Represenatative democracy: Economic costs are huge if powers are unguarded

Monday, 13 June 2011 00:00 -     - {{hitsCtrl.values.hits}}

Of all the forms of government which mankind has so far tried and tested, the representative democracy is unquestionably voted by many as the best. This is based on the premise that it allows the people to decide on their own destiny, work collectively to reach that destiny, change the rulers if they fail to deliver their promises or work against the wishes of the people and keep a tight grip on the use or misuse of the nation’s wealth by their elected rulers. Hence, unlike a monarchy or a dictatorship, the masters of a democracy are said to be the people in whom, it is claimed, that the sovereignty is vested.

Since people working together have a better and sounder collective intelligence, again a claim made from the principle of synergy, such a system should naturally bring prosperity to a nation and help it to climb to heights which it has not yet reached. Accordingly, in the opinion of many, representative democracy should be the best form of government for nations.

But, some economists do not think so. They have found weaknesses in representative democracy systems leading to a misuse and wastage of nation’s wealth at two levels, both working in the system when the exercise of sovereignty is delegated to others by democracy’s masters. One is at the level of the bureaucracy. The other is at the level of elected political rulers.

Economists had for long known that the allocation of funds by governments to undertake public expenditure programmes could involve excesses, wastages and misuses.

Kautilya’s Prescription

Kautilya, Indian economist of the Arthashastra fame in the 4th century BCE, equated public funds to honey or poison placed at the tip of the tongue of a person. Just like a person in that situation cannot resist the temptation to taste a little bit of honey or poison at the tip of his tongue, those who handle the funds of the king, or in today’s parlance, moneys belonging to the people, cannot resist the temptation to misappropriate the same. He, therefore, recommended to the king, while exercising a greater control over their affairs involving both carrots and sticks that public officials should be paid good salaries and wages according to the workload, level of knowledge, expertise and the responsibilities of the jobs they handled. In a Kautilyan economy, the wages are totally decompressed and his recommendation was to maintain an unbelievably high salary gap of one to eight hundred. According to the exact salary levels he recommended, the highest officials like the commander of the army and the chief royal advisor should be paid 48,000 panas per annum, while at the lowest level that includes palace labourers and miners, public servants should be paid 60 panas per annum. Since the Kautilyan salary bill is also based on the king’s affordability to pay, his public service or in today’s parlance, the size of the government sector, should be kept at a minimum level. He believed that such a policy would disincentivise the bureaucracy to misuse or misappropriate public funds.

Niskanen’s economic theory of bureaucracy

Much later in early to mid 20th century, Ludwig von Mises and Gordon Tullock wrote on the bureaucracy and its inherent tendency to misuse the public funds. However, it was in 1971 that a formal economic theory of bureaucracy was developed by the American economist William A. Niskanen in a path-breaking publication titled ‘Bureaucracy and Representative Government’. Before he wrote this book, Niskanen had served as an Assistant Director at the US Budget Management Office and it was widely believed that his experience at the budget office helped him to formalise his theory.

Bureaus versus the public

 According to Niskanen, in a representative democracy, the public elect their rulers, commonly known as the government, and empower them to tax people in order to carry out public expenditure programmes that produce public outputs. Producing a thousand graduates or treating ten thousand patients are two examples of such public outputs. The principle set by the public in this regard is that the government should maintain efficiency at all times in accomplishing this delegated function for otherwise the scarce wealth of the public would be wasted, misused or misappropriated. In other words, the government should tax the public at a minimum level and produce the public outputs at the maximum level. To complete these public expenditure programmes, the government is organised in the form of separate bureaus. For instance, to complete higher education programmes, ministries, departments and public universities are set up; similarly, to complete health programmes, ministries, departments and public hospitals are set up. In this manner, a massive network of bureaus manned by public officials known as bureaucrats is set up to serve the public. The aggregation of these bureaus and the public officials working in those bureaus forms the bureaucracy of a country.

