Economics in a Nobel light

Two economists from Bengaluru discuss the work of Nobel Economics Prize winners Abhijit Banerjee, Esther Duflo and Michael Kremer, and the Indian economy

The Nobel Prize for Economics to Abhijit Banerjee, Esther Duflo and Michael Kremer calls for both celebration and debate. And with Abhijeet and Esther's new book Good Economics for Hard Times just out, it's even more so. At Deccan Herald, we brought in two Bengaluru-based economists to discuss Abhijeet and Esther's research work and their policy offshoots. Prof Amit Basole is with Azim Premji University and had last year studied unemployment in India and come up with some of the same recommendations that the Nobel laureate has recently made. Vidya Soundararajan is a microeconomist, currently the Indian Institute of Management-Bengaluru’s Young Faculty Research Chair, after stints previously with the World Bank, the International Food Policy Research Institute and the erstwhile Planning Commission.

DH: What in a nutshell describes the body of work of the trio who won the Nobel Prize?

Amit: In the field of Development Economics in the last few decades, there has been an increase in emphasis on work that is based on data, based on an approach of identifying causal mechanisms at the core. Since society is complex, and social data is complex, such questions become tough to answer. A growing body of work in economics has focused on different mechanisms to pin down causal relationships. The Nobel Prize this year recognises the body of work using Randomised Controlled Trials (RCT).

Vidya: RCT is essentially a data-generating technique by answering a specific set of questions to ascribe a causal mechanism. For example, if the government is thinking about a training programme and it wants to know if training will help workers improve their wages after the training is over, the way to do it would be to observe the people who have undergone training and then observe their wages. But in only using observational data and correlating it with the training and wages, you end up losing out on a key element -- the fact that people who have undertaken training are already motivated and ambitious, and that motivation can affect their wage. By randomising the study on training and the motivational factor, the causal effect can be ascribed easily. This is how researchers use RCT.

Amit: While the technique of RCT is important, the fact that the Nobel Prize winners have a way of understanding the development process through people's eyes as much as possible has worked for them. Instead of taking a structural view, they have worked on understanding people's motivations, their incentive structures and why the poor, say, make the choices they make. The subjects (of the trials) sometimes surprise you as you may not understand the constraints they face.
DH: In India, Abhijit has been talking about reversing corporate taxes and putting money in the hands of the poor. Is the need for a Universal Basic Income or Minimum Income Guarantee scheme, like NYAY, widely accepted among economists of all shades now?

Amit: Abhijit has been referring to a consensus that we are in the middle of a slowdown as a result of less spending power. While the government has been introducing monetary and fiscal measures, Abhijit and many others have pointed out that when you do something like a corporate tax cut -- the logic is that it will incentivise firms to invest and spend in the economy as they are able to keep most of the profits -- the problem in a demand contraction (scenario) is that if there is no buying power among consumers, the firms will not spend. In the process, the firms just keep the tax cut and will wait for demand to pick up before investing. It does not solve the demand problem. In such a scenario, Abhijit suggests that there is a greater need for direct interventions where money goes to people who are most likely to spend it. In economic theory, generally, the poorer you are, higher are the chances of you spending the extra money you get. This is basic economic theory.

DH: In his new book Abhijit talks about Artificial Intelligence and robotics taking over jobs at a time when we are already facing an unemployment crisis? He also suggests that it is too good a crisis to be wasted and one must instead focus on labour and land reforms. How do you square the two views?

Amit: There's been a lot of alarmist writing about what will happen with robots and there are plenty of sectors that are becoming mechanised and, in general, manufacturing is becoming more capital-intensive, creating fewer and fewer jobs. So, what can governments do about it? There are many industries that are less mechanised as they are skill-based, but in the case of IT industries, AI is posing a threat. As long as we are sensitive to the fact that it is a heterogeneous phenomenon and will affect different things differently, we don't need to panic.

Vidya: India is not facing an AI threat immediately as capital intensity is going up here. MIT's David Otter's famous work talks about this skill-biased technical change in the US which saw a decline in jobs, but in the long run, re-training to do tasks, like the classic example of bank tellers when ATMs were introduced in the 1980s, helps to stay relevant.

