BOOK REVIEW
Title:
An Economist in the Real World
The art
of policymaking in India
Author: Kaushik
Basu
Publisher:
Penguin Viking, 2016, Pages 228,
2016
Copyright: Massachusetts
Institute of Technology (MIT) 2016
Price: Rs. 599/-
Real World Economics
Kaushik Basu is a vice-president and chief economist at World
Bank, as well as professor of economics/ C. Marks professor of international
studies at Cornell University.
He served a 30 month stint as chief economic adviser to the
government of India in 2009-2012.It was a rare foray for Basu, outside
academia, theoretical economics, and research, and spawned this engaging book
for the layman who wants some insight into how economics in general, and
economic policy in particular, works in India.
When Basu joined the government, inflation was raging at
between 7-11%, and lasted for the five years 2009-2014,coming after being stable
for the previous 12 years.
Inflation is a peculiarly Indian obsession, and trumps,
somewhat self-defeatingly, the concern for growth. Basu revisits much worse
inflation, in the hey-day of socialism, and on a much lower base of just about
$0.25 billion. Those were also the days of the infamous ‘Hindu rate’ of growth
- never more than 3.5% p.a..
In 1973-1974, just before the Emergency (1975), inflation never
dropped below 20%, and stood at an astounding 33.3% in September 1974!
The new season of high inflation during Basu’s tenure
however, sat upon a much stronger economy, reasonably large at $2 trillion,
growing at over 4.5% at its worst. And it was back-stopped by a black economy,
estimated to be of equivalent size.
Basu acknowledges as much, writing that India’s cash economy
probably saved it from the ravages of the post 2008 sub-prime crisis and the
borrow-and-spend decades preceding. That downturn engulfed the US and Eurozone,
and sent it reeling.
The West chose to stave of recession, or worse, with negligible
interest rates, and billions in stimulation money, paid out every month, and
for years together.
India picked the opposite course, tightening interest rates,
sucking up excess liquidity, even as it widened the fiscal deficit to finance
welfare measures.
This choking manoeuvre went on, slowing an 8% GDP growth
rate to under 5%, not seen since 1994. But, the inflation stayed high, until
falling oil prices brought it down, but only during the successor NDA
government.
Basu repeatedly makes the point, in almost every chapter of
this volume, that economic policy is just one element in the mix, and only
succeeds to the extent that its prescriptions are taken up by the people –
provided, of course, other macro conditions both nationally and
internationally, are amenable.
He dwells on the theory of the ‘focal point’ first
postulated by Thomas Schelling in 1963, wherein the level of acceptance of a
new law is based on peer behaviour. It shifts the strategic epicentre, or focal
point, to a place where state effort will give best results, assessed along
with John Nash’s concept of the ‘Nash equilibrium’. This speaks of consensus
brought about by several people agreeing on a preferred course of action
voluntarily, as part of his celebrated Game Theory. As an economic
theoretician, Basu feels strongly about the people having the last word.
Another concept, beloved of Basu, is ‘the invisible hand’
postulated by that prince of early capitalist thinking Adam Smith. In this, the
enlightened ‘self interest’ of the people pushes the economy towards desired
outcomes, and economic policy does well to adapt itself to it.
And I suspect, though he does not say it in so many words,
in a black and white economy like India’s, where a full half operates as it
pleases, the writ of the government is, to that extent, happily compromised.
Basu makes relevant comparisons between what India does, and
what other countries, China as yardstick, certainly, but also emerging
economies- Brazil, Turkey, etc. have done differently, but does not make any
definitive value judgements either way.
But also underlying everything Basu has written in this book,
perhaps tantamount to his world view, is the implication that the
sophistication and receptivity of the populace, as in First World Vs Emerging
Economy contexts, has a major effect on outcomes.
For: Mail Today
(651 words)
March 18th, 2016
Gautam Mukherjee
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