Karthik Muralidharan, Associate Professor of Economics, University of California, San Diego speaks with Kaushik Basu, Chief Economist and Senior Vice President, World Bank and former Chief Economic Adviser, Government of India, on the World Bank’s global development agenda; inequality and the design of anti-poverty policies; contribution of recent academic research to development policy; research evidence, political economy and policymaking; State capacity for implementation; and law and economics.
Introduction and the global development agenda of the World Bank
Karthik Muralidharan (KM): It is my pleasure to welcome Kaushik Basu to the ‘Ideas for India Conversation Series’. This is the second of these and we hope to use this platform to have deep, engaged discussions. In a world of sound bite journalism and ‘gotcha’, big-fight TV studio dynamics, there is really a missing market for deep, engaged discussion of ideas. I am particularly delighted to have Prof. Basu here given his academic and policy credentials - having been on both sides of the divide.
So Kaushik, let’s get started with a big picture question: the Chief Economist of the World Bank is probably the most prominent position from which to set a global agenda for both research and practice in growth and development. What would you characterise as your main intellectual and policy thrusts since you have taken over in the last 15 months?
Kaushik Basu (KB): Before getting to that, let me thank ‘Ideas for India’ for doing this. As you said, we get a lot of economic discussion which is little sound bites for the next morning’s interest but you miss out on some of the larger questions which need to be debated. The long-run benefits, or even the downside of doing these things wrong, can be huge. So having a forum where you allow for questions which may not quite be of interest for the next morning’s headlines but of interest to the subject, is very welcome.
With that, let me go to your first question. I feel blessed having this forum of being the Chief Economist of the World Bank because it gives you an opportunity for engagement with the policy end of development economics in quite an amazing way. The reach in terms of global engagement is large. For me especially, this was a great opportunity because I have done my life in research and teaching. Before this, of course, I had my India experience which was a hands-on experience, and then this. There are ideas – lots of important ideas - to be brought to the table.
First of all, I must point out something which is to do with the profession of economics itself, which is heartening and which makes a segue into development economics that I am able to steer a little, using my position at the World Bank. One important change in the economics profession is that some of the extreme thinking that was ideologically rooted without having enough grounds has become very weak. If you look at the good economists – the top end of it – 90-95% would be broadly sharing a lot of common ideas, which was never the case earlier. The extreme right and left fringes have somehow fallen off and that is very important because there are two important recognitions which have come – first, leaving it all to the free market - just letting it run free for itself - doesn’t work and even if it does, it can lead to such gross inequalities that it is going to put ordinary life in peril; political stability is going to go. On the other hand, the belief on the other side that you can bring in the State and the State takes over and does it all has also gone out because you realise that the market, individual enterprise, creativity - these things are very powerful forces. So this coming together of these views with the edges becoming unimportant is very important for the profession itself. When I joined World Bank, I was very keen to have development economics reflect this. Some of this was happening on its own – I don’t want to exaggerate what I have been doing – but it is important to bring this to the table.
There are a couple of other directions in which I wanted to give a gentle push. The World Bank has for long been engaged in poverty and poverty eradication policies. But to go beyond that to say that it is not just poverty eradication but something in terms of sharing the pie that is important. We took it upon ourselves and these were written down as the two goals of the World Bank – formally brought in last year in April. We must strive to bring down poverty in the world especially when you define it as $1.25 a day, which is a shockingly low poverty line but what is even more shocking is that with that shockingly low poverty line, 1 billion people happen to be below it. So we have to fight for that. Secondly, we have to fight for shared prosperity and by that we mean that for every society, there ought to be special attention paid to the bottom 40% and how that is doing - 40% is a bit of an arbitrary number but the point is that you have to pay attention to the sharing of the pie. Subsequently, the World Bank declared this as one of its two major goals, giving it a lot of salience. This has come into play, there have been statements by other economists - Piketty
One more important move that I think I can say that I played a role – I worked with the World Bank President early on when I came in, to say that economic development depends a lot on getting your fiscal policy right, monetary policy right, taxation right, but it is also rooted in human psychology, sociology, culture and norms. In the economics profession there is a bit of resistance to this because it is sort of giving ground to the neighbouring disciplines. But very early, we pushed for this and we have got a World Development Report (WDR) which has just come out on the behavioural and social foundations of development and it is doing extremely well. It is very well written and uses a lot of methods which you are familiar with. So it is a very powerful entry into mainstream development economics. I was at an event in New York City with very prominent policymakers – the Report is being received very well over there. It is heartening to see this because economics is a big profession – you can’t push and nudge and change it in a huge way but small bits of tilting, moving is possible and I think it is being done very nicely.
