Text-Book Vs Real Economics

Proponents of privatisation feel that once the State gets out of enterprise, the overall efficiency of the economy will go up. Since PSUs run inefficiently, private ownership should bring enhanced value. This may not always be true. On looking around, one is not enthused by an overall high degree of efficiency, as claimed, in the private sector. A glance at the list of sick industries will reveal many tigers of yesterday in the private sector declining to pale shadows of themselves. Internal squabbles, poor decision-making over centralisation of authority etc are the defining characters of many private sector companies. The flow of red ink in the private sector is, in part, mirrored by the non-performing assets in public sector banks. National Textile Corporation, a consequence of private enterprise, is no less a problem than the public sector. The woes of PSUs are more transparent and come to surface only because the government funds them. Let us not forget, however, that the public sector itself funds private losses too, albeit indirectly through bank loans which are not repaid. To characterise the entire public sector as inefficient and claim that privatisation will add to social wealth may not be based on facts.

 

This is so particularly in the case of the financial sector. Protagonists for privatisation of the insurance sector forget how the government was forced to nationalise life and general insurance because of pronounced abuse of insurance funds by their erstwhile owners. Public memory is short. In the rash of problems which we face due to the lethargy of some public sector institutions, we should not swing to the other extreme and condemn all public sector institutions in the financial sector.

We need a blend of both, with better regulation and supervision, if the financial sector is to contribute to societys welfare. Earlier experiences do not bring out the private financial sector in the best of colours. Nor does the present orgy of some unregulated companies in the financial sector which follow the practice of running away with the depositors money.

In a seminal paper in the World Banks conference on development economies (1993), Joseph Stiglitz, a member of the US Council of Economic Advisers, pointed out how stories of the demise of the State in the financial sector are exaggerated. The State has to play and does play an important role in the financial sector in most economies. Market failures are most likely in the financial sector. He also points out how in the US economy, 25 per cent of all loans in the 1980s were either direct government loans or guaranteed by the government like students loans, housing and small industries. Debacles did not occur in these areas. Rather, they happened in the savings and loans fraternity managed by the private sector.

Stiglitzs comments are particularly significant to observers of the Indian scene. That financial repression can be debilitating is what we have been taught by Ronald Mckinnon and others, who emphasise the need to reduce the pre-emption of bank resources by the government.

According to Mckinnon, this leads to credit being scarce for business. However, Stiglitz surprises us by saying that there are circumstances in which a little bit of financial repression may not be all that bad. Indeed, he believes that imperfect as financial markets are, repression may be a more optimal solution than total competition and reliance on the market. Indeed, the sequence of actions by which we move governments debt wholly to the market may also be wrong. If the process is too hasty, then before fiscal deficit becomes manageable, high interest rates will lead to a vicious cycle.

More pertinent are the observations of Stiglitz on the question of directed credit. Disenchanted as we have been by the extent of loan melas and abuse of priority sector financing, some of us felt and rightly so that directed credit was being abused. While Stiglitz admits that there is scope of such malpractice, he points out that directed credit is what the East Asian countries used to develop their exports and technology. Indeed, he gives high marks to countries like Korea, which had focussed credit specifically on exports. Stiglitzs voice in favour of higher allocation of credit for exports deserves to be heard, particularly in India where the fashion is to throw exporters to the wolves. As Stiglitz says, domestic business is what banks love to deal with. But, exports are where the social benefits are higher.

Paul Krugman demolishes some of the well-known shibboleths about growth and inflation. In a recent article on monetary policy in The Economist, he questions current orthodoxies about both stable prices and growth. He does not believe that stable prices alone are the best goal for central bankers. Nor does he have much respect either for those who place growth above price stability. He spares no group of practitioners in his scorching criticism.

In particular, he pours ridicule on central bankers like those of Canada and France whose pursuit of stable prices is costing their nations hundreds of thousands of jobs. The benefits of price stability are, in his view, elusive, the costs of getting these are large and zero inflation may not be good in the long run. He is in favour of living with 3 to 4 per cent inflation and adjusting growth targets if inflation is worse than expected.

Where does all this cornucopia of counsel leave us? It serves us right if we seek counsel from the prophets of a profession who specialise in divergent opinions. Or perhaps, as Emerson said in another context, if you are not confused, you do not know anything. At least, this seems true of the practice of economic policy. For those in the hot seats of power, it is no consolation to be told to contract the economy to pursue the goal of low prices and then to be chastised that growth is more essential.

Politicians have all along known this. It is not for nothing that Montagu Norman, the longest serving governor of the Bank of England, had told his economic adviser: You are not here to tell me what to do. You are here to tell me why I have done what I have already decided to do.