ONE reason why Vijay Kelkar’s reports on tax reform have encountered so much opposition from so many lobbies is that Kelkar has approached taxation as an economist, not a politician. Since he is an economist, I have no quarrel with that.
But I can understand why finance minister Jaswant Singh refuses to accept Kelkar’s recommendations on the pragmatic ground that, whatever their economic merits, they antagonise too many sections of voters.
The finance minister (or any minister) is first a politician and only second a technician. The best ministers manage to combine both roles.
The worst sacrifice all common sense to myopic politics. A third category consists of earnest people who are so technocratic that they forget political compulsions
Yashwant Sinha does not quite fit into this category. He was plagued by bad luck. The Asian financial crisis, Pay Commission award and global recession all hit the economy during his tenure. His main problem was not that he was too technocratic.
It was that he announced initiatives (like labour reform) without ensuring that he had the required political backing, and then looked foolish when forced into rollbacks or inaction.
Paul O’Neill, who has just been sacked as US treasury secretary, is a better example of a technocrat who failed miserably as a minister.
A gung-ho free marketer, he thought he had been inducted into the Cabinet to promote free-market ideas. How naïve! How ignorant of the lobby-driven nature of US politics! Not surprisingly, many of his public statements were regarded as gaffes.
He was finally sacked because of Bush’s need to have somebody who could convince voters that an activist, hands-on government was taking the economy forward. Never take the administration’s free marker rhetoric too seriously.
A professor may want to argue that, in a free-market environment, the government is largely irrelevant to the economy and markets determine most outcomes.
But in US politics, you have to convince voters that all good outcomes flow from your own enlightened policies, and all bad outcomes are the fault of opposing parties, or at least of Saddam Hussein.
O’Neill once expressed amazement that people paid so much attention to what he said. He seriously believed, as a free marketer, that the treasury secretary did not matter and should not matter very much. As a free-marketer he opposed raising tariffs to protect the US steel industry.
He was overruled on realpolitik grounds that steel tariffs could save jobs and so help wrest a couple of seats from the opposition in the coming Congressional elections. This proved to be the case. When Enron crashed, O’Neill said it was a tribute to capitalism that bad companies went bankrupt.
As a professorial point, that might pass muster. Yet it was bound to outrage Americans who saw Enron as a slur on capitalism, not a tribute. Many naïve Americans believed that their form of capitalism was the best of all systems, and should produce perfectly truthful, accountable and honest corporations.
They were outraged not only because Enron cooked its books but because top Enron executives made millions by selling shares before bankruptcy, while thousands of employees lost everything by keeping their savings in Enron stock.
A professor might say that fools and their money deserve to be parted: nobody forced Enron employees to keep their money in Enron’s shares. Yet politicians need to echo the public’s outrage.
When Brazil’s currency came under massive attack because a leftist looked likely to win the Presidential election, the country asked the IMF for help.
O’Neill opposed IMF assistance, and remarked scathingly that too much assistance from the IMF ended up in the Swiss bank accounts of Third World leaders.
Many professors or journalists could take this position, which has a core of truth even if not always applicable. But O’Neill forgot that loans from the IMF are frequently determined by politics, not economics.
The Bush administration had watched with concern when the IMF refused to rescue Argentina, and insisted first on major reforms (which have yet to take place).
If the IMF refused to rescue Brazil too, the two largest economies of South America would go down the drain, and financial panic might spread to every country in the region.
Besides, bankers who financed the Republican Party wanted a rescue. And so the Bush administration prodded the IMF into throwing a lifeline of $30 billion to Brazil. This made O’Neill look both foolish and politically inept.
Contrary to popular impressions, the US is not a free market. The production of a hamburger alone involves 80 different regulations, mostly related to the quality of materials. The US seems a free economy because, unlike in India, US businessmen can get permits and licences easily.
But if they violate the myriad regulations in force, they can suffer huge fines, jail sentences and bankruptcy.
Which is why money is so important in US elections. If the country were really a free market, businessmen would not donate large sums to politicians to change (or not change) various regulations.
In fact, official donations for Congressional elections alone rose from $86 million in 1992 to $495 million in 2000. Over and above this, companies spent huge sums on TV advertising supporting their favoured issues, which are theoretically different from supporting candidates but in practice come to the same thing.
In testimony to Congress on limiting campaign finance, several Senators testified that donations (the ceiling being $100,000 each) were meant to buy, and succeeded in buying, influence on regulatory and tax issues.
Alan Hassenfield, head of the toy firm Hasbro was even more devastating in his testimony. “I remain convinced that, in some of the more publicised cases, federal officeholders actually appear to have sold themselves and the party cheaply.”
This is surely true in India too. Many of us deplore this. Yet no finance minister can ignore the reality that politics needs money, and politics affects markets.
The secret of success is to improve systems and policies without hurting (or appearing to hurt) too many vested interests. That cannot be done by technocracy. It requires consummate politics.