Inequality and the design of anti-poverty policies
KM: Fantastic. Probably the biggest pivot in the policy space in India in the past decade was the pivot towards rights-based legislation
KB: The economists have lost the battle - if you want to put it that way – or rather the policymakers have lost the battle because the political economy of this was not appreciated enough. I think the economists were pretty much on the same side apart from some marginal differences on how you would do it, the need for better design. But the political economy was a problem.
Let me step back and point to one thing - since you brought up the rights question - my own view on rights is that certain rights are extremely important and ought to be enshrined as rights. But with rights comes a responsibility and obligation that what you are enshrining as a right, you must be able to deliver on those. To write things down as rights and not deliver is to do
It is true that not enough is being done and we need to work on this. This is one area where, in fact, the economics profession has a lot to offer because we have had experiments from around the world - Brazil, Mexico, Indonesia have tried various things. There have been experiments in India. Then there is
KM: My own take on what is happening in economics as a profession, talking to people in other disciplines, is that our fundamental weakness at some level is that because the touchstone of policy evaluation is the idea of a Pareto improvement (is someone better off and no one worse off) - effectively, economists do not question the justice of the initial positions. You kind of take the initial position as granted and say that conditional on this, how do I improve things on the margin. Given vast inequalities in the opening deal of cards, so to speak, there is obviously a deep political need to create the space for more pro-poor policy. I think because the professional economists have abdicated that space to
Having worked on PDS reforms for some time, I think what is really unfortunate is that beyond a point the reason the reform is difficult is not
KB: Some agreements and disagreements. I fully agree with the first line that you took - treating the status quo as
One area where I may have a small disagreement with you is about vested interests as a block for why these changes cannot take place. Soon after I joined the Indian government in 2009, some journalists would ask me: what is the most important thing you have learnt, moving from pure academia to the world of policymaking. One of the things I became convinced of was what Keynes had talked about - vested interests are important but even more important are ideas that are ossified in the head. I do feel that if you have got so much leakage in the PDS and other benefits, there are vested interests but the bigger restriction or hurdle is the block in the human mind. People who have run a particular programme for the last 20 years may not have a direct vested interest in it but they have a vested interest in that idea. Battling that is very difficult. So you sit in a meeting with a group of policymakers – I don’t doubt their honesty, they don’t have friends that are benefitting from this – but they are totally committed that this is the only way to do it. And you are an outsider bringing in a new idea. Yes, vested interests are important but the ossified ideas also play a role. That brings me to a quick tribute to a forum like this – we have to engage people in deeper discussions, where ossified ideas begin to break a little bit and you begin to think afresh.
KM: That’s exactly where I think the evidence then comes in. One executive summary of Jean Tirole’s work leading up to his Noble
KB: Daniel Kahneman – the guru of behavioural economics - was at the New York meeting that I was referring to earlier. People were shooting questions to him about every possible problem in life. Most of the time, his answer was ‘I don’t know’; there are little things where I have an understanding, where I have something to say – on others, it depends on x, y etc. and I don’t have a full answer. I feel that the admission of ignorance is a sign of his deep thought, rather than not knowing.
