Democratic governance at a crossroads: The enemy to be defeated is within

President Gotabaya Rajapaksa chairs a meeting with the newly appointed State Ministry Secretaries – File photo

This is the keynote address delivered on the occasion of the International Research Conference organised by the University of Ruhuna

Inclusive democracy through representative government

Democracy, as against monarchy or authoritarian rule, has been hailed as the best form of government due to a number of reasons. It permits citizens’ voice in government, allows people to have choice over right to life, career, faith, or property, creates an environment conducive for intellectual pursuit, helps prospering creativity in members and promotes peaceful cohabitation among diverse social, ethnic and religious groups. 

In the older form of democracies that existed in ancient Greece or ancient India around 5th century BCE, these goals were sought to be realised through direct participation of all citizens in society. Yet, one problem with these democracies was that they were not true democracies in today’s context. That was because a large segment in society such as slaves, women or low-caste people was not recognised as legitimate members who could participate in the democratic rule. Hence, they could be termed exclusive direct democracies.

In today’s context, democracies should be inclusive allowing all citizens, irrespective of faith, ethnicity or class, to participate in the governing process. But it would pose a problem because of the sheer largeness of societies not only in terms of number or territory but also diversity and complexity they have gained. As a result, direct democracy was succeeded by a new form of democracy known as ‘representative democracy’. In this form, citizens are to rule themselves through representatives elected by them for a given period. These representatives who are simply agents of the citizens are required to perform their duty as per the wishes of their principals, the citizens. This model will, therefore, not succeed if these representatives are not bound by a governance code, known as democratic governance. 

Governance is how one relates to one’s stakeholders

Governance is simply the way an individual, an organisation, a company or a government relates himself or itself to those who are interested in his or its affairs, known as stakeholders. They can be of two types: those who stand to benefit or those who are destined to lose as a result of the behaviour of the entity concerned. Governance requires the entity to have an appropriate balance between the gains and the losses. This could be done by incorporating an ethical or moral code to governance. 

The most famous of such codes today relate to the need for ensuring sustainability, preserving environment and protecting minority shareholders in a company or in the case of a government, protecting and ameliorating minority ethnic or religious groups.

Today, the demand of societies has been that their elected representatives should adopt good governance practices. However, in reality, two developments have shaken the very foundation of the democratic governance today. One relates to the emergence of evidence that elected representatives have deviated from good governance practices. The other is that citizens, in their present organisational capacity, have failed to keep an effective check on such deviations. Hence, democratic governance is at a crossroads today and if corrective action is not taken, it will meet with a natural death.

Sovereignty is in people

The elected representatives who are simply agents are required to use the society’s scarce resources for the maximum gain of their principals, namely, the citizens. Unlike a monarchy or an authoritarian rule, the masters of a democracy are the citizens in whom, it is claimed, sovereignty of the state is vested. Since people working together have a better and sounder collective intelligence, again a claim made from a principle known as synergy, such a system should naturally bring prosperity to a nation and help it climb to heights which it has not yet reached. This is the promise of democratic governance.

Weaknesses of governance

But, some economists do not think so. They have found weaknesses in representative democracy systems leading to a misuse and a waste of a nation’s wealth at two levels. One is at the level of the bureaucracy. The other is at the level of elected political rulers.

Kautilyan prescription

Economists had for long known that the allocation of funds by governments to undertake public expenditure programs could involve excesses, wastages and misuses.

In early to mid-20th century, Ludwig von Mises and Gordon Tullock wrote on the bureaucracy and its inherent tendency to misuse the public funds. However, it was in 1971 that a formal economic theory of bureaucracy was developed by the American economist William A. Niskanen in a path-breaking publication titled ‘Bureaucracy and Representative Government’. Before he wrote this book, Niskanen had served as an Assistant Director at the US Budget Management Office and it was widely believed that his experience at the budget office helped him to formalise his theory. 

Today, democratic governance is at a crossroads because the enemies are within the system. The citizens cannot control them because they are irrationally and emotionally attached to those enemies. The citizens are therefore myopic and the enemies of democratic governance are bent on using their myopia to their best advantage. To resolve the problem, societies should strive to build empowered citizens who will be able to look beyond what they see right now

Bureaus versus the Public

According to Niskanen, in a representative democracy, the public elect their rulers, commonly known as the government, and empower them to tax people in order to carry out public expenditure programs that produce public outputs. Producing a thousand graduates or treating ten thousand patients are two examples of such public outputs. The principle set by the public in this regard is that the government should maintain efficiency at all times in accomplishing this delegated function to avoid misuse or waste of the scarce wealth of the public. 

