TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

Ganga Prasad G. Rao

Election campaign financing and reform has been at the forefront of politics for the undue influence it has on everything from candidate choice, the platform, the choice of constituencies, the party manifesto itself, even post-election strategies and policies of parties, whether winners or otherwise. The lack of a credible, public, legal, and ethical system to raise finances for election campaigns (and for other normal political activities) has induced many an ill in our society – from corruption and fraud to conspiracies, murders and allegation of electoral manipulation with ‘foreign’ money.

One of the primary inadequacies with the existing system which raises funds from special interests is the overt expectation, post-elections, of returns, even immediate and substantial, for political contributions made prior to elections. Such expectations, admittedly difficult to deny post the electoral win, have resulted in many an administrative lapse/oversight, mis-guided policies, regulatory loopholes and legal grey zones. The harm to the economy, in terms of efficiency losses, and the exacerbation of social inequity could lead to unforeseen, yet large and irreversible consequences in years and terms in to the future. This realization has spawned many an effort to correct the problem, most of them revolving around raising Election campaign funds, ECFs, publicly. Solutions – ranging from involuntary wage deductions, voluntary contributions with tax returns, or a (sales) tax-surcharge – have been mooted, but did not find favour for reasons of impracticability, or worse, a ‘who will bell the cat’ syndrome. Elsewhere, there is the matter of the Government timing its policies to produce results toward the end of its term, so it could leverage its incumbency advantage to pull away in the race for financial contributions and, indeed, with the elections itself. For these and other reasons, it is necessary to consider alternate means of financing elections and ‘satisficing’ coalition partners and the opposition during the term of the ruling party.

Let us therefore take a tentative step forward and consider an admittedly unconventional strategy for financing elections, a strategy that fills the Election pot with ‘contributions’, Hallelujah!, from friendly and unfriendly nations across and beyond our borders. But why? And how? The ‘why’, as it turns out, is easier than the ‘how’. Elections decide the future direction of the nation for the immediate term, and even for terms to follow. And wouldn’t friendly and unfriendly nations - trading partners and competitors – seek to influence that direction much as our MEA seeks to extend its ‘panchsheel-moderated’ influence to SAARC, ASEAN and nations beyond? And if the future of one nation were inextricably intertwined with the futures of friendly and competing nations, wouldn’t it make sense to design a system that permitted each nation to pursue its foreign policies through an overt, legal monetary route – even one that influenced policy though electoral choices - than through underground channels that brought diplomatic disrepute?

As for the ‘how’, if there is mutual awareness, if not tacit recognition of each other’s ‘extra jurisdictional’ monetary influences, then the same could instead be routed through the Sovereign Wealth Fund, SWF, route. Every nation has a Sovereign fund, a fund ostensibly meant to protect the nation’s wealth in the present and the (long) future. Thankfully, these Sovereign funds operate within and without the confines of one’s own nation, and against one another, bilaterally and multi-laterally. What if we exploited their geographical spread across nations to create as many election pots as SWFs, and framed rules under a ‘Hedge (Opposite) ZS’ paradigm to fill them? A Sovereign fund, due its decades-, even century-long vision, seeks more than merely a monetary return; it seeks investments that turn its nation financially, economically, socially, and environmentally sustainable over that duration. That ‘sustainable threshold return’, determined by wealth, resource endowments, and technology, will likely approximate the ‘very long-run’ real interest rate (one can’t do any better with a ‘VLCC’ fund seeking to avoid turbulence in that many dimensions) over the ‘floor’, the floor being the ‘natural rate of gold price inflation’ (one can always postpone a future for a lowly return that approximately matches gold inflation). Aware of this band of low returns, the upper boundary of which varies across nations, the SWFs consciously exploits short- and intermediate-run ‘market exuberance’ to sweep away gains which have their origins in excess volatility, excess returns, or a ‘bakey’ on Potential GDP (the Potential GDP ‘Gap’). These gains find their way in to various pots – overt Foreign aid and a Strategy fund for extra-jurisdictional legislative initiatives if a friendly nation, and a 2-pronged ‘Slush funds for covert military assistance plus a Peace dividend to incentivize economic and military cooperation’, if an unfriendly nation. Since politics determines who takes over the reins of the government, the SWF finds it appropriate that the Peace dividend be offered toward election campaign funds, so the winner, regardless of which party, would be receptive to a peaceful, co-operative future upon forming the new government.