KM: I have seen this in my own work on education policy. For example, when you write an academic paper, it is exactly about being honest about your confidence intervals. But then because the economists are, in some sense, not taking the step towards policy, that abdication is
Coming back to vested interests, an example is what we have seen in our work on biometric smartcards in Andhra Pradesh. It is quite subtle. Here is a programme that is reducing leakage by say 35% so people are losing out. But what we were seeing in our work with the government of Andhra Pradesh was that the stories that would trickle to the top were not the stories of the benefits but the stories of the few times the authentication did not work, stories about how beneficiaries were being hurt. So vested interests are not going to come and say that kill this programme because I am not making money, they are going to hide behind the genuine beneficiaries and then try to derail the programme. We had data from our experiment with 20 million people that showed that 90% of the people unambiguously preferred this and so it was a great illustration of a case of concentrated costs and diffused benefits and how the vested interests show up. You can also see this in the context of the LPG subsidies. The LPG subsidies were rolled back. There is a very nice paper by Prabhat Barnwal, a
Contributions of recent academic research to development policy
KM: So coming back to some of the thrusts and things you have done in your own role at the World Bank - how much of this has been influenced by your own research, and by your experience as Chief Economic Adviser (CEA) to the Government of India, and how much has recent academic research contributed to some of the priorities you are setting at the World Bank? Please give specific examples.
KB: All of these have of course played a role – my own research, research interests, beliefs have played a role. The CEA experience was vital. I am going to give you some examples - even areas where I don’t do research, which
A prominent example is Esther Duflo and Raghab Chattopadhyay’s work on choosing women leaders for local panchayats. Before their RCT there was no way of telling whether it is a more progressive panchayat that chooses women leaders, or the women leaders lead to more progressive policies. But it was a piece of luck that India had effectively applied a randomised trial – they picked it up and gave us great insights into this. There is famous work by Michael Kremer and Edward Miguel on deworming and its role; your own work on
There is another thing where in fact RCTs won’t work but which is very important – this was a learning I got while being CEA at the Government of India. All these micro interventions tend to have macroeconomic implications – you run 1,000 programmes in 1,000 villages, you do trials over there, you will know what it is doing in these 1,000 villages. But running a programme can have fiscal and monetary policy implications – a village that is thousands of miles away and has nothing to do with the villages where the intervention took place, gets a fall-out of the programme.
Macroeconomic analysis - and this was my big eye-opener at the Ministry of Finance - is a strange mixture of science and intuition; you have got masses of data without perfect controls. You have got theoretical analyses trying to understand this. You have got examples from rich countries - the US Fed has been doing something for the last 80 years; Bank of England has been doing something since 1694 when it was founded; they have done different trials. You roughly know that if inflation takes place, you come in with this policy; if your exchange rate is depreciating, you do something else - but this is usually picked up by looking at other countries. It is not totally clear that the policy followed by a rich country will work well in a developing country. There you need intuition, you need theory, you need to do a bit of abstract thinking, you need judgement, and you need experiments. You have to try odd policies at the macroeconomic level, collect the data immediately, and see what is happening and then decide - the American policy which worked very well in the US, will it work here? Maybe it won’t. That needs to be done much more. This is a very hard agenda. This micro-macro interaction is something I am working very hard at; the researchers at the World Bank are aware that I push for this. Since the World Bank is engaged in developing countries, I keep stressing that we don’t want to just take lessons straight out of a rich country and take them to a poor country. We have to empower, build capacity in emerging economies to do their own little experiments and develop their own experience. This marrying of micro and macro is something I learnt during my India experience - the micro interest was
I’ll give you one more example – the current oil price movement is causing a lot of concern. It is a strange concern because usually when prices drop, you just feel good about it. But you have to distinguish between low prices and the process of dropping prices. The process is a process of change, which means that some parts of the world are gaining, some are losing. India is on the gaining side but it will probably cause some turbulence on the macroeconomic side. There is no standard model to fall back on to understand this. In fact, when I left Washington there was a team at the World Bank that was working on what the implications of this will be on different countries. I am sure that over the next few weeks or months there will be much more work on this where you will have to use a variety of different methods – some well-developed, some not so well-developed but we have no choice but to do that.
KM: One of the key themes in the macro development economics literature in the past decade has been the idea of misallocation of resources (capital and labour) across firms within countries, and across sectors. One of the dominant factors of firms doing business in developing countries is the large subsidies to State-owned enterprises that keep distorting both in terms of direct fiscal loss of keeping these entities afloat, but more importantly in terms of the larger distortion of resources that they lead to in the economy and similarly across sectors. Now we have got work, including by David Lagakos, on how much lower productivity per worker is in agriculture. So
KB: The ‘Doing Business’ report has moved into the part of the Bank that is under my charge so I do have involvement in that now. ‘Doing Business’ does not quite have the scope for this because all it does is collect data from 189 countries by asking exactly the same questions. That is done very carefully. Whether the questions are always quite right or not is something to be discussed and debated. But the larger question of distortions and distribution, it is something that is a part of a ‘doing business’ focus, but part elsewhere. The trouble is that it is such a difficult exercise; I feel we should do it but the world is a general equilibrium system and the incidence of interventions will be very difficult to measure. Yes, it should be on the research agenda but I don’t think very good, concrete results will be coming in a rush. We will try and we will improve over time.
