The Hindu Business Line : When politicians act silly, it must be election time

Modern-day politicians throw out money from the treasury during election time. It seems to be generally accepted that in democracies, elections give politicians the licence to be silly in word and deed.

C. Gopinath

Politicians must often feel like the maharajahs of yore. The comic book image of them that I have is one where the maharajah would saunter down the main street of the town sitting atop his festooned elephant, throwing out gold coins in celebration of some event.

The poor and ragged would scramble around the procession to collect their share of the largesse from the state treasury. Since the maharajah often collected his taxes by questionable means, he probably also had a right to dispose of the money by questionable means! When reasonably educated politicians behave like the maharajahs, we need to sit up and take notice.

Modern day politicians throw out money from the treasury during election time. It seems to be generally accepted that in democracies, election time gives politicians the licence to be silly in word and deed. They say and do things that make economists and rationally thinking folks cringe and dive into bunkers while they wait for the elections to be over. The politicians will always have a crowd that cheers them along, and those who did not get a share this time around can wait for the next election for the silliness to set in all over again.

US instances

The US Congress recently decided that it had the right to fling some money about, maharajah style. It has passed a stimulus Bill that will send out cheques amounting to $152 billion (Rs 6,16,280 crore) to the tax payers. Playing along, the President’s advice to the nation has been to go out and spend the money. They hope that the people who receive the money, at the lower end of the income distribution, would buy stuff that would get the economy going again, and avoid the recession into which it is inexorably slipping. A Republican and therefore economically conservative President behaving like a Keynesian? It’s election time.

The silliness continues. The two individuals slugging it out for the US Democratic Party nomination for the Presidential election, Hillary Clinton and Barack Obama, tied themselves into knots recently claiming that the North Atlantic Free Trade Agreement (NAFTA) has cost jobs and, if elected, they will do something about it.

NAFTA, which comprises the US, Canada and Mexico, has been around for 15 years, and while trade has grown significantly, it caused several communities to hurt as their local economies restructured to changed investment patterns.

Farmers continue to hurt in Mexico, while US employees who lost jobs got some compensation from a trade adjustment fund. The US has moved on to sign other free trade agreements with nations in South America. So why dig up NAFTA now? Because both the candidates were in Ohio, a state that has seen a loss of manufacturing jobs.

The general theme of casting doubts on the free trade agreement and raising the hope (or spectre) of protectionism seemed to play well with the local audiences, so they used it.

Both Clinton and Obama know they would be able to do little to turn the clock back, but it all seemed ok to be silly during election time, when you can prod those old wounds and pretend that you can fix the problem if elected.

Farmer loan waiver

An even more serious attack of silliness was seen in the recent Budget of the Indian Finance Minister, Mr P. Chidambaram. He wants to write off the loans, worth Rs 60,000 crore, of small and marginal farmers. The cheers have been deafening. Bank chairpersons (who must have skipped their economics classes in college) are calling it a win-win situation. The emotional argument in favour of such an action is that farmers are suffering, and committing suicide, and therefore needed relief. So why not get onto that elephant and throw out some money. It is easier than trying to fix the real problems the farmer faces. It seems very humanitarian.

After all, the Indian farmer is much put upon, and by passing land ceiling laws, we have managed to keep him at a subsistence level working uneconomic pieces of land. But the same farmer is also an honourable man with a worthy honour code.

First, state governments corrupted him by offering free electricity and telling him that it is a resource that has no cost attached to it. Now, by writing off loans, the minister wants to teach him other lessons.

One is that those farmers who repaid their loans in time are fools. The second is that next time you take a loan, hang on to it till election time and it will be written off. I wonder what Gandhiji would say about this, for he believed that the means were as important as the ends.

Paying for the mistake

Institutions are the basis on which modern societies are built. Countries that do not allow institutions to take root have paid the price. Pakistan has long suffered from short-term rejoicing when a military government takes power and throws out the corrupt and ineffective elected government. The long-term problem that was created was that the institution of democracy was not reinforced nor allowed to put down deep roots.

Again, President Mugabe of Zimbabwe allowed the poor blacks of his country (some would say only his party) to take over large white-owned farmers in a land grab action. There was much rejoicing from his followers. But the country has seen food shortages, chaotic inflation, and a declining faith in the institution of land ownership.

Mugabe, on his elephant, continues to throw out the coins, while the country sinks into despair. Skewed land ownership was a problem, but unleashing land-grabbers was not the solution.

Economies need institutions such as markets, law and order, and faith in a regulatory system to all be aligned and sing the same tune. It takes decades of little actions to build that faith and those institutions. It can be easily destroyed.

Suspending loan repayment

So, is there a way to help the poor Indian farmer without destroying the system of credit and the banking institutions and practices that are built around it? Sure there is.

The same objective of relief for poor farmers can be achieved by suspending (not cancelling) loan repayment, say, for five years, and rescheduling the interest and principal repayment. The bank officers need to be in charge, not the minister, of reviewing each loan and rescheduling the loan.

This is routinely done for businesses that get into trouble. This would give the same relief, without sending the wrong lesson to the farmer that there is no cost to loan default. The additional wrong lesson now being given to the bank officers is that lending to farmers is a hand-out and not a loan so normal principles of lending can be forgotten.

Many years ago, when I was a student of Prof Manmohan Singh at the Delhi School of Economics, he would be certain to have failed me if I had suggested a remedy of loan cancellation to the problem of weak farmers.

So why, then, would he agree to his Finance Minister wanting to institute such an irrational policy? The same reason why his colleagues at the State level have been handing out free television sets, free saris, free bicycles, and so on. All well funded by the treasury. Ah! That silly time, elections, must be at hand.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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