The name of Kaushik Basu is by now familiar to the academics and the media people in Bangladesh. The Chief Economist of the World Bank, he visited the country in December last year. He is purely an economic theorist, but an eloquent writer too. Besides several popular books, he has written a play recently staged in Delhi ('Crossings at Benaras Junction'), developed a Sudoku type of game (termed by him 'Duidoku') and even developed a long proof of the Pythagoras Theorem. He has also translated short stories written by Shibram Chakraborty into English. Basu wore an new altogether hat before writing this book. From December, 2009 to February, 2012 he was hired as Chief Economic Adviser to the then Indian Finance Minister Pranab Mukherjee. A theorist was suddenly dragged into the nitty-gritty of policy making in an emerging economy -- India. What did he learn?
The central message of Kaushik Basu's 2015 book 'An Economist in the Real World: The Art of Policy Making in India' is best captured from the well cited excerpt from Keynes. It says, "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Mad men in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas." Thus when well-thought-out ideas shape policy making because "the world is ruled by little else", a nation takes the right path to economic development. Everybody does not have to agree with this (particularly with the view "that the power of vested interests is vastly exaggerated"!) but the role of knowledge in the complex world can hardly be ignored.
In this book Kaushik Basu applies traditional and evolving ideas in economics to understand the economic issues facing India and similar emerging economies. He addresses myriad issues -- inflation, corruption, public food distribution, infrastructure, poverty, inequality, taxation, exchange rate, education and many more. The analytical lens used by the economist is more important than the issues discussed as he states that this is a "book on practical development economics, with India as the illustrative model, but with lessons for all developing economies." Obviously some of the development issues require standard tools of fiscal and monetary policies as well as common sense while others are better understood by using recent developments in behavioural and institutional economics and, above all, deductive reasoning.
His analysis is based on several broader-level views. First, he has strong faith in the role of market in the development process but he also emphasises that there are occasions when market cannot be trusted. These include traditional situations of pervasive externalities where action of one actor affects others or when ethical concerns should forbid some transactions in the market such as trading in human organs. These also include more subtle situations when people are duped or when they fail to process all available information and make choices they would not have made otherwise. Recent development in behavioural economics emphasises that individuals do not always behave rationally. The financial crisis of 2008, for example, did not openly flaunt the rules of the market but tempted consumers to sign for contracts they could not fully comprehend. Second, he emphasises on the role of institutions, culture and values in the process of economic development. These factors not only help markets function better but also reduce uncertainty in human interactions. Not all transactions are undertaken in markets. Rules and norms often dictate us not to always maximise profit and show altruistic behaviour in some cases. Kaushik Basu refers to a domestic help who 'kept' something for him while doing grocery for the household but never attempted to steal the valuables at home kept unattended. A good policy should encourage social norms to be effective. Third, in many situations the government should only play a catalytic role. Some sectors in India such as services (the IT sector, for example) took off not because of major policy interventions and investments by the government, but because some constraints were removed by adjusting some nuts and bolts of the economy. The development of the readymade garment (RMG) sector or that of the real estate in Bangladesh also had similar experience. Fourth, our understanding of the economy should consider the strategic aspect of human behaviour. We typically assume that an agent will do what he is assigned to do. The policemen will give tickets to speeding motorists or a teacher or a doctor will not be absent without prior permission. This often does not happen and law or contracts become ineffective. Thus we typically hear that law is only on the paper and does not work in reality or we have good laws but poor enforcement.
 Kaushik Basu argues that if this is the case, then law has not considered the strategic behaviour of the agent, be it a policeman or a doctor. This strategic behaviour is shaped by values and customs of an economy and help people form expectations about the behaviour of the others. If a policeman expects that he will not be taken to court if found not performing his duty he will not follow the instructions. In Dhaka a motor-cyclist does not stop from driving on the pavement, or a passer-by does not use the footbridge or a VIP-carrying vehicle continues to take the wrong side of the road because they firmly believe that others will not follow suit and they will not be punished. Another example from Bangladesh would be the issue of food or road safety. We learn how milk can be adulterated from arithmetic taught to us in schools! Thus appointing an authority to monitor a policeman or a doctor will add up to increasing the size of bureaucracy but will hardly result in any success. These expectations may not be changed in a short period; they have to change over the long run if a country has to develop. Raising public awareness through the media or different social organisations may help; concerted efforts to prevent these may also help; but eventually these have to be innately integral to our behaviour.
Finally, Kaushik Basu emphasises the role of international organisations in dealing with many development issues. The world is getting increasingly inter-dependent. The shared goals of reducing poverty and inequality, and inclusive growth require collective action by states as action of one country affects the action of others.
This writer encountered two problems with the book. First, Basu did not adequately address issues pertaining to the political economy of policy making in emerging economies. Sen and Kar (2014) showed that the high growth rates in India in the 2000s were driven by 'closed deals' between the political and business elites. This is the power of vested interests which Keynes downplayed (and Basu endorsed) in the famous quote already cited. Second, Basu thinks that "a big hindrance to good policy is public opinion."
It might be a good idea to look at the role economists are playing in policy making in Bangladesh. For economists to play a more positive role, a certain level of democratic development of a country is required. Prof. Nurul Islam, who tried to shape policies in Bangladesh, cautions that unsolicited policy advice to the government is viewed with suspicion and interpreted as an indication of the adviser's eagerness to gain access to the patronage of the ruling party. On the other hand, the opposition welcomes such advice as these can be used to criticise the government. Possibly, the economists of Bangladesh can play a larger role in the committees formed by the government to solicit specific technical knowledge. The ritual of meeting the think-tanks before formulation of the budget or the Five Year Plans is commendable, but the suggestions should be grounded in research. The effectiveness of policy proposals given by the economists in Bangladesh depends on the amount and quality of research done by them. Few economists in Bangladesh would deny that we need substantial improvement here. Research is not always constrained by money; promotion of research culture is also important. The ministries of the government (particularly those of Finance and Commerce) should enhance their research capacity and collaborate more with the academic and research organisations which can directly contribute to policy making.
The book by Kaushik Basu can broaden the horizon of our thinking on development in Bangladesh, and help us raise the right questions in research papers thus contributing to policy making.
The writer is a Research Director at the Bangladesh Institute of Development Studies (BIDS). Views expressed here are the author's, not of his employer.
lintu@bids.org.bd.
Strengthening research culture
Kazi Ali Toufique basing his discourse on the publication of An Economist in the Real World: The Art of Policy Making in India | Published: March 22, 2016 00:00:00 | Updated: February 01, 2018 00:00:00
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