KM: It is one thing for me to work in a vertical such as education and to say that conditional on the budget, how do we spend this money more effectively. It is a more tractable question for me to answer. But the moment you step out of that into the Ministry of Finance and you say, how do I allocate money across ministries - you are in uncharted territory. So it seems to me that at a broader level, among the most important contributions of economists in the developing country context will really have to be that given the fiscally constrained space that most developing countries are in, given that the tax-GDP ratio is lower at this stage of development - how do we equip policymakers to make trade-offs between investments that have public good characteristics and therefore have larger spillovers versus investments that are really more about publicly-provided private goods (much as they may be merit goods including healthcare, as opposed to public health which is a public good). I feel we are not really getting that kind of analysis in terms of a world of scarce resources – is that something the World Bank is consciously supporting countries to do?
KB: There are two reasons why this happens. Some of these deeper investments – when you are using your fiscal space for something that will yield a benefit 5-10 years down the road – don’t fit well with the political cycle. For the politician it is not of that much interest because it is not something that will be seen in the next two months; the benefits will come after five years. So there is a bit of a natural reluctance in any democratic system – this is true of the United States, this is true of India.
The other is that we need to bring more research on the table – between two different kinds of innovations/ interventions; on the face of it both may look equally good but in one there can be huge long-run benefits and you need some research. I have seen some work by Michael Kremer on deworming showing that it is not just very important for the health of children going to school but the long-run benefits are such that it will have fiscal implications for a country for a very long period. It more than pays for itself – virtually pays for the initial investment entirely and even outstrips that. This kind of a thing is not even known to policymakers - quite apart from their interest - it is not known. If it can be brought to the table, it will begin to make a difference.
For the next to next issue of the World Bank Economic Review, we have decided to go in for a ‘papers and proceedings’ issue once a year, which will be a bit of a directed one – instead of submissions coming in, we will choose themes where you push for some of this. The first of these will actually carry many of the research ideas coming to the table - the work by Michael Kremer which will be published in that. Avinash Dixit has proposed a very interesting idea in a very different area. To give more detail – Avinash first experimented with this idea in India with the Chambers of Commerce. It is a very interesting thought and he is one of the finest theorists so it is very well worked out. For corruption control, we lay the responsibility entirely at the doorstep of the government (I have commented on some of those roles causing controversy). But there is a lot of interest of the collectivity of business groups in less corrupt settings because that brings in Foreign Direct Investment (FDI), and allows others to interact with business houses. For example, if a country is known to have a lot of corruption, foreigners wanting to deal with the country will be hesitant and will not come in. Whereas if it is known to be relatively clean - a contract is a contract, and a contract will be enforced - more FDI and interaction will come in. This means that quite apart from the government, the collectivity of business groups have an interest in a clean slate because they will have a clean atmosphere and will get m
Research evidence, political economy and policymaking
KM: Let me just go back to what you said – on convincing political leaders about the return to investing in public goods in an electoral cycle. This is exactly the motivation for our smartcard paper. One of the things we write
KB: That is certainly a framework of thinking, I have to say, and India has a sophistication of doing that. You don’t get hard results. But we were all the time doing computations of the benefits of interventions. But you also know that when you are doing it with some broad macroeconomic data, how certain this is – there is a big question mark. How much of the analysis you can do in-house is also a question mark. This is the kind of area where the research that takes place in the Ministry of Finance and the Reserve Bank of India (RBI) needs to interface more with research that takes place outside in the independent
One more thing that I feel very strongly about sitting in the World Bank: in the traditional Bretton Woods organisation – World Bank and IMF of 20 years ago - there was a tendency to go down to developing countries wherein you call the finance minister or the central bank governor and preach. There was a lot of reaction to that. Now when I travel around, when I go to small countries in West Africa, island countries - the level of discussion you have with top policymakers there is pretty much the same that you would have in London or Washington, and in
