Kaushik Basu: The Government Should Be a Referee for the Marketplace
What is your view on the revival of Pigovian (of British economist Arthur Cecil Pigou) economic thought globally?
The Pigovian construct of intervening through taxes and subsidies is important but somewhat dated. I think we need more imaginative policymaking than going back to the old Pigovian constructs. Yes, there is of course a role in using taxes and subsidies to correct for externalities. But beyond that the important thing is for the government to play a more enabling role. The government’s first knee-jerk reaction must not be to stop people from doing what they are doing but to give individuals the latitude and freedom to innovate and perform trade and exchange. India is too big and complex a country for our government to be able to deliver all that its large citizenry needs — its food needs, employment needs and so on. To attempt this is to court failure. Instead government must conserve its limited resources to make surgical interventions and to be a referee for the marketplace that encourages the citizenry to provide for the needs of one another.
But wouldn’t Pigovian interventions be relevant in an economy trying to control emissions?
That is right but again this relates to the limited domain of externalities, where one person’s action adversely affects another’s well-being. This is an important area but we must not be obsessed with it. Pigou, I should warn you, became an obsessive hypochondriac in his old age.
Does India have enough resources to scale up quickly?
Scaling up is a two-way thing. If right now we want to step up to being a fully industrial and mega powerful country, then we don’t have the resources. But as India invests more and uses its resources well and develops, it becomes capable of investing even more and that enables it to grow even more.
I do believe, though, that we have more resources than we would think of at first sight. India’s saving and investment rates are remarkably high; on this score India now fully belongs to the East Asian club
of high investors. The investment rate went up by a stunning 10 percentage points between the year 2000 and 2007. This is quite unparalleled. It is true that China invests more than us — close to 50 percent — but we have one advantage that is internationally recognised. India is more efficient in converting investment into output than China.
What about poverty eradication?
With our high growth, we should not have the level of poverty that we do. So poverty eradication must be a priority of any good government. This government has fortunately been spending more money on anti-poverty measures than previous ones. It now needs to design its programmes better so that there are fewer leakages. This is, like exports, another area that needs imaginative government policy initiatives. We need to work out schemes whereby we can reach the target population with minimal loss due to leakages and pilferage, which are still too large.
Are these ideas being heard in the right political and bureaucratic circles?
A problem that all democratic systems have to contend with is that for politicians it is more important to be ‘seen’ to be doing things, than doing things. Also their horizon of policymaking is short, defined by the electoral cycle. Good economic policy often requires us to take a longer view, of say 10 years or even 20. You need statesmen-like politicians, and astute bureaucrats who will have such a long-term vision. Fortunately, India today has a handful of such people in government. This, to me, is reason for hope.
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