The economic pain of democracy

Finance ministers are only listened to in times of crisis, complained India’s then-finance minister Manmohan Singh to Forbes magazine in 1995. Could Singh have foreseen his position 14 years later as prime minister, navigating his country through the world’s worst economic crisis for 50 years, while at the same time persuading 714 million registered voters to return a coalition headed by his Congress party to the helm in the 15th general elections?

More to the point, has he listened to his own finance minister in this time of crisis?

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Because if finance ministers are ignored when the economy is doing well, they are practically shut up in a box during an election year. Elections are notoriously disruptive to developing economies as policies appealing to the heart of the populace rule over the sensible head of economic theory. Studies of Asian economies show remarkable swings towards expansionary fiscal and monetary policies during election years – see for example the charts of Indian commodity taxes and capital spending vs election cycle. Industrialized nations do not exhibit anything like the same degree of economic manipulation.

Given the scale of the 2008 financial crisis, Singh and his cabinet could be forgiven for opening the purse strings beyond India’s capabilities in launching their three recent stimulus packages. But although India could ill-afford to spend or borrow, with a budget deficit running at 7% and national debt at around 90% GDP , farmers were given US$15 billion in debt relief. The farming community accounts for 500 million of the electorate – was this debt-waiver policy tool used for winning votes or was it a prudent economic kick-start in-line with global response to the crisis? Considering the Indian rural community has been largely unaffected by the global economic crisis, this US$15 billion was more likely a reminder of which blue button to push come polling day.

Developing nation democracy, it seems, is a thorn in an economist’s side.

At least, it is in India. China, on the other hand, has taken the democratic principles of one-person-one-vote and turned them into a powerful economic tool which rejuvenated China’s troublesome rural economy, and continues to be the backbone of rural growth today. The Organic Law allows villagers to elect their leaders (essentially the executors of the state’s policy) and is an interesting study of the mechanics between voting and economic growth – without those thorny issues of policy popularity contests.

China puts villagers to the vote

Before the economic reforms of 1978, China’s villages were organized in a tightly controlled commune system. The dissolution of the communes left villages under ambiguous leadership and the situation quickly ran out of control – a Renmin Ribao government report in 1994 estimated some 800,000 villages were “no longer functioning” (ie had fallen foul of the “six vices” and were economically destitute). Lawlessness across 70% of the population threatened to choke the economic reforms; a return to the traditional commune system was unthinkable.

Elections were the answer. The village vote was introduced to quickly restore order in the villages through the removal of corrupt or incompetent officials, and to empower villagers to take a more direct stake in their own welfare. Voting was not designed to promote democracy and indeed these elections are called “semi-competitive” since the ruling China Communist Party (CCP) approves the candidate list. Anti-state candidates, if approved are seldom popular – villagers can better develop their economies when state laws and policies are enforced.

China uses democracy to create order. India uses it to create chaos. When the Indian results are announced (on May 16) and the dust settles on coalition building (hours to months later), the successes and failures of both India and China’s stimulus packages will already be apparent, and the sport will turn to watching how these two governments, so different in style and provenance, continue their ambitious growth plans – and to see just how much difference to economic policymaking a vote makes.

China faces a new challenge in the harsh economic climate: students. Two million restless graduates will be hitting the job market this summer, a small group compared to the might of 800 million Chinese villagers perhaps, but, if provoked, a dissatisfied student body could be a far more dangerous adversary to the CCP than any rural uprising. Unlike villagers, China’s students are educated, politically aware and, above all, very well interconnected as a community – all good traits in revolutionaries.

Without the pressure-release valve of democracy, China must keep its peace with the students by giving them jobs, opportunities. Chinese stimuli and policy measures all point in the same direction: towards domestic manufacturing, job creation, infrastructure, entrepreneurship, and robust channels for capital markets. The speeding transition to a domestic-led economy and plenty of jobs for graduates will cause pain for some sectors, including the cumbersome state-owned enterprises, and a great deal of pain for those companies and officials not willing to move with the times. But votes are not at stake and the country is financially secure – the CCP can afford, financially and politically, to be ruthless in delivering its economic goals and maintaining the political status quo.

Fifty-five-party India must find a different approach to one-party China. India’s new government, whatever form it takes, will find it difficult to achieve its election promises. Even after manifesto pledges such as 100 days minimum guaranteed work and extensive grain subsidies are watered down by the coalition horse-trading, India will need to make some tough choices to fulfill its dream of a rural middle-class while restoring some stability and strength to its fiscal and economic direction.

And India can’t just print money – as Singh himself has said, a government could never get away with inflation at 20% in a democracy. India’s pressing concerns are subsidy reduction, power sector reforms, infrastructure development, yet voter demand may see what little money the country can afford disproportionately spread to the rural communities in hand-outs, write-offs and subsidies. The country’s fiscal position is weak. For India’s economy to get back on track, the finance minister will need to be heard, even if 500 million rural voters don’t like his message.

References

Chen, W. Village Elections in China: Cooperation between State and the Peasantry, Journal of Chinese Political Science, Sept 1999, No. 2, pp63-81.

Forbes Jr., M & Michaels, J. India is not Mexico: An interview with Manmohan Singh, Forbes, April 24, 1995, p160.

Hu, R. Economic Development and the Implementation of Village Elections in Rural China; Journal of Contemporary China, Aug 2005, Vol. 14, Issue 44, pp427-444.

Khemani, S. Political cycles in a developing economy: effect of elections in the Indian States, Journal of Development Economics, Feb 2004, Vol 73, Issue 1, pp125-154.

About James Ockenden (228 Articles)
Journalist covering energy and power markets since 1996.
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