KM: That’s exactly what we are trying to do with this kind of forum. My own experience working in sectors is that there are three levels at which we can share our work – dissemination (say, giving a seminar), recommendation, and advocacy. Most of us would stay away from the last part, and would only go as far as to give a recommendation. Any policy change has winners and losers - so how do you take this policy change and do the work of crafting it through the political economy? For example, free electricity for farmers to most of us would be a very distortionary, unbelievably regressive policy. It damages the cropping pattern, damages the water table. It is one of these no-brainers. But when you talk to any politician, they would say we can’t touch this for farmers. The type of analysis I would like to see would be very simple: all it would take would be an incidence analysis of the subsidy – a very simple graph that is kind of indexing from the lowest to the highest percentile of the beneficiaries and showing how convex the benefit schedule is, and then doing the work to say that you could go to the 80th percentile of this usage and provide that amount of free power to everybody, and to anybody who uses less than that you sell that back. It is effectively a straight income transfer, but then we have marginal pricing. The political cleverness of a design like that is that you have got a voting majority who is going to, by revealed preference, vote for something like that. So I don’t see that as veering into the world of advocacy. I see that as economists putting on a lens of political feasibility and presenting a proposal for something like that to go through.
KB: Here I have a disagreement - and this is a disagreement not with you but with the economics profession. We very often feel that as soon as we write down a policy and you show that it is beneficial for the majority – you will get a political majority voting for this. I don’t think so. Somehow, I can think of a lot of agricultural interventions in this country, which are not good for the mass of people but the few people at the top in agriculture can build up a mood or persuade a lot of people. Even if it is very clear that 60-80% of the bottom segment of agricultural farmers will benefit but the top end will lose out a little bit, you can’t get it through because somehow the mood and perceptions will be different.
KM: I don’t disagree at all. I don’t think economists can influence the political process but
KB: You have to have that but with
KM: So I don’t think we disagree at all. In terms of moving the needle slightly towards the masses so that they understand better what is in their own interests, I was just suggesting that what economists are not doing enough is that we say this is a policy we recommend and we step back; we need to do the additional step of thinking through where the political economy hurdles are, and then communicate accordingly. This sort of an incidence graph can be made sector after sector in subsidies and target
State capacity for implementation
KM: Let me pivot to a very closely related point about something you were talking about earlier. I was in Rajasthan recently, participating in the Chief Minister’s advisory council on policy. This is a very reform-minded Chief Minister and has a checklist of policy priorities across 8-10 areas. While the action items are good, what I was struck by was how little attention is being paid to State capacity more broadly, to actually implement these things. So it feels to me right now that that is the binding constraint affecting the government in sector after sector after sector. It is not that we don’t have capacity at the top to make good policy. There are two things when you think of implementation capacity: one is people, and the other is systems – that is something that is really lacking. You talked about needing to build that capacity in the Ministry of Finance and RBI in terms of analysis. This also applies to legal capacity for drafting good contracts, service delivery - regardless of whether you do PPP (in which case you need capacity to manage these contracts, manage the procurement, which is highly non-trivial) or government provision - you are kind of hamstrung by that limitation.
So my question is about two things: how much is the World Bank thinking about not just policy but implementation and ways in which you could systematically boost this, and which part of government could lead that? And just to connect this to research, one of the interesting areas of research in micro-founded work that has macro implications is the recent work by Nick Bloom and John Van Reenen on management practices and their correlation with differences in productivity; they show this in the private sector, and what little evidence they have suggests that this is even more serious in the public sector. There is evidence to connect to the idea that this might be a really important binding constraint. So what is the World Bank doing, and what can we do about this?
