Is good economics necessarily good (or necessarily bad) politics?
Welfare-enhancing economic reforms have distributional effects and, therefore, create distributional conflict. Good economics may, therefore, not necessarily be good politics.
In the midst of a full teaching semester, there isn’t the bandwidth to create new content for this page — but an opportunity to revisit some of my past writing, which may still hold relevance for the present.
One of the evergreen questions of political economy is whether good economics is also good politics. I’ve had varying thoughts on this over the years, at times more optimistic, at times less.
The image above is the front page, above the fold, of a Sri Lankan business newspaper, reporting on a talk I’d given in Colombo in 2016 to a think tank, and, then privately, similar ideas shared in conversation with Sri Lankan policymakers of a then reformed minded government. Given the vicissitudes in Sri Lanka’s politics since then, I doubt that any of my suggestions had the opportunity to be implemented, even if they made sense to the policymakers I spoke to.
The headline reads that “good economic policy is good politics”, attributed to a “top Indian economist” (flattering indeed, although I’m a Canadian economist born in India). I was speaking at that time on doing business reforms, in which there is a credible case to be made.
However, on structural economic reforms, which create winners and losers, trade liberalization being a canonical example, it’s pretty clear that distributional consequences, and, therefore, distributional conflict, can scupper or reverse welfare-improving economic reforms. Even though economists may argue, correctly, that if a reform is truly welfare-enhancing, in the sense of Pareto-improving, it’s possible for winners to compensate losers, such that no one is worse off and some are better off as a result of the reforms.
However, the redistribution necessary to turn a potential Pareto improvement into an actual improvement very rarely occurs in practice, or happens very poorly. Hence the dilemma for the economic policy advisor who is also cognizant of the political economy of reform in addition to the “pure” economics of reform which may be undertaken by a (fictitious, non-existent) benevolent, omnipotent, and omniscient central planner — which doesn’t seem so far from the myth of “scientific socialism”, something discussed in a recent post.
I wasn’t quite so sanguine when I wrote about this in early 2012 in the Business Standard, an Indian daily, shortly after a disastrously failed attempt by the then-Congress led government to enact some relatively benign reforms on FDI in the retail sector. In passing, the piece also references the then unfolding Eurozone sovereign debt crisis. You may find the original article here.
The title of this post ends with a question mark, whereas the article’s original headline is an assertion. In other words, I remain ambivalent, and (cautiously) hopeful that a sufficiently savvy politician can “sell” good economic policy to the public, or work with greater success than has been the norm to mitigate adverse distributional effects.
The text is placed below. As usual, the version below may differ due to minor copy desk changes for house style.
While written a dozen years ago, there might be some useful lessons for ongoing economic policy debates today. You be the judge.
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Good economics is often bad politics
Vivek Dehejia
January 21, 2012
As the unfolding fiasco over FDI in retail in India amply attests, good economics is often bad politics. This is a fundamental tenet of political economy, the field of study which lies at the intersection of economics and political science but is often forgotten by conventional economists who excoriate politicians for failing to enact much-needed economic reforms. If it were that easy, of course, they would have, a rather basic observation that escapes most technically minded economists. What makes the current scenario interesting is a bold and apparently principled decision by the government being quickly reversed in light of its political calculus, as is the decision by the principal opposition to oppose it on self-evidently opportunistic grounds.
In general, the reason that efficiency-enhancing economic reforms are politically difficult is that they carry distributional consequences. An economy as a whole will gain, for instance, from a move toward free trade, but workers and firms in import-competing sectors stand to be hurt and will protest. Politicians, in turn, will weigh the likely electoral gains and losses, which may not tally perfectly with the corresponding economic ledger.
Unfolding events amply illustrate these arguments. Democratically elected governments in Greece and Italy have fallen and have been replaced by technocratic administrations charged with implementing vitally needed reforms to stave off financial crisis and to save the Eurozone from imploding.
It is the very fact that the proposed measures -- ranging from spending cuts to curbing the privileges of powerful vested interests -- proved impossible for elected governments to enact, with bankruptcy staring them in the face, that starkly illustrates the limitations that democracy places on economic reform.
The different economic performance of China and India is another perfect illustration. After a promising start, economic reform in India has faltered, and growth has begun tapering off. If even a year ago, analysts, foreign and domestic, were predicting that India would overtake China -- in terms of growth rate, if not income level -- the barrier of double-digit growth now seems all but impossible to breach.
Indian commentators blame "policy paralysis," a euphemistic turn of phrase for the government's evident lack of interest in pushing files ranging from privatization of loss-making state-owned enterprises to unshackling rigid labor laws that retard the growth of a large, export-oriented manufacturing sector. The emphasis, rather, is on rolling out large, entitlement-based social programs, such as the flagship National Rural Employment Guarantee Act.
The knee-jerk reaction among economists and a certain category of political analysts is to castigate politicians who put redistribution ahead of growth. They point to the success of the East Asian "tigers" in earlier decades, and China today, as exemplary instances of well-honed policies that have delivered rapid and sustained economic advance.
Yet, they forget, in what might be termed willful amnesia, that all of these instances of economic liberalization took place under non-democratic political systems. South Korea, Taiwan, and Singapore were virtual one-party states, Hong Kong was a British colony, and Chile was ruled by a brutal and blood-soaked military dictatorship, during the period of rapid growth in all of these economies. And China today embodies the very opposite of an open and pluralistic society.
These days, of course, it is no longer army generals with medals and epaulettes, but Ivy League-trained bankers in bespoke business suits, who engineer bloodless coups. And their international backers are no longer the C.I.A., but the I.M.F. But whether sporting navy white or Savile Row pinstripe, the architects of economic reform, now as then, often do so from outside the political mainstream.
The corollary is that that the inertia of democratic polities -- what political economy terms "status quo bias" -- implies that sweeping economic reforms invariably occur in an ambiente of crisis. This was true of India's first wave of liberalization, following a foreign exchange crisis, in 1991, and, obviously, is true of Greece and Italy today.
Some observers, usually economists and policy analysts, lament the constraints that democracy places on economic policy, especially in the context of developing economies, and rue the impossibility of achieving Chinese-style rates of economic growth without embracing Chinese-style totalitarianism. Democracy, on this view, is like a sticky accelerator, which prevents the economic engine from racing ahead at full speed.
This is the wrong lesson to draw. Far from being a "constraint," democracy is integral to a civilized society. It is, in other words, inherently woven into the fabric of a society worth living in, not merely an instrumental component that may be disconnected when it becomes a nuisance.
Hopefully, those who criticize India's recent lacklustre economic performance, or who are cheering on the unelected administrators at the helm in Greece or Italy, will keep this in mind. The moment that democracy appears inconvenient or irrelevant to some, it is incumbent upon the rest of us to speak most vociferously in its defense.