Election manifestos – Time to kill the keynesian ghost

KAUTILYA REBORN 05

I have examined the election manifestos issued by the two major political forces of the country from 1970 onwards. Without exception, they all had a unique feature: promising the voters of giving more and more personal benefits.
The fulfilment of these promises required the government to expand its services, spend more on day to day consumption expenses (current expenditure in budgetary parlance) and raise revenue through higher taxation or printing money or both. They also required governments to curtail productive capital expenditure on constructing roads, ports, airports, irrigation schemes, hospitals and schools.
The end result was the distortion of the country’s budgetary situation beyond redemption with ever rising public debt and mounting high inflation year after year.
Uncritical adoption of Keynesianism
These promises made to the electorate in the name of improving the welfare of the citizens were justified in economic terms by dragging the most renowned economist of the 20th century, namely, John Maynard Keynes, as the support. According to Keynes’ philosophy, which later came to be known as ‘Keynesianism’, a government can accelerate economic growth by spending more on the economy by running budget deficits. That was because such expenditure would increase the citizens’ ability to spend on goods and services and the increased demand for goods and services will incentivise the producers to use more resources, employ more people and create more wealth.
Keynes preached his philosophy in a book published in 1936 under the title ‘The General Theory of Employment, Interest and Money’ as a solution to an economic depression from which a developed country with full employment of resources may suffer from time to time. It was a special case applicable to developed economies and not meant for developing countries.
Keynes becomes economic guru of developing countries
However, politicians in developing countries seized upon the opportunity and used Keynesianism as their development religion and Keynes as their Guru. Sri Lanka’s first Minister of Finance, J.R. Jayawardene, is said to have read this book in 1942, according to his biographers, K.M. de Silva and Howard Wriggins, and immediately got converted to Keynesianism. No wonder for Sri Lanka to follow Keynesian type of budgetary policies in the entirety of its post independence period except in 1954 and 1955.
Yet some other leaders became cautious
However, leaders in other countries were not so quick to be converted to Keynesianism. For instance, economic policy makers in Singapore, according to the man behind its economic miracle, Goh Keng Swee, were sceptic of the proposition made by Keynes that money can create wealth. Their experience was that it was the hard work that can create wealth and therefore, they relied on policies and strategies that evoked hard work in its citizens as the main thrust of future economic prosperity. Similarly, Margaret Thatcher, who later became the British Prime Minister in late 1970s, too had read Keynes in early 1940s but doubted the validity of his theory. Instead, she became a convert to a critic of Keynes at that time, namely, Friedrich A Hayek who branded the Keynesian type of state expansion as a ‘Road to Serfdom’, the title of the book he wrote on the subject.
Keynesianism gets wide support in Sri Lanka
But, the leaders in Sri Lanka, knowingly or unknowingly, became Keynesians and, to their relief, they were supported by a group of mainstream economists in the local universities. Thus, the ghost of Keynes haunted the election manifestos throughout the period, though Keynes himself would not have approved of such high veneration by developing nations to his economic theory meant for developed economies.
The Promise of a bigger state sector
The promises that are made in manifestos in the name of improving the welfare of the citizens are promises to expand the state sector. Politicians normally love an expanded state sector because it enhances their power base. Hence, welfare or no welfare, any policy that aims at expanding the state sector is attractive to politicians. Similarly, bureaucrats too endorse such policies, because they enable them to earn additional fringe benefits, have greater opportunities and enhance their discretionary powers. Citizens are indifferent to the expansion of the state sector, but, if a manifesto offers them a wide range of free goods, then, they too become attracted to the promises made in such a manifesto. As a result, political parties will compete with each other to make their manifestos more attractive to bureaucrats and ordinary citizen. The competition will not only make political parties to offer more and more unrealistic promises, but also corrupt the bureaucrats and the voters in the process.
