The Long Run is But a Series of Short-Runs (and Elections are Tomorrow!)

The Long Run is But a Series of Short-Runs
(and Elections are Tomorrow!)

Ganga Prasad Rao
http://myprofile.cos.com/gangar


The other day, I was pondering about the impact of the policy interventions of the government in cement, iron ore, and milk on my portfolio of stocks. I concluded they were decidedly unnecessary, meant to contain inflation or worse, change the balance of competition in the industry between domestic and international producers. That got me thinking about the incentives facing the ruling party. The ruling political party sets the long-term course of nation and affects the destiny of millions with policies crafted with a decidedly short-term, even self-serving perspective. Elected on forgotten promises, put together as a hodge-podge coalition, cabinets re-shuffled thrice since elections, and 'fighting fire' from one no-confidence vote to another even as they plan their finances and strategy for the 'surprise' election, these parties are ill-suited to giving policy direction to the nation.

It's such a widespread problem and has been our bane for so much time, that it is surprising serious attention has not been paid to resolving it. Some would presume that the ruling party would seek to maximize its re-election odds by seeking policy optimality. True, the chances of re-election following a term in office is, to some extent, a function of the policies adopted by the ruling party. But voters are often uninformed, extra-ordinarily fickle, not to mention, highly forgetful. Their votes represent more an opinion at a single point in time than an informed decision considering past record and evaluation of prospects and promises. Besides, elections are fought and votes are cast on the basis of many factors, of which past record with respect to policy promulgation is but one. No party will pass policies that hurt in the short-run (as truly corrective/optimal policies are likely to) in the hope voters will recognize their long-term worth at the ballot box. Therefore, though parties are likely to propose and pass policies that reinforce their platform and image among public, no one, not the least political parties, lays any claim to long-term desirability of policies from the perspective of the entire nation. In fact, and to the contrary, promulgated policies are likely to be of the 'self-serving concentrated benefits in the immediate run with dispersed long run societal costs' nature. Add to this, the fact that a party falling or fallen from public grace will adopt a 'scorch the earth for a bucketful of water' policy strategy, and what you have is an administration leaning to the immediate right at the cost of all ideals we hold dear for our future generations. In nations ruled by short-lived coalition governments and riddled with caste politics, regional politics, not to mention personal egos, this 'short the long' strategy can devastate the people.

With the exception of long-term bilateral- or multilateral- trade policies, no administration adheres to policies formulated by the previous government – five year plans notwithstanding. Should we then expect and live with frequent policy reversals and re-orientation? Can't we guide, almost force the government to promulgate policies with a long-term perspective? The pessimist in me says 'No, not with the realities and incentives facing them'. What then is the answer? There is a solution, even if radical. If all parties (and voters) agreed to a scheme in which indices of administrative performance and long-run policy optimality were weighted in with votes in determining the change of government, then, one could expect a 'sea change' in the behavior of ruling parties. To implement this, one would first have to constitute a panel of eminent experts – economists, academics, journalists, industry barons and social leaders (perhaps chosen by the public) – who, after deliberating on the pros and cons of the issues, vote on a periodic basis to pass judgment on the administrative-, governance- and policy-performance of the government in various fields using an objective set of criteria. In particular, the long-run optimality of government policies would be determined by various criteria including efficiency of promulgated policies, long-bond indices, housing mortgage index, sustainable development index, achievement of Millennium Development Goals, etc. An 'Administration and Governance' divisia index may be constructed from these indices and expert constructs and arbitrarily scaled to 1 at the start of a term. At any point in time following the assuming of power, the change in the index would represent the cumulative long-run performance of the government. When combined with voting shares obtained in a PR-type ballot, they obtain a composite measure of the total electoral score of the party. A 'threshold' score, that varies inversely with the vote share obtained could be adopted for the re-election of the incumbent party.

This system discounts the importance of voting and limits the damage caused by an uninformed, frenzied electorate whose perspective is manipulated by rhetorics practiced by political leaders, columnists and election psychologists. By punishing short-term self-serving policies, it prods the ruling party to adopt a longer-term horizon while designing policies; In doing so, it better achieves goals of the nation and its people. Developing nations, plagued by an uninformed electorate, coalitions and religious/ linguistic factionalism are particularly likely to gain by adopting such a system.

Sounds far-fetched? Try laissez faire!