from manipulation of financial records and accounting (eg. mis-represent and under-disclose income by under-invoicing production or trade - manipulation of sales receipts, expenses, capital employed, closing stock etc). 

Tightening of the norms of corporate accounting and reporting standards and the strict enforcement of existing regulations is critical to eliminating the creation of black money. Simplification of the tax code could help increase the ease of detecting accounting manipulations. Harmonization of reporting standards under different laws could also help tip the cost-benefit ratio in favor of compliance. There are larger regulatory issues of increasing standards of monitoring foreign capital flows, transfer pricing between entities of the same holding company, and so on, as well as enforcement of regulations thereon. 

Efforts at choking off the creation of black money itself has to be complemented with introducing greater transparency and vigilance into the largest channels of black money circulation. Real estate and gold are two of the biggest platforms for money laundering. In real estate, the steep difference, often a few multiples, between the official land/property registration price and the actual market transaction value is arguably the biggest channel for circulation of black money. The sales of gold, which is a major source of hoarding black money, upto Rs 2 lakh pass off without coming under the tax scanner. In both cases, the loopholes should be closed - land registration values should be the same as market value and all gold transactions should be tax accounted. Finally, cash transactions should be limited so that all transactions are incentivized to be inter-mediated through the financial system.

Update 1 (23/08/2014)

Here is an excellent collection of 40 graphs from Vox on campaign finance challenges in the US.   

Electoral bribery - a tale of two games?

Anecdotal evidence from electoral politics in many Indian states appears to indicate that all the contesting candidates pay reasonably similar amounts of cash bribes to all the voters.

On the face of it, this appears surprising since only one candidate can finally win the electoral race and the electoral race is high stakes and ultra-competitive. In the circumstances, conventional wisdom would have it that atleast some candidates renege on their bribe payments. Further, there should have been a bidding war among contestants to outbid each other in the payment of bribes. So what is the underlying story? Why do "all candidates" bribe "all voters"? Why are the bribes "reasonably similar"?

I am inclined to believe that there are two games being played here. On the one hand, candidates have to weigh the consequence of not making payments given the uncertainty associated with the response of the other side. On the other hand, candidates face the possibility of a potential bidding war in bribe payments.

Consider the first game, which is a defection game. Candidates rationalize bribing voters on the ground that voters have been socialized into expecting bribes and are likely to react negatively (turn against them) if their expectations are not met by any of the candidates. The undeniable reality of an availability bias associated with electoral bribing means that there is a strong likelihood for voters to form expectations about receiving some amount as a bribe. In fact, this expectation is likely to be more pronounced with the incumbent legislator.

The trend is widely pervasive in most parts of India, so much so that any candidate who defects, by not paying or paying less, is perceived to face certain defeat. The table below models a two-candidate electoral game where the decision point is about whether to bribe or not.



This brings us to the second game, the co-operation game. Interestingly, political parties too appear to have internalized the dynamics of the electoral game. Given the inevitability of bribe payments, all of them realize the massive costs associated with a bidding war where one party tries to outbid the other. Since these games are all repeat games, with the same parties fighting over multiple elections, there are sufficient incentives for all sides to embrace an equilibrium and co-operate. The result is an implicit understanding about the magnitude of their bribe payouts. The table below captures this game.



However, there is a small Bayesian twist to this tale which highlights the slippery slope down which both candidates and voters have slipped. Since all parties bribe voters, and voters have to make an electoral choice, they end up making their actual choices based on other considerations. But this choice is conditional on the receipt of bribes. In other words, while voters may make their choice based on several factors, this choice is mostly restricted to those who have paid the bribes. If this line of analysis is true, then all candidates end up defecting and bribing, resulting in a Nash equilibrium. Ironically, atleast in the short-run, the real winner in this is the voter!

So, conditional on receipt of the bribes, what are the factors that drive voting choices? A few intuitive answers include those who paid the larger amount, those perceived as leading the electoral race, those who have struck a chord with some local or emotional issue, and sometimes even those who are perceived as extremely corrupt. Given this, do we have a window of opportunity here to align the individual incentives of voters with general public interest and drive the agenda of contesting candidates accordingly?

ECI nudges voter turnout in India?

The recent Assembly elections in five Indian states saw record voter turnouts. Political pundits promptly attributed it to anger among electorate against widespread corruption and misrule by the incumbent governments.



