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Thursday, November 26, 2020

Creating spaces for different opinions is only way to craft policies that encourage investment

All nations in the world today face a challenge of expertise. Because the world has become so complex, it is impossible for all of us to know everything.

Written by Kaushik Basu | Updated: November 8, 2019 11:16:29 am
Economic Graffiti: Experts, dissent and the economy India’s annual growth rate in the first quarter of this financial year is down to 5 per cent, the unemployment rate is at a 45-year high. (Illustration: C R Sasikumar)

I have strong political differences with the present Indian government. That is what democracy is about — having space for different opinions and ideas. Where I had expectations from this government was in terms of the economy. In terms of its stated objectives — growth, development, job-creation and higher standard of living for the poor — there was little to contest. As an Indian citizen I had hoped — even though my politics was different — the government would succeed in its economic objectives.

What has, therefore, come as a disappointment is the sharp deterioration in the economy. India’s annual growth rate in the first quarter of this financial year is down to 5 per cent, the unemployment rate is at a 45-year high, inequality has risen sharply, the banks are under strain with money supply growth (M3) lagging GDP growth for two years now, and average exports virtually stagnant over the last six years.

Not surprisingly, all this is being written about widely in the Indian media and also in international news outlets. India’s outstanding growth performance from 2003 to 2011 had raised hopes, among all well-wishers, of a new normal for the country. Hence, this unexpected turnaround is a puzzle and source of discontent.

Why did this happen? I believe India’s economy is fundamentally strong. In this column, I do not want to dwell on the nitty gritty of corrective policies—there is enough talent in the country to figure those out. I want to speculate about the larger question of why we are failing to marshal the talent to get India back to the 9 per cent growth it had achieved earlier.

All nations in the world today face a challenge of expertise. Because the world has become so complex, it is impossible for all of us to know everything. We therefore have some people (engineers) who have the expertise to build bridges, some (doctors) who know how to cure infections, some (lawyers) who can advise you on how to fight a legal battle, and some (economists) who know how to design auctions, taxes and monetary policy.

With the rise of the importance of experts, there is an unavoidable heightened tension that has to do with asymmetric information — one party having the knowledge that another party needs. In economics, the breakthrough work on this happened in the early 1970s with George Akerlof’s seminal paper, ‘The market for lemons’ — the paper shows how second-hand car markets work poorly because of asymmetric information. (As an aside, I may mention that Akerlof wrote the paper after a long stay at the Indian Statistical Institute in Delhi. I wonder if part of the credit for the paper should go to some car dealer who introduced Akerlof to the hazards of buying a used car.)

The seller of a second-hand car will typically know more about the car than the buyer, and will have a propensity to misrepresent its quality. I can testify to this from my days in Delhi in the early 1980s. Virtually all second-hand car salesmen would assure you that the car was driven by “a South Indian lady” — a South Indian lady being the ultimate prototype of gentleness, honesty and professionalism at that time, thereby creating the assurance of a well-maintained car. The only way this could have been true was for the world to have had more South Indian women than it did. So, the car-dealers were clearly distorting the truth to serve their own interests.

This is the difficulty with asymmetric information. We know that some experts will use this to their own advantage. And, at the same time we have no escape from the expert in today’s complex world.

The problem with economics is even bigger because economics is part commonsense and intuition, and part algebra and expertise. No politician would ask the engineer to move aside and try to take over the building of spacecraft. There is just too little scope for doing that with mere commonsense. In economics, there is a lot that intelligent persons with basic intuition can do. But there is a lot that they cannot. It is this that makes politicians fall into the trap of designing economic policies on their own and with the support of cronies. What is urgently needed in India today is to draw in the best talent and restore confidence in the markets and banks — institutions in general.

Even if one does not want to go outside the country in search of talent, there is no big loss. Having worked in India, as professor and as policymaker, I am aware that there is a huge amount of talent — in the universities, the private sector and the bureaucracy. We have to create space to draw from this reservoir of talent.

One fundamental precept for this, however, is space for dissent. If we bring in advisers who will simply endorse what the political bosses say, the government may look more orderly, but will achieve little. The true expert will inevitably have opinions which are often different from those of the leaders. There are risks in this, as pointed out above, but this is unavoidable, given the complex character of the modern economy. To create valves for different and even dissenting opinions is the only way to craft policies that encourage investment and sustained growth.

The famed music-conductor, Charles Hazlewood, had put his finger on the problem when he observed that to have a truly great orchestra you have to have trust, and give individual musicians freedom. There has to be space to create, improvise and even dissent. With strong top-down control, where every musician does exactly as the conductor commands, there can be order but never true excellence.

This article first appeared in the print edition on November 8, 2019 under the title ‘Experts, dissent and the economy’. The writer is C. Marks Professor at Cornell University and former Chief Economist and Senior Vice President, World Bank

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