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May 4, 2011

Pareto

Should economists be worldly philosophers?

ROBERT SHILLER AND VIRGINIA SHILLER argue (Economists as Worldly Philosophers, 2011) that economists have lost their worldly philosophical ways. Economics was earlier an interdisciplinary subject but has become more specialised now. This has led to more enrichment of the field but it is unable to connect various dots, thereby missing big events like the 2007 crisis.

They point that both Adam Smith and Keynes drew their ideas from philosophy. Smith was a professor of moral philosophy and wrote ‘The Theory of Moral Sentiments’ (1759), which was a mixture of philosophy, psychology, and economics. That laid the foundation for his ‘Wealth of Nations’ in 1776.

Keynes wrote ‘The Economic Consequences of the Peace’ which dwelled on the outcome of Versailles peace conference after World War I. Keynes’ analysis anticipated the economic, social, and political events that lead to the tragedy of World War II. Shillers say tthat his was one of the most successful economic forecasting by an economist and above all showed an extremely broad, inductive, mode of inquiry.

The paper calls to promote balancing economics knowledge with findings in other fields, including history, psychology, and sociology.

How corruption eats into an economic and political system?

NGOZI OKONJO-IWEALA, former finance minister of Nigeria in a 2007 lecture (Corruption: Myths & Realities in a Developing-Country Context) speaks on role of developed economies in increasing corruption.

Corruption studies focus on economic corruption cases such as rent-seeking and procurement fraud. This is petty compared to political corruption which includes winning elections using private sector finance. This practice has been picked from developed economies where it is much more formalised but has become an illicit practice elsewhere. Thus developed economies have become sanctuaries for funds looted from developing countries.

She proposes developing economies to have an institutional and serious approach to tackling corruption. Developed countries, in turn, need to reform their political finance system and monitoring the stolen funds. She points to four cases of corruption in Nigeria. One particular case of a student forced to drop out of school as she was unable to purchase notes of the teacher outside the classroom, is a common tale.

India is embroiled into several corruption cases. It is amazing how corruption was ignored till high-profile scams came to light last year. Political campaign finance in India has been happening for long in highly innovative ways. In fact, both politicians and Wall Street executives can learn some lessons from Indian polity in this regard.

IMF programs usually relieve austerity rather than make it worse

IMF is severely criticized for imposing fiscal austerity in crisis-hit economies as witnessed during the South East Asian crisis and the recent European debt crisis.

KEN ROGOFF (Austerity and the IMF, 2010) turns the debate on its head. He says that IMF lending programs are wrongly accused of harshness and IMF actually imposes lesser stringent conditions than other lenders. Rogoff asserts that countries come to IMF only when all the other options have been exhausted. Given the situation, IMF lends on more favorable conditions than any other private sector lender. He highlights that IMF lends to these economies at rates just above those at which Germany and US can borrow money.

IMF has many issues upfront before lending – size of the loan, determining the right amount of deficit as official figures are questionable, and political capacity to absorb austerity. This leads to bad press coverage and none of it really is IMF’s fault.

He says the problem is not whether IMF is too stiff on debtors. But whether it is too kind to creditors leading to moral hazard: The idea should be to curb this favorable conditions to creditors. He says the creditors should be pushed into becoming equity investors rather than take debt of economies. This would alleviate the crisis situation.

How India’s financial markets have evolved and developed over the years?

K.P. KRISHNAN of Ministry of Finance tracks developments in various segments of India’s financial markets (Financial Development in Emerging Markets: The Indian Experience, 2011).

India does not rank very high in its overall score of financial development but is relatively well placed in terms of development of non-banking financial services and financial markets. Within financial markets, India fairs well in foreign exchange and derivatives markets. However, the country’s institutional environment is weak with low degree of contract enforcement.

The other insight is the contradictory developments in equity and debt markets with the former very well developed and the latter making very limited progress. Author says that this pace of reforms is because of government’s role. Wherever government is dominant, pace of reforms is the slowest! The debt market and banking sector have had a strong public sector presence, and here the pace of the reforms has been the slowest.

He says regulatory structures need to be streamlined to avoid regulatory inconsistencies, gaps, overlap, and arbitrage. Along with streamlining the regulatory framework, there is a need to review the actual financial regulations and move toward more principles-based regulation to promote financial innovation. Based on this, he says lessons from the crisis are not to restrict finance but let it move ahead and innovate.


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