Niskanen says that, if the objective of the public and the objective of the bureaucrats are the same, then there is no problem about maintaining efficiency in producing public outputs. But, as it is, the objective of the bureaucrats is to maximise their own personal welfare such as the salaries and other fringe benefits known as perquisites or perks. Bureaus, in order to boost their public powers, may expand their work programmes and the number of officials working in a particular bureau. Hence, this objective of bureaus directly conflicts with the objective of the public who want to keep these expenses at a minimum level. As a result, a long negotiation takes place and at the end, all bureaus over-inflate their budgets requiring the government to impose more taxes and make more borrowings to produce a given amount of public outputs.

Niskanen’s observation on the behaviour of the bureaus to over-inflate the budgets for personal gains is typical of public services in both developing and developed countries.

Political leadership is no different

The public’s relationship with the political leadership is no different from its above noted relationship with the bureaus.

In a representative democracy, political leaders are expected to provide the maximum benefit to the public by incurring the minimum costs. This is exactly what they promise the public when they woo their votes at elections. At that point, the objective of the public and the objective of the political leaders are identical with each other. However, after the elections and once the political leaders are voted to power, there is a clearly visible divergence between the objectives of the two parties. Though, in a representative democracy, the people are said to be the masters and technically in a position to change the political leaderships at the elections, this does not happen because the political leaders are capable of changing the public opinions in favour of them again by using the tax payers’ money. How does this happen?

Economists, Martin C. McGuire of the University of California at Irvine and Mancur Olson, Jr. of the University of Maryland have explained the reasons for this unhealthy development in an article titled ‘The Economics of Autocracy and the Majority Rule: The Invisible Hand and Use of Force’ published in the Journal of Economic Literature in its issue in March, 1996.

Bandit rulers are also public good providers

McGuire and Olson have started their article by analysing the objective and the mindset of a leader of a roving group of bandits. If the bandits do not contribute to produce economic outputs in regions they squander, pretty soon they will find themselves in a situation where they cannot conduct thefts any more because the region would be without economic outputs to take away by force. Hence, it pays the bandit leader to acquire a territory, produce minimum public goods so that people could continue to produce economic outputs and at the end rob a major part of their output. McGuire and Olson say that the roving bandit leader who has now settled in the territory as its ruler makes the people within the territory more productive by ‘by providing a peaceful order and other public goods’. Why should he do so? Because, according to the two economists, it helps him to ‘obtain more resources for his own purposes than from roving banditry’. The people within the territory are also better off in a way because they have now more public goods to consume. But, in the long run, since a greater part of their output is robbed by the bandit ruler, they are not incentivised to improve the productivity and make the increase in the output a sustainable one.

Since the bandit ruler can control the amount of output which he can take away from people at his will, he is incentivised to provide a minimum amount of public goods. McGuire and Olson say that this is an ‘invisible hand’ which makes him a public good providing king.

 Democratic rulers too have the same incentive

Democratic rulers are elected by the public, but, during the election as well as after the election, they are invariably surrounded by special interest groups that seek special favours. Hence, it is necessary for the elected ruler to give out ‘pork barrel projects’, a term coined from the US mid country politicians coming up with projects to woo farmers’ votes and therefore now applicable to any public expenditure programme that benefits a given group or people in a locality and not a nation as a whole. This is the fundamental golden rule which the elected ruler has to observe if he is to ensure his survival in politics and return to power in a future election. To produce pork barrel projects, he needs funds and those funds are raised through taxation if explicit taxes are imposed or through inflation, if printed moneys are used. There is nothing which can stop such a ruler from misusing his powers has been amply demonstrated by Robert Mugabe of Zimbabwe when he said that ‘if he does not have money to launch projects, he would produce money to do so’ at a time inflation in his country was running at more than 100,000 percent per annum.

