02 Jul 2018 19:09 IST

The economics behind public policy

Rational analysis can help planners make decisions that lead to sustainable growth and benefit society

In the last couple of years, the policies of the Indian government have become compelling topics of conversation. Oil prices, interest rates, GDP growth and ease of doing business rankings are all concepts we are often pressed to have an opinion on.

The fact that such issues are being talked about and debated, leading to the public being better informed, is a positive development for any democratic society as it leads to a greater awareness and curiosity about how our political leaders make decisions. Do they have similar discussions in the corridors of power? How does our state evolve, move towards sustainable growth and implement policies for the benefit of society?

The answer lies in public policy, a field that represents the activities of government and quasi-government agencies. Public policy deals with how and why these organisations intervene in the market sphere in a variety of ways. The difference between this field and others is that it is motivated not by profit, but by considerations such as equity and justice. It aims to ensure that a country’s economy grows in a sustainable fashion that helps citizens get access to prosperity. Today, policymakers are increasingly finding economic theories and analysis to be the best way to inform and assess their decisions and meet these laudable goals.

Policy formulation and implementation

Sustainable economic growth and prosperity are, by consensus, the overarching goals of public policy. However, as the debates around policies reveal, there is little agreement on how best these can be achieved. Policy-makers must be able to identify what needs to change in a country’s economy to better equip it to grow sustainably. They then need to understand how best to achieve that change.

Given how complex and interconnected aspects of a nation’s economy can be, each change has a multitude of potential side effects that need to be measured and evaluated. There are many instances of policy decisions in India’s past that showcase just how far-reaching decisions can be and how unintended consequences can completely change the outcome.

For example, when India’s leaders looked at the economy after Independence, they were worried that foreign competition would prevent the growth of domestic companies and industry. As a result, they limited the entry of foreign companies, with the hope that this would allow Indian companies to develop and be ready to compete on the global stage.

In the decades that passed, many Indian companies did come up; however, because they were just competing with one another , they were not as innovative as their foreign counterparts. This led to industry lagging global trends, leaving it lacking the competitive edge. It was only after then Finance Minister Manmohan Singh opened up the Indian economy through market reforms and liberalisation in 1991 that the economy started booming.

The decision-makers who chose to close India’s economy did so for what they thought were good reasons. Chances are that, had they known what impact it would have in the long term, they may have decided differently. For policy-makers to make responsible and rational choices about all of these different measures, they need to rely on some scientific method of evaluating their options. Further, they require a clear monitoring mechanism to assess the actual consequences of the policy measures under implementation to evaluate their impact.

Economic analysis is the best way to accomplish both of these. The reason is simple. Economics as a discipline is best suited for an in-depth understanding of the complex socio-economic forces at play in a market and society. Further, its focus on rational, data-driven choices helps decision-makers make the most efficient choices to achieve a given set of ends. Reliance on objective analysis helps ensure that the policies are well-considered, effective and efficient. A comprehensive monitoring and evaluation mechanism based on economic principles would also help assess the policy impacts in real time, allowing for dynamic tweaking and course-correction, if necessary.

Correlation with sustainable growth

Another benefit of an economics-driven public policy is that it allows the public to play a bigger role in policy-making. When policies are presented as rational, data-driven choices and the reasons are put forth to the public, they can have more informed opinions about them. A well-informed electorate, that is better able to measure a country’s progress and thus hold the government and its agents responsible, is important for any democracy, particularly one as vibrant and chaotic as India’s.

Sustainable development and growth come into play when nations consider their resources and make choices about how best to use them. These resources and their use are a matter of public concern, as their ownership is ascribed to the nation and its citizens. The effective conservation, quality maintenance and distribution of resources lead to the kind of sustainable development that countries are aspiring towards. This is a crucial goal of public policy and is a question that is at the centre of India’s future — how can we grow economic activity in the face of ecological fragility and finite resources?

Different priorities

The various communities and groups that exist in society often have differing concerns and priorities. The country has, at various points in the past, wrestled with the problem of balancing these competing interests. If a large infrastructure project can provide power to an industrial area and spur employment and economic growth, is that worth the displacement of local communities? How can our leaders weigh the options and choose between the harms of pollution and the benefits of industrial growth and progress?

The Narmada Dam was an infrastructure project that caused great controversy in India. After prolonged deliberations that took a few decades, decisions were made about building smaller dams and raising the height of the Sardar Sarovar Dam to better harness water resources for power generation and agriculture.

However, the project also required that several local populations, villages and tribals be relocated. These communities resisted the project, claiming that their relocation away from their source of livelihood was too high a price to pay for the benefits of the project in terms of economic growth. Popular resistance to the project was mobilised, and long delays led to both sides losing a lot of time and money.

Weighing the choices

Economics could have been a solution, allowing a data-driven and objective determination of costs and results that may have helped policy-makers look at the problem differently. Based on such a study, they could have made a more compelling case for the dam and even developed a relocation and resettlement plan that addressed the concerns of the displaced communities. Such choices and how to make the right decisions are at the very core of economics and rational analysis.

The field studies how scarce resources can be effectively utilised and also helps balance the key objective with other imperatives – including, as in the case of public policy, concerns around equity and justice. For the sustainable development of India socially, politically and economically, while conserving our ecological balance, public policy needs to rely more heavily on economics.