T C A Srinivasa-Raghavan: The costs and benefits of populism

OKONOMOS

Does intense political competition increase welfare or reduce it?

All democracies, at some point or the other, are seized of the problem caused by a disproportionate exploitation of differences between groups by the political parties. In India, since the early 1970s, this phenomenon has come to be known as competitive populism.

The populism can be economic, as in the recently passed Rural Employment Guarantee Act. Or it can be social, as when the BJP seeks to garner Hindu votes by encouraging anti-Muslim sentiments and actions.

An important question that India has been trying to answer since 1969 is whether such populism increased or decreased economic welfare. Opinion is very sharply divided between one and the other.

An answer of sorts was provided by Pranab Bardhan and Tsung-Tao Yang last year*. They pointed out that "while political competition can yield allocative benefits for the public, it can also generate aggregate welfare costs by constricting the set of politically feasible public investments."

In other words, what you gain on the swings, you can lose on the roundabouts. So the purpose of the paper, say the authors, is to "provide a cautionary tale against simple generalizations about the economic consequences of political competition."

In short, don't automatically assume that they are always good or always bad because a great deal depends on other things such as information asymmetries between the public and the state (for instance, in the Rural Employment Guarantee Act), the inter se distribution conflicts (Dalits versus OBCs) and the sort of public investment that is undertaken (large dams increase poverty at least in the short run).

I found the following statement especially apt in the Indian context. "Long-term investment opportunities may waste away under the shadow of electoral politics, even when competing elites would each appear to have both the incentive and the means to nurture such investments to maturity." One example of this is the wage bill of the state and Central governments.

There is also the problem that electoral politics "can undercut the state's ability to resolve problems of coordination between competing groups". We can see evidence of this in political response to the Supreme Court's judgement about reservations in unaided colleges.

Another insight is that although the public is eventually more powerful than the rulers in the sense that the latter can be voted out, the former has to be not too demanding when faced with utter rascality (as in the Rural Employment Guarantee Act). This is because "the public's ability to threaten incumbent rulers with dismissal can backfire if the threat of dismissal becomes too strong."

What can happen then, say the authors, is that if the ruling party doesn't see re-election as a realistic possibility, it can begin to "extract the maximum rents possible during his remaining time in office. Thus, a too strong threat of future dismissal may induce a wholesale shift in political incentives towards the short term."

So what does the public do in order to prevent "massive looting"? It has to tolerate corruption "even if it is within their powers to punish it with dismissal from office, in order to stave off wholesale graft." You can see this in the form of explicit complicity in the bribing that is so prevalent in India.

Finally, "when public investment is undertaken but accompanied by high levels of government spending, the public grows suspicious that the incumbent ruler has lined his own pockets rather than faced high actual investment costs."

When political competition is intense, and when the public needs to incur a very small cost to dismiss incumbents, it quickly acts on these suspicions and punishes the incumbent. We saw this in the 2004 election.

"Anticipating this, the incumbent ruler is cowed into inaction when the actual cost of public investment is high (even though it may still be small in relation to the benefit). Specifically, increased political competition forces an incumbent to limit government spending whenever public investment is undertaken."

*Political Competition in Economic Perspective, BREAD Working Paper No. 78, July 2004