Illustration: Jayachadran/Mint
Illustration: Jayachadran/Mint

Mysteries of political business cycles

During elections, politicians and voters are in cahoots like never before to gain access to government coffers

Game theorists come up with the oddest things. “It’s impossible for a professor to administer a surprise quiz," my thesis guide, Pradeep Dubey, had remarked one day. “Why on earth?" I remarked incredulously having subjected my students to some carefully chosen missiles recently. Pradeep merely smiled and said, “If you wait till the last class it’s not a surprise because students know you have no other class to administer the quiz. But then, if you wait till the second last class too, it’s not a surprise, since students know a ‘surprise’ quiz cannot be administered in the last class, and so has to be administered in the second last class. A test in the eighth class, too, would not be a surprise as it would simply be seen as just another attempt to ‘surprise’ by administering the test in a class other than the last one. Taking this reasoning to its (seemingly) logical conclusion, a professor can never administer a surprise quiz in a course."

I was rather puzzled but there was more to come. “For the same reason, a government can never indulge in fiscal largesse with an eye on electoral gains. If they splurge towards the end of their term, voters will guess it is for electoral gains, so that won’t work. Even if they splurge a little prior to the end, voters would still figure out that the government, realizing its inability to deceive voters at the end, is merely advancing the freebies with an eye on electoral gains. So that won’t work either. Taking this line of reasoning all the way, fiscal profligacy is a myth."

Now I had him, I thought. “But what of the last-minute gyrations of the United Progressive Alliance (UPA), the finishing touches being given by state governments across the political spectrum, the ordinances and state bifurcations? What of the evidence on the so-called political business cycle showing that fiscal deficits are, on average, 1% higher in election years, with these cycles significantly larger in developing countries, but also observed in developed countries?"

“Tell me more," he said assuming a thoughtful air. I hurtled on: “Research by a legion of economists and political scientists including William Nordhaus, the highly respected Yale Professor, Nouriel Roubini, the pundit who predicted the crash of the US housing market, has shown the reality of the political business cycle. It has also traced the correlation of this cycle to economic rents enjoyed by political leaders in power (also known as corruption!), and the lack of awareness in the population." I was eager to show off my wide reading. “Which also explains the greater association that emerges with developing countries, where these factors are accentuated," I concluded triumphantly.

“Just dropping names of academicians, even US-based ones, is not going to get you far," said Pradeep, himself one of the breed. “Do you think voters in India are naive? Do you think they want to pass up on the one time they get the politicians to work for them—the election? Have you not observed how the residents of urban slums accept freebies from all and sundry and vote for whoever they want? Have you ever considered that voters may be making the best of a bad situation by affecting gullibility?"

I had to admit he could be right. But he was not done. “And do you think mere ordinances on whistleblowers, grievance redressal without any implementation figure prominently on the voters’ recall as they exercise their franchise? All the actions in the last days of a government need not be made to win the election. Some could also be legacy builders, measures to remember them by long after they have faded into obscurity. Or legacy destroyers that make it difficult to function for the government to come."

“But could greater government spending not be a way of generating more sources of ill-gotten income for politicians to fight elections with?" I shot back. My thesis advisor seemed pleased. “This is the first time I’ve heard you think today," he said. “But, unfortunately, I can’t agree with your hypothesis. In a society where corruption is rampant, during elections governments are likely to reduce the proportion of leaked funds in order to distribute largesse among people. At least during an election, acquisitiveness can be eschewed for future personal benefit, if not greater good. The literature on the political business cycle completely misses this point. If the reduction in leakage could be measured the extent of the political business cycle could even be accentuated."

“So now you agree with the political business cycle literature?" I pounced on him. “Research also shows that these cycles are positively influenced by the inability to rig elections, and negatively by conditionalities imposed by multilateral agencies such as the International Monetary Fund (IMF)."

But he was off on another track. “Students make the teachers believe they can be given a surprise test, so that the teacher gives them a test they won’t be surprised by. Teachers don’t mind doing this because this might result in a higher feedback at the end of the term. Figure out this puzzle and you will realize that during elections, politicians from the government and the public are in cahoots like never before to gain access to government coffers."

He was contradicting himself again. He had said politicians reduce corruption during an election, and here he was accusing them of opening up the treasury to the public and making off with some of the spoils. But he was not finished with his surprises. “In a game in which you have to pick an integer between 0 and 100 and the winner is the one who picks the highest integer that is below two-thirds of the average integer picked by all participants, the integer everyone should pick should be zero. But it’s always closer to 20 even with the smartest students. That’s why the political business cycle may be a reality even with canny voters." Go figure.

Rohit Prasad is an associate professor of economics at MDI, Gurgaon.

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