In other words, the government should tax the public at a minimum level and produce the public outputs at the maximum level. To complete these public expenditure programs, the government is organised in the form of separate bureaus such as ministries, departments, universities and hospitals. The aggregation of these bureaus and the public officials working in those bureaus forms the bureaucracy of a country.

Niskanen says that, if the objective of the public and the objective of the bureaucrats are the same, then there is no problem about maintaining efficiency in producing public outputs. But, as it is, the objective of the bureaucrats is to maximise their own personal welfare such as the salaries and other fringe benefits known as perquisites or perks. Bureaus, in order to boost their public powers, may expand their work programs and the number of officials working in a particular bureau. Hence, this objective of bureaus directly conflicts with the objective of the public who want to keep these expenses at a minimum level.

As a result, a long negotiation takes place and at the end, all bureaus over-inflate their budgets requiring the government to impose more taxes and make more borrowings to produce a given amount of public outputs. Niskanen’s observation on the behaviour of the bureaus to over-inflate the budgets for personal gains is typical of public services in both developing and developed countries.

Political leadership is no different

The public’s relationship with the political leadership is no different from its above noted relationship with the bureaus.

In a representative democracy, political leaders are expected to provide the maximum benefit to the public by incurring the minimum costs. This is exactly what they promise the public when they woo their votes at elections. At that point, the objective of the public and the objective of the political leaders are identical with each other. However, after the elections and once the political leaders are voted to power, there is a clearly visible divergence between the objectives of the two parties. Though, in a representative democracy, the people are said to be the masters and technically in a position to change the political leaderships at the elections, this does not happen because the political leaders are capable of changing the public opinions in favour of them again by using the taxpayers’ money. How does this happen?

Economists, Martin C. McGuire of the University of California at Irvine and Mancur Olson, Jr. of the University of Maryland have explained the reasons for this unhealthy development in an article titled ‘The Economics of Autocracy and the Majority Rule: The Invisible Hand and Use of Force’ published in the Journal of Economic Literature in its issue in March, 1996.

Bandit rulers are also public good providers

McGuire and Olson have started their article by analysing the objective and the mindset of a leader of a roving group of bandits. If the bandits do not contribute to produce economic outputs in regions they squander, pretty soon they will find themselves in a situation where they cannot conduct thefts anymore because the region would be without economic outputs to take away by force. Hence, it pays the bandit leader to acquire a territory, produce minimum public goods so that people could continue to produce economic outputs and, at the end, rob a major part of their output. 

The people expect the political leaders to tame the bureaucrats and that is why they elect a government to power. However, this does not happen because there is incentive for both bureaucrats and political leaders to collude together to inflate the public expenditure programs. The checks which the people have introduced to eliminate such occurrences are therefore conveniently twisted by the two parties to their advantage. The end result is the waste, misuse and misappropriation of nation’s wealth by both the bureaucrats and political leaders. The people have to bear the burden by way of either higher taxation or higher inflation

McGuire and Olson say that the roving bandit leader who has now settled in the territory as its ruler makes the people within the territory more productive by ‘by providing a peaceful order and other public goods’. Why should he do so? Because, according to the two economists, it helps him to ‘obtain more resources for his own purposes than from roving banditry’. The people within the territory are also better off in a way because they have now more public goods to consume. But, in the long run, since a greater part of their output is robbed by the bandit ruler, they are not incentivised to improve the productivity and make the increase in the output a sustainable one.

Since the bandit ruler can control the amount of output which he can take away from people at his will, he is incentivised to provide a minimum amount of public goods. McGuire and Olson say that this is an ‘invisible hand’ which makes him a public good providing king.

Democratic rulers too have the same incentive

Democratic rulers are elected by the public, but, during the election as well as after the election, they are invariably surrounded by special interest groups that seek special favours. Hence, it is necessary for the elected ruler to give out ‘pork barrel projects’, a term coined from the US mid country politicians coming up with projects to woo farmers’ votes and therefore now applicable to any public expenditure program that benefits a given group or people in a locality and not a nation as a whole. This is the fundamental golden rule which the elected ruler has to observe if he is to ensure his survival in politics and return to power in a future election. To produce pork barrel projects, he needs funds and those funds are raised through taxation if explicit taxes are imposed or through inflation, if printed moneys are used.

