The economics of direct local elections

Awan Wibowo Laksono Poesoro, Jakarta

We will soon witness direct regional elections -- mayors, regents and governors -- in many regions throughout the country. After directly electing their president and vice president last year, Indonesian voters now will also exercise the same rights to elect their local leaders.

Will leaders brought to the fore by these democratic fiestas bring leviathan enhancements in the society's welfare? Or, will they be another deleterious factor hampering the improvements of prosperity?

To find the answers, we could use economics, as it is often employed as a tool to aid us to predict human behavior. We shall learn that some scenarios and roles of the elections' actors have somewhat resembled economic models and roles of economic agents.

To make an analogy, first let us view the upcoming elections as markets, political ones. As any common market, a political market is a channel through which buyers and sellers make decisions as to what goods and services to have and produce and in what quantities.

Next, voters in the elections can be considered as buyers. They want victorious candidates to supply goods and services to the product markets, while the candidates -- in their roles as company stockholders, or sellers -- will, in response, propose various public policies in order to meet the demands.

Consequently, what will the winning candidates, as sellers, ask in return from the voters? The answer is that the candidates ask the voters to provide the factor markets with factors of production, such as labor for the civil service.

For day-to-day operations, the elected regional heads will be assisted by regional government institutions, which can be regarded as company managements comprising company executives.

Nevertheless, there are political parties, whose endorsements of candidates running for office are required by the Law 32/2004 on Regional Administration, and interest groups such as NGOs, whose intention is to guide public policymaking to their causes. We can classify them as company stakeholders.

Now that we have the actors, I shall introduce two economic models.

The first one is the neo-classical approach, with proponents including the prominent economist Robert Lucas.

According to the model, agents maximize. This means all the actors in the elections will use all attainable information to produce optimal decisions. It also assumes that expectations are rational, meaning they are the best forecasts that can be generated by using all the attainable information. The last assumption is that markets clear -- which means the actors will adjust to being better off, thereby equating supply and demand, or clearing the markets.

Under the assumptions, the voters will maximize their utilities from all available policy options offered by the candidates during their campaigns, incorporating into consideration all the costs pertaining to each policy, such as taxation. In return, the candidates will maximize votes from the public. As a result, candidates with the best policies will come up as the winners, and the welfare of the society will therefore be improved.

Meanwhile, neo-Keynesian economists, like Gregory Mankiw, argue that this is not always the case. They contend there are times that markets fail and thus do not clear due to imperfect information.

The first type of imperfect information is incomplete information, meaning information is randomly insufficient and not manipulated by any agent in the markets, hindering efficient resource allocation and thus creating welfare losses.

For example, the voters are not well-informed about the candidates' aimed policies due to short campaign periods, hence judging candidates only by their physical appearances. Or, some candidates do not have adequate funds to launch far-reaching campaign programs, so the voters hardly know them.

The second type is asymmetric information, which means information is purposely incomplete and manipulated by some actors. This will result in misallocation of resources, causing more welfare losses.

Two of the most well-known asymmetric information problems are moral hazards and adverse selections. An example of a moral hazard is when the elected regional heads -- feeling they have full legitimacy -- do not keep their campaign promises and begin acting in their own benefits, maximizing personal satisfaction rather than improving their people's prosperity.

And an example of adverse selection is when the people cast their votes for candidates with policies that are popular in the short run -- such as the policy against a fuel price hike -- but actually do not have any comprehensive policies that will considerably enhance the society's welfare in the long run.

Bureaucrats can also be held responsible for political market failures. As executives who deal with the day-to-day managing of government agencies, they possess more information about things that are going on in their agencies than their regional heads.

It will be too costly for any of these candidates to criticize bureaucrats. Ergo, they will have the power to sway the provision of public goods and services, maximizing budgets instead of ameliorating efficiencies.

Market failures are sometimes attributable to stakeholders like interest groups and political parties as well. They occasionally have different agendas with the regional administration chiefs, trying to influence public policymaking to match with their goals.

It is now evident that information problems can lead all the actors, including the voters, to actions resulting in market failure, like the appearance of second-best leaders. Accordingly, as the neo-Keynesians maintain, the government should intervene to ensure smooth information flows.

Considering the disarray that characterize the preparations for these elections, it is doubtful that the central government can do much this time. But in the future, they should introduce crystal-clear rules, untainted referees, well-organized preparations, as well as better education and competitive provision mechanisms for public goods and services to minimize the problems.

Moreover, our government should improve the quality of their agencies, including the law enforcement agencies, by eradicating corruption and collusion in the recruitment and promotion systems so that scrupulous bureaucrats will be produced.

As for now, our only chance to get optimal results from the elections is to hope all the actors, including ourselves, will be mature enough to put the nation's greater interests above of all else. Is the chance slim? It is for us to decide!

The writer is a researcher at The Indonesian Institute, Center for Public Policy Research.