Indian democracy has the disadvantage of a vertical structure. Everybody gets involved in every decision. You can see this from those ubiquitous government folders which travel from desk to desk, gathering no-objection signatures, before anything is approved. It is often felt this is what democracy is all about. Everybody or a majority has to be in approval for a decision to move. This is best described as a ‘vertical democracy’.
But there can be another kind of democracy. Everybody has a say but not on all decisions. All the decisions are partitioned so that you get to have a voice for only the ones in your domain. India needs to shift from its relatively vertical structure of permission system which slows down decisions to a more horizontal, partitioned democracy.
When it comes to economic decision-making, it is a pity that it is not recognised that economics has a technical, engineering-type side to it. While economics is indeed open-ended and nebulous in some ways, in some areas, it can be used with as much sharpness as in engineering projects.
Auctions are a good example. Government can do vastly better if it sells resources not by evaluating them by themselves, setting price and selling it off, but by selling it off through well-designed auctions, which would endogenously determine what the price is. (GoI would eventually do this, for 3G spectrum auctions, with huge success in fund-raising, but also drawing attention to the fact that it raised much less than it could have in earlier 2G auctions.)
Another thing that I have learned is that in the Indian bureaucracy — and maybe this is a feature of bureaucracies everywhere — to any question that you may be asked, you never say you don’t have an answer. If you don’t have an answer to the question asked, then give an answer to a question for which you do have an answer, never mind no one asked that question.
It’s Really Engineering
It is fascinating watching the government from within. I earlier took Keynes’ remark on the greater importance of ideas than vested interests in the shaping of the world as nice but a bit self-serving for an academic. I spouted it often as a professor because it raised my status, but I didn’t really believe it. Now, having taken leave from academe and come into the world of policy, for the first time I believe that Keynes had hit upon a fundamental truth. It is the lack of imagination and the grip of stale ideas on political leaders and career bureaucrats that have a tendency to stall good policy. I also now feel convinced that economics as a discipline is not just a stunning intellectual achievement but it is, in practice, a very useful discipline.
Admittedly, economics has many areas where policy has to rely on little science and a lot of judgement and common sense. But there are also fields, such as the design of auctions, the fine print of antitrust laws and the methods of giving food or other subsidies, which are beginning to resemble engineering. Ideas from these fields can be put to great use. One has to see them not being used to realise their value.
India’s food procurement policy is riddled with such obvious fallacies. I have been in numerous meetings on food price inflation where bureaucrats insist that the Indian government must at all times hold on to some minimal food reserve because food is such a vital need. What they miss out on is that if a certain amount of reserve is held at all times, as a rule, they may as well not hold that reserve.
But it is very difficult to make seasoned minds see this. There are many other ideas that can bring some quick relief but it is a battle to make people change tradition. I regret that I am not pushy enough to get my ideas into practice. I feel some of them are so obviously good that any clever person would want to use them once they hear about them. As it happens, only the prime minister [Manmohan Singh] seems to see clearly some of these ideas that I bring up in meetings.
The more I see the prime minister alongside other politicians, the more I am convinced he stands head and shoulders above them. Like Nehru, he is truly passionate about India. My conversations with him are almost never about politics and everyday political machination. It is always about what we can do to enable India to do better. I am aware that this may not be of much value since political intrigue is such an important ingredient of political life. Only if voters were a little more sophisticated to understand this, we would have a more successful nation.
Of Sweet Nothings
I am amazed at how much we human beings can talk when we have little to say. The ploy is to take cover behind nice-sounding statements. Take economic recovery. Some economists agree we are about to see a V-shaped recovery. Others say it will be U-shaped, whereby we will stay at the bottom for a while. Then there are the proponents of a W-shaped recovery, which involves a second dip. Some agree it will be a J-shaped recovery where we will ultimately rise beyond where we were, unless of course we have an L-shaped recovery in which we have to be reconciled to there being no recovery. Think of literally any letter of the English alphabet and there is some economist who believes we are about to see that letter-shaped recovery.
What all this shows is that we have little idea about the nature of recovery but will not admit to that. A lot of these monetary policy discussions occur nowadays by slipping into health analogies which sound nice, but mean little. When a person who has bad health refuses to exercise, we don’t allow the person to sit on the couch and die, we try to coax the person on to the treadmill. So we hear experts saying, ‘We must get Greece on the treadmill; otherwise its economy will die.’ The audience nods sagely. But what does ‘getting Greece on the treadmill’ mean? Moreover, it is not at all clear what the death of a nation means.
If I am right that much of what these monetary policy experts say has little content, how do they understand one another? After all, they do agree, disagree, discuss and debate. My hypothesis is that this is like the twitter of birds. Birds do not understand one another (admittedly, that is our presumption) but still they have seeming conversations.
To test this out, in the middle of the Toronto discussion on monetary policy in G20 countries, I decided to offer a meaningless comment which used the right words and had the right sound bites. But the comment had no meaning — at least no meaning to the person making the comment. It was fascinating to see my audience agree and disagree with me. Judging by the animated discussion that this gave rise to, the group clearly found it meaningful and deep. I write this in a light vein but I am serious about this aspect of some parts of economics.
