My Recent Works, Interviews etc on India’s Money, Public Finance, Banking, Trade, BoP, Land, etc (an incomplete list)

My critical assessment dated 19 August 2013 of Professor Raghuram Rajan is here and here

& dated 23 August 2013 of Professors Jagdish Bhagwati & Amartya Sen and Dr Manmohan Singh is here

My critique of PM Modi’s 8 November 2016 statement began on Twitter immediately, and is  summarized here “Modi & Monetary Theory: Economic Consequences of the Prime Minister of India” https://independentindian.com/2016/12/09/modi-monetary-theory-economic-consequences-of-the-prime-minister-of-india/

 3dec

My 3 Dec 2012 Delhi talk on India’s Moneys is now available at You-Tube in an audio version here.  My July 2012 article “India’s Money” in the Caymans Financial Review is here and here https://independentindian.com/2012/07/21/my-article-indias-money-in-the-cayman-financial-review-july-2012/

My 5 December 2012 interview by Mr Paranjoy Guha Thakurta, on Lok Sabha TV, the channel of India’s Lower House of Parliament, broadcast for the first time on 9 December 2012 on Lok Sabha TV, is here and here  in two parts.

My interview by GDI Impuls banking quarterly of  Zürich  published on 6 Dec 2012 is here.

My interview by Ragini Bhuyan of Delhi’s Sunday Guardian published on 16 Dec 2012  is here.

 “Monetary Integrity and the Rupee” (2008)

https://independentindian.com/2008/09/28/monetary-integrity-and-the-rupee/

  “India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

 “Fallacious Finance” (2007)

https://independentindian.com/2007/03/05/fallacious-finance-the-congress-bjp-cpi-m-et-al-may-be-leading-india-to-hyperinflation/

 “Growth and Government Delusion” (2008)

https://independentindian.com/2008/02/22/growth-government-delusion/

 “Distribution of Govt of India Expenditure (Net of Operational Income) 1995”
https://independentindian.com/2008/07/27/distribution-of-govt-of-india-expenditure-net-of-operational-income-1995/

“India in World Trade & Payments” (2007)

https://independentindian.com/2007/02/12/india-in-world-trade-payments/

“Path of the Indian Rupee 1947-1993″ (1993)

https://independentindian.com/1993/06/01/path-of-the-indian-rupee-1947-1993/

“Our Policy Process” (2007)

https://independentindian.com/2007/02/20/our-policy-process-self-styled-planners-have-controlled-indias-paper-money-for-decades/

“Indian Money and Credit” (2006)

https://independentindian.com/2006/08/06/indian-money-and-credit/

“Indian Money and Banking” (2006)

https://independentindian.com/2006/04/23/indian-money-and-banking/

“Indian Inflation” (2008)

https://independentindian.com/2008/04/16/indian-inflation-upside-down-economics-from-new-delhis-establishment/

 How the Liabilities/Assets Ratio of Indian Banks Changed from 84% in 1970 to 108% in 1998 https://independentindian.com/2008/10/20/how-the-liabilitiesassets-ratio-of-indian-banks-changed-from-84-in-1970-to-108-in-1998/

indiasbanks1

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

https://independentindian.com/2008/07/28/growth-of-real-income-money-prices-in-india-1869-2004/

“How to Budget” (2008)

https://independentindian.com/2008/02/26/how-to-budget-thrift-not-theft-should-guide-our-public-finances/

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

https://independentindian.com/2005/10/27/waffle-but-no-models-of-monetary-policy-the-rbi-and-financial-repression/

“The Dream Team: A Critique” (2006)

https://independentindian.com/2006/01/08/the-dream-team-a-critique/

 

“Against Quackery” (2007)

https://independentindian.com/2007/09/24/against-quackery/

“Mistaken Macroeconomics” (2009)

https://independentindian.com/2009/06/12/mistaken-macroeconomics-an-open-letter-to-prime-minister-dr-manmohan-singh/

Towards a Highly Transparent Fiscal & Monetary Framework for India’s Union & State Governments (RBI lecture 29 April 2000)

https://independentindian.com/2000/04/29/towards-a-highly-transparent-fiscal-monetary-framework-for-india%E2%80%99s-union-state-governments/

“The Indian Revolution (2008)”

https://independentindian.com/2008/12/08/the-indian-revolution/

Memo to Kaushik Basu, 2010

Land, Liberty, & Value, 2006

https://independentindian.com/2006/12/31/land-liberty-value/

On Land-Grabbing, 2007

https://independentindian.com/2007/01/14/on-land-grabbing/

No Marxist MBAs? An amicus curiae brief for the Honourable High Court

https://independentindian.com/2007/08/29/no-marxist-mbasan-amicus-curae-brief-for-the-honourable-high-court/

Coverage in The *Asian Age*/*Deccan Herald* of 4 Dec 2012.

IICtophalf IICtalkbottom,half

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sundayguardiantp sgmiddle sgmid2 sgmid3 sgmid4 sgmid5 3Dec

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Posted in Academic research, Amartya Sen, Arvind Panagariya, Bhagwati-Sen spat, Britain in India, China's macroeconomics, China's savings rate, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Public Finance, GDI Impuls Zurich, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's 1991 Economic Reform, India's balance of payments, India's Banking, India's Budget, India's Capital Markets, India's corporate governance, India's corruption, India's currency history, India's Economic History, India's Economy, India's Exports, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Military Defence, India's Monetary & Fiscal Policy, India's Money, India's nomenclatura, India's political lobbyists, India's Politics, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, Inflation, Institute of Economic Affairs, International economics, Jagdish Bhagwati, Jean Drèze, Lok Sabha TV, Macroeconomics, Manmohan Singh, Microeconomic foundations of macroeconomics, Milton Friedman, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Reverse-Euro Model for India, Sen-Bhagwati spat, Sonia Gandhi. 1 Comment »

No magic wand, Professor Rajan? Oh but there is…2013 (Plus: 7 Jan 2016 “Professor Rajan stays or goes? My answer to a query”)

7 January 2016
rajan

3 June 2014

from World Economy & Central Banking Seminar at Facebook

Professor Rajan’s statement “I determine the monetary policy. I say what it is….ultimately the interest rate that is set is set by me” equates Indian monetary policy with the money interest rate; but monetary policy in India has always involved far more than that, namely, the bulk of Indian banking and insurance has been in government hands for decades, all these institutions have been willy-nilly compelled to hold vast stocks of government debt, both Union and State, on their asset-sides…and unlimited unending deficit finance has led to vast expansion of money supply, making it all rather fragile. My “India’s Money” in 2012 might be found useful. http://tinyurl.com/o9dhe8d

11 April 2014

from World Economy & Central Banking Seminar at Facebook

I have to wonder, What is Professor Rajan on about? Growth in an individual country is affected by the world monetary system? Everyone for almost a century has seen it being a real phenomenon affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress… A “source country” needs to consult “recipient” countries before it starts or stops Quantitative Easing? Since when? The latter can always match policy such as to be more or less unaffected… unless of course it wants to ride along for free when the going is good and complain loudly when it is not…. Monetary policy may affect the real economy but as a general rule we may expect growth (a real phenomenon) to be affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress..

22 September 2013

“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike…”

I will say the statement above is the first sensible thing I have heard Dr Rajan utter anywhere, cutting through all the hype…I should also think he may be underestimating the task at hand, so here’s some help as to what needs to be done from my 19 Aug 2013 Mint article “A wand for Raghuram Rajan” and my 3 Dec 2012 Delhi lecture:

“Rajan has apparently said, “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.” Of course there are no magic wands but there is a scientific path forward. It involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity. It also involves institutional changes in public decision-making like separating banking and central banking from the treasury while making the planning function serve the treasury function rather than pretend to be above it. It is a road long and arduous but at its end both corruption and inflation will have been reduced to minimal levels. The rupee will have acquired sufficient integrity to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases. India signed the treaty of Versailles as a victor and was an original member of the League of Nations, the United Nations and the IMF. Yet sovereign India has failed to develop a currency universally acceptable as freely convertible world money. It is necessary and possible for India to aim to do so because without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. An RBI governor’s single overriding goal should be to try to bring a semblance of integrity to India’s money both domestically and worldwide.”

