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Economic stress and political outcomes

Source : BUSINESS_STANDARD
Last Updated: Sun, Apr 07, 2013 19:50 hrs

There is a reassuring narrative about the political response to economic stress in modern democracies. As economic problems mount, they find increasing space in the rhetoric of political parties, both ruling and opposition. As elections approach, these parties, recognising the importance of the issue, outline what they would do to solve the problems. The electorate makes a dispassionate judgement on which party's proposals are more likely to work and vote accordingly. The winning party forms the government, implements its proposals, the problem is solved and everybody lives happily ever after ... or until the next shock hits and the cycle recurs.



But is this narrative even close to describing reality? Let's look at a few recent political outcomes in countries that are all unquestionably dealing with economic stress, to greater or lesser degree. In the United States, notwithstanding the dominant campaign theme that the status quo was completely unable to deal with the country's economic problems, the outcome saw it being fully preserved. The Democrats retained the White House and the Senate, but in the latter fell short of the filibuster-averting 60 mark, which now makes enacting legislation much more difficult. The Republicans retained the House of Representatives. This clearly makes it difficult to judge as to which party's proposal on solutions to economic problems was more credible.

In Greece and Italy, two of the most stressed European economies, the outcomes were completely fuzzy, with no party coming even close to a clear mandate, even as their governments were participating in complex external negotiations. Was this because none of the contesting parties had credible plans to deal with the situation? Or were the issues so complex that voters were simply unable to evaluate the respective strategies articulated by the parties in terms of their feasibility?

Of course, these examples do not tell the whole story. There have been outcomes with significant implications for economic policy. In the United Kingdom, the Labour Party was displaced by the Conservative-Liberal Democrat coalition, which initiated a substantial fiscal consolidation programme. More recently, the transition of power in Japan has resulted in an aggressive monetary expansion, which marks a dramatic departure from the Bank of Japan's approach in the past. It is too early to gauge the impact of these policies, but both instances do conform to the narrative of decisive political responses to economic stress.

What does the Indian experience suggest? It is tempting to see the electoral outcome in 1991 as a virtuous political response to what was unquestionably a deep crisis. A single-party government replaced an unstable coalition and immediately initiated a process of economic reform, which had a lot to do with the subsequent growth performance of the economy. But the facts are also amenable to a more nuanced interpretation. The Congress partly barely got a majority, so it was not a decisive vote for change, let alone a specific set of economic policies. And the situation was so dire that perhaps any party or coalition that assumed power would have had no choice but to initiate the same set of policies. Of course, the path taken after the initial macroeconomic crisis management measures had been initiated might have been different, but that is another story.

The really interesting, though much more difficult to explain, outcomes are the 1996 and 2004 results. In the first, the economy had just entered a high-growth period (which, of course, proved to be short-lived), vindicating the government's position that its reorientation of economic policies would pay off - and fairly quickly at that. Again, in 2004, after a long period of modest growth (though not by historical standards), growth was picking up rather strongly and looked like it would persist for a while. Both situations seemed to favour the incumbent parties or coalitions, but the outcomes proved to be different. Obviously, other factors combined to offset the advantage that economic performance could potentially have afforded the incumbents. But that is also another story.

If there is a bottom line to all of these examples, it is probably this: democracies facing economic stress can very well produce political outcomes that do not offer obvious solutions to the causes of that stress. This can, of course, be attributed to the role of several other factors in determining political outcomes. However, it is striking that even in situations in which the economic situation would be expected to have been by far the dominant issue in the campaign debate, the outcome did not reflect any clear preference for an approach.

The Indian experience suggests that while crisis can lead to reform, it is not very clear that this is the result of a decisive political mandate. In fact, the other two instances that I referred to suggest that incumbents are not necessarily rewarded for what may be perceived as good economic performance during their terms. This may imply, purely from the perspective of symmetry, that they are not penalised for adverse economic conditions during their term.

The complexity and fuzziness of the relationship between economic stress and political outcomes is an important factor as we look ahead to the prospects of recovery and growth acceleration over the coming years. Substantial improvement in economic governance and policy reorientation are being widely seen as critical to these prospects. In various ways, parallels are being drawn to 1991, when the policy initiatives following the elections apparently saved the day. But things could go other ways as well, as recent developments around the world have demonstrated. Electoral outcomes could provide no clarity at all as far as the citizens' preferred approach to economic policy and management is concerned.

While this constitutes a significant risk, for example, an unstable coalition with survival as its primary objective, it also provides an opportunity. This opportunity will be exploited or squandered away depending on how the national parties gear themselves up for the campaign. Public articulation of what each of them proposes to do to first achieve macroeconomic correction and then stimulate rapid, inclusive growth is absolutely critical to this. The argument that mass political campaigning does not need this kind of detailed communication is not tenable. Whether this action plan figures in the popular discourse or not - it should - the prospects for the economy could stand or fall on the soundness of the plan and the speed of its execution. This is essentially what defined 1991 and it could well make or break 2014.

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