KB: The World Bank is doing a lot on this, also because the current President Jim Kim is very keen on the last mile of delivery. If you set up a system and you don’t do the last mile right, you don’t get the benefit to reach the people. There are a lot of examples in India of that happening. We are thinking of that in our WDRs that are taking place, starting with the one on social and psychological drivers of development, which is that how you frame something you are offering to people, makes a difference. Human psychology is such that it makes a difference. So this report is on the social and psychological dimensions on how to deliver something better. The next report will be on internet for development – the use of digital technology for the last mile. India is a prominent player in this with Aadhaar and other things. We are thinking of a third WDR on something to do with organisations or the management of systems. So these will be like a trilogy, all focusing on last mile delivery - how do you get the delivery into people’s hands with as little leakage as possible on the route? So the World Bank is very much on board with this specially given Jim Kim’s interest and because of the expertise; it’s a question of drawing this expertise together. The first WDR is done. There is currently a whole team, with Narayan Murthy on the advisory board, at work on the second one on internet and development, which will address this question very closely. And we are thinking of a third one which will close the loop on different ways in making sure we deliver better. Some of the kind of results that you are talking about will find their space in these three reports so that we can take these documents to the World Bank client countries - which are the countries to whom we lend.
We also want to play the role – and the World Bank is in a position to do it well - in bringing ideas from across the world. Brazil, as you know, has used Conditional Cash Transfers probably more effectively than any other country. Brazil’s drop in inequality has been surprisingly sharp, but there are two sides to it - it started with such huge inequality that the first miles were easy to get to, but it also had a lot of very interesting interventions that made for better distributions. So some of these ideas we will bring from across the world, some from experiments taking place in India, and some from theory.
KM: It’s interesting because
KB: One thing that should be there - and something we have started doing at the World Bank - is to have embedded researchers where an intervention is already taking place. You send some researchers there who are not disturbing the process but only collecting data, and maybe have a control group to see the comparison. So the government is continuing with its own policy but there is an embedded researcher who is collecting information that gets shot back to Delhi and then Delhi analyses and says that this intervention is working well or not
Law and economics
KM: One thing I want to come back to is theory, evidence and policy, with a very concrete example based on your own
KB: This is an interesting question; as you said, I have worked extensively on this. Over here, the morals become so strong (this goes back to what I was saying about farmers - emotions get the better of deciding what is good for them, what is not good for them). It happens even in elite societies – there is a lot of confusion from a moral point of view. I first got involved in this child labour debate when I wrote a New York Times op-ed in 1994 arguing that all the well-meaning activism in America for banning child labour immediately across the world – you have to be very careful about this. In a dreadfully poor country, even if you enforce the ban well, you may put an end to child labour but by exacerbating child starvation. You have to be sensitive and you have to be careful that partially done may make it worse. Properly done ban may not also work well in every country but in some countries, it can deflect you to a better equilibrium. This required a lot of work because it reacts against your first emotion – there may be situations where you have to allow child labour to happen till you have got things in place. If you are not giving them food and basic wherewithal, to suddenly come in and say that from tomorrow the children cannot work - you are going to starve them. You have to get those things in place. So this is not an argument in favour of child labour, as some people made it out to be, but it is a criticism of the fact that you don’t want the children to starve just because it makes you feel morally good; you have to put in place other policies before you go for that. This took me into this debate and I wrote up a theoretical paper – I did a couple of them – which got a lot of attention. What was very satisfying for me is that in a theoretical paper, one makes some assumptions about the way the world works and you feel that it will be right; subsequently, there is a lot of empirical work which tends to corroborate that and gives you a more hands-on idea of where it will work and where it won’t. Some of the axioms, which were axioms to me with no evidence; something I had called the luxury axiom - now there is a ton of evidence showing that most of the time that axiom is right. This is very satisfying for me because this is one area where you see economics at its best. You are using analysis as carefully as possible in areas which are emotionally very difficult so most people can’t immediately relate to that but gradually you begin to win people over and try to persuade that you aren’t being mean when you are saying hold back, rethink and design your policies better - you are just concerned and in fact, perhaps even more concerned
KM: A big part of the rights-based movement is also, in some sense, the intervention of the courts, The courts in India over the past decade have been particularly activist in terms of stepping into what would otherwise be policy space, and often very
KB: Very good question because this is very close to my heart. Actually right now, for me personally, law and economics is the major research agenda. I don’t get time to do closed door research the way I would earlier. But two weeks ago, I was at the Institute for Advanced Study in Princeton; I gave a very early paper on how to think about law and economics properly and I do plan, in the nooks and crannies of my administrative job, to work on this. So it is something that I have on hand as an important topic.