The descent into a Banana Republic?

The quality of debate surrounding the Supreme Court's decision to cancel 122 2G spectrum licenses with the "stroke of a pen" is a reflection of the standards that prevail in public issue discourses in mainstream media in India.

Stripped off all its sensationalism, the 2G spectrum issue essentially boils down to this. The Government of the day, in its wisdom (or lack of it) and well within its rights, put in place (or inherited) a discretionary telecommunications spectrum allotment policy. However, in its implementation (during the 2008 allotments), there were clear discrepancies and irregularities, atleast in case of some of the bidders, that leave no doubts about malafide intent.

So the Supreme Court - three years after the allotments are made, operators have stabilized their full commercial operations, and a web of contractual obligations involving different market stakeholders have emerged - steps in and examines the evidence on corruption in the allotment process and puts a full-stop by cancelling all the spectrum allotments made during that period. What's more, it goes beyond the malafide intent and questions the government's use of a discretionary allotment policy and effectively seeks to "legislate" an "auction-based" allotment process. A nascent mobile telecommunications market-space, the equivalent of a mid-size European country, is decreed to be wiped out in four months.

Now consider this. A newly elected democratic government of Banana Republic, a war torn and military-ruled country in the continent of Timbuktu, decides to encourage foreign investments to boost its economy. It offers attractive concessions like free land, tax holidays, and so on in mineral exploration and manufacturing sector. Investors flock to Banana Republic, enter into sovereign contracts with its government, and start exploration and manufacuting activities. The economy booms, tax revenues increase, and the country starts its recovery from its war-era devastation. There are the inevitable tales of cronyism and corruption in some of the contracts awarded, all of which have aroused some national indignation. Then disaster strikes and the military takes power. Its first act is one of deep populism. It plays on the national resentment at the corruption in contracts signed with foreign investors and cancels all sovereign commitments of the previous government and expropriate the foreign investments. Banana Republic slips into its normal state of turmoil.

Apart from the different exterior trappings (the cancellation was at the "stroke of a pen" in the former, while it was at the "boom of a gun" in the latter), on substantive terms, is there any difference between the two scenarios? In both cases, sovereign policy commitments made by the respective democratically-elected governments of the day (whatever its flaws) and implemented deficiently (as is the case with any implementation in such societies) are, without any of the legal requirements of fairness and justice, cancelled over-night at the arbitrary discretion of a few individuals. In both cases, apart from moral hazard arising from defaulting on sovereign commitments and the long-term economic damage caused, the decision-makers have clearly over-looked the fact that much water has flowed under the bridge subsequent to the "original sin". The decisions extinguished the multiple economic transactions and contractual commitments - many of them without any malafide intent, based on legally valid legislative and executive decisions, and a consequence of the natural flow of economic activity - that have emerged after the original decisions/allotments.

Not for a moment am I holding any brief for those who violated their constitutional responsibilities or who benefited fraudulently. All of them should be brought to book for their criminal liabilities. The political masters, bureaucrats, and the businessmen who colluded to defraud the exchequer should all be throughly investigated, their criminal intent established and punishment imposed. For example, the public servants who took part in the conspiracy should be punished under the prevailing rules, while the businessmen who benefited from it should be punished under the relevant rules and the amounts defrauded quantified and collected from them and their partners. This should be done in a manner that least disrupts the competitive marketplace (and even its critics would admit that the economic outcomes - technology, business models, consumer surplus etc - of India's telecommunications reforms has been one of its economic and policy success stories) that has emerged from the original decisions.

In any case, the sovereign policy commitments of democratically elected governments, however flawed, should always prevail and not be left at the mercy of flippant individual discretion, howsoever mighty, provided the allotment process is in conformity with the broad constitutional principles. This becomes all the more important if subsequent transactions, in good faith and based on the sanctity of a sovereign commitment, have been executed on the original decision. However, law should take its course and severely punish those who displayed any malafide intent, discrepancies, and wilful omissions in the implementation of the allotment process.

The term "banana republic" is characterized by two features - a country operated as a commercial enterprise for private profit and one where the sanctity of long-term policy commitments of any of its governments is of questionable value. On these grounds, does India qualify to be a "banana republic"?

Mental fatigue and decision-making

One of the less understood and least discussed areas of public policy is the influence of psychological and behavioural motivations in determining the actions and decisions of human beings. Conventional wisdom on this has relied on the assumption that human beings are rational and respond to incentives (rewards and punishments) and regulations (rules). But this approach overlooks the critical influence of cognitive biases on human behaviour.