 

 

19 August 2013

A wand for Raghuram Rajan

9 August 2013

No magic wand, Professor Rajan? Oh but there is… read up all this over some hours and you will find it… (Of course it’s not from magic really,  just hard economic science & politics)

Professor Raghuram Govind Rajan of the University of Chicago Business School deserves everyone’s congratulations on his elevation to the Reserve Bank of India’s Governorship.  But I am afraid I cannot share the wild optimism in India’s business media over this.  Of course there are several positives to the appointment.  First, having a genuine PhD and that too from a top school is a rarity among India’s policy-makers; Rajan earned a 1991 PhD in finance at MIT’s management school for a thesis titled “Essays on banking” (having to do we are told “with the downside to cozy bank-firm relationships”).   Secondly, and related,  he has not been a career bureaucrat as almost all RBI Governors have been in recent decades.  Thirdly, he has been President of the American Finance Association, he won the first Fischer Black prize in finance of that Association, and during Anne Krueger’s 2001-2006 reign as First Deputy MD at the IMF, he was given the research role made well-known by the late Michael Mussa, that of “Economic Counselor” of the IMF.

Hence, altogether, Professor Rajan has come to be well-known over the last decade in the West’s financial media. Given the dismal state of India’s credit in world capital markets, that is an asset for a new RBI Governor to have.

On the negatives, first and foremost, if Professor Rajan has renounced at any time his Indian nationality, surrendered his Indian passport and sworn the naturalization oath of the USA, then he is a US citizen with a US passport and loyalty owed to that country, and by US law he will have to enter the USA using that and no other nationality.  If that happens to be the factual case, it will be something that comes out in India’s political cauldron for sure, and there will arise legal issues and court orders  barring him from heading the RBI or representing India officially, e.g. when standing in for India’s Finance Minister at the IMF in Washington or the BIS in Basle etc.   Was he an Indian national as Economic Counselor at the IMF?   The IMF has a tradition of only European MDs and at least one American First Deputy MD.   The Economic Counselor was always American too; did Rajan break that by having remained Indian, or conform to it by having become American?  It is a simple question of fact which needs to come out clearly.   Even if Rajan is an American, he and the Government of India could perhaps try to cite to the Indian courts the new precedent set by the venerable Bank of England which recently appointed a Canadian as Governor.

Secondly, does Professor Rajan know enough (or “have enough domain knowledge” in the modern term) to comprehend let aside confront India’s myriad monetary and public finance problems?  Much of his academic experience in the USA and his approach to Western financial markets may be quite simply divorced from the reality of Indian credit markets and India’s peculiar monetary and banking system as these have evolved over decades and centuries.  Mathematical finance is a relatively new, small specialised American sub-field of economic theory, and not a part of general economics. Rajan’s academic path of engineering and management in India followed by a finance thesis in the management department of a US engineering school may have exposed him to relatively little formal textbook micro- and macroeconomics, monetary economics, public finance, international economics, economic development etc, especially as these relate to Indian circumstances  “Growing up in India, I had seen poverty all around me. I had read about John Maynard Keynes and thought, wow, here’s a guy who managed to have an enormous influence on the world. Economics must be very important.”… He ran across Robert Merton’s paper on rational option pricing, and something clicked that set him on his own intellectual path. “It all came together. You didn’t have these touchy-feely ways of describing human behavior; there were neat arbitrage ways of pricing things. It just seemed so clever and sophisticated,” he said. “And I could use the math skills that I fancied I had, so I decided to get my PhD.”

Let me take two examples.  Does Rajan realise how the important Bottomley-Chandavarkar debates of the 1960s about India’s rural credit markets influenced George Akerlof’s “Market for Lemons” theory and prompted much work on “asymmetric information”, 325.extract signalling etc in credit-markets, insurance-markets, labour-markets and markets in general, as acknowledged in the awards of several Bank of Sweden prizes?  Or will he need a tutorial on the facts of rural India’s financial and credit markets, and their relationship with the formal sector?  What the Bottomley-Chandavarkar debate referred to half a century ago still continues in rural India insofar as large arbitrage profits are still made by trading across the artificially low rates of money interest caused by financial repression of India’s “formal” monetised sector with its soft inconvertible currency against the very high real rates of return on capital in the “informal” sector.   It is obvious to the naked eye that India is a relatively labour-abundant country.  It follows the relative price of labour will be low and relative price of capital high compared to, e.g. the Western or Middle Eastern economies, with mobile factors of production like labour and capital expected to flow accordingly across national boundaries.   Indian nominal interest-rates in organized credit markets have been for decades tightly controlled, making it necessary to go back to Irving Fisher’s data to obtain benchmark interest-rates, which, as expected, are at least 2%-3% higher in India than in Western capital markets. Joan Robinson once explained “the difference between 30% in an Indian village and 3% in London” saying “side by side with the industrial revolution went great technical progress in the provision of credit and the reduction of lender’s risk.”

What is logically certain is no country can have both relatively low world prices for labour and relatively low world prices for capital!  Yet that impossibility seems to have been what India’s purported economic “planners” have planned to engineer!  The effect of financial repression over decades may have been to artificially “reverse” or “switch” the risk-premium — making it lucrative for there to be capital flight out of India, with real rates of return on capital within India being made artificially lower than those in world markets!   Just as enough export subsidies and tariffs can make a country artificially “reverse” its comparative advantage with its structure of exports and imports becoming inverted, so a labour-rich capital-scarce country may, with enough financial repression, end up causing a capital flight.  The Indian elite’s capital flight out of India exporting their adult children and savings overseas may be explained as having been induced by government policy itself.

431314_10150617690307285_69226771_n

Secondly, Professor Rajan as a finance and banking specialist, will see at once the import of this graph above that has never been produced let aside comprehended by the RBI, yet which uses the purest RBI data.  It shows India’s mostly nationalised banks have decade after decade gotten weaker and weaker financially, being kept afloat by continually pumping in of new “capital” via “recapitalisation” from the government that owns them, using more and more of the soft inconvertible currency that has been debauched merrily by government planners.  The nationalised banks with their powerful pampered employee unions, like other powerful pampered employee unions in the government sector, have been the bane of India, where a mere 30 million privileged people in a vast population work with either the government or the organised private sector.  The RBI’s own workforce at last count was perhaps 75,000… the largest central bank staff in the world by far!

Will Rajan know how to bring some system out of the institutional chaos that prevails in Indian banking and central banking?  If not, he should start with the work of James Hanson “Indian Banking: Market Liberalization and the Pressures for Institutional and Market Framework Reform”, contained in the book created by Anne Krueger who brought him into the IMF, and mentioned in my 2012 article “India’s Money” linked below.

The central question for any 21st century RBI Governor worth the name really becomes whether he or she can stand up to the Finance Ministry and insist that the RBI stop being a mere department of it — even perhaps insisting on constitutional status for its head to fulfill the one over-riding aim of trying to bring a semblance of integrity to India’s currency both domestically and worldwide.  Instead it is the so-called “Planning Commission” which has been dominating the Treasury that needs to be made a mere department of the Finance Ministry, while the RBI comes to be hived off to independence!  

Professor Rajan has apparently said “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.”  Of course there are no magic wands but my 3 December 2012 talk in Delhi  has described the right path forward, complex and difficult as this may be.

The path forward involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity, plus institutional changes in public decision-making like separating banking and central banking from the Treasury while making the planning function serve the Treasury function rather than pretend to be above it.  The road described is long and arduous but at its end both corruption and inflation will have been reduced to minimal levels, and the rupee would have acquired integrity enough to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases.

3dec

India signed the Treaty of Versailles as a victor and was an original member of the League of Nations, UN and IMF.  Yet sovereign India has failed to develop a currency universally acceptable as a freely convertible world money. It is necessary and possible for India to do so. Without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. 

Professor Rajan will not want to be merely an adornment for the GoI in world capital markets for a few  years, waiting to get back to his American career and life and perhaps to the IMF again.  As RBI Governor, he can find his magic wand if he reads and reflects hard enough using his undoubted academic acumen, and then acts to lead India accordingly.  Here is the basic reading list:

“India’s Money” (2012)

“Monetary Integrity and the Rupee” (2008)

“India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

“Fallacious Finance” (2007)

“Growth and Government Delusion” (2008)

“India in World Trade & Payments” (2007)

“Path of the Indian Rupee 1947-1993” (1993)

“Our Policy Process” (2007)

“Indian Money and Credit” (2006)

“Indian Money and Banking” (2006)

Indian Inflation

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

“How to Budget” (2008)

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

“The Dream Team: A Critique” (2006)

“Against Quackery” (2007)

“Mistaken Macroeconomics” (2009)

“The Indian Revolution (2008)”

https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/

Enjoy!

