Lemon Law

How crappy used cars explain the chaos in Thailand and Egypt.

Haven't we seen this movie before? Here's the plot: a democratically elected government tries to enact controversial new policies, protests ensue, the military gets involved, and soon the government is at risk of being forcibly removed. It's happened in Egypt, and now it may be happening in Thailand. But why?

A cynical observer might conclude that in both cases, the military was taking advantage of protests by a minority to hand power back to its favored elites. Yet there's a chance that the protests in Egypt and Thailand have actually represented the opinion of the majority. After all, plenty of Egyptians who voted for the Muslim Brotherhood were outraged by its attempts to consolidate power, just as many Thais who supported Prime Minister Yingluck Shinawatra were appalled by a proposed amnesty for corrupt politicians -- including her brother, the former Prime Minister Thaksin Shinawatra.

Perhaps voters just didn't get what they expected. But rather than wait for the next elections, they poured into the streets to demand immediate change. In Egypt, with the help of the military, they got it. Given the recent precedent, they may get it in Thailand as well.

This series of events bodes ill for democracy in both countries. Fortunately, at its root is a very familiar problem.

Imagine you're buying a used car. Some used cars are good and some are lemons, but you can't tell with certainty which are which. As a result, you'll never be willing to pay a seller the full value of a good used car; there will always be some chance that it's a lemon. And since no seller will be able to get full value for a good used car, only lemons will be for sale -- and no one will want to buy them.

This is Nobel laureate George Akerlof's market for lemons. Because of the asymmetry in information about cars between buyers and sellers, the market breaks down. The same can be true for politicians.

That's because elections suffer from an asymmetry of information, too. Voters can never be completely sure what politicians will do once in office, so there's always a chance that they'll disappoint voters in some way. This isn't a huge problem for democracy in itself; plenty of American voters were angered by George W. Bush's wars and Barack Obama's failure to chase down wrongdoers from the global financial crisis, but no coups or revolutions ensued. Yet when governments are more fragile, the electoral "market" can begin to break down.

In elections, politicians are the sellers of their own time and effort. They offer this effort in exchange for the power to implement their agendas. The trouble starts when that power can be easily taken away. Thai politicians have known since 1976 or earlier that they could be removed from office through means other than elections, and Egyptian politicians have learned it more recently. With only a tenuous grip on power, neither Egyptian nor Thai politicians will ever get "full value" for winning an election. As a result, Akerlof's model predicts that only lemons -- in this case, bad politicians -- will enter politics in Egypt and Thailand.

How can this problem be solved? One way is to protect elected governments. Rather than appearing to submit to the will of protestors, the military would back elected leaders to the hilt. But in countries lacking robust systems of checks and balances, an unconditional guarantee of security for elected governments might give them a license for all sorts of abuses.

Akerlof proposes some alternatives in his original paper. One is a warranty: if you're disappointed by the product you've purchased, you can get a new one or your money back. In politics, the closest thing to a warranty is the ability to impeach leaders or dissolve the government through a vote of no confidence (which, incidentally, Yingluck recently survived). Failing either of those mechanisms, frequent elections at least ensure that voters have a chance to pick new leaders on a regular basis.

Frequent elections have their drawbacks, though. Recently, the two-year cycle of national elections in the United States has come in for criticism, given the almost constant campaigning that has resulted. Some pundits have even suggested that the Chinese system, where politicians essentially have a ten-year mandate, is superior. Yet the Chinese and American models can both be viewed as fixes for the market for lemons.

In China, the government -- albeit not an elected one in a way Americans would recognize -- has a strong grip on power for a set period of time, offering "full value" to politicians. In the United States, mistaken "purchases" by voters can be quickly corrected. China puts the sellers first, while the United States favors the buyers.

Which group would you choose?


Daniel Altman

Second Child Syndrome

Is the relaxation of China's one-child policy too little, too late?

