Populist political decision and its economic impact

Petrol and minimum wage are two widely used tools.

LAHORE: It is commonly argued that politicians use short-term measures to gain political mileage at the cost of long-term impacts. Politicians, on the other hand, inherently face a short-term ‘business cycle’, and therefore they dedicate resources in projects that can yield visible results in a relatively short span of time. This is not entirely their fault, as the parliamentary democracy is inherently short-sighted and thus there is usually a stand-off between popular politics and bitter economic realities. As the nation draws nearer to elections, and all parties grill themselves in search of new mantra of development, it may be useful to suggest some parameters that serve the interests of democracy without failing economic realities.

My basic argument is: the ideas which are not measured, in an economic sense, do not count politically. This is contrary to what politicians and intelligentsia generally believe. I will argue that in light of certain economic parameters, both short-term and long-term interests can be watched for. And we can create a marriage of convenience between economic wisdom and popular democracy.

A primary parameter is the social costs and benefits of a project or its welfare gains.

Take, for instance, the issue of minimum wage laws. The federal and some provincial governments have recently announced raising minimum wage. Let’s put this to a theoretical test subject to empirical examination. It seems that the minimum wage is good politics as it seems to bring a political advantage while also ensuring social protection. But does minimum wage law, when implemented strictly, bring welfare of the targeted beneficiaries? In countries where this law is really enforced, rigid labour structures have impeded competitiveness as the employers resort to avoid hiring if the costs are too high.

If we enforce the minimum wage laws in true sense, we are likely to observe an increase in the unemployment. Thus enforcing an apparently good legislation would have negative consequences for politicians. Also, in countries, where the administrative structures are weak, announcement of a law and then presiding over its contempt and indifference will surely dissuade more voters than to persuade new ones.

The other popular measure that governments usually resort to is price control. Price control is not only an economic non-sense, but they are also a bad political idea, as they impede welfare rather than creating it.

Price control does not distinguish the consumers on the basis of their income levels- they are untargeted subsidies. Rich or poor, you pay the same Rs2 for buying a ‘sasti roti’ (cheap bread) from the registered tandoors. There is no way to guarantee that only the poor, or in fact, mostly the poor, would take advantage of price control. Often, the poor resides in rural areas, as in the case of Pakistan, who do not enjoy an equivalent access to the market. Thus the urban consumers, who are more vocal, tend to take more benefit of price control because of greater access.

I suggest that every major regulatory and legislative proposal should be examined for social costs and benefits and the impact on personal choice by an independent panel of economists whose report should be presented in the standing committees as well as on the floor of the house. These reports will not be binding however they should come out with specific numbers on social costs and benefits of a new proposal. Backed with media, this analysis will create necessary political pressure on the politicians.

The writer is managing partner of development pool and is a founding member of Economic Freedom Network Pakistan.

Published in The Express Tribune, May 21^st, 2012.