Posted in Academic economics, Academic research, Asia and the West, asymmetric information, Banking, Big Business and Big Labour, Bretton Woods institutions, Britain in India, Capital and labour, Deposit multiplication, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Exchange Rates, Economics of Public Finance, Financial Management, Financial markets, Financial Repression, Foreign exchange controls, Governance, Government accounting, Government Budget Constraint, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform, India's agriculture, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's currency history, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's Polity, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest group politics, Interest rates, International economics, International monetary economics, International Monetary Fund IMF, Land and political economy, Microeconomic foundations of macroeconomics, Monetary Theory, Money and banking, Paper money and deposits, Power-elites and nomenclatura, Public Choice/Public Finance, Public property waste fraud, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Rajiv Gandhi's assassination, Statesmanship, Unorganised capital markets. Leave a Comment »

Milton Friedman’s Nov 1955 Memorandum to the Govt of India which I published for the first time at UH-Manoa on 21 May 1989, and then later in the 1992 book

miltononmefinal

A Memorandum to the Government of India 1955 by Milton Friedman

 

(published by me for the first time some 34 years later on 21 May 1989 at UH-Manoa…that original document was in my professorial office at IIT Kharagpur — and is yet to be returned despite a High Court order! 

See also    “Milton Friedman’s extempore comments at the 1989 Hawaii conference: on India, Israel, Palestine, the USA, Debt and its uses, Erhardt abolishing exchange controls, Etc”

andMilton Friedman on the Mahalanobis-Nehru “Second Plan”’

and Milton Friedman: A Man of Reason, 1912-2006… 

and Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform? Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington? Judge the evidence for yourself. And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture! )

 

 

[EDITORIAL NOTE from *Foundations of India’s Political Economy: Towards an Agenda for the 1990s* edited by Subroto Roy & WE James…: “This memorandum is dated November 5, 1955, and was written at the invitation of the Government of India, where the author was working for some months as a consultant to the Ministry of Finance. It has not been published before. The editors believe it remains relevant to Indian discussions today. The history of the advice given by other Western economists in the early years of the Indian Republic has been recently surveyed by George Rosen in Western Economists and Eastern Societies: Agents of Social Change in South Asia 1950-1970 (Delhi: Oxford University Press, 1985).”]

“The Goal
A 5% per annum rate of increase in real national income seems entirely feasible, on the basis both of the experience of other countries and of India’s own recent past. The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago. The basic question is one of method, of the social and economic arrangements that will best promote the conversion of these potentialities into realities while at the same time maintaining freedom and democracy and giving ever-widening opportunities to the mass of the Indian people. The belief that underlies these notes is that the basic requisites are a steady and moderately expansionary monetary framework, greatly widened opportunities for education and training, improved facilities for transportation and communication to promote the mobility not only of goods but even more important of people, and an environment that gives maximum scope to the initiative and energy of farmers, businessmen, and traders. The conquest of the technical frontier like the conquest of the geographical frontier requires a varied initiative by millions of individuals, flexibility of outlook and organization, and willingness to venture. The Government of India is doing much, and much that is highly effective, to bring these requisites into being. There is much more to do that at least in Indian conditions can be done only by the Government. But the Government also is following some policies and proposing others that are likely to hinder rather than promote economic development. The following comments, which are mainly restricted to such policies, deal with investment policy; policy toward the private sector; monetary policy; resources available to the public sector; and foreign exchange policy.

Investment Policy
Over-Emphasis on the Capital-Output Ratio. There is a tendency not only in India but in most of the literature on economic development to regard the ratio of investment to national income as almost the only key to the rate of development, to take it for granted that there is a rigid and mechanical ratio between the amount of investment and additions to output. In the opinion of this writer, this seems a serious mistake. At the one extreme, output can increase even without investment; at the other, too high a ratio of investment may actually produce a lower rate of increase in income.

There are two reasons why the amount of investment and the increase in output can be, and empirically are, only loosely connected. First, the form and distribution of investment are at least as important as its sheer magnitude. Second, what is called capital investment is only part of the total expenditure on increasing the productivity of an economy. The first reason needs little additional comment. The second is perhaps less clear. In any economy, the major source of productive power is not machinery, equipment, buildings and other physical capital; it is the productive capacity of the human beings who compose the society. Yet what we call investment refers only to expenditures on physical capital; expenditures that improve the productive capacity of human beings are generally left entirely out of account. In the United States, for example, only about one fifth of the total income is return to physical capital, four fifth to human capital. By this writer’s estimate similarly, only about one fifth of the annual rate of growth in the United States can be attributed to the direct effects of investment in the usual sense; four fifth must be attributed to the growth in the productivity of human beings. Annual expenditures on improving the quality and quantity of human resources are at least as large as and perhaps much larger than investment as usually defined. Destroy the physical plant of the United States and leave the skills of the people and it would take but a few years to restore the initial position. Destroy the skills and leave the plant and the level of output would sink irretrievably. The cathedrals of medieval Europe, the pyramids of Egypt, the monuments of the Moghul empire in India are all testimony to the possibility of a high rate of investment in physical capital without a growth in the standard of living of the masses of the people. These considerations are especially important for India, precisely because its frontier is the frontier of technical knowledge and skill.

This is not to deny in any way the desirability of investment in physical capital. It is certainly highly important and is to some measure an indispensable concomitant of the development of human capital. But it is not the whole or even the most important part of the story. The danger is that concentration on it may lead to policies that increase physical investment at the expense of investment in human capital; and even within the area of physical investment, may lead to increases in the kind of physical investment that we can measure at the expense of kinds that we cannot measure. We must be aware lest we become the victims of our statistical creations.

Emphasis on Two Extremes Against the Middle.  The form of investment is no less important than its kind. The chief problem in the Indian programme that impresses one here is the tendency to concentrate investment in heavy industry at the one extreme and handicrafts at the other, at the expense of small and moderate size industry. This policy threatens an inefficient use of capital at the one extreme by combining it with too little labour, and an inefficient use of labour at the other extreme by combining it with too little capital. The presumption for an economy like India’s is that the best use of capital is in general somewhere in between, that heavy industry can best develop and be built upon a widely diversified and much expanded light industry. We may hasten to add that this is only a general presumption which may well admit of special exceptions. Perhaps, for example, the steel industry is one exception in India.

Attempt to Do Too Much in the Public Sector. Indian thought may not have taken full account of the post-War experience of European countries in expanding the public sector. Country after country moved in this direction immediately after the War; to the best of the present writer’s knowledge, the results were in every case disappointing. This experience has produced a drastic change in the attitudes of the labour and left-wing parties toward nationalization and detailed state control over economic activity. The elements in the parties that have not changed their approach are now being dubbed “reactionary” by some of their fellows!

This point may be especially important for India. The areas for which only Government can take responsibility are here so large, so vital, and require such large investments that they alone would be a heavy burden on the limited administrative personnel of high calibre. It seems the better part of wisdom therefore to avoid any activities that can be left to others. The problem involves both the kind of activities taken into the public sector and the magnitude of investment. Some further comments are made on the latter below in discussing the resources available to the public sector.

Attempt to Control Private Investment in Too Rigid and Detailed a Fashion. (i) Cutting off particular investment projects may not make resources available for other uses but may simply eliminate savings that would otherwise have been available. Much saving is made to finance specific investment projects. If it cannot be used for that purpose, it may well be directed to consumption or to the accumulation of bullion or its equivalent. (ii) It is impossible to predict in advance the lines of investment that will turn out to be the most productive — as the failure of so many private enterprises amply demonstrates. There is therefore great need for a system that is flexible and can change easily. (iii) Detailed direction wastes scarce energies and ability of public servants in producing and enforcing regulations and of private individuals in trying to evade or avoid or change them. (iv) Given that the public sector gets the resources it demands, is not the market criterion appropriate for the allocation of the rest of investment? To frustrate it means to deny consumers freedom of choice and so to reduce the value to them of the goods produced. (v) Government does have a responsibility for seeing to it that the total of public and private investment is kept within the total resources of the community without inflation. But this can best be accomplished by monetary and fiscal policy, rather than by detailed regulation, leaving the allocation of investment among private industries to be accomplished by the interest rate. Insofar as this mechanism works imperfectly, measures to improve its operation seem preferable to supplanting it.

