You are using an older browser version. Please use a supported version for the best MSN experience.

Does development spending affect an MP’s chances of re-election?

LiveMint logoLiveMint 18-08-2017 Ragini Bhuyan

One of the central themes of political economy is the political spending cycle which is supposed to wax and wane in line with elections. Do Indian voters respond to such spending synchronized with elections? An Economic and Political Weekly research paper by Harry Blair, a researcher from Yale University, looks into the Members of Parliament Local Area Development Fund (MPLAD) spending from 2009 to 2014 to answer this question. Blair finds that most Lok Sabha MPs tended to save their funds in the early part of their term only to boost spending just before their elections, but this did not turn out to be a winning strategy. A lower proportion of such MPs were re-elected compared with those who spent evenly throughout their term. The 2014 election results were also affected by the Bharatiya Janata Party wave, which might have influenced these findings, Blair argues. It remains to be seen whether the effects of the political economy cycle kick in during future elections.

Also read: Constituency Development Funds in India

The benefits of a digital economy are generally associated with an increase in the demand for skilled workers. A World Bank working paper by economists Marcio Cruz, Emmanuel Milet and Marcelo Olarreaga argues that online trade can also benefit unskilled workers since the internet reduces the fixed costs of trading and allows even smaller firms to access global markets. Smaller firms are more likely to employ unskilled workers, and thus the internet can help drive demand for such workers. This can potentially help reduce wage inequality. The authors studied data on cross-border online trade and labour surveys from 22 developing countries and found that a one percent increase in the share of online exports over GDP reduced the wage gap by 0.01%.

Also read: Online Exports and the Wage Gap

Easier access to working capital can increase the job-creation capacity of small labour-intensive firms, according to an International Monetary Fund working paper by Mai Chi Dao and Lucy Qian Liu. The authors suggest that a reduction in the share of firms facing financial constraints is associated with higher employment growth across economies. These findings are based on 62,000 firm-year observations from 130 countries between 2006 and 2015 from the World Bank Enterprise Surveys.

Also read: Finance and Employment in Developing Countries: The Working Capital Channel

The government should pursue disinvestment of public sector undertakings (PSUs) more aggressively instead of pursuing performance contracts, according to a new paper by Ajay Chhibber and Swati Gupta of the National Institute of Public Finance and Policy. The authors study the impact of privatization by looking at measures of productivity instead of financial returns. Between 1990 and 2015, the period over which successive governments undertook disinvestment, value added per employee (VAE, used as a measure of labour productivity) rose four times while net sales to assets (NSA, used as a measure of operational efficiency) rose five times in PSUs. Divestments raised the productivity levels of PSUs, the authors argue. Performance contracts such as Memoranda of Understanding did not affect productivity.

Also read: Bolder Disinvestment or Better Performance Contracts? Which Way Forward for India’s State-Owned Enterprises

Despite undertaking a series of structural reforms, Mexico’s economy has witnessed very little productivity growth, points out a recent article by Santiago Levy, vice-president at the Inter-American Development Bank, and Dani Rodrik, professor of economics at Harvard University. According to the economists, the reason lies in Mexico’s extreme dualism, with a majority of its workers employed in low-productivity informal firms. This problem has aggravated during Mexico’s liberalization, with a number of high-productivity firms in the formal sector dying, and low-productivity firms surviving. It remains unclear why this has happened but the authors point to two possibilities: the lack of proper sequencing in reforms, and flawed social insurance policies that promote informal employment. Mexico’s example serves as a warning that there are no ‘ready-made blueprints’ for reforms, the authors write.

Also read: The Mexican Paradox

Economics Digest runs weekly, and features interesting reads from the world of economics.

More From LiveMint

image beaconimage beaconimage beacon