An excellent post in Economix draws attention to the critical role of extraneous, human behaviour-related factors in deciding outcomes in public administration. It points to a recent paper by Shai Danzigera, Jonathan Levavb and Liora Avnaim-Pessoa who analysed the changes in the nature of decision-making by eight experienced parole judges in Israel during a court session.

They examined more than 1,000 rulings made by them in 2009 found that the probability of favorable decisions declined dramatically as the session progressed. They write,

"Are judicial rulings based solely on laws and facts? Legal formalism holds that judges apply legal reasons to the facts of a case in a rational, mechanical, and deliberative manner. In contrast, legal realists argue that the rational application of legal reasons does not sufficiently explain the decisions of judges and that psychological, political, and social factors influence judicial rulings. We test the common caricature of realism that justice is “what the judge ate for breakfast” in sequential parole decisions made by experienced judges. We record the judges’ two daily food breaks, which result in segmenting the deliberations of the day into three distinct “decision sessions.” We find that the percentage of favorable rulings drops gradually from ≈65% to nearly zero within each decision session and returns abruptly to ≈65% after a break. Our findings suggest that judicial rulings can be swayed by extraneous variables that should have no bearing on legal decisions."

A Guardian report quotes one of the authors, Jonathan Levav,

"You are anywhere between two and six times as likely to be released if you're one of the first three prisoners considered versus the last three prisoners considered."

This finding resonates with studies elsewhere and in other areas. Behavioural economists like Dan Ariely have found that making successive decisions depletes a limited mental facility. As people get tired, they look for shortcuts, and one of the easiest shortcuts is to uphold the status quo – in this case, denying parole. As the Economix report writes about its implications elsewhere,

"This suggests that college admissions committees are more likely to accept the first applicants they consider after a lunch break. Or that quality-control officers may be more likely to ignore possible flaws in products as a long day drags toward its close."

As the Economix post argues, while food and rest are imperfect solutions to overcome mental fatigue related problems, checklists may be more effective in addressing them. In fact, Prof Levab points to the extensive use of checklists by professionals like pilots as an acknowledgement of the reality of mental fatigue.

Update 1 (7/6/2011)

The idea of depletable self-control - that an individual’s capacity for exerting willpower was finite (or exerting willpower in one area makes us less able to exert it in other areas) has been gaining currency in recent years. In 1998, researchers at Case Western Reserve University published some of the young movement’s first returns. Roy Baumeister, Ellen Bratslavsky, Mark Muraven, and Dianne Tice set up a simple experiment. They had food-deprived subjects sit at a table with two types of food on it: cookies and chocolates; and radishes. Some of the subjects were instructed to eat radishes and resist the sweets, and afterwards all were put to work on unsolvable geometric puzzles. Resisting the sweets, independent of mood, made participants give up more than twice as quickly on the geometric puzzles. Resisting temptation, the researchers found, seemed to have "produced a 'psychic cost'".

Over the intervening 13 years, these results have been corroborated in more than 100 experiments. Researchers have found that exerting self-control on an initial task impaired self-control on subsequent tasks - consumers became more susceptible to tempting products; chronic dieters overate; people were more likely to lie for monetary gain; and so on.

In addition to self-control decisions, researchers have found the same problem with tradeoff decisions - where w resolve conflicts among choices as rationally as possible. Any decision that requires tradeoffs - like choosing between more money and more leisure time - require the same conflict resolution as self-control decisions and seems to deplete our ability to muster willpower for future decisions.

Princeton economist Dan Spears has found that such self-control and trade-off decisions are more pervasive for poor people, with the result that they make a large number of sub-optimal subsequent decisions. For example, if you have enough money, deciding whether to buy the soap only requires considering whether you want it, not what you might have to give up to get it. However, many of the tradeoff decisions that the poor have to make every day are onerous and depressing - whether to pay rent or buy food; to buy medicine or winter clothes; to pay for school materials or loan money to a relative - are weighty, and just thinking about them seems to exact a mental cost.

Mullainathan and Banerjee too found that given their scarce incomes, the same self-control or trade-off decision problem is more consequential for the poor than the rich. These findings bring in a new dimension to poverty - "poverty doesn’t simply reduce freedom by constraining an individual’s choices, but that it may actually alter the nature of freedom by reducing an individual’s willpower".