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Speeches & Transcripts

Jan-Peter Olters: Financial Implications of Local Elections in Kosovo

September 25, 2013

Jan-Peter Olters, Country Manager for Kosovo Conference: Financial Implications of Local Elections in Kosovo Kolegji Unversum, Pristina, Kosovo

As Prepared for Delivery

For reasons beyond the scope of today’s discussion, the upcoming local elections could prove historic and help to prepare the groundwork for a free, democratic, and multi-ethnic Kosovo.

Elections provide voters with an opportunity to have their voices heard and their preferences revealed, to decide on whether to continue on the current path or to start something else anew. Evidently, this interaction between voters and candidates is much more direct in local elections than during national campaigns, as both voters’ expectations and politicians’ accountability are more immediate. The ability to maintain macro-fiscal and financial stability or to negotiate a Stabilization and Association Agreement with the EU—and the implications of such an achievement—are, of course, much more abstract than the state of the schools one’s children attend, the ability to repair and maintain local roads, and the ease with which business licenses and cadaster documents can be obtained from the local government.

In their decision on whether or not to support incumbents, voters tend to look at, principally, two elements of an incumbent government’s and/or mayor’s track record and medium-term policy program.

First, voters in Kosovo, Germany, or any other country look at revealed and proposed policy priorities and the degree to which these resonate with one’s personal situation and family needs. The ability to generate government revenues—i.e., principally taxes from the citizens—and secure supplementary financing sources —i.e., either one-off revenues from privatization or loans from domestic or foreign sources—defines a government’s budgetary constraint. These limits are, of course, much more binding for local governments, many of which have no capacity and fiscal space to borrow. This means, choices need to be made—choices in favor of some policy priorities and, as flip side of the same coin, against certain other priorities. These choices have implications on the development potential of a given municipality as a whole, the welfare a citizen and voter can derive from the public goods and services provided by government, and the opportunity costs (i.e., the foregone other expenditures) that he or she will have to pay for that. These types of considerations refer to the “ideological” component of a voter’s ultimate ballot box decision: has the government spent, will the government spend the available budgetary resources on the right policy priorities?

A voter’s second major consideration relates to an incumbent politician’s competence and his or her challengers’ perceived competence. Clearly, money wastefully spent on the right policy priorities is no better than—and probably worse—than public funds spent carefully and effectively on the wrong policy priorities. For a politician or candidate, it is a whole lot easier to frame a policy program, outline policy priorities, and present an ideological policy stance different from one’s competitors than to demonstrate administrative competence. And for any politician, who is eager to do that, the challenge is complicated by the fact that voters’ perceptions on election day can either be backward-looking (i.e., assessing the competence shown during the previous mandate) or forward-looking (i.e., forming expectations over a politicians’ and candidates’ respective abilities to use public funds to generate the highest possible public benefits).

In many ways, politicians tend to find voters who are looking back to the previous mandate easier to influence, not least because they use previous performance as intellectual shortcut to assessing an incumbent’s competence. Many authors in the sub-discipline of Political Economics reduce such a voter decision to vote for the incumbent (if viewed competent) or support the challenger (if not).

This, of course, increases a politician’s incentive to demonstrate competence by realizing as many public investments as closely to the elections as possible. In the literature, this is referred to as the political business cycle. Just before elections, all available funds—and, to the extent possible, those from the next mandate—are used to fix roads, schools, and hospitals and be as responsive to voters’ preoccupations as possible. This increases the investment dynamism to an extent that cannot be maintained over an entire electoral cycle, meaning that related activities drop off after the elections and only restart just before the next elections.

Available budgetary figures seem to indicate the existence of such a behavior. If one takes, for instance, the execution of municipal capital budgets during the January to July period, one sees a rate of 25.9 percent in the off-election year 2008 and 28.7 percent in the election year 2009. For the current electoral cycle, the numbers confirm the same behavioral pattern. The execution rate of municipal capital budgets was 26.1 percent during the first seven months of the off-election years 2010–12 and 33.8 percent in the election year 2013.  As such, the numbers appear consistent with the view that municipal governments seek to convince the electorate of their administrative competence by increasing the rate of investment activities in the months just prior to the local elections.

Clearly, this type of policy-making becomes more difficult as a strategy of electoral success if voters look at performance differently. If such a conduct is understood, voters become a whole lot less “impressed” by ongoing public investments and, instead, try to understand the implications for the electoral mandate ahead. Demands from forward-looking voters on politicians are thus entirely different from those just described. They are more likely to understand the fiscal constraints and the resultant unsustainability of any political business cycle. Their perception of competence is derived on the basis of indicators neutralizing exactly those that attract backward-looking voters.

To be able to form expectations over a four-year horizon means, of course, that the current situation has to be understood. The easier it is to understand what is happening, the higher is the voter’s a priori confidence in government, whether local or national. This is where transparency becomes a critically important component of the political debate. Transparency generates confidence. Confidence increases electoral attractiveness.

The reasoning is straightforward: a competent politician does not need to hide the budget, execution rates, and supportive strategies from the electorate. Municipal offices run by more competent politicians are more responsive to requests from public, and websites contain more—and more detailed—information. At worst, forward-looking voters might interpret politicians’ attempts to generate political business cycles as further indication of a lack of competence, thereby placing politicians seeking re-election into a very difficult position.

As important as it is for a voter to understand whether a politician is ideology-driven (i.e., competing for a political office to be able to implement a certain policy program) or is office-driven (i.e., offering a policy program to be able to win a given political office), it is critical for a politician to understand to which extent his or her electorate is backward- or forward-looking.

The inherent policy dilemma might, however, not be irreconcilable. I quote here Edward Tufte who wrote the following in 1978:

“Are … election-year economic machinations … completely undesirable? I am not sure. At a minimum the issue is more subtle than the anti-political evaluation now recorded in the economic … literature. One relevant observation is that election-year economics may tend to redistribute income downwardly. A bribe to voters is, after all, a bribe to voters.”

There is no doubt that households at the lower end of the income distribution in Kosovo need all the help they can get. At the same time, it is crucial for politicians to distinguish types of promises made to the electorate and avoid those with (i) permanent fiscal implications that cannot be met year after year without crowding out other critically important expenditures; and (ii) with negative implications on ongoing reform programs, undoing efforts made over previous years.

It’s the case in Kosovo, as in any other country: not every politician can successfully merge good politics and good economics. But to do that, both sides of the politico-economic equilibrium need to be understood very carefully.

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