The economics of direct local elections

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.