Parikshit Ghosh (Associate Professor of Economics, Delhi School of Economics) speaks with Kaushik Basu (Chief Economist and Senior Vice President, World Bank and former Chief Economic Adviser, Government of India) on issues ranging from the change in World Bank’s mission and its engagement with the world, rising inequality in the developed world, managing the negative side effects of growth, to the role of behavioural economics and paternalism in development, and the exclusionary nature of the ongoing digital revolution.
Parikshit Ghosh (PG): When the World Bank was founded, it was out of a sense of international economic cooperation and perhaps there was a feeling that the development of poor countries coincided with the interest of richer countries. But of late, there has been a lot of heartburn about things like outsourcing, immigration, and equity issues surrounding climate change talks. Do you see a rift developing between the North and South? And if that is so, what does it imply for the World Bank’s mission and how does the Bank plan to handle it?
Kaushik Basu (KB): I don’t see a new rift developing between industrialised countries and emerging economies. There have always been some lines of tension between the two, which shift occasionally from one area to another. We are today much more sensitive to the climate consequences of what we do and therefore some of the tension is around climate change issues. Historically, tensions have developed over World Trade Organization (WTO) negotiations or when the International Labour Organization (ILO) tried to bring in core labour standards common to the world. I myself had written how one labour standard for the world means very little. If you set this at a level reasonable for developing economies, it would be meaningless for high-income countries; and if you set it at a level where it has some bite for high-income countries, it would destroy the labour market in most developing countries.
What is interesting is that the World Bank’s engagement with the world has undergone a change compared with the time of its founding just after World War II. And in recent times the arrival of the new banks - Asian Infrastructure Investment Bank (AIIB), Brazil Russia India China and South Africa (BRICS) Bank or the New Development Bank – is causing some shift in the nature of the World Bank’s mission.
PG: How exactly is the Bank’s mission changing?
KB: One very interesting change is a return to reconstruction work. This was the World Bank’s original mission after the devastation of World War II, though ending poverty became the goal subsequently and still is. What has happened over the last few years is that once again there is
There has been another broad change in the World Bank’s engagement with the world after I joined the Bank and was asked to help set up a few mission goals. In addition to fighting absolute poverty, we decided to add another goal, which we call promoting shared prosperity. Basically, it is attending to inequality, by focusing on the growth rate of the bottom 40% vis-à-vis the rest. The World Bank is very comfortable with this now, but when I started this discussion at the end of 2012, there was a lot of resistance, with some arguing that this entailed being nosy about rich countries as well. Scandinavian and Nordic countries were happy but there were others who were not so happy. We did not have the data capacity and had to get Organisation for Economic Cooperation and Development (OECD) to help us. As an international organisation, focusing on inequality was very new.
PG: There is a dramatic increase in inequality in the developed world; we are back to the pre-Depression era. This is getting a lot of publicity and people are invoking various factors including trade, technology, globalisation,
KB: Technology - and two particular kinds of technological change. One is just technological innovation whereby you can do with less labour. Number
If you look at the last 30 years, the wage bill in rich countries is becoming a smaller share of the gross domestic product (GDP) at a rate that is quite remarkable. You cannot continue at this rate without groups of workers being decimated. Robot sales last year were a record number, and then there is
People are also earning a larger and larger share of their income from bits and pieces of paper they own - a patent that you have, a share that you hold. I think all this is feeding into increasing inequality. To me, this is no individual’s fault, but it will be our fault if we do not respond to this global trend. There is a need for
PG: One aspect of inequality is inclusive growth — how to make growth accessible to the bottom 40% or 20%. But it seems, in India, there are some negative side effects of growth. Examples include the land acquisition problem or air pollution - which is now becoming a political issue. The Left is often critical of the development model that institutions like the World Bank or IMF have been pursuing. How do we manage growth without these negative side effects?
KB: I think the nature of growth has to change. If we continue in the same way, we are going down a path which is not good for all of us. But you cannot hold back developing countries, which are still abysmally poor. What we need is to think of growth differently. We typically think of growth as more of everything. But growth can involve breakthroughs in medical research. Instead of eating more food and building fancier houses, if we can make dramatic improvements in our health, the value of that can be huge. This will be growth which is not damaging to the environment but leads to better lives. There too you can get some new challenges. If you get a medical breakthrough, which is so expensive that only a thousand people can get it, it will increase inequality. The basic point is if we are to survive climate change and other challenges, you do not want to slow down growth but change the nature of what it is that we are consuming and what constitutes a better life.
PG: The latest World Development Report puts a lot of emphasis on behavioural biases. In the 50s, the main bottleneck for development was thought to be resources and investment, and the Bank’s role as a funding agency was cut out. Then came the idea that institutional and market failures are very important. Now you are emphasising these behavioural biases. Maybe people do not have the right goals and values; maybe some moral suasion has to take place. What is the Bank’s role here? How can it help?
KB: This, I feel rather good about. This is the first World Development Report that was commissioned under my charge and I chose this topic, and we decided to call it ‘
This is an extremely important topic and I had written about it earlier from a theoretical perspective. Some standard axioms of economics are satisfied by rats, but rats do not trade and exchange because they do not have some common underlying values and customs that are needed. In
When the private sector tries to sell a product, it is not just about making the product as nice and cheap as possible. Where it is placed in the shop window, next to what product with what price tag - those things play on human psychology. The private sector uses this knowledge of the human
Our latest World Development Report called Digital Dividends, which we launched in January, is also one I am very proud of. Its main premise is that while the internet, mobile phones and other digital technologies are spreading rapidly throughout the developing world, the anticipated digital dividends of higher growth, more jobs, and better public services have fallen short of expectations; and nearly half the world’s adult population remains excluded from the ever-expanding digital economy.
The digital revolution is transforming the world, aiding information flows, and facilitating the rise of developing nations. This is wonderful news and we must embrace this revolution with open arms. But while these achievements are to be celebrated, this is also
PG: For the World Bank, providing funds is straightforward. But now you are talking
KB: Indeed, one criticism that we got
There are two different kinds of paternalism. One is where I insist
PG: I recently read your new proof of the Pythagoras theorem. So after dabbling in the messy real
KB: It was
The second and final part of the interview focuses on India-specific issues ranging from the use of economic knowledge in policy decisions,