Policy Toward the Private Sector
Protection of Inefficient Methods of Production. In addition to the Government controls already considered which are designed to direct investment, there are others whose purpose is mainly protective: the excise tax on factory-made shoes and factory-made textiles; reservation of markets, and the like. In the opinion of this writer, such policies seem misdirected. India’s basic problem is the inefficient use of manpower; it is no solution to protect inefficiency, and the attempt to do so leads to a waste not only of human resources but also of physical capital. The extra money consumers have to pay for the products, let alone direct subsidies to producers, could be channelled at least in part into investment. And there may even be actual disinvestment — we were told that some shoe machinery was lying idle and depreciating because of the tax.

There is a tendency to underrate the importance of nominally low taxes in promoting inefficiency. For example, there is a 10% tax on factory-made shoes. But half to two-thirds of the cost of shoes is the raw material. The tax therefore amounts to 20% or 30% of the value added by the factory, and it will not pay to produce shoes unless factory production is at least this much more efficient than hand production. The justification for these devices is to increase employment. The objective is fundamental, and would be worth achieving even at some cost in total output, but it seems to the present writer dubious that these means accomplish their objective even in the very short run, and certain that they work against it in the moderate or long run. What they do is to increase the number of people employed inefficiently; but they also decrease the number of workers in factories producing the same product, and in other industries stimulated by the higher income of the factory workers; the decrease is likely to exceed the increase but because it is more diffuse and less obvious, it tends to be neglected.

Coddling of Private Industry in Certain Directions Combined with Severely Restrictive Controls in Others. Just as it is inappropriate to discriminate in favour of the cottage industries, so it is equally inappropriate to discriminate in favour of factory industry or large concerns. Granting them special favours — in the form of especially advantageous loans, guaranteed markets, refusal of licenses to competitors, enforcing or even permitting private price-fixing and market-sharing agreements — simply encourages inefficiency and wastes scarce resources. If private industry is granted special favours by the Government, it is certainly inevitable that its use of these favours will be controlled; but this does not offset the harm done by the favours; it merely introduces new sources of rigidity and inefficiency. Business ingenuity is devoted to carving out protected sectors instead of to opening up new markets and lowering costs. There is no justification for private industry unless it is competitive, unless the right to receive profits is accompanied by acceptance of the risk of loss. Private industry should be made to stand on its own feet without either favour or harassment.

Monetary Policy
Erratic Policy. A stable monetary climate is a basic prerequisite for healthy economic growth. Yet over the past five years, monetary policy has been highly erratic. It first permitted and facilitated substantial price rises, then reacted too far in the opposite direction. More recently, monetary policy has again reversed direction and again threatens to go too far, this time in an inflationary direction. This erratic policy is recorded directly in the behaviour of the stock of money and of wholesale and retail prices, and indirectly, in a less rapid rate of economic advance than would have been feasible.

The present writer believes that monetary policy in India would be more stable and consistent if the monetary authorities paid more attention to the size of the money stock and less to other indicators, and if they took as their proximate goal, a steady expansion in the money stock (allowing for seasonal influences) at a rate of something like 4 to 6 per cent per year. It may be noted that detailed examination of the record of American monetary authorities persuades one that this general proposition is equally true for the United States, with a desirable rate of expansion of the money stock of 4 per cent per year.

The importance of a stable monetary policy hardly can be overemphasized. There is probably no other single area in which mistakes can be more disastrous or appropriate policy more beneficial. The fact that it operates on a general level and makes its effects felt impersonally and indirectly is at one and the same time the reason for its crucial importance and for the widespread failure to recognize its importance.

Deficit Financing. Deficit financing is currently proceeding at the rate of something like Rs. 150 to 200 crores a year. Given the generally deflationary trend of the recent past, such a rate doubtless can be absorbed for a time without a serious price rise. It is exceedingly doubtful, however, that it can be for more than a year or so. According to some rough yet fairly detailed estimates made by this writer, something less than Rs. 500 crores is the maximum amount that can be absorbed over the next five years without a substantial rise in prices. By this estimate, continued deficit financing at a rate of Rs. 200 crores per year over that period would produce a price rise of at least 30 per cent, and perhaps much more.

Resources Available to the Public Sector
There seems to be a general agreement that planned expenditures in the public sector substantially exceed expected receipts, even after allowing for a shortfall of actual expenditures, for deficit financing to the extent of Rs. 1,000 to 1,200 crores, and for a substantial amount of foreign aid. If we are right about the safe amount of deficit financing, the actual gap is substantially larger than the amounts generally cited. This financial gap corresponds to a real resource gap. It can be filled without curtailing the Plan only by either getting additional resources from abroad; or making domestic resources more productive over and above the 5 per cent per year increase already allowed for in the estimates; or transferring resources from other uses. The transfer of resources can be brought about by additional taxation, forced savings, additional voluntary savings, or a reduction in private investment. Additional voluntary savings and a reduction in private investment can in turn be brought about to some extent by a monetary policy that allows interest rates to rise. Inflation is of course a possible danger, but it is not really a separate method of filling the gap; it is a form of taxation and, in the view of this writer, a particularly inefficient and inequitable form.

This only states the problem. We have not been able to study in detail either the tax structure of India or the financial structure for mobilizing and encouraging savings, so no independent judgment can be given on the possibility of filling the resource gap by the various means. Casual impression suggests that there is some possibility of increasing tax revenues without doing much harm, but that any substantial expansion in tax revenues or heavy reliance on any of the other methods except for foreign aid is currently subject to extremely serious limitations. If this is so, filling the gap by their use, if successful, might make public investment larger only at the expense of reducing the rate of growth of aggregate real income by killing incentives outside the public sector, eliminating potentially productive private investment, and producing either inflation or a deadening network of direct controls. This is a special case of the point made earlier about the loose connection between the rate of investment and the rate of growth of income. It may well be that under the circumstances, cutting the size of the program may be preferable to trying to fill the gap on the revenue side.

On the tax side, three comments may be made: (i) The small scope of direct income taxes seems an obvious defect in the tax structure. A more broadly based tax with lower exemptions and more effective administration might both raise considerable revenues and produce a more equitable distribution of the tax burden. (One recognizes that for a country like India there are special problems of administration and enforcement that this writer is incompetent to assess.) (ii) The use of excise taxes for the protection of one method of production or one product as opposed to another not only promotes inefficiency but is also wasteful of revenue. A 10 per cent tax on shoes would yield more revenue, do less harm to productive efficiency and cost the consumer little if any more than a 10 per cent tax on factory-made shoes. As a side observation, is it clear that if the extra proceeds were used to facilitate the retraining and placement of hand workers it would be of less value even from the point of view of the employment problem? (iii) A minor possible source of additional revenue that would have favourable effects on efficiency is the auctioning off of licenses to use foreign exchange suggested as a possibility below.

The Foreign Exchange Problem
The Foreign Exchange Gap. It is generally accepted that present programmes are likely to involve a substantial excess in the demand for foreign exchange over the available supply, even if allowance is made for foreign aid at roughly the present level. These estimates take for granted not only the investment program but also retention of the existing exchange rate and the existing structure of import and export controls. Even under these assumptions, the foreign exchange gap in part and perhaps in whole is a particular aspect of the total resource gap: any reduction in the total resource gap will automatically reduce the foreign exchange gap. Given the special foreign exchange resources that are likely to be available, we may guess that solution of the total resource gap would largely solve the foreign exchange gap as well.

Exchange Controls. The existing structure of exchange-controls and their associated system of import and export licenses and of discrimination between sources of purchases, seem to this writer a major obstacle to the growth and progress of the Indian economy. They involve waste and inefficiency in the use of foreign exchange. They introduce delay, uncertainty, and arbitrariness into domestic business activities. They impose on officials in charge of exchange control a task that is bound to be discharged most imperfectly, however able and devoted the officials may be. The criteria the officials use — and must use — tend to perpetuate the status-quo ante, and therefore constitute an obstacle to dynamic change and adaptation in an area that traditionally has been one of the most dynamic sectors in the economy and the source of much of the impetus to change. Exchange controls necessarily involve the indiscriminate distribution of implicit subsidies to those granted import licenses, and they lend themselves to abuse as a means of granting administrative protection from foreign competition to inefficient or monopolistic domestic producers.

The elimination of the exchange-controls and import and export restrictions is thus a most desirable objective of policy. It must be recognized, however, that it would probably increase the demand for foreign exchange, but the likelihood of an increase means that elimination of controls would have to be accompanied by the introduction of some other means of rationing exchange. It should be emphasized that this increase in the demand for foreign exchange is not a fresh problem that would be created by the elimination of exchange-controls. The problem is there now. That is why controls are deemed necessary. The question is whether there are not less harmful ways of solving it.