Amit: Labour reform is very complex. Looking at the big constraints in India, small companies are able to hire but don't because they will have to bear high compliance costs. If we can instead create good conditions in the economy where demand is strong and economic growth is strong and firms have an incentive to expand their production, then they will take on workers. There should not be a small section of the workforce that has a lot of protection, while the rest don't. This gives scope to inequality. We should extend basic social security, minimum wages and re-training to all and then attempt to dilute (over)protection of the few.

Vidya: Basic cushioning, like social security for the unemployed, is a must. Labour reforms leading to firms working freely in the labour market have helped developed countries stay afloat. Easing hiring and firing and simultaneously increasing social security is the way to go. You can’t do the first without doing the second.

Amit Basole and Vidya Soundararajan.

DH: When Abhijit met Prime Minister Modi, he was praised for his achievement but only wished him good luck for his “future endeavours”. Do you think some of his ideas will be considered by this government?

Amit: I don't think Abhijit's problem is that people don't listen to him. The approach has been very influential. Policy implementation is big as it involves many variables, and all those variables need to be factored in.

Excerpts from the Nobel laureates' latest work

UUBI (Universal Ultra Basic Income)

In developing countries, where lots of people are at risk of finding themselves destitute from time to time, and where the safety nets, however imperfect, that exist in rich countries (emergency rooms, shelters, food banks) are missing, the value of having an assured fallback option like UBI could be enormous, both in dealing with bad luck and in making it easier to try something new.

One of the most common ways in which people safeguard themselves against income risk in many parts of the developing world is by holding on to land.

The one thing that farmers in West Bengal wanted in compensation for giving up their land was the promise of a job, a stable source of income. Perhaps, if there had been some kind of UBI to provide this income, the resistance might have been much less and it might have been easier to move arable land into industrial use. If UBI alleviated the need to stick to your land at all costs, it would reduce this misallocation. It might also reduce labor misallocation by making it more palatable for the landed to sell their land and move where there are better labor market opportunities.

India, however, does not have anything like UBI right now. The current scheme proposed by the government applies only to farmers and is nowhere near a living. The minimum income guarantee proposed by the opposition is more akin to the negative income tax credit. The plan is that it should be targeted to the poor and progressively taxed away as incomes grow. In fact, very few countries have anything like a UBI, which is guaranteed to everyone and is not taxed away. If they have anything, they have transfers targeted to the poor that can be conditional or unconditional. But targeting the right people in the developing world tends to be especially difficult because most people work in agriculture or on tiny firms. It is almost impossible for the government to know how much they earn, making it very hard to isolate the poor and target them with the extra income....

Give Us This Day Our Daily Bread

In India, one of the more successful recent efforts by the left was the demand for a national food security act. Passed in 2013, it promises five kilos of subsidized food-grains every month to almost two-thirds of Indians, over seven hundred million people. In Egypt, the food subsidy program cost 85 billion Egyptian pounds in 2017-2018 ($4.95 billion, or 2 percent of GDP). Indonesia has Rastra (formerly called Raskin), which distributes subsidized rice to over thirty-three million households.

Distributing grains is complicated and costly. The government has to buy the grains, store them, and transport them, often across many hundreds of miles. In India, the estimate is that transport and storage add 30 percent to the cost of the program. Moreover, there is the challenge of making sure the intended recipient gets the grains at the intended price. In 2012, eligible households received only a third of the amount they were due under teh Indonesian Raskin program, and paid 40 percent more than the official price.

In India, the government is now considering moving to what it calls direct benefit transfers, sending money to people's bank accounts rather than giving them food (or other material benefits), on the grounds that it would be much cheaper and less subject to corruption. However, there is considerable opposition, led mostly by left-wing intellectuals. One of them interviewed twelve hundred households throughout India about their preferences for cash versus food. Overall two-thirds of the households mentioned transaction costs (the bank and market are far, so it's hard to turn cash into food). But one-third of the households who prefer food argued that getting foodstuff protects them against the temptation to misuse cash. In Dharmapuri in tamil Nadu, one respondent said, " Even if you give ten times the amount I will prefer thge ration shop since the goods cannot be frittered away.

(Excerpted from 'Good Economics for Hard Times: Better Answers to Our Biggest Problems,' authored by Esther Duflo and Abhijit Banerjee (winners of the Nobel Prize in Economic Sciences 2019), published by Juggernaut Books.)