However, there is a strong likelihood that this increase was not merely because of discontent. After all, anti-incumbency factor is common in Indian democracy, and has rarely resulted in such uniform jumps in voter turnouts.

Incidentally, this was the first election where an electoral slip was delivered to all voters following a directive from the Election Commission of India (ECI). Accordingly, less than a week (most often 3-4 days) before the polling day, an electoral slip containing the date of polling, location of polling booth, serial number of the voter in the voters list, and his/her photo was delivered to all voters. Traditionally, voters slips were disbursed by political parties during the campaigning, especially to their potential voters, so as to encourage them to vote.

If the delivery of voters slips contributed to the inceases in voters turnout, then its transmission would have been through two routes.

1. The voters slips, delivered just before the polling day, may have served to remind voters about their voting obligation and generated a form of social pressure on the voter to turn up to vote. In other words, the slips may have primed the voters into voting.

2. The voters slips - especially the location of the polling station, date and time, and the reassurance about their names being on the voters list - may have served as "channel factors" that bridged the information asymmetry and nudged the voters into visiting the polling booth to cast their votes.

Either way, unwittingly, the ECI may have used a powerful insight from behavioural psychology to nudge citizens into voting. This may also be a powerful reminder to advocates of making voting mandatory that such subtle nudges are a more effective and sustainable approach to increase voter turnout.

PS: There is no confirmation that voters slips were responsible for the increase. The increases in turnout from 2006 to 2011, where voter slips were not used, does complicate drawing ready inferences. I am sure that in the coming days atleast some researchers would use constituency data to tease out effects, if any.

Nudge, not legislate, voter turnout!

The Gujarat government have recently passed a legislation making voting in local government elections compulsory. If the voter fails to vote for the reasons other than prescribed in the rules, he may be declared a "defaulter voter" and would face consequences for which rules will be framed and approved in due course.

Mandatory voting is sure to raise opposition among liberals who reject it as being against the fundamental values of democracy itself. Further, on the implementation side, there are far too many imponderables that can come in the way of enforcement of any rules that seek to punish "defaulter voters". Further, apart from increasing awareness, there may be other effective means of mobilizing voter turnout, especially in low turnout urban areas, like "nudging" people to vote.

In this context, research into randomized experiments to increase voter turnout conducted during the 2006 US mid-term elections and 2005 German federal elections by Daniel G. Goldstein, Kosuke Imai, Anja S. Göritz, and Peter M. Gollwitzer carry great relevance. They conducted two experiments - a mere measurement treatment (asking people if they intend to vote, thus causing them to reflect on their intentions) and an implementation intentions treatment (asking people how they intend to cast their vote, thus making them plan) - and examined the outcomes for both one-shot goals (e.g., voting on Election Day) and open-ended goals (e.g., voting early or by post) with deadlines in either days or months in the future.

They found that "mere measurement increased voter turnout for open-ended goals and for proximal one-shot goals but not for distant one-shot goals. Implementation intentions increased voter turnout for both open-ended and one-shot goals in the near and long term." Therefore, when elections are just around the corner, or when open-ended early-voting options exist, the mere measurement treatment can nudge people to vote in larger numbers.

The Nudges blog points to voter mobilization techniques involving randomly sending letters, airing radio and print advertisements, phoning homes, or sending canvassers door-to-door making personal pitches, all of which seek to "nudge" voters into actually casting their votes. It was found that mobilization techniques involving direct contact (as opposed to the impersonal channels of phones, e-mails and advertisements), like sending volunteers to remind voters about the vote next day, is effective in significantly increasing voter turnout. In fact, research by Betsy Sinclair et al based on experiments conducted in 2006 Californian elections, have found that voter turnout increases more (by more than 9 percentage points) if you send a neighbor instead of a stranger to someone’s house.

Instead of taking the extreme step of making voting legally compulsory, governments interested in addressing the voter turnout issue may be better off "nudging" than "legislating" voters to cast their votes. During the last elections in India some of these were tried out, though they were of the impersonal mass outreach variant. In fact, such techniques are more likely to be effective in local government elections. Residential Welfare Associations (RWAs) and other local volunteers may be mobilized to remind voters about their voting responsibility, say two days before the voting, so as to avoid infringing with the restrictions on campaigning that come into effect 48 hours before close of polling.

