Friday, March 14, 2014

Effect of the elections on national economy

The knee-jerk reaction to an announcement of elections in India is typically regarding the amount of money that will be wasted. Estimates range from high hundreds of crores to low to medium four figure crores of rupees.
I want to stop this knee-jerk.
As has been made clear by many an economist, including Adam Smith and Paul Krugman, if there is no national outgo of money in any transaction, it is a zero-sum game within the economy. What is one man’s expense is income for another. The money stays in the economy.
Most of the expense for election is confined within the shores of the nation. Indeed, given the likelihood of one-way cross border flows on this count, the income may have a significant component of foreign monies and that cannot be bad for the economy. It may be a different matter that the outgo is from the government and parties, and income is for the most part to the election entrepreneurs.
The above must not matter as the circulation of money is what is of concern. The national economic activity gets a boost, not a whole lot different than what happens during war time. Therefore, I believe proper reckoning of election effect on the economics of the country will show a sudden spike in growth numbers!
But, I conveniently skipped another aspect. The moment shadows of an election appear on the horizon, all government procurement activities come to a grinding halt given the uncertainties of the future political dispensations. Shadows of the Election Commission also loom over every decision of the executive. Even on-going projects suffer severe slow down, particularly when, as in the current instance, elections are scheduled not too far from the beginning of a budget cycle. Vote on accounts or interim budgets do not inspire confidence in the bureaucracy. This is economic slowdown, of a predictable kind.
Combine the two and considering the fact that government procurement is orders of magnitude larger than election expenses, what you get is negative growth in the circulation of monies in the economy. This state of affairs continues for about 2 months before elections, the one month long process and another month for things to settle down. That is, one third of the year is lost.
It is for this reason frequent elections are bad and not on the fact that each election entails much spending.
One last thought. All of the above are nothing but unsubstantiated thoughts coming from an economics illiterate. Take them for whatever they are worth, if anything at all.
Raghuram Ekambaram

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