The quality of politicians and economic growth

The quality of growth depends on the quality of politicians you elect! 

That’s the main point of a working paper by Prakash, Rockmore and Uppal, who summarized their findings in a VoxEU column. Apparently, the findings are based on their working papers, but a link to it is not provided yet in the column. Anyway, intuitively the results do not seem surprising if you look at the developing countries that have weak institutions and the same politicians or their associates being elected repeatedly.

Excerpts from the article:

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Despite a history of widely contested and transparent elections, and the presence of a vibrant and open media, India is electing an increasing number of politicians facing criminal charges. This share has risen from 24% of members of the Indian Parliament in 2004 to 34% in 2014 (New York Times 2014). While the election of criminally accused candidates to public office is concerning in any context, it is especially so for India. Large quantities of funds are distributed by the government through a wide variety of interventions and programmes, which have been plagued by costly scandals with losses in the hundreds of billions of dollars (Sukhtankar and Vaishnav 2015). A severely understaffed judiciary and police force, resulting in an extremely slow judicial system, exacerbate this problem. Taken together, these realities create a context in which an influx of criminally accused politicians could be especially costly for an economy.

Using information on the charges filed against candidates, we estimate the causal effect of electing criminally accused politicians to the State Assembly on the subsequent economic activity in their constituency. In particular, we focus on elections in 20 Indian states during the 2004 to 2008 period. Since economic data are not systematically available for constituencies, we rely on satellite data on the intensity of night-lights. These data have been increasingly used to proxy for economic growth, as studies find a strong relationship between GDP and night-light intensity at the sub-national level (Bleakley and Lin 2012, Henderson et al. 2012, Hodler and Rashky 2014, Storeygard 2014). 

[…]We find that the election of an accused politician leads, on average, to roughly a 22 percentage point lower yearly growth in the intensity of night lights. Based on conversions between GDP and night lights, this is roughly 5.61% to 5.86% GDP growth per year (as compared to the 6% otherwise). Overall, these results highlight the high aggregate economic costs of electing lower quality politicians (i.e. criminally accused) and point to likely significant individual costs in foregone access to public services.

[…]We find a strong negative effect of electing politicians accused of financial or serious charges. In contrast, politicians who are only accused of either non-financial or non-serious charges do not have a negative impact on economic outcomes. We also find that the size of the negative effect increases with the number of underlying accusations. These results show that the specific accusations and charges matter, and the costs increase with the severity of the accusation.

[…]When we examine the accumulation of these costs, we find that the effects only appear in the later years of the politician’s term. There is no apparent effect in the initial years. We believe that this is explained by the need for politicians to collaborate with local bureaucrats to engage in corrupt activity (Iyer and Mani 2012). After elections, bureaucrats frequently change positions so it takes a certain amount of time for corruption politicians and bureaucrats to identify each other. Additionally, the effects of neglected public infrastructure, such as roads, may take some time to slow down economic activity.

[…]we find that the number of incomplete road projects increases in constituencies represented by criminally accused candidates. Once again, the negative impact is driven by candidates who are accused of serious and financial charges throughout India.

[…]we convert our estimates into rough measures of GDP costs and find estimates ranging from 2.3 to 6.5 percentage point lower GDP growth per year for our main result. 

[…]instead of focusing on the overall outcomes (such as the delivery of public goods), voters focus on whether politicians can deliver targeted transfers to their specific group or caste. Not only are voters perhaps more likely to overlook accusations, but these accusations might serve as a signal of the politician's willingness to use the office to reward fellow group members (Chauchard 2014, Wade 1985).

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For Japan, raising inflation target and increasing wages by 5-10 percent may be better

While some countries are grappling with high inflation, Japan (and in relative terms the developed countries) are struggling with persistent low prices, stagnating wages, low economic growth despite massive monetary stimulus for the last few years, and unemployment. Monetary easing is considered more palatable compared to fiscal stimulus because of the latter's impact on fiscal deficit and public debt. But then when monetary sector has little traction on the real sector during these depressed times (low demand as well as cautious credit flows), the most effective antidote to persistently low prices and growth is fiscal stimulus as the multiplier tends to be higher (in the case of government spending in productivity-enhancing investment projects). So, when GDP grows (faster than fiscal deficit and public debt growth), things may look a little less scary. In some countries this requires policies to deliberately raise inflation, which may eventually stabilize fiscal situation!

Here is a nice piece by Blanchard and Posen of the Peterson Institute for International Economics (PIIE) on what Japan should be doing now to prop up prices and then GDP growth. In a nut shell, Japan may consider raising wages by 5-10% (wage growth has been pretty much insignificant for many years in Japan and it follows the inflation rate).

Excerpts from the article published in FT:

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Japan needs inflation, and more inflation than the 0.5 percent achieved with its quantitative easing (QE) program. The need is not for the usual countercyclical reasons, even if the economy is flirting with technical recession. Rather, the country needs meaningful positive inflation for reasons of fiscal stability.

[...]Together, Abenomics and the Bank of Japan's commitment to a 2 percent inflation target were intended to encourage a virtuous cycle from positive inflation to wage increases to greater consumption and so on. The central bank's large-scale asset purchases (Y80 trillion a month of Japanese government bonds) have helped: Inflation has fluctuated between 0.5 and 1.0 percent, an improvement over the deflation of the preceding two decades, and the yen has declined in two stages to Y120-plus to the dollar.

But that decline has proved insufficient to start an inflation cycle in the face of falling energy prices and the recent Chinese slowdown. Nominal wages rose only a little more than 1 percent in 2014 and 2015. For the average Japanese investor and consumer, inflation expectations have not budged.

Japan needs to jump-start a wage-price spiral of the sort feared from the 1970s, but that Abenomics rightly aspired to after 20 years of deflation. Such a cycle should be started by increasing nominal wages by 5 to 10 percent in 2016. Tripartite bargaining is practiced in Japan—i.e., annual nationwide wage negotiations for the unionized part of the Japanese labor force with government participation. A third of the country's workers are covered by these bargains, and many more (including management) have their wage adjustments set accordingly. Even part-time worker pay is correlated with this process. Such bargaining with government input can push wages up, just as in the past it has kept them down. In the 2014 and 2015 wage rounds, the Abe administration publicly advocated a rise in wages but did little else.

[...]The point is not to redistribute income from business to labor. If anything, employers and other price setters should be encouraged to pass on the increased costs from wages to consumer prices and try to maintain their profit margins. The Bank of Japan should maintain QE to accommodate this general price and wage increase until the cycle takes hold over a three-year period. This means replacing the current 2 percent inflation target with something much higher—such as 5 to 10 percent—for several years. This would be unlikely to cause accelerating double-digit inflation, but if it did, the Bank of Japan could easily stop that spiral. In parallel, the central bank should also aim for an exchange rate depreciation proportional to inflation, so as to keep the real exchange rate roughly constant.

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