How Kautilya saw it
Kautilya too talked about the welfare of the citizens of a country. He declares its importance in the epigraph that, ‘in the happiness of his subjects lies his own happiness.’ He said that a king should behave like a saint – king who is ever active in promoting the peaceful enjoyment of prosperity or, in other words, the welfare of the people. According to Kautilya, the welfare of people encompasses the protection of the weaker sections, maintenance of such people at state expense, free travel on ferries for them, providing livelihood for the handicapped, especially the handicapped women, protection of children and animals. To meet such expenses, Kautilya concurred that resources from the king’s treasury need be used. However, Kautilyan prescription is different from the use of deficit financing by modern governments to finance the promises made in their election manifestos.
Kautilyan budgetary policy
The Kautilyan budgetary policy essentially denotes surplus budgets. He advocated that the king should build his treasury and for the king to do so, he should necessarily spend less than his revenue. The king should earn more revenue by promoting economic activities, trade and government enterprises. Hence, the surplus budgets in a Kautilyan economy come from greater economic efficiency and not out of unnecessarily high taxation. In fact, Kautilya frowned upon taxing people unjustly. He said that ‘the king should not tax people unjustly because that will make the people angry and spoil the very sources of revenue’. He advised that a weak king needs to recoup his depleted strength by promoting the welfare of people. To support welfare schemes, the king can use resources from the treasury, but not by running deficit budgets or taxing people as is being done in modern times.
The example of Singapore: ‘No to Keynesianism’
The danger of making unrealistic promises in manifestos and attempting to deliver them subsequently by funding the same by taxing people or borrowing or printing money have been well understood by Singaporean leaders. They laid foundation for maintaining prudence in their budgetary policy right from the very beginning of their independence. While continuing with a currency board system which cannot print money for financing the government, they prohibited the Singapore monetary authority to lend funds to the government. According to Goh Keng Swee, such a policy was adopted by Singapore because ‘financing budget deficits through central bank credit creation appeared to us (that is, founding fathers of Singapore) as an invitation to disaster’. According to these far sighted leaders, ‘the way to a better life was through hard work, first in schools, then in universities or in polytechnics, and the then on the job in the work places’ He further said that ‘diligence, education and skills will create wealth, not central bank credit’.
Want vote catching expenditure? Then, bring money from home
Singaporean leaders were well aware that politicians were all out there for offering vote catching public expenditure programmes in their election manifestos. Such programmes have to be funded through borrowing or printing new money. Borrowings will raise the public debt and divert scarce resources from building capital assets needed for long term growth to short term consumption. Printing money will create inflation, reduce the real welfare of people and bring pressure on the exchange rate to depreciate in order to maintain the competitiveness of exports. As Goh Keng Swee noted, this was really ‘an invitation to disaster’. Hence, the Singaporean leaders made it necessary for politicians intending to offer vote catching promises in manifestos to bring the resources for financing the same from ‘their homes’.
Popular policies reduce economic growth
The experience of the writer is that political parties come to power by making various unrealistic promises without proper funding sources. But, the voters approve of such schemes because those promises are for their personal benefits. But, after coming to power, the politicians have to deliver their promises and attempt to prevail upon the technocrats in the treasury to find resources for implementing the same. The difficulty arises only at that stage. In a general budgetary constraint, to finance one item, it is necessary to curtail another item. Hence, in order to implement popular policies, a series of budgetary adjustments are made in the Treasury favouring public consumption and curtailing public investment. The enhanced consumption will improve the welfare of the people in the current period. But, without a sustainable resource base, it becomes only a short – lived gain. The curtailment in capital items reduces future growth prospects thereby adding a fetter to both the employment and wealth creation in the economy. When funds become scarce, the governments resort to printing money, as was done by Zimbabwe in the recent period, and such printing will create inflation putting people to greater economic hardships. The end result will be for the governments to lose power at the next elections.
Hence, in the interest of long term sustainable growth, it is now time to kill the Keynesian Ghost that secretively penetrates the election manifestos and fetters long term economic growth.