Economics has been described as “the dismal science”. I do not quite know who came up with that description. One of the prime suspects might be the conservative Anglo-Irish political philosopher Edmund Burke. He once lamented that the rampant use of statistics in the modern age signals “the end of chivalry”. Economic science has made humungous intellectual strides in the twentieth century. It began as a branch of moral philosophy in the eighteenth century with Adam Smith’s influential The Wealth of Nations. The era of classical political economy continued up to the twenties, with such influential thinkers as Karl Marx, Thorsten Veblen and Alfred Marshall.
One of the greatest paradigmatic revolutions came with John Maynard Keynes’s 1930s work, The General Theory of Employment, Interest and Money. Keynes single-handedly laid the intellectual foundations of modern economics as a practical science. Keynesianism became associated with counter-cyclical interventionism by governments to stem the tide of business cycles, recessions and economic depression.
The so-called neoclassical counter-revolution began with Milton Friedman and the Chicago School in the seventies. The new neoclassical economics is anchored on the market as the foundation of social and economic progress – of liberty itself. Monetarism and neo-liberalism have been its offshoots. That paradigm has dominated the field and has shaped the contours of national economic policies and international economic relations. After the financial meltdown associated with the Wall Street subprime crisis of 2007-2008 and the ensuing Great Moderation, the primacy of neoclassical economics came increasingly into question. Things have never ever been quite the same.
On Wednesday 5 September 2008, Her Majesty Queen Elizabeth II of Britain was at the London School of Economics and Political Science (LSE) to commission its New Academic Building. She surprised her audience by asking the question: “If these things related to the global financial crisis were so large, how everyone missed them?” Nobody had a ready response for Her Majesty’s query. She herself was reported to have lost more than UK£$25 million from her estimated fortune of UK£320 million during the financial crisis. It took almost a whole year for a team of leading LSE economists to come up with a reply to the monarch. In a memo dated 22 July 2009, they tried to offer an explanation for their collective failure: “…Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”
Before the financial crisis, economists suffered from an unbelievable level of intellectual hubris. Ever since, they have had to eat humble pie. Dani Rodrik of the Kennedy School of Government and other leading economists has been preaching a new gospel anchored on revisiting the very foundations of academic economics. It is a welcome revival that provides a fresh approach to doing economics in a manner that takes account of context and relevance for human livelihoods and the life-chances of billions of people on our planet. It has been said that when a doctor makes a mistake, one patient could die; but when an economist makes a mistake, millions could perish.
One of the people that I have considered a great mentor of mine has been the distinguished Indian economist Asuri Vasudevan. A retired Executive Director of the Reserve Bank of India and former senior official of the IMF, he sent me a book that he recently co-authored with a colleague of his, Partha Ray. Vasudevan served for several years as a Senior Adviser to the Governor of the CBN. Both he and his wife the distinguished political scientist Prema Vasudevan know our country very well. They are both passionate about Nigeria and Africa.
Vasudevan and Ray have written a splendid book, Macroeconomic Policies for Emerging and Developing Economies (Sage 2018). It is an intense work of 220 pages, with seven chapters covering topics such as development strategy, fiscal and monetary policy, exchange rate and financial stability. What the authors have done is to ask a set of fresh questions about macroeconomics and the policies needed to engender growth and structural transformation in emerging and developing economies. They take their bearings from the evolution of economic theory and the historical experience of various nations; from the defunct Soviet Union and its state planning to China’s post-Mao modernization and the development planning experience of India. It is a work of great erudition that is also moderated by intellectual humility.
Several important insights can be gleaned from this work.
First, they make the important point that development strategy has to be the bedrock of macroeconomic policy. They review several of such strategies, from the policy of Soviet socialism in the defunct Soviet Union to agrarian collectivization in China, import-substitution industrialization in India and export-led industrialization in South Korea, Thailand, Taiwan and Singapore. Articulating a development strategy is by no means easy. It is not just a technical process. It is largely a political process, although economists and statisticians are always required to provide the framework for design and implementation of such strategies. It is a capital lesson for countries such as Nigeria and others in Africa that do not have any development strategy to speak of.
Second, the authors make it clear that the Washington Consensus and the neo-liberal agenda that was imposed on developing countries by the IMF and the World Bank has not achieved the desirable results. But at the same time, they remain skeptical about the alternative — the so-called “Beijing Consensus”. Their conclusions point to the need for countries to devise pragmatic solutions based on understanding of their path-dependent trajectories, national conditions and binding constraints and opportunities.
Thirdly, the authors emphasize the importance of “credibility” and “feasibility” in economic policy-making. It is good to be ambitious. But setting up grandiose objectives should be moderated by technical planning based on evidence, data, credibility and feasibility. Linked to this is the need for a flexible approach. Policies and plans should not be cast in stone, given the dynamic nature of international economic conditions and the uncertainty deriving from positive as well as negative sudden shocks inherent in our twenty-first century world economy.
Fourthly, the authors make it clear that while capital market liberalization should be the ideal, there are circumstances when capital controls are advisable. In the 1990s Prime Minister Mahathir Mohammed took the bold steps to impose capital controls at a time when much of Asia suffered from massive capital flight and financial hemorrhage, much of it against the advice of the Washington institutions. At the end of the day, countries that maintained open-market liberalization regimes suffered massive losses while Malaysia that did the opposite avoided the worst of the financial crisis. The lesson here is that policy-makers need to be flexible and pragmatic. Dogmatism should be avoided while flexibility should be embraced.
Fifth, the question of exchange rate policy must be addressed in a careful and dispassionate manner. The authors make the point that exchange rate determination is not just a question of market conditions but also of actual and expected exchange rates of the countries concerned. Emerging and developing economies should therefore not give in to undue pressure to devalue their national currencies. Exchange rate policy should be pursued as part and parcel of a comprehensive monetary policy framework to ensure stable prices, promote growth and employment while enhancing long-term macroeconomic and financial stability.
Sixth, coordination between monetary and fiscal policy is vital. In many emerging and developing economies, the phenomenon of “fiscal dominance” is endemic. It is often the case that fiscal and monetary authorities find themselves working at cross-purposes. Fiscal and monetary coordination is therefore vital to ensuring that public finances and budgetary expenditures promote fiscal and monetary balance while monetary policies support the macroeconomic objectives of employment and growth. At the heart of effective coordination is institutional effectiveness. Public institutions must be reformed in such a way that strengthens the capacity of leaders to design and implement sound policies that promote the common good of all.
Linked to this is the question of central bank independence. I agree with the authors that central bank independence is essential for sound monetary policies. I also share their view that autonomy without accountability is dangerous. The collective wisdom of the last couple of decades makes it clear that while central bank independence is good for price stability as well financial soundness, growth and employment; every country needs to shape its monetary regime to ensure accountability and responsible behavior on the part of its central bankers. In their own words: “We are of the firm view that cooperation with the government should be the mantra of central banking and differences in view on economic conditions and corrective actions should be settled in a manner that positively promotes overall economic and social welfare” (p. 196).
Tags: Emerging and developing economies