Techniques that use the "mere measurement treatment" would also avoid controversies over covert campaigning (using this nudge experiment to campaign) and can be tried out in urban areas, which have the lowest voter turnout and where subversion of these campaigns are least likely. Further, people in these areas are more likely to respond to these signals given the higher level of "peer pressure effect" within communities. So maybe, it is time that NGOs and public interest organization take a leaf out of the aforementioned studies and recruit community volunteers to "nudge" people into voting, and thereby prevent the need to have such compulsory voting legislations.

Update 1 (3/11/2010)

Excellent summary of the nudge techniques being adopted by political parties in the US to get people to turnout for voting. A study by Yale professors Alan Gerber and Donald Green during the 1998 elections split 30,000 New Haven voters into four groups - some received an oversize postcard encouraging them to vote, others the same message via a phone call or in-person visit, and the control group received no contact whatsoever. The in-person canvass yielded turnout 9.8 percent higher than for voters who were not contacted. Each piece of mail led to a turnout increase of only 0.6 percent. Telephone calls, Gerber and Green concluded, had no effect at all.

RCTs as electoral strategy

Governments are naturally reluctant to subject their programs, especially those involving individual welfare handouts, to rigorous impact evaluation. What happens if the program is found to have not delivered on what it promised? This has confined academic researchers and program evaluators to analysing programs funded by Non-Governmental Organizations and multi-lateral institutions and thereby seriously limited their canvas of study. However, I am inclined to believe that it may be an electorally prudent strategy for governments and ruling party representatives to embrace program evaluations like randomized control trials (RCT). Here is why.

Program evaluation by way of RCTs can be beneficial for politicians facing elections besides providing valuable learnings about the impacts of various development program components. RCTs perforce divides the target group into two randomly distributed treatment and control groups. In other words, one half is administered the welfare benefit while the other half is denied the same.

The situation is tailor-made for the ruling party politician to offer the incentive of extending the program to the other half in return for re-electing him. This is likely to over-ride any ill-effects of them having been denied the first chance of sharing in the benefits of the program. They can also be incentivized with the prospect of a revamped program that is more effectively administered and whose punch for the beneficiary is greater, a result of the lessons learnt from the RCT evaluations. Presumably, the first half should be happy in two ways - at benefitting from the program and more so when his neighbour has not!

Interestingly, by the same logic, randomized phasing of welfare programs will also contribute towards the sustainability of the program even in the case of a government change. The overall success of the program in delivering welfare benefits and the fact that half the group have not got their share of the benefits will maintain the pressure on the new government to continue the program, if only to deliver the benefits to those hitherto denied their share.

Randomization into two (or more) groups is also beneficial to the ruling party in so far as they can now more optimally utilize the scarce resources available by covering only one-half of the population without losing the loyalty of the other half. They can therefore use the same resources to now cover two or more programs. Further, since the beneficiaries are randomly and transparently selected, instead of the usual partisan manner, the government may find it easier to rationalize away any discontent amongst those denied the benefits.

However, it is important that on the net, these programs deliver substantial benefits to those in the treatment group. This is rarely a problem since any new welfare program would deliver some benefit or the other to its beneficiaries, in its own ineffcient and poorly targeted manner. The challenge is only to design it to deliver the greatest bang for the buck and to the specific target group.

This approach was adopted in Mexico when the PROGRESA Conditional Cash Transfer scheme was first launched in 1998 in only half of the 506 targeted communities. It has been claimed that the randomized phase-in of the program (and the resultant ability to incrementally make changes based on the results of the RCT results) has played a major role in ensuring the continuity of the program despite the governmental change in 2000.

The debate about electronic voting

The Madras High Court is hearing a Public Interest Litigation (PIL) seeking a ban on the use of Electronic Voting Machines (EVMs) in bye-elections and to direct that elections be conducted using ballot papers. This comes in the wake of doubts raised by some parties about the reliability of these machines.

And now in the US House of Representatives, a bill has been introduced by Rush Holt that would ban paperless electronic voting in all federal elections from November 2010. Mr. Holt’s bill would help prod election officials toward the best of the currently available technologies - optical-scan voting. With optical scans, voters fill out a paper ballot that is then read by computer — much like a standardized tests the votes are counted quickly and efficiently by computer, but the paper ballot remains the official vote, which can then be recounted by hand. The bill would also require the states to conduct random hand recounts of paper ballots in 3 percent of the precincts in federal elections, and more in very close races.