Alternatives to Exchange-Controls. One alternative, which retains central control over the amount of foreign exchange to be released, is to auction off whatever amount of foreign exchange it is decided to release, permitting the purchasers to use it for anything they wish and in any currency area they wish. This would be a far more efficient system of rationing and would hinder internal economic development far less than the present system and at the same time yield some revenue. We have not been able to construct even a rough estimate of the amount of revenue, but it is unlikely to be of major magnitude.

It would be preferable to avoid this auctioning system as well. While it eliminates any distortion in the pattern of imports, it does not produce the appropriate adjustment of exports to imports. Only two other basic alternative modes of adjustment to changes in the conditions of external trades are available: first, to inflate or deflate internally in response to a putative surplus or deficit in the balance of payments; second, to permit the exchange rate to fluctuate. At least in the present worldwide monetary conditions, the first is not desirable economically, since it puts internal conditions of trade at the mercy of changes in external conditions and these are about as likely to result from vagaries in the internal policies of other countries as from changes in the “real” conditions of trade. The preferable method is to let the exchange rate be determined in a free market — the method of a floating exchange rate that has been adopted by Canada with such conspicuous success.

It may be worth saying a few words about how a floating exchange rate eliminates any foreign exchange gap and means that there are not two problems, a total resource gap and a foreign exchange gap, but only one, a total resources gap. Suppose the total programme is in balance but, at the existing exchange rate, there is an excess of demand for foreign exchange over the supply. The result is to lower the rate. This makes India’s products more attractive to the outside world, foreign products more expensive to Indians. The result is to lead to an increase in exports, thus making more foreign exchange available, to shift the pattern of investment within India away from kinds with a large import component and toward kinds with a larger domestic resource component, away from production for the domestic market to production for the foreign market, and to shift consumption from foreign goods toward domestic goods. A putative foreign exchange surplus clearly has the opposite effects. In addition to these effects on trade, there are also, of course, effects on capital movements, which depend on whether the change in rate is regarded as temporary or permanent.

India’s membership in the Sterling Area raises obvious difficulties in the way of India’s acting alone, and may make it impossible for India to free her exchange rate except in concert with a similar move by Britain. However, if these difficulties could be surmounted, an independent movement by India might have very great advantages precisely because India is entering into a period of rapid economic change and is not a major financial centre. This writer believes there is more of an analogy between India’s and Canada’s positions than might at first appear. In a world of inconvertible currencies, a country that offers convertibility, albeit at a fluctuating fate, has a special attraction for investors and traders.

The problem of trade is frequently considered separately from that of the import of foreign capital. This is a mistake. Imports of goods may bring with them no capital directly but they bring businessmen and contact, and discovery of investment opportunities by people who are anxious to exploit them and who have contacts at home interested in such opportunities. Such continuous and intimate contact is likely to produce both a larger and, equally important, more productive flow of foreign investment than any number of missions coming out for brief periods with the objective of exploring investment opportunities.

Foreign Assistance. Any foreign assistance will of course help to fill both the total resources gap and the foreign exchange gap. Its direct impact, however, is much greater on the foreign exchange gap. In consequence, foreign assistance is especially likely to permit an elimination of import and export controls without threatening the existing exchange rate. But it would be a mistake to suppose that foreign assistance, however extensive, would permit elimination of controls, a fixed exchange rate, and an independent domestic monetary policy for any length of time. Even though the exchange rate is in some sense in long-run equilibrium, accidental fluctuations will from time to time produce large drains on reserves and if there is no mechanism for adjusting to them, these drains may well make the short-run position untenable.

Conclusion
If these comments have concentrated largely on the financial machinery of economic organization, it is not because that is the only or even the most important problem facing India but rather because, on the one hand, it is more within this writer’s special competence, and on the other, it seems to be the area in which current policy can be improved most. The present writer is convinced that the fundamental problem for India is the improvement of the physical and technical quality of her people, the awakening of a sense of hope, the weakening of rigid social and economic arrangements, the introduction of flexibility of institutions and mobility of people, the opening up of the social and economic ladder to people of all kinds and classes. And what gives an outsider like this writer a feeling of optimism and hope about the future of India, makes one feel that India is on the move and will continue to move, is that so much is being done and such a good beginning has been made on this fundamental problem of creating the human and social basis for a dynamic and progressive economy.”

Silver Jubilee of “Pricing, Planning & Politics: A Study of Economic Distortions in India”

May 29 2009:

It is a quarter century precisely today since my monograph Pricing, Planning and Politics: A Study of Economic Distortions in India was first published in London by the Institute of Economic Affairs.

ppp1984

Its text is now available (in slightly rough form) at this site here.

Now in May 1984, Indira Gandhi ruled in Delhi, and the ghost of Brezhnev was still fresh in Moscow.   The era of Margaret Thatcher in Britain and Ronald Reagan in America was at its height.   Pricing, Planning & Politics emerged from my 1976-1982 doctoral thesis at Cambridge though it came to be written in Blacksburg and Ithaca in 1982-1983.   It was the first critique after BR Shenoy of India’s Sovietesque economics since Jawaharlal Nehru’s time.

The Times, London’s most eminent paper at the time, wrote its lead editorial comment about it on the day it was published, May 29 1984.

londonti

It used to take several days for the library at Virginia Tech in Blacksburg to receive its copy of The Times of London and other British newspapers.    I had not been told of the date of publication and did not know of what had happened in London on May 29 until perhaps June 2 — when a friend, Vasant Dave of a children’s charity, who was on campus, phoned me and congratulated me for being featured in The Times which he had just read in the University Library.  “You mean they’ve reviewed it?”  I asked him, “No, it’s the lead editorial.” “What?” I exclaimed.  There was worse.  Vasant was very soft-spoken and said “Yes, it’s titled ‘India’s Bad Example'” — which I misheard on the phone as “India’s Mad Example”  😀

Drat! I thought (or words to that effect), they must have lambasted me, as I rushed down to the Library to take a look.

The Times had said

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India.   If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is.   A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World.   As with many of Britain’s former imperial possessions, the rot set in long before independence.  But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy.  We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence.  How could Indian officials explain their poor performance relative to Hongkong?  Dr Roy has the answers for them.   He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats.  The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.”  Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches.   No businessman can expand his operation while there is any surplus capacity anywhere in that sector.  He needs government approval to modernize, alter his price-structure, or change his labour shift.  It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi.  Her policies have clearly positioned India more towards the Soviet Union than the West.  The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.”  All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

I felt this may have been intended to be laudatory but it was also inaccurate and had to be corrected.  I replied dated June 4 which The Times published in their edition of  June 16 1984:

timesletter-11

I was 29 when Pricing, Planning and Politics was published, I am 54 now. I do not agree with everything I said in it and find the tone a little puffed up as young men tend to be; it was also five years before my main “theoretical” work Philosophy of Economics would be published. My experience of life in the years since has also made me far less sanguine both about human nature and about America than I was then. But I am glad to find I am not embarrassed by what I said then, indeed I am pleased I said what I did in favour of classical liberalism and against statism and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals overnight.)

The editorial itself may have been due to a conversation between Peter Bauer and William Rees-Mogg, so I later heard. The work sold 700 copies in its first month, a record for the publisher. The wife of one prominent Indian bureaucrat told me in Delhi in December 1988 it had affected her husband’s thinking drastically. A senior public finance economist told me he had been deputed at the Finance Ministry when the editorial appeared, and the Indian High Commission in London had urgently sent a copy of the editorial to the Ministry where it caused a stir. An IMF official told me years later that he saw the editorial on board a flight to India from the USA on the same day, and stopped in London to make a trip to the LSE’s bookshop to purchase a copy. Professor Jagdish Bhagwati of Columbia University had been a critic of aspects of Indian policy; he received a copy  in draft just before it was published and was kind enough to write I had “done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!”

Siddhartha Shankar Ray told me when  we first met that he had been in London when the editorial appeared and had seen it there; it affected his decision to introduce me to Rajiv Gandhi as warmly as he came to do a half dozen years later.

Within a few months though, by the Fall of 1984, I was under attack by the “gang of inert game theorists”  who had come to  Blacksburg following the departure of James Buchanan.  By mid 1985 I had moved to Provo, Utah, really rather wishing, as I recall,  to have left my India-work behind me.  But by late 1986, I was at the University of Hawaii, Manoa, where the perestroika-for-India and Pakistan projects that I and WE James led, had come to be sponsored by the University and the East West Center.

