Vijay Kelkar

Financial Express recently did a special feature about 20 interesting people in India’s economic reforms. In that, I wrote this profile of Vijay Kelkar.

Vijay Kelkar’s is a fascinating story in Indian public policy. He started out as an economics Ph.D. and turned himself into a consummate policymaker. While he did many interesting things in the field of oil and gas, and as executive director of the IMF, I worked with him in his fiscal phase.

This involved carrying forward the tax reform agenda of the 1990s, translating the intent of the FRBM Act into a concrete workplan,
leading the transformation of income tax administration through innovative institutional arrangements in the form of the Tax
Information Network (where the implementation was contracted out to NSDL), analysing and championing the Goods and Services Tax (GST) and leading the 13th Finance Commission.

For most people, the idea of the fiscal reform is exhausting. Fiscal systems have many moving parts, and suffer from the political economy problem of entrenched beneficiaries. I used to get astonished at the way Kelkar, who is 20 years older than me, consistently found the energy and morale to go back into the fray again and again, chipping away at solving long-standing problems. This also taught me that while weary cynicism is a more fashionable pose, progress is only achieved through the dint of boundless optimism.

Practical people are often dismissive of the world of ideas, but that is not the Kelkar that I have known. For one thing, he made a point of reading the current global research in economics on an astonishing scale. I have been frequently humbled in finding that his knowledge of the current literature was better than mine. I suspect his years at the IMF were very useful in tooling him up in modern open economy macroeconomics, which is often a gap in the knowledge of those who experienced a closed India in their formative years. Kelkar has always encouraged me, saying that in an open society, ideas matter, so it was important to build good ideas, and to push important messages out in the public domain, even when this makes many people uncomfortable.

After decades of engagement, Kelkar is no longer active in the public policy work of the New Delhi community. However, he has begun a stint as chairman of the National Stock Exchange (NSE). Given the immense importance of the equity market in the Indian economy, and the immense complexity of ownership and governance of stock exchanges, it is indeed valuable that a person of his wisdom is performing this public service.

Interesting readings

The Anna Hazare silliness is depressing. Writing in the Indian Express, Shekhar Gupta has an interesting angle on why there is so much interest in this snake oil.

India’s $2 trillion economy means we have to reform faster by R. Jagannathan on FirstPost.

Meera Subramanian has a beautiful story about how Diclofenac, fed to cows, is killing off India’s vultures. We’re down from 50M vultures to 60k. The consequences are bigger than we think.

Former Sebi member Abraham?s claims under CVC lens by Appu Esthose Suresh in Mint.

China’s port in Pakistan?, by Robert D. Kaplan, in Foreign Policy.

The 10 most corrupt Indian politicians.

A promising band: Menwhopause. Listen.

The decline of Asian marriage, in the Economist.

Vinayak Chatterjee on ten projects that matter in India today.

The new draft Microfinance Bill. Back story.

Nirvikar Singh in the Financial Express on the CCI order about NSE.

Think again: War by Joshua S. Goldstein in Foreign Policy.

Hegemony with Chinese characteristics by Aaron L. Friedberg, in the National Interest. Arab Spring, Chinese Winter by James Fallows, in the Atlantic. The South China Sea is the future of conflict by Robert D. Kaplan, in Foreign Policy.

The problems of dogs in Iran.

How should the history of the industrial revolution influence economic reforms?

While recently reading Deirdre McCloskey’s ‘Bourgeois Dignity’, Joel Mokyr’s ‘The Enlightened Economy’ and Eric Jones, ‘Locating the Industrial Revolution’ (discussed previously here, here and here) I was pleased to find that these authors have been able to make a strong case that the industrial revolution can be best explained by modern economic growth theory that emphasizes the importance of technological progress, innovation and productivity improvement. It is reassuring that this conceptual framework fits the facts relating to the history of the last few hundred years as well as comparative growth experiences of different countries in more recent times.

In their explanations, however, McCloskey and Mokyr move substantially away from the view that because ‘incentives matter’ the best explanation for everything must be found in changes in economic incentives. This does not necessarily involve moving away from a utility maximization framework. There is no reason why such a framework cannot recognize that inventors may be strongly influenced by the pleasure of discovery and recognition by their peers; innovators may obtain pleasure from seeing scientific knowledge being put to good use; and everyone may gain some satisfaction from acting in accordance with their own perceptions of their identity, whether that involves behaving like a scientist, a gentleman, a tycoon or a mendicant.
In explaining the industrial revolution Mokyr and McCloskey and Mokyr emphasize the importance of beliefs and ideologies – in particular those associated with the Enlightenment. Three inter-related strands of beliefs and ideologies connected to the Enlightenment seem to be particularly relevant:
First, Mokyr argues that the influence of the Baconian program – with its emphasis on research to solve practical problems – extended beyond formal scientific research. He makes a strong case that the ‘legitimization of systematic experiment carried over to the realm of technology’, including through the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues.
Second, as emphasized by McCloskey, there was a bourgeois revaluation – a change in attitudes toward the middle classes, markets and innovation. Mokyr links this to norms relating to politeness and gentlemanly behaviour, and an apparent improvement in social trust which reduced transactions costs.
Third, there is the ideological change stemming directly from the success of the Scottish Enlightenment and, in particular, from publication of ‘Wealth of Nations’ by Adam Smith. As Mokyr writes:
‘The Enlightenment in its different manifestations advocated a set of new institutions that cleared up centuries of mercantilist policies, regulations and social controls, whose objective had been primarily to redistribute resources to politically connected groups and to enhance the interests of the Crown (the best connected group of all). The mercantilist world was unsuitable to a brave new world of continued technological progress driven by free markets, innovative entrepreneurship, and an internationally collaborative effort to advance technology’ (p. 486).
In reviewing Eric Jones book I asked myself whether the industrial revolution could be attributed to economic freedom and suggested that his book had reinforced my view that it could be (even though Jones does not argue strongly in favour of that view). My subsequent reading has not led me to change that view but it suggests that economists interested in economic growth should give more attention to beliefs and ideologies that lie behind the formal rules of the game and their incentive structures.
In writing this I am reminded of comments made by Douglass North in his Nobel Prize lecture in 1993:
‘It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide “legitimacy” to a set of rules, revolutionary change is never as revolutionary as its supporters desire and performance will be different than anticipated. And economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement. The implication is that transferring the formal political and economic rules of successful western market economies to Third World and eastern European economies is not a sufficient condition for good economic performance. Privatization is not a panacea for solving poor economic performance’.
The fact that privatization by itself is no panacea does not stop me from arguing in favour of it, but I take the point that economic freedom cannot be sustained unless prevailing beliefs, ideologies and norms are supportive.

Lessons from Chile

Hernan Buchi, former minister of finance in Chile, recently published a new book called “The Economic Transformation of Chile” (link) where he outlined comprehensive economic reforms that boosted economic growth, lowered unemployment, reduced poverty and set the stage for more than two decades of robust growth and an economic turnaround which has been unprecedented in Latin America.

The books serves the reader with a menu of intriguing facts, curious statistics and precise analysis of how macroeconomic stability was achieved. Chile has been the leading nation in Latin America with the most stable and predictable inflation rate. Country’s decent fiscal management and solid macroeconomic outlook were important cornerstones behind the invitation to the OECD.

According to Jose Pinera (link), Chile is expected to enter the club of developed nations in 2018, the first Latin American country ever. Chile pioneered the privatization of the pension system in early 1980s. Today, country’s fully-funded pension system based on individual savings accounts is a model for the rest of the world (link) in overhauling unfunded pay-as-you-go social security systems.