Nations might differ in the ‘threshold returns’ they set for their SWF given their resource endowments, stage of development and expectations for the future. In turn, this translates to varying degrees of involvement in the capital markets of other nations and implies different behaviour in the markets, and indeed contributions to the ‘Peace Dividend ECF’. A rich nation that seeks to be just and sustainable might adopt a lower threshold return than a developing nation and distribute more of its gains among ECFs than the latter. Consequently, the rich nation may offer a larger contribution to the ECF than would a developing nation.

If level changes in the Equity section of the market are indicative of achieving performance benchmarks or falling short of them, Equity and Bond volatility of lessons or interim compensation/exploitation, changes in Bond levels of ‘secular’ reductions/increases in inequity, and Complements of the presence of ‘opposites and hedges’, then, given nations could be friendly or competitors, and the ‘home’ government either to the Right, Center, or Left, there are, potentially, several alternative configurations for the allocation of SWF funds in Boom and Bust years across asset classes. However, using the ‘principles’ as enunciated above, two illustrative, albeit aggregate allocations for a pair of SWFs is proposed below:

FRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
	SovA Comp (20%)	Volatility	SovB Comp (10%)
SovA Comp (20%)	SovB Key (65%)	Level	SovA Key (50%)	SovB Comp (20%)

Nation_A Peace Dividend: Sov_B Bakey(5%)

Nation_B Peace Dividend: Sov_A Bakey (10%)

UNFRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
SovA Comp (10%)	SovA Comp (5%)	Volatility	SovB Comp (10%)	SovB Comp (10%)
	SovB Key (50%)	Level	SovA Key (60%)

Nation_A Peace Dividend: Sov_B Bakey (30%)

Nation_B Peace Dividend: Sov_A Bakey (25%)

Thus structured, the Peace Dividend pot is the sum of gains from capital markets and strategic residual nations pay each other to avoid overt military, economic, or diplomatic confrontation in the current time frame. The pot could also be alternatively interpreted as representing the monetary translation of resolved and unresolved issues in international trade, diplomatic/military relationships and social/religious contracts/benchmarks, or as representing certain viewpoints and (unilateral) decisions by the SWFs. By the nature of the allocations, the ECFs shrinks when SWFs prefer to stay invested in peace time, and enlarges in those years when the two nations turn unfriendly and lock horns with each other. By offering the Peace Dividend toward the Election Campaign fund, the nations mean as much to share the ‘spoils’ with political parties, as it means to hold them responsible for correcting the unresolved issues in the new Parliament.

In a multi-lateral context, each nation would be investing across the capital markets of friendly and unfriendly nations, and the SWF allocations turn as much more complex. It is suffice to point out, however, that in such cases, the SWF would invest much less at home and distribute a larger share of its portfolio in investments abroad. Further, the allocation to any single market would be a small fraction of its market capitalization and, indeed, of the SWF net assets. Consequently, the ECF, now comprised of contributions from several SWFs, would take on an international flavour and seem like an International Election Fund. Extrapolated to all democratic nations, the ECFs would constitute a global system for cross-financing of elections.

The focus now shifts to how the monies available under the Election Fund are apportioned across the various parties – ruling and opposition. To aid in answering the question, consider a proposal that rewards and punishes the Ruling party and the Opposition in some relation to their economic and social performance. In a democracy, parties make ‘offers’ to voters via their manifesto/agenda and nominate candidates to pursue them. Due the majority criterion, populist policies – policies that are privately enriching to the masses in the immediate- or short-run, but zero-sums across time, space, and the environmental commons, are preferred by voters. Due competition, parties seek to better one another with their offers, and thus push the more greedy or desperate amongst themselves to stake a manifesto that implies extreme, unsustainable exploitation of the commons and future generations. Such economic exploitation is facilitated by interventions in various economic spheres, specifically, interest rates, subsidy-induced government borrowing and budget deficits, exchange rate and trade policy, and industrial policy. A Government that follows a zero-sum strategy, ‘depreciate ‘n export’, or ‘exploit the environment’ strategy is likely to:

a) lower short-term interest rates,

b) lower Corporate/Capital gains/Personal Income taxes,

c) announce populist subsidies that enlarge the budget deficit and induce an unsustainable fiscal deficit,

d) resort to laxity in enforcing environmental laws and regulations, and

e) artificially depreciate currency to boosts exports if at the cost of stoking domestic inflation.

