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Apr 8, 2012

How governments spend our money

The decision of the Dr Bhattarai-led government to grant Rs 20 million to Prakash Dahal, son of the president of Maoist Party, to climb Mount Everest raised a storm of derision from every nook and corner of the country. It was impossible to understand the logic behind the government’s move. 

After persistent and universal criticism, Dahal stated that he would not want to use the money and instead asked the government to use it to provide relief to conflict-victims. Despite this, the government is yet to recant its decision. Deeper contemplation about this event teaches us some vital lessons on understanding politics and the nature of government’s action.

Other people’s money

Why did the government find it okay to endow Prakash Dahal with Rs 20 million without reservations? The answer lies in the basic principle of economics: Incentives matter. The money being spent neither belonged to Dr Bhattarai nor any of the government officials involved. When it comes to other people’s money, even the thriftiest of people get extravagant. Expecting thriftiness from government whose primary job is to extract money from one person to pay for the benefits of another is mere foolishness. 

Nobel Laureate Milton Friedman has elucidated this tendency of governments to plunder wealth in his work describing the four ways of spending money. When a person spends his own money on himself, he tries to economise as well as get the highest value out of his spending but if his money is being spent on others, he tries to economise but does not necessarily care about the highest value. Similarly, when we are spending other people’s money for ourselves, we tend to get the highest value out of our spending but rarely try to economise. The worst case scenario is when a person gets to spend someone else’s money for another person, where the person who spends the money has neither the incentive to economize nor get the highest value. Spending done through the governments are prime examples of this.

It is the mindless mechanism of ‘robbing Peter to pay Paul’ which makes government plundering so voluminous and efficient. Otherwise how could a company such as the Janakpur Cigarette Factory, which hardly produces anything useful and has been incurring losses for a whopping 20 years, be endowed with millions of pocket money? No entrepreneur or individual would have kept pumping money into a loss making business for even three to four years, let alone 20.

Had it not been for other people’s money, it would have been hard to have less than 15 per cent of the development budget spent even after eight months of initiation. Similarly, it is for this very reason, projects undertaken by the government tend to get delayed for an amazing stretch of time and exponential increase in overall expenditure without any remorse of the spender. In fact, it pays to delay and overspend. Hence, increased role of the government would therefore naturally mean an increase in the wastage. 

Government decisions are hard to retract

The epic protest required to revert the government’s decision to endow Dahal with Rs 20 million gives an inkling of how much effort it takes to rectify even a small decision from the government. Unlike in a marketplace where people vote with their choices and see instant results, the political mechanism of doing things is so distorted that the service provider(government) and the consumers are miles apart. 

The only effective way citizens can give their feedback to their political service provider is through regular elections which unfortunately is quite rare (almost extinct) in Nepal’s context. No wonder same people get to power even when people are clearly dissatisfied with them.

Even with good people and good intentions, rectification of errors is not easy to implement. Efforts get entangled with the mess of bureaucratic procedures, political bargaining and pleasing of every party involved. It has been years we have been facing petrol-eum crisis and a huge amount of money has already been spent but we are yet to see any effective solutions to the problem. Other people’s money effect tends to remove the urgency for reforms whereas initiations from some well-meaning individuals also get lost in the bureaucratic and political maze.

Government mistakes are costly and affect millions

Unlike failure by private entrepreneurs, which affect the involved parties only, failure by government actions affect everyone. The government spending a whooping amount for the Everest expedition could easily mean some people from some parts of the country must have forgone their development budget. The loss incurred by Nepal Oil Corporation is equally borne by people from some remote areas of the country like Jumla who might never use vehicles at all. The relief packages received by the Kathmanduites recently could have meant some people from Solukhumbu were denied some basic infrastructure. Although the impact of such government actions are not visible directly and are facilitated by the other people’s money effect, the costs are there nonetheless. 

The question every Nepali should ask: If I am receiving some benefit from the government actions, who is paying for it? Is it, in the end, my money alone that is coming to me (in a reduced amount) through an indirect route? And can we expect government spending to be effective and economical when ‘other people’s money effect’ is a primary characteristic of government spending?

-Surath Giri