Wednesday, November 29, 2017

Second generation commitment devices

As argued in a recent article written by a former central banker of Argentina and a co-author:
“We call for amending the design of some of democracy’s existing commitment devices. These relate to the judiciary, media, central bank, regulators – the elite’s expertise and the experts themselves. The current commitment devices and institutions don’t seem to be fully sufficient nor entirely credible (depending, of course, on the country and its institutional history). These institutions should be improved immediately by introducing what we call a ‘second generation’ of commitment devices. These are specifically designed to materially improve existing structures through stronger and more credible accountability elements, for both the institutions and the elite. They can reduce the populist’s incentives and ability to introduce measures that would quickly and disproportionally favour him and allow him to enhance his grip over the initial benefits.”
These “second generation commitment devices” require a careful study of the biases of regulators and a careful study of the behavioral issues that surround the political arena in which they work, because the forces of populism do play with these tools. Before embarking on the specific or generic reforms suggested by Mario Blejer and Piroska Nagy-Mohacsi in that article, such as periodic reviews of regulatory institutions or focusing more on fair process than outcomes (as well as “allocate resources to improving the public’s understanding of the long term costs of unsustainable policies”), it would be useful to have a better knowledge of the characteristics of the decision-making process of the individuals that participate in regulatory decisions.
Mainstream political operators respect the existing institutional constraints and functioning of politics, but these are often under criticism. As another  recent article on the supply and demand of populism suggests, new leaders are then very tempted to break away from one form or another of existing constraints. These constraints can be formal or informal, and it is not unusual that national-populist leaders, at the same time that they propose walls or exits, they also depart from inherited conventions and use strong rhetoric or ride the waves of the mob rule. The answer should be serious institutional reforms.

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