It is never easy to review a book written by a close friend. Thankfully, Kaushik Basu’s latest offering, An Economist in the Real World: The Art of Policymaking in India, offers no moral or ethical dilemmas. As always with Basu’s works, he writes lucidly and uses the correct turn of phrase. Thus, barring his purely theoretical pieces, the understanding of which requires sound training in microeconomics, social choice theory and game theory, his more “generalist” works such as this book are eminently readable by the laity.
Structured around insights gleaned during Basu’s two-and-a-half-year stint, starting December 2009 as the Chief Economic Adviser (CEA) in the Ministry of Finance under Pranab Mukherjee, this book is organised across 10 chapters. The first is about the arrival of a micro-theoretic economist from the Delhi School of Economics and Cornell University at North Block, where the policy bias, if any, is in favour of relatively elementary macroeconomics with an overriding sense that data, in whatever rude form, must dominate no matter what. Hardly a propitious place for a theoretical micro-economist.
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Thanks to the support that he received from Pranab Mukherjee, who probably enjoyed conversing with a clever Bengali lad, as well as Prime Minister Manmohan Singh when needed, and the fact that he is an eminently likeable person, Basu soon started his work on crafting economic policy inasmuch as it can be done through the office he held.
Chapter two is a fairly straightforward description of India’s growth story. It shows, as many have demonstrated, that after decades of slovenly growth, the country started to decisively pick up pace from around 1995-96; and of foreign currency reserves increasing from under $6 billion in 1991 to over $300 billion in 2008. Despite the slackening of growth in the last few years, Basu believes that “for India to return to an average growth rate of 8.5 per cent per annum as it has been recording since 2003 seems entirely feasible”.
In Chapter three, which is on inflation, Basu puts forward a hypothesis which is axiomatically abhorrent to almost all central bankers. After showing, albeit somewhat casually, that there has been hardly any negative correlation between inflation and interest rates — and a distinct correlation between raising interest rates and dampening growth — Basu argues in favour of the need to explore unconventional inflation tackling measures. An example cited is that of Turkey in 2010-2011 where, facing over 10 per cent inflation, the central bank opted to gradually reduce the lending rate and ease liquidity in the system which, in turn, rapidly spurred growth, hence supply, and eventually brought down inflation to 6.3 per cent by the summer of 2011. As he says, “It is arguable that India erred in following the traditional policy of trying to control inflation by keeping central bank interest rates high. This reined in some of the growth, while having minimal effect on inflation”.
Let me touch upon another stimulating macroeconomic suggestion before sharing one of Basu’s micro-theoretic insights. It has to do with exchange rate management. China has been known to control exchange rates. It kept the yuan at artificially low exchange rates for a long period despite burgeoning foreign currency reserves. That hugely helped the nation’s exports. Even today, though more flexible, the People’s Bank of China maintains an exchange rate that is lower than what it ought to have been in a freely floating regime. In contrast, India has by and large opted for a far more floating exchange rate regime were no RBI governor in recent times has lost sleep if the rupee has fallen or risen, or ordered massive dollar buying or selling interventions to hold the exchange rate at some “desired” level or band. Basu argues that this “liberalism” with our floating exchange rates, while desirable in principle, may have militated against creating a strong enough export oriented manufacturing and services base; and he makes a case for “scheduled intervention” where the central bank enters the market with a buy or sell bid conditional on the price.
My favourite exposition is in Chapter eight: on corruption that takes the form of “harassment bribery”, such as bribes demanded to get a valid income tax refund, or to get bona fide import consignments passed by customs. Basu uses simple game theory to demonstrate that if we change the law to make bribe giving legal but bribe taking emphatically not so, much of the problem is solved. Why? If both bribe taking and giving are considered illegal (as it is today), then after the act, neither the taker nor the giver will cooperate with any anti-corruption authority. If bribe giving is legal but taking is manifestly not so, then two things occur: first, the bribe giver has no compunction in squealing; and second, since the bribe taker knows that the giver can squeal, he won’t be persuaded to take a bribe.
Unfortunately, since politicians, newspaper scribes or civil servants are not known to understand game theory and have a prickly notion of public morality, this argument of Basu’s, which first appeared in the Ministry of Finance website, caused an outrageous furore. Like many good ideas, it died. May it be resurrected soon enough.
If I have a bone to pick, it is that the title suggested some really hilarious anecdotes. Basu wrote a daily diary during his stint as the CEA, which must have enough references to the silliness and pomposity of select bureaucrats and politicians to create an uproariously funny chapter. But he hasn’t. Maybe, it is because the diary “is too fresh to be published” and “revelations and notes on personalities” will have to wait a little more. So, I look forward to the revelation sequel. Hopefully, soon enough.
Book name – An Economist in the Real World: The Art of Policymaking in India
Author- Kaushik Basu
Publisher – Penguin Viking
Pages – 256
Price- ` 599