The unpublished results of the India-project reached Rajiv Gandhi by my hand on September 18 1990 as has been told elsewhere.  A week later, on September 25 1990,  Rajiv appointed a small group that included myself, to advise him.  It was that encounter with Rajiv Gandhi that sparked the origins of the 1991 economic reform.  Yet in 2007 one member of the group, declaring himself close to Sonia Gandhi, brazenly lied in public saying it was Manmohan Singh and not I who had been part of the group — a group of which I had been in fact the first member!  Manmohan Singh himself has never claimed to have been present and in fact was not even in India at the time it was formed.

I have explained elsewhere here why I believe this specific  lie  came to be told by this specific liar who shared membership with me in the group that Rajiv had formed:  because I had also pleaded with  many and especially within this group that Rajiv had seemed, to my layman’s eyes, very vulnerable to assassination, and none of them had lifted a finger to  do anything about it!  Such is how duplicity, envy and greed for power make people mendacious and venal in politics!

As for Pricing, Planning and Politics, Dr Manmohan Singh received a personal copy from my father whom he had long known through the Kaul brothers, Brahma and Madan, both of whom were dear friends of my father since the War and Independence.   From a letter Dr Singh wrote to my father,  he would have received his copy in late 1986 when he was heading the Planning Commission in his penultimate appointment before retirement from the bureaucracy.

Readers of Pricing, Planning and Politics today, 25 years after it was published, may judge for themselves what if any  part of it may be still relevant to the new government that Dr Singh is now prime minister of.   The work was mostly one of applied microeconomics or the theory of value; in recent years I have written much also of applied macroeconomics or the theory of money as it relates to India.  My great professor at Cambridge, Frank Hahn, was kind enough to say in 1985 that he thought my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”; that to me has been a special source of delight.

Subroto Roy, Kolkata

Two Different Models for India’s Political Economy: Mine & Dr Manmohan Singh’s (Updated Feb 24 2011)

 

From Facebook

February 24 2011

Subroto Roy does not know if he just heard Manmohan Singh say “inflation will soon come down” — excuse me Dr Singh, but how was it you and all your acolytes uniformly said back in July 2010 that inflation would be down to 6% by Dec 2010? 6%?! 16% more likely! I said. Until he explains his previous error, we may suppose he will repeat it.

January 11 2011:

Subroto Roy can stop the Indian inflation and bring integrity to the currency over time, and Manmohan Singh and his advisers cannot (because they have the wrong economic models/theories/data etc and refuse to change), but then they would have to make me a Minister and I keep getting reminded of what Groucho Marx said about clubs that would have him.

Subroto Roy does not think Dr Manmohan Singh or his acolytes and advisers, or his Finance Minister and his acolytes and advisers, understand Indian inflation. If you do not understand something, you are not likely to change it.

 

 

March 6 2010:

Subroto Roy  says the central difference between the Subroto Roy Model for India as described in 1990-1991 to Rajiv Gandhi in his last months, and the Manmohan Singh Model for India that has developed since Rajiv’s assassination, is that by my model, India’s money and public finances would have acquired integrity enough for the Indian Rupee to have become a hard currency of the world economy by now, allowing all one billion Indians access to foreign exchange and precious metals freely, whereas by the model of Dr Singh and his countless supporters, India’s money and public finance remain subject to government misuse and abuse, and access to foreign exchange remains available principally to politicians, bureaucrats, big business and its influential lobbyists, the military, as well as perhaps ten or twenty million nomenclatura in the metropolitan cities.

 

April 8 2010:

Subroto Roy notes a different way of stating his cardinal difference with the economics of Dr Manmohan Singh’s Govt: in their economics, foreign exchange is “made available” by the GoI for “business and personal uses”. That is different from my economics of aiming for all one billion Indians to have a money that has some integrity, i.e., a rupee that becomes a hard currency of the world economy. (Ditto incidentally with the PRC.)


Updates:

From Facebook:

Subroto Roy  reads in *Newsweek* today  (Aug 19) Manmohan Singh “engineered the transition from stagnant socialism to a spectacular takeoff”.  This contradicts my experience with Rajiv Gandhi at 10 Janpath in 1990-91. Dr Singh had not returned to India from his years with Julius Nyerere in his final assignment before retiring from the bureaucracy when Rajiv and I first met on 18 September 1990.

“After (Rajiv Gandhi’s) assassination, the comprador business press credited Narasimha Rao and Manmohan Singh with having originated the 1991 economic reform.  In May 2002, however, the Congress Party itself passed a resolution proposed by Digvijay Singh explicitly stating Rajiv and not either of them was to be so credited… There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior to 1991 and scant evidence they have originated liberal economic ideas for India afterwards. Precisely because they represented the decrepit old intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked in the mid-1980s to be part of a “perestroika-for-India” project done at a foreign university ~ the results of which were received…by Rajiv Gandhi in hand at 10 Janpath on 18 September 1990 and specifically sparked the change in the direction of his economic thinking…”

Subroto Roy notes that current Indian public policy discussion has thus far failed to realise that the rise in money prices of real goods and services is the same as the fall in the real value of money.

Subroto Roy  is interested to hear Mr Jaitley say in Parliament today the credibility of Government economists is at stake. Of course it is. There has been far too much greed and mendacity all around, besides sheer ignorance. (When I taught for a year or so at the Delhi School of Economics as a 22 year old Visiting Assistant Professor in 1977-78, I was told Mr Jaitley was in the law school and a student leader of note. I though was more interested in teaching the usefulness of Roy Radner’s “information structures” in a course on “advanced economic theory”.)





July 31 2010

Subroto Roy reads in today’s pink business newspaper the GoI’s debt level at Rs 38 trillion & three large states (WB, MH, UP) is at Rs 6 trillion, add another 18 for all other large states together, another 5 for all small states & 3 for errors and omissions, making my One Minute Estimate of India’s Public Debt Stock Rs 70 trillion (70 lakh crores). Interest payments at, say, 9%, keep the banking system afloat, extracting oxygen from the public finances like a cyanide capsule.

 

July 28 2010

Subroto Roy observes Parliament to be discussing Indian inflation but expects a solution will not be found until the problem has been comprehended.

July 27 2010:

Subroto Roy continues to weep at New Delhi’s continual debauching of the rupee.

July 25 2010:

Subroto Roy  has no idea why Dr Manmohan Singh has himself (along with all his acolytes and flatterers in the Government and media and big business), gone about predicting Indian inflation will fall to 6% by December. 16% may be a more likely figure given a public debt at Rs 40 trillion perhaps plus money supply growth above 20%! (Of course, the higher the figure the Government admits, the more it has to pay in dearness allowance to those poor unionized unfortunates known as Government employees, so perhaps the official misunderestimation (sic) of Indian inflation is a strategy of public finance!)

 

July 12 2010:

Subroto Roy is amused to read Dr Manmohan Singh’s Chief Acolyte say in today’s pink business newspaper how important accounting is in project-appraisal — does the sinner repent after almost single-handedly helping to ruin project-appraisal  & government accounting & macroeconomic planning over decades?  I  rather doubt it.   For myself, I am amused to see chastity now being suddenly preached from within you-know-where.

 

July 4 2010:

Subroto Roy does not think the Rs 90 billion (mostly in foreign exchange) spent by the Manmohan Singh Government on New Delhi’s “Indira Gandhi International Airport Terminal 3” is conducive to the welfare of the common man (“aam admi”) who travels, if at all, mostly within India and by rail.

Subroto Roy hears Dr Manmohan Singh say yesterday “Global economic recession did not have much impact on us as it had on other countries”. Of course it didn’t. I had said India was hardly affected but for a collapse of exports & some fall in foreign investment. Why did he & his acolytes then waste vast public resources claiming they were rescuing India using a purported Keynesian fiscal “stimulus” (aka corporate/lobbyist pork)?

 

May 26 2010:

Subroto Roy  would like to know how & when Dr Manmohan Singh will assess he has finished the task/assignment he thinks has been assigned to him & finally retire from his post-retirement career: when his Chief Acolyte declares on TV that 10% real GDP growth has been reached? (Excuse me, but is that per capita? And about those inequalities….?)

(Yet Another) Memo to Dr Kaushik Basu

Dear Kaushik,

Apropos your reported predictions, I have had to say at Facebook:

Subroto Roy  is appalled the GoI’s Chief Economic Adviser has declared (as the PM and the PM’s Chief Acolyte had  declared in earlier months) that prices are trending downwards stochastically but amused that at least a stochastic (“fluctuating”) trend got mentioned.