Such interventions lead further to structural imbalances in bond and savings markets, currency markets, international trade and environmental protection. An ECF that distributes the Peace Dividend monies indiscriminately among political parties could exacerbate these tendencies, and cause irreparable damage to the economic and financial fundamentals of the nation. To staunch such irreparable economic damage, the ECF must so structure its ‘payouts’ that it incentivizes prudent and sustainable economic policy decisions by the political parties.

Toward constructing a ‘rule of thumb’ for ECF payouts across parties, first conceptualize a Payout Fraction, PF, designed simply as a counter-weight to the perverse incentives faced by political parties, in particular, the Ruling party, even if it implies, in the context of politics spanning the entire 180 degree Left-Right spectrum and the presence of friendly/unfriendly nations, a certain subjective judgement as to what is ‘appropriate policy’ and what isn’t. Let PF be a product of two variables: a time-dependent ‘Equity Rating’, Z, and a composite of policy variables and economic parameters, EPP, that measures the ‘ZS-Exploit’ strategy:

PF = k. Z.EPP

Z, the first component of the PF, constructed as A(t/60) and A(1- t/60) - where 't' represents the month count from the start of the new government for a 5 year term - provides for formal cognizance of the public perception of the government - the so called Approval Rating, A - in the distribution of electoral funds between the ruling party and the opposition parties. If the survey for the Approval rate were so designed as to limit itself to household and social welfare (an indicator of cost of living, livelihood standards, and social equity), then the above formula would be a time-weighted, see-saw combination of equity and efficiency measures. It’d apply directly to the Ruling party, but in the complement to the Opposition. In both cases, the fraction would vary over time albeit in opposing trends. The ruling party stands to gain much of initial fund flows from the ECF; conversely, the hand of the Opposition is strengthened toward the end of the term, thus offering a credible counter-weight to the incumbency advantage of the existing government.

The second component, EPP, must be designed to offer an appropriate corrective signal that, when applied to distribute monies from the ECF, would offer the appropriate disincentives to political parties and force them to refrain from engaging in short-term exploitive behaviour. That signal would only obtain if EPP targeted those instruments and policy variables that the Ruling party employed to exploit, intervene in, or influence outcomes. It is to the choice (and design) of these instruments, outcomes and policy variables that we now turn our attention to.

Many governments have exploited the trade-off between economic growth and the environment to jumpstart their economy. To counter this incentive, albeit ‘judiciously’, we include as the first term of the PF equation, the percent GDP growth net of the Inflation in the price of Carbon Permits; the inflation in the price of carbon permits being an indicator of the marginal severity of environmental exploitation. If the Government were environmentally judicious with its growth policies, the net would be positive, implying its environmental compromises resulted in higher economic growth. Conversely, poorly conceived, environmentally profligate industrial policies that raise marginal environmental damage and turn the net negative, take away from the Payout fraction to the Ruling party. Anticipating that the ECF will deny them campaign funds for being environmentally insensitive, the Ruling party either changes course or delays the environmentally injurious decision, thus averting the environmental wrong.

To the second term in the PF formula, we assign the task of catching the Government short if it pursues the all-too-familiar Keynesian ‘spend-big-on-subsidies-and-kickstart-the-economy-with-low-interest-rates’ strategy. Such strategy discounts the impact on government finances, in particular the budget deficit, and in turn leads to both inflation and higher long bond yields due inter-temporal and cross-sectional ‘crowding out effect’. To counter such ‘governance short-cuts’, the Payout Fraction is designed inversely related to the sum of the long-short rate spread and the inflation rate. This variable increases in magnitude with the extent of intervention and damage, and helps check any ‘irrational exuberance’ on the part of the Ruling party upon assumption of office.