An NYT op-ed has argued that "electronic voting machines that do not produce a paper record of every vote cast cannot be trusted... there is no way to be sure that a glitch or intentional vote theft — by malicious software or computer hacking — did not change the outcome. If there is a close election, there is also no way of conducting a meaningful recount."


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Studies on vote buying and salaries of legislators

Two interesting papers relevant to the election season

1. Frederico Finan and Laura Schechter claim that vote-buying is sustained by an "internalized norm of reciprocity" arising from social preferences. They find that "citizens who receive money from a candidate feel obliged to vote for him and citizens who do not receive money from a candidate feel a desire not to vote for him". They show that "politicians are 15 percentage points more likely to offer reciprocal individuals something in exchange for their votes. Reciprocal individuals are in turn 15.9 percent more likely to vote for the party that offered them a good". In other words, the surest way to seal a vote is to offer cash payments to those belonging to the candidates community or caste network. It also partially explains the persistance of caste-based vote banks in India.

2. Claudio Ferraz and Frederico Finan examined the variation in the salaries of local legislators across Brazil’s municipal governments (based on population thresholds) and find evidence to support the claim that "higher wages increases political competition and improves the quality of legislators, as measured by education, type of previous profession, and political experience in office".

But their studies do not shed light on whether this increase in performance is due to the positive selection or the incentive effects of higher wage and whether it ultimately translates into improvements in voters’ welfare. Given the massive data set available from Indian electoral politics, it would interesting if some study could explore the effect of higher monetary incentives on development outcomes.

Elections as stimulus - II

This blog has consistently argued that the coming general elections has the potential to provide one of the cheapest and most effective boost to the economy. In fact, the multiplier of such spending is likely to be the largest in view of the fact that most of the spending will be on goods and services which are produced and delivered by the local eocnomy itself.

The Businessline estimates the total spending would be in excess of Rs 15,000 Cr (this blog had estimated between Rs 15000-20000 Cr), mainly on aircraft, vehicles, fuel, posters, tents, audio equipment, food and paying the daily expenses for the core workers.



As good fortune would have it, many of the larger economies of the world are all set for elections in the next two years. Indonesia votes for COngressional and Presidential polls in mid-2009, and Brazil for Presidential polls in October 2010. Argentina, Chile, Colombia, Hungary, Poland, South Africa, and Ukraine too are set ot go to vote over the next two years. And as the graphic below suggests, the quantum of spending in elections, especially in India, Brazil, and South Africa is substantial enough to provide significant boost to the local economy. In other words, teh biggest contribution the politicians can make to these nations is by bringing forward their elections and then spending as much as they can afford in the ensuing elections!

CCTs and winning elections

Here comes fairly compelling evidence to show that Conditional Cash Transfer (CCT) schemes are not only efficient means of transferring development assistance but are also vote-winners! Chris Blattman points to a fascinating study of CCT schemes by Marco Manacorda, Edward Miguel, and Andrea Vigorito, which finds evidence that such programs generate greater political support than other welfare spending programs.

They studied the impact of the Uruguayan PANES CCT program, consisting mainly of a monthly cash transfer for a period of roughly two and half years, on political support for the government that implemented it. Their findings include

1. Beneficiary households are 21 to 28 percentage points more likely to favor the current government (relative to the previous government).
2. The impact of the same nominal cash transfer is "larger among poorer households and for those near the center of the political spectrum", consistent with the "probabilistic voting model in political economy" and the fact that "the marginal utility of consumption is highest for this group".
3. The "effects persist after the cash transfer program ends".
4. They estimated that the "annual cost of increasing government political support by 1 percentage point is roughly 0.9% of annual government social expenditures".

Intutively too, cash transfers, being more direct and salient, are more likely to catch the immediate imagination of its beneficiaries than the more indirect methods like subsidies or in kind assistance. Surely, it provides more direct exposure for the politician to deliver the subsidy for fertilizers or crop price support or health insurance as direct cash transfers instead of the regular method providing poor quality seeds or fertilizers or health care.

In fact, one of the greatest attractions for politicians (and Governments) in promoting Self Help Groups (SHGs) and micro-finance in states like Andhra Pradesh, has been the symbolic political value attached to the regularly held loan disbursement melas. The flagship poverty alleviation programs of both the previous (Velugu program) and present (Indira Kranti Pathakam and Pavala Vaddi loans) governments in Andhra Pradesh have revolved around direct cash transfers in the form of micro loans to SHG members.