Will China get rich before it gets old? That's the question I've been asking myself for a few years now, ever since I saw the long-term demographic projections for the world's second-biggest economy. It used to look like the answer was no, but the relaxing of China's one-child policy could change that -- and much more.

As I wrote here about a year ago, the age profile of China's population will look roughly the same as Japan's within three decades. Japan has one of the world's oldest populations, with the highest median age anywhere. As a result, there are fewer workers to support every Japanese retiree through the pension system.

These demographics can be a significant drag on growth, since a greater share of the economy's production is devoted to supporting people whose contributions to output are decreasing. In other words, either average living standards have to decline or more output must go to consumption rather than the creation of new capital and technology.

With life expectancy rising, immigration far outweighed by emigration, and fertility controlled by the one-child policy, China has been heading rapidly towards the same demographics as Japan. To be sure, longer lives and loopholes in the one-child policy have allowed its population to keep growing, unlike Japan's. But China's aging population is poised to put a dent in the economy before it can exhaust one of its most powerful engines of growth: urbanization.

Urban areas are good places to make workers more productive by raising their living standards, teaching them better technology, and giving them access to more capital. In cities, it's easier to build and maintain factories, get access to energy, and achieve economies of scale. It's also easier to reach workers and their families with health care, education, and other services. New ideas travel faster in cities, too, helping to improve the processes of production.

In terms of urbanization, China is four decades or more behind Japan. The share of China's population living in cities is just over 50 percent -- about where Japan was in 1950 -- but it is urbanizing more quickly, according to the United Nations. But as I pointed out above, China has been on track to become as old as Japan within just three decades, suggesting that the fulfillment of China's basic economic potential could end prematurely. Continued urbanization might help China to deal with its forthcoming pension burden, but growth and living standards would still suffer.

Softening the one-child policy, as the Central Committee of the Communist Party of China has promised, could alter this economic future. If fertility rates were to increase by, say, 20 percent, then in two decades -- before China was supposed to look like Japan -- the annual cohorts of workers entering the labor force would start to be 20 percent larger as well. Within another decade, the overall increase in the labor force might reach 5 percent. And as time went on, the ratio of workers to retirees would continue to rise.

By pushing back the aging of the population, China would give itself a longer time horizon for strong growth. Of course, it would still face other roadblocks, including weak legal institutions and a corrupt business climate, but its main sources of growth would be less constrained. The story does not end there, however.

The one-child policy has been a fundamental part of Chinese culture for decades, and any change will profoundly affect major decisions among families. Parents who have only one child tend to invest a lot in that child. But when they have one more, some combination of three things might happen: 1) the parents can work harder in order to provide the same resources to two children as they would have to one, though this cuts into the time available for child care and family leisure; 2) they can spread their resources evenly between the two children; or 3) they can devote more resources to the child who seems more promising or, conversely, to the one who seems to need more support.

Many Chinese families have not had to make this choice. Instead, they have invested everything they could in their little emperors, leading to better nutrition, health, and education. The country's enormous improvement in human development indicators since the 1980s, as measured by the United Nations, surely owes some credit to the restrictions -- some would say human rights violations -- of the one-child policy. But in removing these restrictions before China is wealthy enough to take care of an increased populations could slow the pace of these advances, hampering growth.

The transition to a two-child (or more) policy could also generate more immediate risks for China. The sudden increase in the supply of labor when the first big cohort hits the market could lead to a spike in unemployment, which is fuel for unrest and political dissatisfaction. A surge in the native-born population of Chinese cities could slow urbanization, too, if the competition for jobs were to stoke hostility against internal migrants.

Early reports suggest that the transition will be gradual, so some of these risks might be finessed. It's also possible that changes in the one-child policy will only have a marginal effect on fertility, affecting only about 20 million parents. And of course, plenty of families might simply decide not to have more children. But even if the eventual abandonment of China's limits on childbearing led to an additional 10 million births a year, as the government's own estimates have suggested it might, the long-term effects on the economy would be decidedly mixed. Immigration, anyone?