Governor Subbarao has been set a small challenge the other day to release asap for public scrutiny the comprehensive macroeconomic model he says he believes the RBI has — which may be  hard if no such model may exist at the RBI.   Nor does your Ministry or anyone else in New Delhi have such a model.  So what is the Government’s precise scientific basis for predicting a slowing of inflation?  Nothing at all?

The Government needs to begin to try to understand that inflation does not slow down in circumstances where real public debt per capita and money supply have been growing exponentially for decades — to the contrary, inflation tends to rise to dangerous heights!  Debauching of  fiat money would hardly have been allowed if the rupee was a hard currency because we would have seen an honest exchange-rate crashing through the floor with this kind of inflationary finance the Government has given us over the decades. There is, sad to say, zero chance of the rupee becoming a hard currency that all one billion Indians may feel confident about so long as such inflationary finance continues unabated.

Cordially yours

Suby

A New Drachma? Thinking further on the need for a new Greek domestic currency to revive trade: Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?

From Facebook (March 2010):

…My view on Greece appears different. In my view, a transition to a new Drachma will be drastic but will not be any more catastrophic than the present trap Greece has put itself in.

The current path makes a fetish of the fiscal side when the problem at root has been monetary, arising from a purported monetary union, a *superficial* monetary union being created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences.

Money has two main functions, being a medium of exchange and a store of value; the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default makes the Euro a risky store of value for Germans, Dutch et al. Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, others would have been wondering about a flight to safety outside the Euro. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may worsen the situation without any new equilibrium path being anywhere near to be found.

The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. There would have to be a

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls (smuggling is inevitable);
(c) deciding a new price for the Drachma, say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.
(f) Exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions.

Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

I have spent decades arguing *against* all this in the Indian case but have to say it is what Greece may need now, for a period of adjustment of half a dozen or so years.

Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?
by Subroto Roy on Monday, 17 October 2011 at 16:13 ·
 
Money according to economic theory has two main functions, namely, being a medium of exchange and a store of value; I have been saying that I think the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default would make the Euro a risky store of value for Germans, Danes et al. If I am right, Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, the Germans, Danes et al would have been wondering about a flight to safety outside the Euro. Some young mathematical economist may take my idea and develop it it intelligently as the *dual* problem to Gresham’s law http://en.wikipedia.org/wiki/Gresham%27s_law inasmuch as weak fiscal positions are causing, through a common money, stronger fiscal positions to weaken…
 
Addendum Oct 25 2011
My guess has been the Euro has become a de facto hard currency for Greeks, who will then hoard it and slow the velocity of circulation, damaging the turnover of normal domestic trade and hence damaging national income; i.e. it has become too expensive as a currency to properly fulfill the medium of exchange function of money in Greece; at the same time, Germans, Dutch and others in fiscally strong economies relatively have to account for the added risk of Greek infirmity and hence find the Euro less of a store of value than otherwise, causing incentives to flee to other denominations. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may well worsen the situation without any new equilibrium path being anywhere near to be found.
 

Thinking further on the need for a new Greek domestic currency to revive trade
by Subroto Roy on Friday, 16 September 2011 at 07:35 ·
 
Subroto Roy: Re  “it is still not clear what will actually happen”, what will happen is there will be an inevitable recognition that the introduction of the Euro was premature, probably irreversible, and likely to be catastrophic as it unwinds.
 
Edward Hugh Yes, well…. and apart from that little detail Suby, what else do you forsee. I absolutely agree, by the way, that these madmen (and women) have taken the global economy to the brink of disaster through their inability to listen.
 
Maria Tadd When words like catastrophic are used, they obviously send fear into the hearts of many. Suby and Ed, how do you envision the fall out to look like?
 
Subroto Roy    There has to be a clear way out for a currency to exit; that has never been thought out beforehand; creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union.  A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. Now Greece needs, as I have said over two years, an inexpensive inconvertible domestic money which allows domestic trade and savings to take place normally; the Euro would have to become a hard currency for external use.
 
Edward Hugh Do you mean like what has been happening in Croatia Suby?
Subroto Roy I am afraid I have to admit ignorance of Europe’s facts, what I am working on is my (quite sound) knowledge of monetary economics acquired from Hahn, Friedman, Walters, ACL Day, Griffths, Hicks via Miller, etc. Thinking about Greece overnight: if the Euro has become a de facto hard currency there, its velocity of circulation will fall as people tend to hoard it, causing domestic transactions & trade and hence national income to fall too; hence further the need for an inexpensive domestic currency (under capital controls) for domestic trade and transactions to be revived.
 
(Capital controls imply import restrictions and the rationing of foreign exchange so Greeks will not be big tourists in the rest of the world for a while but what the heck they have so much to see in their own country.)
 
 
From Facebook Oct 3 2011:
 Subroto Roy:
 
“What I have said for two years now is that Greece needs to introduce a soft inconvertible domestic money to facilitate domestic trade and revive growth; it would have to be accompanied by import controls and forex rationing with the Euro becoming a hard currency in Greece for external transactions. Why? Because the Euro has probably become a de facto hard currency for Greeks who would then tend to hoard it, slowing velocity of circulation and causing domestic transactions to be reduced. (At the same time, Germans, Danes and others have an incentive to leave the Euro for the safety of some other hard currency in view of a possible Greek default.) Money has two main functions, being a store of value and a medium of exchange. In present circumstances, the Euro is becoming a dubious store of value for the Germans et al while becoming too scarce to be a proper medium of exchange for the Greeks. All this is good standard monetary economics, which no one in the ECB, IMF, financial journalism etc somehow seems to be able to recall. Instead they have made a fetish of the fiscal side, and that is destined to neither address the root problem nor to bring civil peace….”

My “Reverse Euro” Model of June 1998, and my writings on a new money for Greece: letter to the Wolfson Economics Prize donors by Subroto Royon Thursday, 20 October 2011 at 18:51 ·
 

Hello,
In June 1998, I gave an invited lecture at the Institute of Economic Affairs on a “Reverse Euro” model for India, i.e., on how India could and should consider creating (under certain conditions) more than a dozen state-monies to coexist with a national currency too in the interests of a better fisc and some slight pretence to monetary integrity. In doing so, I also expressed my very grave foreboding about what the Euro was intended to be doing the following year in actual practice in Europe; I remember visiting a prominent British  Euro-optimist too and making my argument in contrast about the Euro’s arrival.

Subsequently, Milton Friedman and I corresponded too about my idea, and he found merit in it in describing an exit route for, he said, Italy for example, if that country needed such an exit route given its fiscal condition to depart from the Euro in due course. I also talked briefly about the subject at an invited lecture at the Reserve Bank of India in April 2000, as well as elsewhere.

Over the last two years, I have (and I think was the first to do so) suggested Greece needs a New Drachma, and how this should be gone about.  This has been outlined by me with many economists informally by email, as well as discussed at Facebook at some length.

I have little doubt what I am saying is broadly right — in the sense that it is the most consistent with the formal body of economic theory known as monetary economics.  I was taught monetary economics very well in the mid 1970s at the LSE by, for example, ACL Day, Alan Walters, Brian Griffiths, Marcus Miller (a student of JR Hicks) and others which came to be followed by my doctoral dissertation at Cambridge under Frank Hahn, and postdoctoral work in America with Jim Buchanan.  Plus Milton Friedman became a friend and stood for me as an expert witness in a US federal court (the only time he ever did that)!  My most recent work is a book edited with John Clark titled Margaret Thatcher’s Revolution: How it Happened and What it Meant published by Continuum in 2005 — that has an essay relevant to this subject commissioned by us and done by Patrick Minford of Cardiff.

So I do plan to write something for your prize but whatever I do write will not be worth the vast sum of money you are offering — in fact, I would say you need to break it up into little bits in due course and parcel it out to the most fruitful ideas.  The fox knows many things but the hedgehog knows one big thing… This is a fox problem, not a hedgehog one.  Perhaps you should commission a journal or a multi-essay volume or a set of volumes or monographs rather than hand out one big cheque to someone who will not deserve it. (And please say no more about the moneys the Bank of Sweden gives away every year in the name of the advancement of knowledge in economics…)  

The problem you have raised is a fundamental one and should have been raised decades ago, not merely by Eurosceptics in the occasional lecture or newspaper article but in many formal academic doctoral theses and journals all over Europe, long before the Euro came to be introduced — and note that the jump from the unification of Germany (with the 1:1 DM:Ostmark problem) was less than a decade before that.  That did not happen.  So now your belated initiative is most welcome, better late than never, better something than nothing.

Do let me know please what else I need to know to send in my theoretical thoughts on this.