Many shrewd politicians have realized that they derive more political mileage from these direct cash disbursements than the old IRDP-style asset distribution! CCTs are only a small step ahead from the SHG loan disbursements. Now, atleast this should spur some of our own politicians to embrace them!

Voter turnout and elections

YouNotSneaky! argues that it is not necesary to have a higher turn out in elections to get an accurate reflection of the collective social choice. It is even claimed that a higher turnout imposes higher social costs, without commensurate benefits. Using the Law of Large Numbers and Central Limit Theorem, he infers that in an election involving a large electorate, a 10% or 15% turnout would be sufficient to elicit a more or less accurate verdict.

It can be safely surmised that those with strong views and specific positions on issues are more likely to vote, and it would seem only appropriate that this be the case. In contrast, those indifferent to the outcome are likely to stay back, which again seems appropriate enough. Therefore the arguement that voting is a public good and those staying away free-ride on the back of those who vote, would appear to be inaccurate.

Ironically enough, another way to get an accurate voting outcome is to charge the committed voters a specific voting fee, while letting the others vote for free. If a fee is a charged, only those committed to specific causes will pay up for exercising franchise.

Alan S. Gerber, Donald P. Green, and Christopher W. Larimer did a large-scale field experiment involving several hundred thousand registered voters to test the influence of of social pressure as an inducement to political participation. They send out letters telling people whether they and their neighbors have voted in past elections and promising to send a followup letter after the election. The unsubtle message is: voting records are public information, and if you don't vote this year your neighbors will know about it. It was observed that the turnout among those who got the letters was a whopping 8.1 percentage points higher than the control group.

Cass Sunstein and Richard Thaler feel that voters can be "nudged" into voting by asking specific questions about whether they intend to vote or not a few days before the elections. There is another interesting article in the NBER by Aaron Edlin, Andrew Gelman and Noah Kaplan, Voting as a rational choice: Why and how people vote to improve the well-being of others

Getting people to vote!

StickK.com has started commitment contracts to incentivize voters to vote in their local elections. As Dean Karlan writes in an FT op-ed,

"StickK can verify (using publicly available data) whether people fulfill their commitment to vote. If they do not, StickK e-mails their friends or charges their credit card as punishment for failure. If money, individuals choose where the money gets sent; but most choose to send it to a charity (chosen by stickK, so the individual gets no specific pleasure from knowing where the money goes), or even harsher, to an 'anti charity', a politically polarizing charity such as the Bill Clinton Presidential Library or the George W. Bush Presidential Library."

(HT: Freakonomics)

Selling broadcast rights

Barry Nalebuff and Ian Ayres feels that selling the broadcast rights on the party conventions in the lead up to the US Presidential elections is a good way to raise campaign funds. And they also suggest selling the broadcast rights to high-profile court cases, and use the proceeds to pay for both the defense and the prosecution, and space landings to support space exploration.

(HT: Freakonomics)

Polls Vs Prediction Markets

With elections around the corner in India, both political parties and candidates are naturally eager to assess their respective electoral prospects. The media feed this appetite by indulging in a frenzy of polling as the election day draws closer. News papers and news channels compete with each other in publishing opinion polls and also claiming greater credibility based on selective interpretation of thier previous poll results and the final election verdict.

These opinion polls survey the preferences of a representative enough sample (and this is most often a subject of debate and controversy) of voters and a reasonably large enough number of voters. The voters make their choices based on their present perceptions of the respective parties or candidates. This in turn is generally based on their assessment of the past performance or actions of the political parties and candidates. Opinion polls are therefore largely a reflection of the past performance of the candidates.

Justin Wolfers argues that Prediction Markets are a better indicator of the actual result than opinion polls because, unlike the latter, the former makes its assessments based on the expectations of the future performance. He writes that prediction market traders even take cue from the opinion poll results and change their predictions assuming that the contestants respond to their poll results by changing strategies.

Prof Wolfers quotes the works of Robert Erikson and Christopher Wlezien, who find that opinion poll results tend to be skewed by time inconsistency problems, and therefore needs to be discounted for. The initial advantages or leads generally tend to get dissipated over time, and the voting public tends to be more strongly anti-incumbent three-and-a-half years into an administration than they are on Election Day. Further, polls are slow to reflect economic conditions.

