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Can bad politics make for good economics?
Financial Express, India Saturday, January 28, 2012

Barun Mitra
It is generally believed that good economic policies do not necessarily lead to electoral victory, in India. There is a general agreement that economic competition improves the lot of the paying consumer. So, what might be the impact of political competition? While economic growth is not sufficient to help win an election, could increased political competition among major political formations help in adopting economic policies that perform, and contribute to marginal improvements in the lot of the citizens, asks Barun Mitra in Financial Express.

It is widely believed that good economics is not necessarily good politics. Hard economic decisions are usually taken only when a crisis hits. However, it would seem that the political context in India is changing, quite irrespective of any particular outcome in the elections.

Political fragmentation in the 1980s and 1990s was dominated by identity politics. However, in the past decade, there has been noticeable political consolidation, with more stable alliances emerging, increasing political competition, and shifting the agenda more towards developmental issues.

Indeed, 2012 may turn out to be quite significant in our political evolution, with seven states going to polls, five of them now, and two later in the year. For one, there are no big emotive issues to colour these elections. So, the focus is firmly on development. More interesting is the fact that all the major contestants seem to be more evenly matched than ever before. Irrespective of the outcome of the elections, the indications are that after the elections, the focus may increasingly be on policies that actually perform.

Policies matter, but an analysis of economic growth and electoral outcomes in two of the major poll bound states—Punjab and Uttar Pradesh—suggest that politicians are forced to look for policies that improve economic
performance only when they find that their political survival is at stake.

 So, the hypothesis is that political competition creates the condition where economic reforms become possible, which improve economic growth. The point is not that an increased growth rate necessarily improves the prospect for reelection, but what the impact of political change is on economic growth.

 In the graphs, annual economic growth rates are compared with the electoral outcome (vertical bars), in terms of whether the ruling party or coalition is reelected (+1), or defeated (-1). In the case of stable coalitions, such as the Akali Dal and BJP in Punjab, they are seen as one in this code. Given the nature of coalitions, two more variations are included. If an existing ruling party is again part of a governing coalition (either from inside or outside), the outcome is assigned +0.5, and if another coalition comes to power then -0.5.

What this analysis seem to suggest is that when political competition is high, the growth rate tends to move higher. It is needless to say that the economy is a very complex animal, and does not move in a linear manner. But what the graphs seem to suggest is that as political competition stabilises, the economy tends to move into a higher gear.

On the other hand, the political narrative also suggests a clear trend. First, the dominance of the major political force declines. This is followed by political fragmentation, and then consolidation, and consequently increased political competition. This pattern was first reflected in the states.

For instance, Punjab is the first state in north India where two major political forces, the Congress and Akali Dal-BJP have been competing hard for office for 40 years now. Since 1972, in every assembly election, the two have exchanged their places. At first glance, the Punjab graph may suggest that economic growth may not matter, and the ruling party would lose power irrespective of performance. But a more careful reading would show that the economic growth rate has been slowly improving.

Punjab, of course, has been among the economically better off states in India for a long time. And it is possible to identify policies such as the green revolution to attribute for its initial success. Then the fragmentation of the polity and the rise of insurgency in the 1980s slowed the economy. Growth picked up significantly in the 1990s, and so did political competition, yet ruling parities continued to fail to get reelected. The state economy bottomed in the early 2000s, with the drought leaving its mark. Then the economy picked up, while the government changed yet again.

What is really interesting is that the average growth rate in the past two decades stayed higher. Punjab’s per capita state domestic product increased three-fold in the past two decades.

So, the proposition here is that political competition with the real prospect of change in government perhaps provided the necessary incentive for the political leadership to look for policies that deliver. Since change can come only through the political process, this analysis, if found valid, could help us better understand the political context in order to have a handle on economic prospects.

At the other end of the economic spectrum is Uttar Pradesh, which is also going to polls at the same time. Geographically the largest and economically among the poorest, the state has lost its political predominance in national politics since the 1990s. The current election may change that, though.

 UP has the dubious distinction of throwing up 20 chief ministers in the past three decades. Till the 1990s, the chief ministership had rotated mostly among various contenders within the Congress party. But then the politics fragmented, and the government changed hands nearly a dozen times, with all the major political parties in the state getting a chance to rule, interspersed with President’s rule, between 1990 and 2003. Since then, there has been modest political consolidation, with two major parties (SP and BSP), and two relatively small but significant political players (BJP and INC).

The Uttar Pradesh graph illustrates these changes—not very satisfactorily—since it captures only the election outcomes. And even that is complicated by rapidly shifting alliances. For instance, after the 2002 election, Mayawati of BSP had formed a coalition government, but it barely lasted a year, when MLAs defected to support a government by Mulayam Singh’s SP. In the election of 2007, SP lost and BSP got a clear majority. Yet, UP seems to fit into this broad narrative quite well. As politics consolidated and became more competitive, economic growth increased, and its per capita state domestic product doubled to over R12,000, between 2000 and 2010.

Two other states that fit this narrative quite well are Maharashtra and Tamil Nadu. And two states that do not neatly fit in to this narrative are Gujarat and West Bengal. But that is a story for another day.

Despite the prevailing sense of policy paralysis at the national level, clearly India is changing. Increasing political competition has opened new opportunities for the voters to not only demand performance, but to drive the economic changes as their aspirations rise, and expectations leap far ahead of supply. For a political economist, it would be worthwhile to focus on this process of political change, which is making it necessary for political parties to explore new policies that might meet the demands of their electorate.

The 2012 elections, quite irrespective of the results, may finally demonstrate whether India is really entering a new phase where competitive politics delivers good economics.

This article was published in the Financial Express on Saturday, January 28, 2012. Please read the original article here.
Author : Mr Barun Mitra is the director of Liberty Institute, an independent public policy think tank in New Delhi.
Tags- Find more articles on - economic policy | election expenditure | Indian elections | Indian political economy | Indian politics | political legitimacy

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