Taxing people is to take away their wealth by force.

To use this force as well as to create a peaceful environment, democratic rulers are given power to exercise violence on their subjects. According to economist, Jack Hirshleifer of the University of California at Los Angeles, anyone who has this power will use it to satisfy his own self-interest if that power is not controlled by various checks and balances. But the ground realities show that even when such checks and balances have been imposed, they are not that effective because the political leaders of representative democracies have learned to outsmart the framers of laws. This they do by a number of ways. They could always use their majority power in the legislatures to push through their schemes. If some of the legislators dissent, experience shows that the political leaders could use either the coercive powers they enjoy to subdue dissenters or give out pork barrel projects to silence them. But, this is done at the expense of the tax payers.

Hence, the democratic rulers who have the certainty of returning to power in future elections will provide certain public goods to keep the electorate happy, but use a major part of the tax money for their own purposes and for providing benefits to the special interest groups that support them. When there are public protests against their misusing the nation’s wealth for private and family purposes, they resort to the use of force to suppress such protests. Sri Lanka’s present state of affairs provides ample evidence for this.

The root cause: The Principal-Agent Problem

The root cause for both bureaucrats and political leaders in representative democracies to satisfy their personal benefits as against working for realising the objectives of the people has been identified by economists as the Principal-Agent Problem or PAP. The people are principals in both cases and bureaucrats and political leaders are agents who are required to work for the attainment of the wishes of the people.

Hence, PAP is simply the existence of conflicting objectives between the principal and the agent whom he hires. The principal wants to gain the best for himself and that is why he pays the agent to do the job. But the agent, acting in his own interest may do things which are injurious to the principal. Thus, the bureaucrats hired by the government on behalf of the people or the politicians elected by the people will not satisfy the needs of their respective principals, but try to satisfy their own desires which are different from those of the principals.

The people expect the political leaders to tame the bureaucrats and that is why they elect a government to power. However, this does not happen because there is incentive for both bureaucrats and political leaders to collude together to inflate the public expenditure programs. The checks which the people have introduced to eliminate such occurrences are therefore conveniently twisted by the two parties to their advantage. The end result is the waste, misuse and misappropriation of nation’s wealth by both the bureaucrats and political leaders. The people have to bear the burden by way of either higher taxation or higher inflation. In many countries, both bureaucrats and political leaders are insulated from the twin burdens by extending generous tax exemptions like duty free imports and tax free allowances and paying salaries which are adjusted upward automatically along with the increases in the cost of living, a system known as indexing wages.

The way out for the public

McGuire and Olson have pointed that limiting the term of a US President to two four-year terms has effectively taken out the incentive for him to offer ‘pork barrel projects’ and use his powers to serve his own personal interests. But, this is not the case with US Senators and Congressmen who have the chance of getting re-elected again and again. In their case, it is difficult to prevent special interest groups from surrounding them for various economic favours which are granted at the expense of the public. In the absence of an effective checks and balances system, political leaders who have the chance of getting re-elected will definitely make use of their power to advance their personal causes.

In many developing countries, political leaders are elected for life, that is, at each subsequent election, they get re-elected to office by popular vote. This system has the same features as the old monarchies in which the monarch will hold absolute powers over his subjects till his death. When one realises that he has uncontrolled absolute powers over his lifetime, it is difficult for him not to abuse or misuse his powers, especially the power to extract economic benefits for his personal use. 

The recent history is abundant with instances where long-serving political leaders misuse nation’s wealth for the advancement of one’s family or one’s closest allies. When they become institutionalised, the way to remove them is only through a violent public uprising involving loss of life and property. It is therefore absolutely important to restrict the term of political leaders to a given period, if countries are interested in avoiding misuse or abuse of economic powers by their leaders.

The enemy is within and not out

Two Harvard political scientists, Steven Levitsky and Daniel Ziblatt, in their 2018 book titled ‘How Democracies Die’ have identified that the enemy of democracy comes from within and not from out. Today, democratic governance is at a crossroads because the enemies are within the system. The citizens cannot control them because they are irrationally and emotionally attached to those enemies. The citizens are therefore myopic and the enemies of democratic governance are bent on using their myopia to their best advantage. To resolve the problem, societies should strive to build empowered citizens who will be able to look beyond what they see right now.

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)