Prediction markets are "information markets" or "speculative markets created for the purpose of making predictions" where the participants trade in contracts whose pay-offs depend on outcomes of unknown or uncertain future events. It is based on one of the basic maxims of classical economics - in a truly efficient market the market price will be the best predictor of an unknown future event. James Suroweicki had claimed that prediction markets are a more reflective statement of the reality as it represents the "wisdom of the crowds".

In the most basic prediction markets, the "winner-takes-all" market, the contract costs, say Rs 5, and pays off, say Rs 25, if and only if a specific event occurs. The price on a winner take all market represents the markets expectation of the probability that an event will occur.

In an "index contract", the payoff varies in a continuous way based on a number that rises or falls, like the percentage of vote received by a candidate. The price of such a contract represents the mean value that the market assigns to the outcome. In "spread betting", trades differentiate themselves by bidding on the cutoff that determines whether an event occurs or not, like a candidate receives more than a certain percentage of the popular vote.

The Iowa Electronic Markets, run by the University of Iowa Tippie College of Business, is one of the most successful prediction market in the world and has predicted many US Presidential elections. Our own informal and illegal "satta" markets are another example of a crude prediction market, though these are more one-off markets than continuing markets.

Given the coming elections and the amount of time available to make meaningful trades, it may be a good idea for some university or newspaper to run a prediction market on the election results. Besides, it will also throw up interesting statistics and information, which can be analyzed to better understand the preferences and motivations of the Indian voter.

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.

Mint op-ed on competitive populism

Here is my Mint op-ed on competitive populism.

Incentives in Elections

The logic in this post is slightly vague at at a few places. Though I am still searching for a few answers, I am convinced there are ways out. But it flags off an important dimension to future electoral reform policies.

It is commonplace in even informed circles to attribute all the ills facing our country to politicians. The middle class see the ubiquitous politician as the embodiment of all that is bad about our political system. They are perceived as corrupt, venal, rapacious in their plunder of the public resources, prevent honest officers from discharging their duties, and so on. My very firm belief is that this may be a very simplified and uncharitable judgement, which overlooks the incentives and disincentives facing a politician.

I shall assume that a politician is a rational economic agent, out to maximize his objectives. Edmund Burke famously said, "The duty of a politician is to win elections". A politician is therefore driven by the ultimate objective of winning over his electorate. This remains true even today and is the fundamental choice facing any politician. To this, we may also add that the politician also faces ample incentives to make money.

I will outline two broad strategies that can be applied to winning elections. There may be variants between Strategy I and Strategy II, but a typical electoral strategy falls somewhere in between the two. Strategy I is the regular stereotype of how a candidate fights elections.

Strategy I : The politician offers inducements or allurements like liquor or cash to win over the voter. Though the typical candidate spends a fortune in such transactions, these inducements are transitory. Even after spending this money, he is not sure of bagging the vote, since his oppponent can pay a little more and outbid him. There is a very real danger of the candidate losing his money and the election too.

Strategy II : In contrast, if the politician fulfills an important felt-need of the village, say a school building or drinking water bore or distribution line, the villagers feel gratified and owe him a debt. This translates into a more enduring and stronger relationship between the politician and the voters in the village. There is a greater probability of them voting for him than if he had resorted to the first strategy. Apart from striking a more durable contract with his voters, the politician benefits in two ways from this strategy.
1. He saves the huge amount he would otherwise have had to spend in buying off his voters.
2. He also pockets his share of commission from the contract awarded to execute the engineering work.

Quite often, this strategy runs into trouble as the executive machinery and administration are not able to deliver on the promise. At other times, the work executed is of very poor quality, and the school building develops leaks after six months. In both cases, the politician gets disrepute and loses his electoral appeal. He is then left with no choice but to return to his original strategy of buying off his electors. Therefore it needs to be kept in mind that the officials and the administration plays a critical role in helping or failing the political representative.

As can be seen, Strategy II is easily more beneficial to the incumbent. He can have the best of both worlds - minimize his expenditure, and increase his chances of victory. But implementing Strategy II requires the support of the bureaucratic and administrative machinery, who are responsible for delivering on the promises made by the politician. This is in turn gives them an incentive for posting capable officials (who are more likely to be reasonably honest) in important positions, thereby reducing cronyism and its attendent corruption.