I do not for a moment think this is true of all economics. There is a huge amount of meaning to what Ken Arrow wrote, John Hicks wrote, Paul Samuelson wrote. There is Euclidean elegance and meaning in what Gérard Debreu did. There are some stunning, almost magical, insights in some of the theoretical works of Joe Stiglitz and George Akerlof. But many policy experts, especially in the area of macroeconomic policymaking, take advantage of the core of economics which is deep, and talk, whereof one should be silent, to sort of quote Wittgenstein.
But there is one puzzle. If my hypothesis is right, how come central banks do their job reasonably well, as they seem to? I believe the answer has to do with evolutionary behaviour. Central banks use rules of thumb regarding repo rates and various policy rates.
The reasons they give for their choice of particular rules are not compelling, but the rules of thumb they follow (and the actions that these rules lead to) work because the bad rules of thumb, which led to adverse reaction, have over the years been dismissed.
So the policy rules actually used are not the ones we can demonstrate will work, but they nevertheless serve some purpose by the laws of evolution. The bad rules have, in effect, gone extinct. You do not need any special understanding to get to this just as the giraffe does not have to understand the value of a long neck in order to have one.
Two problems make the Indian government less efficient and less effective: overwork in the top echelons of bureaucracy, and the culture of permissionism that pervades the government. At one level, it is impressive that virtually all civil servants who are fairly senior, or are striving to be so, work extremely hard.
A slightly less charitable view of this phenomenon is that the senior bureaucrats often work as back-end, on-call workers for their master — the minister or some member of Parliament. And like the on-call workers in the feudal landlord’s manor, once they are part of this system, they have no choice but to plod away 14 hours a day, seven days a week. Whatever be the cause — ambition, diligence, drive or exploitation — the upshot is that they work to the point where efficiency and creativity suffer.
These individuals, though initially very bright, come to acquire a parrotlike quality, with the ability to do a large amount of mechanical work. This does hamper creativity in the government.
The other problem is what can only be called the malaise of permissionism. For a newcomer arriving straight into the top echelon of government, as was the case with me, what is immediately noticeable is how everyone is always taking permission. The requests for permission generally get passed up the pyramidal structure of the government; and a surprising amount of trivia go all the way to the top, namely, to the minister.
You want to go to Varanasi for a day to attend to an ailing relative, you want to change the brand of coffee served in the ministry, you feel there should be another attendant to keep the bathrooms clean. All such proposals move in a chain of hard cardboard folders, tied with strings, from one room to another, acquiring notings from senior members of the bureaucracy.
This is such a far cry from the American university where senior professors are allocated budgets and can with a stroke of a pen get a visitor to come from New Delhi, Tokyo or Istanbul, all paid for. The system there is not one of prior permission but periodic review to make sure that no one is misusing authority.
I know that the switch over to such a system will initially cause some corruption and misuse. But the alternative is so inefficient that we have to try change the system. Moreover, being given some final authority on matters nurtures trust and a sense of responsibility and even honesty. There will be some initial misuse but that has to be treated as transition cost. We have to remember that even with all these cumbersome checks and balances, we are not known for the absence of corruption.
The Inflation Superstition Wherever I go, I find a raging debate and discussion on India’s inflation. There is palpable anger that this is all deliberately caused by the government. This is completely wrong. Once inflation gets started (and there is no doubt that government has some responsibility for that), it is difficult to control. It has to be a slow process bringing inflation down because otherwise you can crash the economy.
Of all the economic ills, inflation is one that governments do not want because people do not need official data to realise this is happening.
Each person knows this almost every morning or evening when they buy the day’s supply of food or go shopping. Inflation causes the popularity of governments to fall more than any other economic ill, from growth slowdown and recession, to rising unemployment. I have now understood why people assume inflation is deliberately caused by the government.
Human beings have a propensity to believe that someone or some well-defined agency is wilfully responsible for whatever happens. It is this propensity that has led humans to many false beliefs through the ages, ranging from god having created the universe to governments causing inflation to persist.
Rights & Wrongs of Rights
…I write a letter to the prime minister (he has asked for this) about the new Food Security Bill and what its weaknesses were. I believe a right to food law is a good idea but its current design needs lots of correction.
Well-meaning activists push for too many needs to be enshrined as rights — the Right to X, Y and Z, unmindful of the critical principle, commonly attributed to Immanuel Kant: ‘ought implies can’. When you say someone has a right to something (or someone ought to get something), it must be the case that there is some way to fulfil that right.
An ought or a right that is not feasible is a meaningless normative injunction. It is for this reason that I have opposed giving everyone the right to work that some activists have pushed for. I have clashed with activists on this, on the simple ground that I do not think in a large and complex economy such as India, this right is feasible.
There is no way we can guarantee everyone gets a job. To write down every basic need as a right recognised by the government is a travesty of the ‘ought implies can’ principle. It is actually worse. By declaring too many such rights which by definition will not be satisfied, we debase the nation’s law and the meaning of rights itself. Then when we declare a right that can be guaranteed, no one pays heed to it. The law languishes on paper, as happens for so many laws in India. The right to food, I think, is feasible.
Government can guarantee this because it can take steps to ensure it is fulfilled. But even with such rights, we have to keep in mind that there may arise times when there is an aggregate shortfall in food. In those times, everyone cannot be guaranteed a basic minimum food. We should spell out explicitly how we would handle those special occasions, when the ‘can’ of the Kantian injunction may not be fulfilled.
Former CEA Kaushik Basu decodes borderlands where politics and economics meet in new book - Economic Times
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