The late James Buchanan successfully punctured the
innocent belief that governments seek to dispassionately promote the
public interest. He showed that politicians tend to pursue policies that
promote the private interests of the groups they represent.
Buchanan, who died on 9 January, was a constitutionalist.
He paid more attention to the rules of the game rather than individual
policies that emerge from the inevitable compromises of everyday
politics. Economists usually do not give much importance to such rules
of the game, though how individual choices are made is crucially
dependent on the incentives created by these rules.
The problem has deep roots. Buchanan once said that
economists introduce their subject matter by referring to Robinson
Crusoe, who has to allocate scarce resources among competing uses. This
is the core concern of modern economics. Then the choices of the lone
man on an island are transferred to the study of the economic choices of
society as a whole, despite the fact that the way individual choice in
any society is not made independently of the choices of other
individuals. That is where rules come in, because they affect
interactions in a social setting.
“The same individuals, with the same motivations and
capacities, will interact to generate quite different aggregate outcomes
under differing sets of rules, with quite different implications for
the well-being of every participant,” Buchanan wrote in The Constitutional Imperative, which he co-wrote with Geoffrey Brennan.
The debate between the importance of rules and discretion
in economic policy is an old one. Indian economic policy has been
dominated by discretion rather than rules. It has not been
constitutional in the Buchaninite sense of the word. Too much has been
bet on the good sense or the technical ability of administrators to
efficiently, ceaselessly tweak policy. Such discretion is particularly
damaging when it is handed over to an irresponsible political system.
The constituent assembly that debated the political
constitution did not seem to have given too much thought to the economic
rules of the game. It did empower Parliament to impose limits on
government borrowing. It set up the Finance Commission that till today
gives a formula on how tax revenues are to be shared by different levels
of government. But the thrust of the debates seem to have been on
economic outcomes rather than the rules that would bring us closer to
those outcomes.
There have been a few other attempts at imposing rules on
policymakers. The landmark Fiscal Responsibility and Budget Management
Act of 2003 essentially meant that Parliament was using its powers to
impose limits on government fiscal policy. Being part of the World Trade
Organization automatically forces the Indian government to respect
global trade policy rules.
Another example: The terms of reference of the 14th
Finance Commission headed by former Reserve Bank of India (RBI) governor
Y.V. Reddy has an interesting item: “The need for insulating the
pricing of public utility services like drinking water, irrigation,
power and public transport from policy fluctuations through statutory provisions.” This was pointed out in an email by R. Srinivasan of the department of econometrics at Madras University.
But discretionary policies have been far more important
through the decades. The Indian central bank has generally argued
against either a formal inflation target or a money supply rule or an
interest rate rule such as that devised by John Taylor. Fiscal policy
has also been run by the whims of the government of the day. Some of the
most malign policies in the planning era—the introduction of ad hoc
treasury bills that automatically monetized the budget deficit or the
bizarre web of import controls that came up after the foreign exchange
crisis of 1957—were a classic case of discretion run wild.
Some amount of discretion is needed in a volatile world. A
policy regime based exclusively on rules would be unnecessarily rigid,
as the world discovered during the gold standard. But the other extreme
is not very welcome either, since it puts too much trust in either the
honesty or the knowledge of policymakers.
So here is a question: Does India need an economic
constitution? It need not be a single document, but a set of laws that
impose clear guidelines on what governments can or cannot do? It will
not only discipline the government but also add to the credibility of
policy.
Of course, all this assumes that the government will play
by the rules of the game. It will respect the rule of the law. One
should not take that for granted in these times. The move to tax on a
retrospective basis—which this government is trying—is a classic case of
contempt for the rule of the law. It is precisely such actions that
Buchanan warned us about and the main reason why we need to pay
attention to his wise advice on constitutional rules.
source-livemint.com
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