The delays and negotiations can be considered as 'transaction cost of democracy'
Date : 18/05/2024
Amitabh Kant, CEO of NITI Aayog, while speaking in the context of challenges of reforms, mentioned that we have ‘too much democracy’. This has become controversial expectedly. Though he clarified later that his statement was taken out of context, the opposition and critics latched on to it and spoke about how this country has been upholding democracy for the last 70 years. I would rather go one step ahead and call the delays, obfuscations and negotiations as ‘institutional cost’ or ‘transaction cost of democracy’ in economic sense. For example, in the case of the recent Farm Bills, the apt description of the present situation can be described as the cost of upsetting the equilibrium of the coalition of the vested interests with huge stakes. The status quo offers such a huge opportunity to usurp the surplus that there is good incentive to fight it. The substance of this paper is not to show that democracy entails inefficiencies and cost, but instead to show that when we try to correct imperfections in the system, how certain it is that vested groups form coalitions to thwart it.
It is commonplace in management to talk about the value chain of farm products. But, here is a case of a whole chain of distorted value chains being exploited by all the intermediaries. From various studies and reports it is clear that neither the farmers/growers get their due, nor the consumers get any price advantage from MSP or regulation. Then, who walks out with the surplus? Should it be all the intermediaries in the value chain? Reconfiguring this value chain is going to be nothing short of a revolution.
Transaction cost of democracy
The transaction cost of democracy is not just the case of cost of transaction. The direct costs of democracy are like the maintenance of a huge army of party cadres (should their contribution be included in the estimation of GDP), or cost from the spoils system, or the attendant leakages from the system. There are several other dimensions of cost which are quantitative and qualitative, the obvious and less obvious, and the significant ones and the recurring ones.
There is a branch of economics which would call these implicit indirect or opportunity costs as transaction costs, which in this case is the transaction cost of democracy. The unproductive institutional costs are designated as agency costs which fit the democratic system as well. Some would point to other malfunctioning dimensions of democracy like monopolistic control by families, cost of coalition politics of parties which are heterogeneous, etc. These are also subcomponents or may be a large component of transaction costs. Maybe we can call all these in totality as ‘democratic deficit’ rather than cost of democracy, if that is palatable to critics. The transaction cost that we are referring to is the ‘time cost which is often not factored, ‘cost of migration’ to a new system, one time cost of dislocation and collateral damage, and cost of negotiated settlement. The benefits are the reduction in these costs and a policy is worth if these benefits over weigh the costs.
Value chain of value appropriation
The contributions to the value of a commodity start from inputs which include seeds, fertilizers, pesticides, water, power; factors of production like land, labour, equipment; and support services like logistics, grading, sorting, and packing, storage; and intermediaries and traders like wholesalers, mills, retailers, financial cost (I am short circuiting the process from commodity to final consumer products, else it can be a long list). In this value chain, inputs and financial costs are subsidised, land is protected, and the purchase price and procurement are assured. Crop insurance takes care of some part of risks. At each stage of the process, there is value addition by the actual service provider and value appropriation by the intermediaries. At each stage there is inefficiency which is borne by the consumers or by the taxpayers if the government incur the costs.
At the starting of the spectrum of the value chain, the farmers get the minimum of the value generated but at the end of the spectrum consumers don’t get any benefit from all the subsidies and support. The question then becomes who absorbs these benefits? The system is designed such that if you want benefits, you have to own a large tract of land, or you should be an intermediary or a trader in the chain. And everything is carried out on the name of poor farmers, MSP, public procurement, and mandi.
The real transaction cost of democracy is not the protest that is happening which is a legitimate right. The cost is something else; it is the cost of illegitimate beneficiaries of the system who usurp most of the gains. They are fighting to protect their share and in the process, the hapless farmers are being misled into believing that it is in their interest. If it is for the benefit of the farmers, they should be really willing to negotiate for reforms; the reforms which will place the farmers at the centre and give them the power of the market. These implicit transaction costs, which is a significant cost that we pay in terms of huge budget towards subsidy, leakages, mountains of decaying stocks, and poor quality of commodities of public procurement, etc;which are the real costs the consumers and taxpayers are paying.
Value chain in the new schema
One allegation is that the value that is appropriated by the intermediaries in the present schema will be appropriated by the corporates in the new schema. True, the corporates will try to extract the maximum surplus from the value chain. But, what needs to be understood is that the corporates will in turn bring in efficiency in production, logistics, grading and sorting, warehousing, etc. The overall share of the cake and share of gain will be definitely more, and both the farmers and the consumers will stand to gain. In fact, the new schema of market driven production might help the farmers to derisk themselves. If at all we can advance a criticism, it is that some of the intermediaries will find their role again in the new schema and start playing. But, that the corporates will be able to handle.
Network of vested interests
The market equilibrium that we talk about in agriculture is the equilibrium among the vested interest holders euphemistically called stakeholders, i.e., intermediaries. These vested interests are the real appropriators of value. This equilibrium will be upset under the new schema of liberalization. This was the liberalization scenario in 1991 which the Congress government ushered in the industrial sector. There were vested interests in terms of infant industries, PSUs, licenses, import restrictions, etc. which got dismantled. But, the same Manmohan Singh dithered when it came to agricultural reform. Should we call wisdom or weakness. Like the educational policy, this was also given a go by for four decades, though time and again they have been voicing for exactly the same reforms, when they were ruling.
Fight for stakes combines with fight for political relevance
The democratic deficit comes when the vested interests find support from people who are fighting for their political relevance. Then the concern is no more the welfare of the farmers but the political posturing. If the real intention of the supporters is the welfare of the farmers, then they should be asking for reform and not status quo. They should stipulate their preferred positions. Scrapping of the law or status quo cannot be the starting point of any negotiation. If the protesters respond in intransigent ways then no reforms are possible in the future. This is what I call posturing, that is paralysing the process not just the highways at any cost.
This is the reform moment for agriculture and it should not be missed. The government should directly deal with the farmers groups than the groups with political affiliations.
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