World Bank CEO’s pat for demonetisation is a shot in the arm for Modi; it also exposes unreliability of economists

The pat by World Bank CEO Kristalina Georgieva for the “positive impact” of demonetisation is perhaps the biggest international endorsement that Narendra Modi could have hoped for in recent times. Moreover, her suggestion that other countries should study this move literally makes it a global best practice.

World Bank CEO Kristalina Georgieva. Reuters

World Bank CEO Kristalina Georgieva. Reuters

While many economists predicted India would slow down drastically because of demonetisation, Georgieva has said that it will grow at seven percent, a figure close to what Modi government claims.

Georgieva’s praise is clearly a shot in the arm for Modi and his government; but what it also highlights in the process is the absolute undependability of economists, or rather the macroeconomists who decide our vital economic policies.

Barely a month ago, the World Bank’s twin, the IMF, had a totally opposite view to that of Georgieva: that demonetisation had hit Indian growth hard and that it would slow down to 6.6 percent from its earlier projection of 7.6 percent. The IMF claimed that it would decelerate the growth even during the next fiscal year by about 0.4 percentage point.

It’s not just the IMF, but also many other international economists who had similar opinions. Nobel laureate Amartya Sen was rather harsh when he said that demonetisation was a gigantic mistake, a despotic decision, and Modi’s “Napoleon moment”. Former prime minister and an ex-IMF economist Manmohan Singh called it a “mammoth tragedy” and predicted that the economy would slow down by at least two percentage points, twice as much as the IMF had predicted. Another World Bank veteran, Kaushik Basu said it would fail. The Marxist government in Kerala said that demonetisation affected 56 percent of its economy.

On the other hand, there were a host of experts such as Jagdish Bhagwati, Arvind Panagariya, Arvind Virmani and Bibek Debroy, who studied and practised the same discipline of economics in similar national and international organisations, with a diametrically opposite view. According to them, it was a bold step and would only have a positive impact. They even questioned the facts and assumptions that the other camp relied on. The star professor-economist from Harvard, Gita Gopinath appeared unclear how it would pan out.

Even while factoring in the competing schools of thought, the politics, the changing variables and the inherent unpredictability of the subject, this division is disconcerting because ultimately our economic policies — both national and provincial — are formulated by economists. If the famed practitioners of a discipline that claims a fair amount of scientific rigour are way off the mark — notwithstanding what they predict — do we even need them to play with our policies, or rather our lives?

From the divided opinions, predictions and emerging data, all of their scientific premises look speculative - a bizarre equal probability game deciding the most vital aspect of our public policy. What Cambridge economist and popular author Ha-Joon Chang said a few years ago that “economics, as it has been practised in the last three decades, has been positively harmful for most people" appears prophetic.

It’s time that we took the modelling, calculations, predictions and opinions of the economists with a pinch of salt. Probably this is why the great American mathematician Norbert Wiener called economics “a one or two digit science.” According to him, one shouldn’t take the mathematical formulae they use seriously. “Just as primitive peoples adopt the Western modes of denationalised clothing and of parliamentarism out of a vague feeling that these magic rites and vestments will at once put them abreast of modern culture and technique, so the economists have developed the habit of dressing up their rather imprecise ideas in the language of the infinitesimal calculus.”

What bothers one is the absolute authority with which one makes assertions, that too involving precise numbers. Stating the limitations upfront is an ethical prerequisite for any research, and statistical and methodological artifacts are unavoidable features of scientific studies; but none of these economists care even to nuance their predictions. It’s strange that they jump into conclusions when the fact of the matter is that their science is extremely unreliable for many reasons such as the inability in undertaking controlled studies, bad data, excessive faith on a certain political philosophy and unpredictable behaviour of people. That’s why post-demonetisation, we get Manmohan Singh speculating a two percentage point reduction in growth and the World Bank predicting a positive impact.

And this chasm will make politicians smirk, exactly the way Modi did early this week when he made fun of “intellectuals from Harvard and Oxford” buoyed by the strong growth figures that maintained India as the world’s fastest growing economy. This fuzziness helps people like him manipulate our biases.

The real calamity in the process is the truth. In the end, who was right? The doomsayers or the Pollyanna? Or the uninformed vassals? Will we ever know? Are these growth figures for real and the science behind them sound? If it’s indeed a game of chances, as it turns out to be now, should we really trust these hallowed economists?

As Ha-Joon Chang wrote in his best seller "23 Things They Don’t Tell You About Capitalism", “Good economists are not required to run good economic policies. The economic bureaucrats that have been most successful are usually not economists. During their ‘miracle’ years, economic policies in Japan and (to a lesser extent) Korea were run by lawyers. In Taiwan and China, economic policies have been run by engineers…In the old industrial countries such as Germany and France too, it’s the quality of engineers and designers, not economists.”

Published Date: Mar 03, 2017 02:14 pm | Updated Date: Mar 03, 2017 02:16 pm