Kaushik Basu’s academic credentials are impeccable. His first love is teaching and researching. He has taught at several universities in India and abroad. He has published more than 160 articles in scholarly journals and newspapers. Currently, he is Senior Vice-President and Chief Economist of World Bank.
When he took up his assignment in December 2009 as the Chief Economic Adviser (CEA) to the Government of India, it was his first exposure to work with a government on policymaking. As he says in the preface, he found it “a remarkably enriching experience.”
In the Twelfth Dharm Narain Memorial Lecture delivered at the Institute of Economic Growth, Delhi, he explained his predicament. ( Does economic theory inform government policy? September 2010). He was facetious when he told the audience that if they were expecting a one-word answer to that question, they would not get it. He went on to say that he would rather speak about “the inter-connections between two seemingly disparate worlds — the world of abstract economic theory and the world of policy and politics.”
That is what Basu does in this book. If the reader expects an ‘insider’ account from him, he will be disappointed. It was a time when India faced the heat fuelled by an economic crisis spreading across the globe. An insight into the nature of debates that took place during those days would be of value for posterity. Basu writes that he has recorded them in a private diary, but is not ready to share it now. And yet, the book has high scholastic value. Basu is a consummate theorist and handles deftly the complex and fragile web of relations between economic theories and policies. He gathers observations of unfamiliar phenomena more like an anthropologist. The range of subjects handled is vast —from macro-economic-fiscal and monetary policies, globalisation and India’s growth rate or potential to the micro-economic such as food supply and security. He analyses basic theories and tests their relevance in real-life situations. He is indeed aware of the limitations. In the same vein, he analyses how well-intentioned programmes may be counter-productive. Unlike his earlier books, this book is for the average reader and avoids econometric data. The writing is elegant and the compelling narratives are laced with anecdotes and wit.
The book is structured neatly. The first five chapters handle broad economic issues. The sixth critiques food storage/security policies and suggests alternatives. The last four are non-economic but impact economic policies drawing on later-day research in behavioural sciences. These chapters are so well arranged that each chapter moves on seamlessly to the next.
Analysis of inflation (‘Emperor of Maladies,’ he terms it) is a radical departure from accepted wisdom. He questions the current mindset of central bankers and explains how their perceptions and tools are flawed. As he adds, we should not be rooted in textbook doctrines and “it is important to examine contrarian policy.” He feels that India erred in following the traditional policy of controlling inflation by keeping the central bank interest rates high. “This reined in some of the growth, while having minimum effect on inflation.” At this distant date, this remark smacks of armchair economics. At another level, he is insightful while explaining that the phenomenon of “stagflation” in some countries (E.U., U.S., Japan) and inflation in emerging economies is due to the lack of global coordination of monetary policies.
Another interesting chapter is on ‘Globalisation and the challenge of development’. The changing structure of the global economy causes enormous strains in the world and calls for nimbleness on the part of policymakers, which is hard to marshal. In this context, he deals with the issue of rising inequalities of income. He has harsh words against ‘fundamentalists’ who take a permissive view of inequality. He recalls, a la Piketty, that in the changed global scenario, to promote shared prosperity and to end extreme and chronic poverty, while there is need for each country to work out its programmes, there is need for cross-country coordination and global regulation.
On food security, the author again takes a non-conventional view. He says that our policies are flawed. Storage of huge stocks is wasteful and the PDS is marked by corruption, pilferage and inefficiency at local levels. Therefore, he pleads for the abolition of food storage and replacing it with private trade. While dealing with this issue, his reliance on institutional and behavioural economics, as advocated in the last four chapters, seems to desert him. He is too ready to condemn local authorities for corruption, but too ready to trust private trade to work honourably. His argument that grain storage that is not distributed is a waste (or as good as not having) is a fallacy. Given the psychology of traders, food storage is a safeguard against profiteering and exploiting shortages. Consider what happened in the pulses trade last year in the absence of buffer stocks.
His views on reforming education by dismantling the University Grants Commission and allowing privatisation to make India a global hub are far fetched and not based on ground reality. It is well known that the nexus between politicians and private promoters has led to the degeneration of educational institutions.
Basu’s application of behavioural sciences to economic issues (O-rings, nuts and bolts, as he terms it) is enlightening. Development depends a great deal on social norms. He makes liberal use of the Nash equilibrium to capture different social contexts. Though the concept of equilibrium is useful, it is dangerous, if overdone.
The last chapter is in the nature of a pedagogic appeal on future policies. Basu would like the government to avoid micromanagement. He expects the government to use the market. However, he is not a market fundamentalist. On the whole, this book is a primer on economic development done by a great theoretician who bends abstract theories to suit real-world needs. If Basu had amplified his book, drawing on the debates he witnessed inside the government as CEA, it would have added more value. Perhaps, in his next book.
K. Subramanian is a retired Finance Ministry official who writes on economic issues.
