Development Watch - Credibility and Signalling in Public Life
JANUARY 9, 2013 · BY DR TARRON KHEMRAJ ·
Introduction: The importance of credible signals
The seller of a used car knows the history and quality of the car much more than the buyer who walks into the show room. The used car salesman could moderate the buyer’s suspicions by offering a warranty on the used car. Here the salesman is using a signalling tool, the warranty, to tell the buyer he has confidence that the used car will work well over the warranty period.
Described here is one of the classic examples of the asymmetric information problem, which is a problem that occurs when one side of the market knows more than the other side. Many private markets are affected by this problem; for example the loan market, insurance markets, real estate market, and the labour market. The participants in these markets have evolved market-based solutions to these problems and sometimes the government is needed to intervene to protect consumers from information problems. Signalling in various forms is one of the market-based methods to ease problems associated with the imbalance in information.
The same principle of asymmetric information is rife with respect to the operations of the government, especially the PPP government. Since the government has more information about the various accounts in which it holds the people’s money the public may form opinions whether these funds are being used well or are being siphoned away for improper use. The PPP is sending the wrong signal when it fails for seven years to give the public audited accounts of NICIL’s operations. It sends the wrong signal when the highly qualified wife of the Minister of Finance cannot be seconded from the audit office to another office to utilise her obvious skills.
When the PPP refuses to implement procurement reforms it sends the signal it wants to protect the channel of redistributing the people’s monies to a chosen few. When the Ombudsman’s office is weakened as it is today, the public is right to speculate about the massive accumulation of publicly displayed assets of a few big-wigs who are paid as public servants, albeit senior ones.
The signal the government sends is not one of credibility but one of a commitment to opaque activities. It is as though the government has made a commitment to hide information from the public instead of addressing the inherent asymmetric information problems. If the PPP government were a market salesperson it would be out of business today as no one would be willing to buy what it sells. The government’s opacity, furthermore, does not breed confidence but more suspicion from the public.
An example of credibility and commitment
Let us look at an activity in real public life where the issue of signalling, credibility and commitment plays a vital role. As is known the recovery in the US economy is weak; unemployment is still at a level the Federal Reserve, that country’s central bank, considers unacceptable. Therefore, to stimulate economic activity the Fed reduces the short-term benchmark interest rate – known as the federal funds rate – to almost zero per cent. With the interest rate approaching zero, the Fed is now backed up against the wall. What does it do now?
It responds by making a commitment to the markets and the public that it will create money so as to generate some inflation. The central bank knows that the public may not believe its actions. Therefore, it responds with something called quantitative easing, buying up various financial assets held by the public and paying them with the cash it created.
As the public spends the cash it generates some prices increase and therefore encourages people to spend today. So although it cannot reduce interest rates further – a situation known as the liquidity trap – it can inject money into the economy via quantitative easing. It will take another column to examine the effectiveness of quantitative easing. However, the point here to note is the Fed made a credible commitment to inject money into the economy. By doing that it hopes to change people’s expectations and behaviour – namely to make them spend today so the economy can get moving.
Why is credible government signalling critical for Guyana?
Credible signals from the government are even more important in a country like Guyana with its historical ethnic voting patterns. Guyana faces the ultimate information problem in voting life. As some analysts, such as Mr Henry Jeffrey, have noted Guyana is a bi-communal society with two numerically dominant ethnic groups. Perhaps the greatest information asymmetry the country faces is as follows. An African Guyanese voter cannot know on the day of election how an East Indian voter will vote. Similarly, an East Indian voter cannot know how an African Guyanese voter will vote in secret ballot.
Now given the intra-ethnic social networks both voters trust that their ethnic-based party is most likely to look after their respective economic interests. Therefore, they both vote for their respective ethnic party – the average East Indian votes for the PPP, while the average African Guyanese votes for the PNC. The numerical advantage of East Indians implies the PPP wins the election. As I have argued in the past, the leaders in the PPP – after gerrymandering internal party Congress elections – established an elected oligarchy in which the people’s resources are controlled by a chosen few.
However, what is needed in a regime of ethnic voting is confidence and credibility given the resource control issue. This would become even more important should Guyana discover oil. Moreover, the PPP government needs to send signals that will minimize the public’s expectations of corruption. The examples of adverse signalling I alluded to in the introduction do not instill expectations of fairness and transparency; they only harden the ethnic divide – they reinforce ethnic voting at the moment of secret ballot.
In the future I intend to develop the thesis of ethnic voting as an asymmetric information problem between two dominant groups as they vie to control economic resources. We will work out the forms of signalling mechanisms that can increase the reward of cooperation instead of non-cooperation that is evidenced in the ethnic vote. The present economic structures make it rational for a voter to vote for ethnic-based leaders; hence, non-cooperation. The challenge is to increase the rewards of cooperation.
Police reform and the positive signalling deficit
Minister Rohee has decided to promote police reforms. He is, however, opening this new innings of reform with a serious deficit of credible signals. Too many wrongs have occurred since the jailbreak of February 23, 2002 to be dismissed in the name of police reform. Minister Rohee, we must remember, allowed a Police Commissioner who “benefitted materially from the drugs trade”, according to the Americans, to serve. Not even an investigation given the American concerns. Signals don’t get more warped than this and credibility is completely destroyed.
Why the Minister refused the initial British aid of 4.5 million pounds to reform the police? Who is this British security consultancy agency that is now given the contract to reform the police? What history do they bring to police reform? Where is the forensic lab? Is the Central Intelligence Unit a spy agency that will help the government to enforce authoritarianism? Are opposition activists’ names being placed on a surveillance list? Who killed Minister Sawh? What role Roger Khan played for the government?
If Minister Rohee is serious then he will send the signals to build confidence and change expectations. Crimes are not a PPP problem, a PNC problem or AFC problem; they are a Guyanese problem. That said, the Minister and President Ramotar have to build favourable expectations by inviting the Parliamentary parties to be part of the reform process. The PPP could also send a credible signal that they are willing to commit to reforms by heeding Mr Granger’s call for an Inquiry into the massacres of Lusignan, Lindo Creek and Bartica, and the execution of Minister Sawh (see SN January 5, 2013).
Send comments to: tkhemraj@outlook.com
