I just stumbled upon this paper written in 2000 by Ajit Karnik of Mumbai University. It was just an amazing reading.
The paper given an eco perspective to political unwillingness. In the process, we also understand why certain political decisions are made. We also get some amazing literature to read on the subject. It also helps us understand a bit about why UPA won elections in 2009.
The paper looks at why most policies are inefficient. Political unwillingness seems to be a critical reason as per the author.
A substantial body of literature is now available which points to extensive and inappropriate state intervention as the primary cause of macroeconomics problems that beset many economies. Even when it is apparent that a more efficient, alternative form of government intervention is available, this intervention does not get implemented. Numerous explanations have been proposed to understand the inertia that impedes the move from inefficient to efficient policies. Of these explanations, the reliance doctrine, path dependence and corruption are important.
This paper proposes “lack of political will” as the most important reason why a ruling political party is unable to commit itself to economically efficient choices or policies. The notion of political will is explicated using concepts from the transaction costs perspective.
And what is this political unwillingness?
Politicians, in general, and ruling political parties, in particular, have often been accused of ignoring the “public interest” and promoting “vested interests”. The term public interest is generally used to connote the genuine welfare needs of the diffused mass of voters. This mass of voters does not constitute a well-defined interest group and, in a democracy with regular elections, generally lacks the political power to dislodge the government. Vested interests are generally assumed to include interest groups or lobbies, which can play a critical role in the making or breaking of a government at elections time. The inability of the government or the ruling party to distance itself from interest groups or to promote the welfare of the masses is seen as a lack of “political will”.
The term “lack of political will” appears to lack a precise definitions. Even though it is used frequently in common parlance, a definition from an economic and a political perspective is hard to come by. The following quote from Dixit and Londregan (1995, p.856) appears to capture the essence of it: Political will is seen to be lacking when “politicians are unable to commit themselves to ignoring political characteristics and making long-term promises to reward economically efficient choices”.
There are three entities in the game – ruling party, interest group and other voters/general public. And we have two transactions. First between the part and interest group and second between party and others:
The paper models the interactions between an interest group and the ruling party on the one hand and between general electorate and the ruling party on the other as quid pro quo relationships or transactions. In the first type of transaction, the ruling party offers the interest group of favourable policy (say, subsidised public sector output) in exchange for political support. In the second transaction, the ruling party offers the general electorate subsidised welfare amenities (say, basic health care) in exchange for political support.
Political unwillingness as per the paper means ruling party sides with interest group. Why does this happen?
The author uses a concept called Transaction Cost Politics (based on Transaction cost economics). He shows how transaction costs are lower in case of contract between ruling party (RP) and interest group (IG) compared to other Voters (V):
The RP needs the support of either the IG or V in order to win re-election. Getting the support of either of the two groups requires different types of contracts, each with its own magnitude and distribution of TCs. The TCs in the IG-RP contract are faced mainly by the IG, which can take measures to reduce these costs through monitoring and a rewards/ punishment strategy.
On the other hand, the TCs in the V-RP contract are faced mainly by the RP and it seems unlikely that any amount of monitoring and/or punishment strategy will enable reduction of these costs. From the point of view of minimising TCs, it is apparent, that the IG-RP contract works better and that is the contract that will be preferred by the RP, the common party in both the contracts. Further, in the IG-RP contract, the distribution if TCs is completely in favour of the RP, unlike in the case of the V-RP contract: in the former all TCs are borne by the IG and in the latter all TCs are borne by the RP.
This is just the summary bit. The author explains how TCP includes following aspects (based on TCE):
- Notion of Contract: Just like TCE, contract is central point in TCP as well. In politics the contract is between political party and voters - the promise of a policy in return for votes. Though a political contract is far more difficult.
- Contract enforcement –Contract enforcement in difficult in TCP. Usually govt. helps (or hinders) in contract enforcement in TCE. Here it is one of the agencies in the contract. Moreover political property rights are insecure..
- Bounded Rationality — In TCE, bounded rationality plays a huge role leading to incomplete contracts. This is even more acute in TCP.
- Opportunism–As contracts are incomplete it leads to rise in opportunism. In TCP, RPs can renege on promises.
- Asset Specificity –Because of opportunism, promised investments in assets could be reversed/modified.
This is them modeled on both the transactions – RP with IGs and RP with Voters.
As per TCP, transaction between RP and IG will be preferred. This is because contract enforcement issues remain with IGs and they can monitor it as well. The size of IG is smaller and more powerful as well.
Reducing the TCs arising out of ex-post opportunism by the RP can be achieved by better monitoring the actions of the RP coupled with a rewards/punishment strategy (Milgrom and Roberts 1992). Rewards may be made available to legislators belonging to the RP, who push through policies favourable to IGs. On the other hand, a RP that reneges on its part of the bargain may not be able to secure the support of the IG at the time of the next elections. Such a punishment strategy will ensure that co-operation evolves between the IG and RP. Punishing the RP for violating the terms of the contract will require co-ordinated and collective action by the members of the IG, which may be plagued by problems of free-riding (Olson 1965). However, the small number of members in the IG and the coincidence of their economic interests will alleviate free riding problems and make possible measures to reduce the TCs of the exchange between the IG and the RP.
In case of Voters and RP, the monitoring issues remain with RP and as a result, the costs are larger.
As stated above, the RP, in order to signal its credibility, will have to provide welfare amenities in anticipation of votes from V. Further, in view of the restriction mentioned in footnote 8 above, the provision of welfare amenities will have to take place substantially prior to the elections. The RP, at this point, cannot be certain of victory in the elections. This uncertainty that the RP has to face belongs to the class of systemic uncertainties which cannot be reduced in a democratic context.
The other problem arising out of bounded rationality is concerned with voter myopia. Since welfare amenities have to be provided substantially prior to elections, short voter memory may mean that V does not reward the RP for the provision of welfare amenities.
The TCs arising out of bounded rationality have to borne by the RP and not by V. Should the RP lose the elections, its investment in welfare amenities will have come to naught. Further, voter myopia will mean that the RP may not be rewarded for providing V with welfare amenities. It may be remembered that in the IG-RP contract, the TCs of bounded rationality had to be borne mainly by the IG.
Simply fascinating.
We can even apply this to general elections in 2009. Why did UPA win in 2009? Well it did a bit of both.
- Sixth Pay Commission was awarded to public sector employees. This helped win vote of public sector employees. Not strictly an interest rate group as we understand the term. But if we think from labor/union economics perspective, increasing salaries should have led to swing in votes. Though, this was delivered before the elections.
- Started NREGA and increased subsidies which helped win the rural vote bank. This fits in neatly into the above analysis as benefit was given before the elections.
Both were done in the guise of fiscal stimulus which made the whole thing even more interesting..