Taxing people is to take away their wealth by force. To use this force as well as to create a peaceful environment, democratic rulers are given power to exercise violence on their subjects. According to economist, Jack Hirshleifer of the University of California at Los Angeles, anyone who has this power will use it to satisfy his own self interest if that power is not controlled by various checks and balances. But the ground realities show that even when such checks and balances have been imposed, they are not that effective because the political leaders of representative democracies have learned to outsmart the framers of laws. This they do by a number of ways. They could always use their majority power in the legislatures to push through their schemes. If some of the legislators dissent, experience shows that the political leaders could use either the coercive powers they enjoy to subdue dissenters or give out pork barrel projects to silence them. But, this is done at the expense of the tax payers.     

Hence, the democratic rulers who have the certainty of returning to power in future elections will provide certain public goods to keep the electorate happy, but use a major part of the tax money for their own purposes and for providing benefits to the special interest groups that support them. When there are public protests against their misusing the nation’s wealth for private and family purposes, they resort to the use of force to suppress such protests. What is happening today in North Africa and the Middle East is a stark testimony to the ability of rulers to use coercive powers to suppress dissent.

 The root cause: The principal – agent problem

The root cause for both bureaucrats and political leaders in representative democracies to satisfy their personal benefits as against working for realising the objectives of the people has been identified by economists as the Principal – Agent Problem or PAP. The people are principals in both cases and bureaucrats and political leaders are agents who are required to work for the attainment of the wishes of the people.

    Hence, PAP is simply the existence of conflicting objectives between the principal and the agent whom he hires. The principal wants to gain the best for himself and that is why he pays the agent to do the job. But the agent, acting in his own interest may do things which are injurious to the principal. Thus, the bureaucrats hired by the government on behalf of the people or the politicians elected by the people will not satisfy the needs of their respective principals, but try to satisfy their own desires which are different from those of the principals.

The people expect the political leaders to tame the bureaucrats and that is why they elect a government to power. However, this does not happen because there is incentive for both bureaucrats and political leaders to collude together to inflate the public expenditure programmes. The checks which the people have introduced to eliminate such occurrences are therefore conveniently twisted by the two parties to their advantage. The end result is the wastage, misuse and misappropriation of nation’s wealth by both the bureaucrats and political leaders. The people have to bear the burden by way of either higher taxation or higher inflation. In many countries, both bureaucrats and political leaders are insulated from the twin burdens by extending generous tax exemptions like duty free imports and tax free allowances and paying salaries which are adjusted upward automatically along with the increases in the cost of living, a system known as indexing wages.

The way out for the public

McGuire and Olson have pointed that limiting the term of a US President to two- four year terms has effective taken out the incentive for him to offer ‘pork barrel projects’ and use his powers to serve his own personal interests. But, this is not the case with US Senators and Congressmen who have the chance of getting re-elected again and again. In their case, it is difficult to prevent special interest groups from surrounding them for various economic favours which are granted at the expense of the public. In the absence of an effective checks and balances system, political leaders who have the chance of getting re-elected will definitely make use of their power to advance their personal causes.

In many developing countries, political leaders are elected for life, that is, at each subsequent election, they get re-elected to office by popular vote. This system has the same features as the old monarchies in which the monarch will hold absolute powers over his subjects till his death. When one realises that he has uncontrolled absolute powers over his life-time, it is difficult for him not to abuse or misuse his powers, especially the power to extract economic benefits for his personal use. This is what Kautilya described as ‘the impossibility to resist the temptation to taste honey or poison on the tip of one’s tongue’. The solution to the problem is not to keep such honey or poison on one’s tongue for a long period. The recent history is abundant with instances where long serving political leaders misusing nation’s wealth for the advancement of one’s family and one’s closest allies. The popular uprising in the Philippines in 1986 and the recent turmoil in Egypt, Tunisia, Libya and Syria are testimonies to such instances. Though the countries concerned could get rid of their corrupt political leaders eventually, they were able to do so only after these countries had to suffer a massive economic destruction and loss of valuable human life.

It is therefore absolutely important to restrict the term of political leaders to a given period, if countries are interested in avoiding misuse or abuse of economic powers by their leaders.

The motto is that unguarded representative democracies entail huge economic costs on the nations concerned.

(W.A. Wijewardena can be reached at )