A new economics for a new world

ARTICLE HIGHLIGHTS

• The Indian government is grappling with economic challenges like inflation, interest rates, exchange rates etc

INSIGHTS ON THE ISSUE

Context

Economic challenges for India:

• Management of inflation, interest rates, and exchange rates, for which the Reserve Bank of India is expected to find a solution.
• Negotiating bilateral and multilateral trade agreements that protect the interests of India’s farmers and workers, for which coordination is required amongst the Ministries of Commerce, Industry, and Agriculture.
• Secure employment with adequate incomes, which involves all Ministries and all State governments.
  • It is linked with the other two: it has become a principal cause of social tensions and political conflicts in the country.

Why Economists don’t have a systemic solution for this “poly-crisis”?

• Consensus among them has broken down even about solutions to its separate parts.
• They are divided on whether central bankers should operate independently of governments
• whether inflation should take precedence over employment
• whether imports should be made less costly for consumers
• Protection of workers’ incomes should take precedence to increase their purchasing power
• who is hurt by the depreciation of the rupee.

Chinese model:

• China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster.
• China became an industry and technology powerhouse, which the United States is being threatened by.

Success of China followed by Vietnam:

• Vietnam is proving to be more attractive than India to western and Japanese investors.
• Western neo-liberal economists have attributed China’s remarkable economic growth to its adoption of free trade policies,
• Vietnam: They rediscovered what was learned from China.
• Before both countries opened to foreign investors(China before Vietnam): They had already attained high levels of human development, with universal education and good public health systems.

Case of India:

• Jagdish Bhagwati(Trade-and-growth economists): They were dismissive of economists like Amartya Sen who advocated the human development theory of growth.
• Jagdish Bhagwati said: The size of the economic pie must be increased before it can be redistributed.

What should have been done?

• Basic human development must precede growth because it is the means for growth.
• Incomes must be increased simultaneously to enable more consumption and attract more investments.

The problem with the current paradigm

• It is too linear, too mathematical, too mechanical.
• Economists have separated themselves from other disciplines into their own self-referential silo.
  • They should examine the emerging science of complex self-adaptive systems.
  • It provides a way for economists and policymakers to comprehend complex socio-economic systems.

Tinbergen’s theory:

• It states that the number of policy instruments must equal the number of policy goals.
• In complex organic systems: which all natural and socio-economic systems are root causes contribute to many outcomes.
• Outcomes circle back to feed the roots too.
• The behavior of the system cannot be explained by linear causes and effects.
  • The causes interact with each other, and effects also become causes.

What does it justify:

• The necessity of independent monetary institutions for managing inflation
• Separate trade and industry specialists
• Separate policies for environment management and agriculture.

Way Forward

• Since wages in China have become much higher, India seems well-placed to attract global investors.
  • To attract investors, India must compete with other countries.
• India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time.
• Trade and monetary policies that fit the United States, China, Vietnam, or India will not fit the needs of others.
  • Their needs have emerged from their own histories.
• Global solutions and economic theories invented in the West have caused problems, for which new solutions are essential.
• The inadequacy of the current paradigm was revealed by several crises in this millennium:
  • 2008 global financial crisis
  • inequitable management of the global COVID-19 pandemic
  • looming global climate crisis (in which, clearly, one solution cannot fit all).
• ‘Vasudhaiva Kutumbakam’ (One Earth, One Family, One Future) is the theme of the G-20, which India is leading this year.
  • A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West.
  • India’s economists must step forward and not just follow these developments. They must lead them too.

QUESTION FOR PRACTICE

Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021) (200 WORDS, 10 MARKS)

Source: The Hindu

• Prelims: Indian Economy(GDP, BOP, GVA, Economic reforms etc
• Mains GS Paper III: Indian economy and issues related to planning, mobilization of resources, Effect of liberalization on the economy etc