Cordially

Suby Roy

From Facebook (February 21 2012)

My idea has been far better (because it is based on standard monetary economics which the ECB, IMF etc bureaucrats appear to have all forgotten or never learnt) …

[Devaluation refers to exchange-rates. There are no exchange-rates, that is precisely the problem; exchange-rates are prices, and as such market signals. By getting rid of them, market signals were lost. The point I am making in my notes is that there is still an *implicit* shadow exchange-rate if you like, so the Euro being used in Greece actually has a different local price in terms of real goods and services than the same Euro being used in Germany!]

Hans Suter: A Drachma at a discount of 40% would certainly push tourism by a 20% ? That would be a 3 to 4% jump of GDP.)

Subroto Roy: A New Drachma can be at 0.1 of a Euro, or less. But at least *local* trade and business will be revived and slowly national income will grow. The Greeks will feel free and self-confident and sovereign. Yes they cannot buy any more BMWs or tour Paris or Italy any more. But they can go and visit the Taj Mahal and the Pyramids perhaps. [And they can take 100 years to repay their Euro debts instead of 50 years…]

Subroto Roy hears “If the Baltics can, then why not Greece?”, and says the Baltics are the Baltics, God Bless them, Greece is Greece… I have no idea about the Baltics. The closest I got to them was an Estonian friend in Helsinki many years ago. In Greece what I am saying is that the money that is being used, the Euro, is no longer a natural money, and for that matter, it never was a natural money — money and banking evolve naturally out of trade and commerce, and to truck, barter and exchange are natural human propensities. Creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union. A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. The Euro has been an artificial money that eradicated the vital market signalling function that exchange-rates played (since exchange-rates are prices). A new inconvertible soft domestic money for Greece would allow domestic transactions to turnover properly once more and hence revive trade and national income. Greece could still be “in” the Eurozone nominally in the sense of having a fixed exchange-rate with the Euro which would be used for external trade. But there would have to be capital controls and import controls and foreign exchange rationing. At least for a while, probably a long while. Greece’s Euro debt would take 100 years instead of 50 years to repay. But at least the Greeks would feel free and sovereign and self-confident again, and adjust to their domestic economic realities in peace.

From Facebook May 14 2012
Diran Majarian
“The big issue here is how to deal with the debt overhang after the drachma transition since this must apply to both assets and liabilities.”

Subroto Roy The New Drachma has to be an inconvertible soft currency and Greece has to have import controls and capital export controls. Euro denominated assets held by domestic residents become Drachma-denominated (at a fixed, not a market-determined rate, e.g. 1:500 or 1:1000); Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.


May 14 2012
The famous Professor Wilhelm Buiter (Cambridge BA 1971, Yale PhD 1975) has said this? “The instant before Greece exits it (somehow) introduces a new currency (the New Drachma or ND, say). Assume for simplicity that at the moment of its introduction the exchange rate between the ND and the euro is 1 for 1. This currency then immediately depreciates sharply vis-à-vis the euro (by 40 percent seems a reasonable point estimate). All pre-existing financial instruments and contracts under Greek law are redenominated into ND at the 1 for 1 exchange rate. What this means is that, as soon as the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further funding to any and all entities, private or public, through instruments and contracts under Greek law. Holders of existing euro-denominated contracts under Greek law want to avoid their conversion into ND and the subsequent sharp depreciation of the ND. The Greek banking system would be destroyed even before Greece had left the euro area”…

Excuse me? This from the Chief Economist at Citi bank and “Professor of European Political Economy” at my alma mater, the London School of Economics and Political Science? What a load of rubbish Professor Buiter! Whom did you learn your monetary economics from? OK, ok, I should be polite: what makes you think a 1:1 exchange-rate should be fixed? Why not 1:500? Or 1:1000? The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. And why should Greece default on its Euro debt?! It might merely take a little longer to repay it. The change in currency is a conceptually distinct problem from that of credit-worthiness. Here is what I have said instead over two years, and for free:

Reintroducing the New Drachma would require

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls;
(c) deciding a new price for the Drachma, I would say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions. Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

A New Drachma?
From Facebook:
 April 29 2010:
Subroto Roy thinks a New Drachma is inevitable sooner or later but remains deeply puzzled at the possible ways it may get reintroduced. The examples of such monetary reforms are all long gone from memory, in the immediate aftermath of WWII. It seems clear the Euro will become an increasingly scarce currency not suitable for fulfilling the normal medium of exchange function in domestic Greek transactions and will become a rationed hard currency under capital controls for external transactions only. It may already be hard or impossible to restrain a capital flight, perhaps underway. How will the actual transition be made? Perhaps by allowing Greek government debt denominated in a new local money, call it the New Drachma, to become tradeable? I said in my *Reverse Euro* model for India lecture in June 1998 at London’s IEA that the Eurozone could end up looking less like America’s monetary union than India’s.
 
April 8 2010:
Subroto Roy, reading “It is hard to know how to interpret this large decline in deposits”, says “Not really. The Euro is becoming a *scarce hard currency* in Greece, i.e., it is becoming too expensive to use Euros to satisfy Greece’s transactions demand for money, the medium of exchange function, hence Greece has an increasing need for a new local currency which will satisfy that function while the Euro is retained for use in Greece’s international transactions”.
 
Subroto Roy thinks the only sustainable long-term solution may be the reintroduction of a New Drachma, which will need time to stabilize behind a period of foreign exchange controls and rationing. The DM/FFr-based Euro would become a hard currency relative to a New Drachma.
 
March 24 2010:
Subroto Roy expects the US, Britain, ANZ and everyone else in the IMF who is not in the Eurozone may legitimately ask why the effective subsidy of Greece by its Eurozone partners should be transferred to the rest of the world.
Subroto Roy thinks the Europeans have enough clout in the IMF to, say, insist some of their own IMF-directed resources be directed towards Greece specifically, which would spell the unravelling of the IMF if it became a general habit.
 
Subroto Roy says “I had a very productive few months in 1993 as a high-level consultant working for Hubert Neiss at the IMF (consultants are, or at least were, very rare at the IMF unlike at the World Bank etc) when I came to understand a little of how the place works (leaving aside all the theory). The French Managing Director is a politician and not an economist or even a central banker, and I am sure France and Germany can swing some IMF money towards Greece. But of course, the IMF can by definition give no *monetary* or exchange-rate advice to Greece because there is no sovereign monetary authority in Greece any more. Hence all it can do is add the same fiscal (and political) advice and conditions as the rest of the Eurozone countries have done plus make the piggy bank larger with some IMF money. It may work once, but if France and Germany then say, right, Portugal, Spain, Italy are next in line, that is the end of the IMF, because its European members may as well be asked to pull out altogether. On the other hand, my radical advice to the IMF might have been to propose to help Greece to reintroduce the drachma and re-establish a sovereign monetary authority of its own, which would take IMF advice and expertise as a New Drachma would take time to stabilize and there would be a period of capital controls on foreign exchange transactions.”
 
Subroto Roy gave a Jun ’98 lecture at London’s IEA on why India should have a  *Reverse-Euro* model: eg 16 major states have their own (domestic) monies with a national rupee coexisting too & free currency markets everywhere. I said I feared a Eurozone may end up *looking like India* rather than the US in this. India has papered over wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!
 
Subroto Roy says Europe could have been a confederation & an economic union for practical purposes without individual monetary sovereignties being lost. E.g., the drachma or peso or escudo or punt or lira could each have chosen to appropriately link to some combination of the DM, FFR, sterling etc. And a Europe-wide Euro from an ECB could have coexisted as well.
 
Subroto Roy  finds Mr Constanzo mention Gresham’s Law, and says, “Certainly there might have been currency competition in Europe, and some of the smaller currencies may have chosen to go to *that* Euro — but DM would not have done, and would have been an alternative to it.”
 
Subroto Roy  thought imposing a single newly invented money on different economies a bit like imposing a single newly invented language (like Esperanto) on different peoples.
 
Subroto Roy  says India has papered over the wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!
 
Subroto Roy  thinks the effective subsidy French farmers et al were getting from Germany in pre-Euro days all came to be subsumed within Euro-economics; an alternative would have been to *leave* DM as it was, & perhaps FFR too, & to have introduced a Euro for smaller economies to use (presumably to save transactions costs);*that* Euro could have been linked to the DM etc. The Germans would have been happy & the problems avoided.
 
Subroto Roy  says German unification hit the Germans badly enough and they seem hardly in any mood to keep on playing Sugar-Daddy to everyone else while still having to defer to the putative victors of WWII (France and Britain) for political leadership.