Monday, May 31, 2010

Politics first...then economics

Ken Worsely brings to attention an interesting (although known)fact - Sound economic policies cannot do much on their own. They need to be backed by political will.

This is from his blog:
...The IMF suggests that Japan increase its consumption tax by 5% as a step towards reducing its public debt.

Of course, consumption tax hikes tend to spell political disaster in Japan, as Prime Minister Noboru Takeshita learned after introducing the consumption tax in 1989 and PM Ryutaro Hashimoto discovered after raising the tax to 5% in 1997. While both the former and current ruling parties have acknowledged that consumption taxes need to be increased, neither party has shown a willingness to say so in their election manifestos.

Until now. Today it was reported that a DPJ joint election panel agreed to include language promising to increase consumption taxes as part of the DPJ’s Upper House campaign. However, it was also agreed that the tax should not be raised until after the next Lower House election, which would be as far away as 2013. And there was no discussion of just how much the tax should be increased.

If that seems vague, the leading opposition party’s stance is not much better. The LDP has called for an increase in consumption taxes in its election manifesto, but does not say when or by how much

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And again - Political will is always required to implement sound economic policies. But in a multi-party democracy, gathering political will is not easy. Different political parties have different agendas. If they are in the opposition, it is in their interest to block any reasonably controversial bill in the parliament. This task of gathering political will gets even more difficult when there are various parties in power- i.e., a coalition government. In such a government there will always be compromises made by parties. Party agenda will always come first. In such economies, decision making becomes difficult. Legislations are passed less frequently. Development happens more slowly.
Unfortunately, we are moving towards such a system. There are lots of countries now which do have coalition govts in the power. Britain, India, Czech Republic...and many others.
I am interested to see if any data exists related to GDP growth of countries during coalition govt Vs. single party government.

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