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/-
At The Crossroads of Theory & Practice
Kaushik Basu, a distinguished academic specialised in
theoretical economics, international relations and research, works at the
highest echelons of the World Bank and Cornell University.
For a brief season 2009-2012, Basu stepped into the realm of
applied economics, when he was the chief economic adviser to the government of
India, coming in at the invitation of then prime minister Manmohan Singh.
Coming to India in the backdrop of the sub-prime crisis that
was raging in the US and Europe, post 2008, he found India relatively
insulated from its ravages, in part
because of the buffer of its black money economy, that saved the banks from
undue strain.
This book is largely a meditation on the novelty of those
India years, but it refers to many situations in other parts of the world for
points of comparison and illustration as well.
There is a clear divide, economically speaking, of the early
decades since independence with its low growth rates and high inflation, up and
into the 1980s.
Then came the
path-breaking reforms of 1991, and every chapter in the book is written with a
focus on the post 1991 reformist period, with an hopeful eye to the future.
However, Basu’s wry comment on 1991 and the reasons for the
momentous changes wrought, was that: ‘for a system resistant to change’ implication
that it was the same in 2010, ‘nothing is as good as a crisis’.
He points out, amidst years of the derisively labelled ‘Hindu
rate’ of growth that never exceeded 3.5%, that during the Emergency in 1975-76,
India saw 9% for the first time. It was almost a harbinger of the post 1994
period.
However, though he points out 1975, Basu refuses to
attribute it to the totalitarianism of the Emergency, and hastens to point out
that the following year it was down to 1.2% once more. In fact, 1979-1980, saw India’s
GDP at a disgraceful minus 5.2%!
Besides, one of the reasons for the Emergency was severe
civil unrest, caused, in part, by very high inflation, peaking at an astounding
30% per annum after the oil price shock of 1973.
Inflation, particularly food inflation, was once again a
concern when Basu was here, but nothing like it was in the old days. The UPA
contained it by using tight monetary policies and high interest rates. But yes,
it was one of the causes that led to their loss of power subsequently.
Basu baulks at the notion that ‘text-book’ economic policy
alone can necessarily contain inflation, citing contrarian successes in other
places such as Turkey and Brazil, where interest rates were lowered despite
high inflation, in order to stimulate, and not deflate demand.
In another place, he does say however, that Brazil was well
used to double-digit inflation year after year.
What is clear is that Basu’s foundations in macro-economic
theory are on full display throughout. But he lays great stock with underlying
sociological factors to determine the success rate of policies adopted.
As in his first book, (Beyond the Invisible
Hand:Groundwork for a New Economics), he mixes anecdotes and examples,
revisiting the concept of the shifting but strategic ‘focal point’ first
developed by Thomas Schelling in 1963.
This, leavened by another, the ‘Nash equilibrium’ developed by “Beautiful Mind”
John Nash, as part of his Nobel prize winning Game Theory.
The ‘Focal point’, to Basu, is the co-relationship between
the impact of new laws, even policies, on economic outcomes. A new law, writes
Basu, influences human behaviour in a relative manner, only to the extent one
person believes another will be influenced by it. So each person instinctively
reacts in consonance with his peers.
Collectively therefore, the impact of new laws, no matter
how they are written or what they in themselves intend, happen in
a relative manner, and shift the
strategic ‘focal point’ to a place that must become the epicentre of the effort
afresh.
But, since different laws are received variously, the shift
in the ground zero, the ‘focal point’, inclusive of its direction too, is a
variable that must be responded to. It is as if economic policy is suspended
over a sprung dance floor.
The new law, as a thing written and enacted, has little
salience in itself, and even the policing or enforcement of it cannot ensure
its willing acceptance. Ideally, it should be voluntarily accepted by most
people, leaving deviants in the minority.
The ‘Nash equilibrium’, comes into play when various ‘players’
choose the same option. Basu points out however that there can be several ‘Nash
equilibriums’ operating at the same time, calling for coordination between
them. But people, somehow, resolve any confusion on their own, via their innate
sense of order, by choosing one option above all others, one they can all generally agree upon.
These ideas, to Basu, are the foundations of proper economic
development, because the tool-box of just setting monetary targets, fiscal deficit
limits, setting trade tariffs, banking regulations, etc. cannot work without
the backing of social and psychological conditions they rest upon. This, though
he’s too polite to say it in so many words, is the difference between a First
and Third World mentality.
Basu seeks through his books and his other work to catalyse
‘new ideas for economic policy’. He believes in proposals to stimulate a more
perfect competition to engender efficiency, and writes against the rigidities
and distortions caused by oligopolies, for example, in the distribution of food
grains. Basu favours many small and localised distributors, over just a few
nationwide big depots,that can, and do, exert more price and supply controls.
In the end chapters, Basu does to stick his neck out and
predict that India will ‘join the ranks of industrialised nations’ with a per
capita income of at least $10,000 per annum by
2040, ‘and bring chronic poverty to an end well before that’. He thinks
India has reached take-off point, and will maintain ‘a GDP growth rate of
approximately 8.5% per annum’.
He revisits the concept of
Adam Smith’s ‘Invisible hand’ mentioned also in his first book, which postulates
much of the momentum and order we see in society and economic activity is
governed by ‘self-interest’ of ordinary people, and ‘the coordinating power of
the market’.
This is, of course, is an elegant invocation of the
free-market principle redolent with laissez faire. Basu quotes: ‘there
is no economy on earth that is closed and has grown rapidly’, and then mocks it
by saying planet earth itself is a closed market, and has done very well for
itself, thank you.
But, in almost every instance when he says anything overtly
free-market, he hedges his own position with caution, pointing out there are no
absolutes that appeal to his common sense.
For: The Pioneer
(1,116 words)
March 16th 2016
Gautam Mukherjee
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