The third strategy, that of ‘Depreciate ‘n Export’, involves intervening in the currency-exchange rate market to artificially depreciate the currency as a means to turn exports attractive. Such depreciation could be induced by a variety of tactics: from flooding the economy with excess supply of currency (M2), sustained selling of domestic currency to buy dollars in the currency market, to reducing the CRR. The ensuing boost to exports (which supposedly contributes to GDP growth) is tempered by the hike in inflation and the compensating rise in bond yields. Thankfully, the Payout Fraction has anticipated the flagrant exploitation of such a strategy in the bond-inflation summation construct, and the same is sufficient to internalize this perversity too.

Much like the Budget deficit is exacerbated by populist subsidies, the Current account deficit too is a reflection of exchange rate and terms of trade and, thus, is affected by trade policies. The Current account deficit is determined by the efficacy and the sustainability of exchange rate interventions. A Government that maliciously adopts a deficit-raising growth strategy must be held accountable to its voters. The ECF-PF route is a tentative means to obtain such control. A ratio of GDP growth to the sum of Budget deficit and Current account deficit reveals the effectiveness of both the subsidy economy and trade policy; it is a direct variable in the Payout formula. This ratio assumes values greater than 1 when the percent rise in the sum of deficits is outdistanced by the percent rise in GDP, and less than 1 vice versa.

Finally, the tendency to either reduce Corporate/Capital gains tax rate or personal income tax rates to assuage the business community or middle class voters can be anticipated with a construct that is simply the ratio of the sum of marginal Corporate, Capital and Persona Income tax rates to the yield on Long bonds. The rationale is that a reduction in tax revenues must be compensated for with the issue of more long bonds (short bonds would come to roost within one’s own term); in turn, raising long bonds incrementally causes its yield to increase. This construct trends in opposite direction to the short-run incentives of the Ruling party and serves to brake those unsustainable ambitions.

Combining the above ‘arguments’ of the EPP function, the Payout Fraction takes the form:

PF = k. Z. EPP{ [ (y_bl-y_bs)+i_p] , [GDP^/(d_b+d_ca)^], [GDP^- P_cp^] , [(t_c+t_cg+t_pi)/y_bl] }

where

^: percent growth rate of the relevant variable

Z = A(t/60) - Opposition; A(1-t/60) - Ruling party

i_p: (Price) Inflation

y_bl: Long Bond Yield

y_bs: Short Bond Yield

d_b: Budget Deficit

d_ca: Current Account Deficit

t_c: Corporate Tax

t_cg: Capital Gains Tax

t_pi: Personal Income Tax

P_cp: Price of Carbon Permit

Together, these variables measure the net impact of biased, politically motivated, or economically indefensible interventions in domestic, trade, taxation, currency, and goods markets. The Payout Fraction, tentatively proposed above, when computed and combined with the aggregate ECF pot for the nation (as determined by contributions from various SWFs operating in the nation’s capital markets) determines the flow of election funds to the Ruling and opposition parties. Thus designed, the Payout Fraction offers the right incentives to political parties no matter on which side of the government they sit on. It achieves the goal of ‘equitably’ distributing the ‘Bakey-Largesse-Sting’ from the SWFs among political parties who determine the economic course of the nation.

The upfront knowledge of the Payout Function, and the fact that any lapse in policy making enriches the opponent, ensures political parties anticipate their gains and losses under alternative strategies, re-consider incentives before and after the elections, and internalize the same in their policy promulgations. Finally, the advantage that the Ruling party has in terms of determining the size of its own Payoff (and that too, immediately) due promulgating policy at the start of the term is counter-balanced by the design of the Payoff function which enriches the Opposition toward the end of the term when SWFs are likely particularly active and when public opinion turns absolutely critical to survival.

The proposal above is, in the context of the globalized society we live in and the realities of the day, a practical solution to the issue of Electoral and Party financing. It obtains a degree of control on the perverse incentives facing political parties in elections by offering them a publicly credible and legal source of funds for campaigning, and guides the nation toward an equitable and an efficient economy by inducing prudent and enlightened policy making.

Besides, it leaves something citizens relish on their dinner plates…

…. A Corruption Bakey!