What are the objections? The major argument against Strategy II is that it always favors the incumbent. Further, since the opposing candidates cannot use this approach, they fall back on Strategy I. Behavioural economists have documented that people tend to forget older gains and be more attracted to the latest gains (since cash and liquor inducements are made just before the voting process). Further, they also acknowledge personal gains more than social or civic gains. This makes the incumbent wary of the inducements offered by his opponents. There is therefore an unstable equilibrium about this arrangement. If the incumbent finds that his opponent gaining ground by resporting to unscrupulous vote buying strategies, he may be forced to defect.

The response to this objection is two-fold. One, if the incumbent is able to fulfill the felt needs of his electorate, then he surely deserves to be re-elected. After all, the whole process of democratic elections is to find out the candidate who can deliver on his promises. If we have a candidate who is able to deliver on his promises, which are in turn reflection of the electoral demands, then where is the need for a replacement? For any opposing candidate to succeed, he has to possess attributes and faith of his electorate that are superior to that possessed by the incumbent.

Two, the opponents should also adopt the same strategy as the incumbent and become rational agents. They should identify the most important felt-need of the village or locality, and make its fullfillment one of their major poll planks. They now benefit from the same advantages as the incumbent - saving the money spent buying voters and rents from contractors. Further, the opponent even gains an advantage over the incumbent, in that he is now promising something which the incumbent failed to deliver. All this will also incentivize candidates, especially in local body elections, to focus on important local issues and needs, thereby making elections more meaningul and issue oriented. And there are no shortage of important felt-needs in every area or village, for all candidates to espouse.

The benefits of such competitive populism on the society and polity are enormous. The challenge now is to make the politician a rational economic agent and get them to abandon Strategy I and adopt Strategy II! Or in other words, get all candidates to play the same game and not defect! More of this in a later post.

Market solution to more effective debates in Councils

One of the thing that strikes you about the debates in any Parliament, State Assemblies or even local Councils, is the amount of time that gets wasted in filibustering. In an age of live television feed and intense media scrutiny, playing to the galleries is understandable. This wastage of time results in inadequate time being devoted to discussing important issues. In the circumstances, we need to devise mechanisms that will ensure that grandstanding and wasting public time is minimized, while all important issues are adequately discussed and debated. How do we do this?

Political parties espouse issues and interests, with varying priorities. It is natural that if a Party has strong support base among fishermen, it would be more interested than other parties, in being part of any debate on issues related to fishermen's livelihoods. In contrast, political parties for whom fishermen's issues are only one among the many issues in their agenda, may not be as interested in the issue as the Party with strong fishermen support base. The later would at best be a disinterested participant in the debate. It encourages meaningless speeches, where representatives of political parties speak about issues about which they have little interest, only because they have been given their turn to speak.

The cardinal principle of equality demands that all shades of opinion be given an equal right of being heard. This would necessitate giving every Group or Party equal time for representing their issue.

Assume that there is a "speaking time" account maintained in an Exchange within the Assembly, Parliament or Council. Let us also assume that each Party or Group is allotted some total speaking time for the session. In a splintered multi-party system as ours, we can even categorize parties based on their representation, and then allocate time based on the category. The Exchange monitors the time utilized by each Party or Group, with respect to the amount of time allotted to each.

Now let us introduce a mechanism whereby Parties can trade speaking times. Those Parties, unable to utilize their allotted speaking time for a session, can now trade their unutilized times to a Party which is in deficit of speaking time. The incentive for a party to trade its surplus speaking time is that this time can be carried forward for the entire tenure of the Assembly, so that they can utilize their times more efficiently over this tenure. Further, parties refusing to trade their surplus times can be penalized by deducting the same amount of time from their allocation for the next session.

The aforementioned arrangement has many advantages. It would straight away ensure that parties and speakers put more value on their speaking times. Given the cap on the amount of time available, political parties will be forced to better manage and schedule their priorties for the session. Bluster and grandstanding could get reduced. Important issues will get focussed on their substance, and the quality of debates will improve. It is also more probable now that important issues which are not exercising the priorities of the majority, will get highlighted and discussed.

Critics would complain that it promotes parochialism and interest group politics. My answer would be that in modern day democracy, interest group politics is unavoidable. One of the more interesting ways of mitigating the influence of something we want to avoid, but which is inevitable, is to co-opt and formalize it. Trading in speaking times would only recognize this reality and formalize institutional mechanisms to take this into account.

There could be other more interesting incentive structures for trading times. But that is a question of detail. The larger point emphasised here is the utility of trading of speaking times, in enforcing discipline and containing filibustering in the houses of democracy .