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SPEAKER 1: This is a production of Cornell University Library.
SPEAKER 2: --welcome you to our first Chats in the Stacks book talk for the semester. Some of you have found the refreshments in the back, but help yourself. And then also on the table are some cards announcing other book talks for the spring semester.
So let me introduce our speaker now. Dr. Kaushik Basu is both an eminent scholar and an engaged practicing economist. He is currently serving as senior vise president and chief economist at the World Bank, a position that follows his previous contributions as chief economic advisor to the government of India at the Ministry of Finance from 2009 to July 2012. He's also held numerous leadership and advisory posts in service to major international agencies and national government bodies, addressing concerns of economic as well as human development.
At Cornell, where he's currently on leave, Dr. Basu is professor of economics and the C. Marks Professor of International Studies. Having earned his BA with honors from Delhi University and his master's and PhD degrees from the London School of Economics, he joined the Cornell faculty in 1994. Earlier, he was a professor of economics at the Delhi School of Economics, where he founded the Center for Development Economics in Delhi. He is also a founding member of the Madras School of Economics.
As a teacher, Professor Basu has served as committee chair or member for over 50 PhD students. As an author, he has published widely in the areas of development economics, industrial organization, game theory, and welfare economics. His publications include over two dozen books and close to 200 articles in scholarly and policy journals, as well as a variety of popular news media.
These biographical facts and numbers alone suggest rich and professional or personal achievements. But perhaps most revealing of the quality, style, and extremely wide impact of Dr. Basu's work are some of the accolades that his publications have drawn. I'll cite just a few of the words and phrases that fellow scholars, journalists, business leaders, and Nobel laureates alike have used to describe Dr. Basu's books.
Some have said alluring, deconstructing of otherwise sacrosanct tenets in economic theory and policy, beautifully written and engaging, marked by sophisticated reasoning needed to tackle complex practical problems, yet accompanied by wit and humor. And last but not least, both state of the art and fun to read. So these descriptors give us a hint of the promise to be found in Dr. Basu's important, already widely acclaimed new book. So it is with great pleasure I hand off to our speaker today.
KAUSHIK BASU: Thank you. Thank you very much, Mary. I should begin with an apology. My usual library haunt used to be Olin. And I marched off very happily to Olin, then pulled out my papers, and I saw it was Mann. And hence, the few minutes of delay as I had to turn around.
Thank you, just Cornell and Mary, all of you, for organizing this. It's a great pleasure for me to be back. I don't quite know what the rules of the game are. I was planning to speak for about 25 minutes or so and then have Q&A. If that's in violation of what you are planning, you should tell me. OK. Yeah, OK.
So what I want to tell you, first of all, a brief gist of what the book is. Then I'm going to thematically go over a couple of areas. And there are just three pages of PowerPoint-- that's all-- where I will try to show you how very powerful ideas of economics, practical ideas, can come about by staring at numbers very simply occasionally. It doesn't always happen. I'll give you illustrations with just three pages of this.
The book, I should tell you at the start, it is an economics development, economics development policy book. That is what it's about. It has some personalities. It has incidents and places being talked about. But in the end, it's supposed to be a serious take on development policy in a developing country.
The book happened only because I kept a diary, which I had never done earlier in my life. So I wanted to begin by telling you why I decided to keep a diary, which I am now thankful. The diary, I have to assure you, is more interesting than what's there in the book.
But it's too recent history, so I couldn't dip into the diary fully. But the decision for diary keeping, I want to tell you, and then plunge into some topics. That's my plan.
So first of all, my entry into policy-making was really, for me, a very dramatic experience because two reasons. India's chief economic advisor, I discovered when I went there, has never been a person who's had no experience in government. And I had had absolutely no experience in government. So my life, entire career, had been in academe, research and teaching.
I was one year a visitor at the World Bank 16 years ago. But really, I was taken there to do research and writing and oversee what was happening. So even there, my experience was entirely that of a researcher, very different from what I do now. Now it's much more hands-on policy in the World Bank.
So it was really completely a bolt from the blue. We had gone as usual, my wife and I, for the summer months, which we did during the academic break in India. And it was on the 9th of August 2009, completely out of the blue, that I get this phone call in the evening, saying that-- it was a woman's voice saying that, I am calling from the prime minister's office and let me get quickly to the point, and got a bit too quickly to the point. She asked me if I would consider being the chief economic advisor to the Indian government.
I talked with her briefly. And I said, this is a sufficiently big decision that I do need to speak with the prime minister. I had known the prime minister, who was once a professor of economics, Dr. Singh, the previous prime minister. So I said, I would like to speak with the prime minister, but the only catch is tomorrow evening, I'm going back to Cornell.
So she hung up and came back on the phone 10 minutes later, saying that, we've worked out a plan. Tomorrow, after packing up and all, you come to the prime minister's residence in the evening. And you will get time to talk to him. And then you take off.
So I remember, really a bit nervous, shaken up, by this sudden possible turn of events. I went to Prime Minister Singh's residence, had a wonderful chat. He is a very gracious person. He's a very good thinker. And he kept stressing that I want to bring ideas back into the policy space, the role.
He himself had once been the chief economic advisor to the Indian government. And he gave-- I won't give you the names-- one or two people who stood out as having done very well. I want to revive this. So I would really like you to consider.
So I told him that I'm very interested, tempted to take it, and probably will take it. But let me not make a commitment just now. And he also said-- and this is the part of India which slows things down bureaucratically, but I also like-- he said that, well, I mean, my wanting you here does not mean that it's a done deal. There is a bit of a process and a decision-making. So we will also go through our side of it.
And that was the conversation. Packed up, picked up our bags, came back to Cornell. I was at that time the chair of the Department of Economics. And over the next two months, there were all kinds of inquiries I was not used to. Intelligence background and things like that was being checked on me. My nationality.
This post can only go to an Indian national, so they wanted to be sure that it's a green card, permanent resident. But my nationality was Indian. But then it happened. Happened quick enough.
So December 9, we were back in Delhi into this job. And the first few days, and weeks maybe, were among my most disorienting days in my life. It was from a completely academic life into this very, very practical arena, people rushing around.
Little customs and practices are also very often different, which strikes you. Gradually, you get used to it. You realize that human beings are fundamentally so similar that you have to overlook some of the stylistic differences. But they were, in the beginning, very, very disorienting to me.
Some of you may have been. The setting is beautiful. In Delhi, three ministries, three or four ministries, have North and South Block location. And these are old colonial buildings, so lovely. It just makes up for everything, all the difficulties. Sandstone from somewhere in Rajasthan, the buildings are made. And that's where I took up office.
And the disorienting feeling, I can tell you, started very soon. I remember within a couple of weeks-- these things are not dated. And I am giving you some incidents from the book, but some also I am going beyond the book.
I remember getting a note from the finance minister. So my location is the Finance Ministry. The person I work with most directly is the finance minister, who now is the president of the country, subsequently became that. And the two persons to whom I was sort of on call, had to be available, the understanding was the prime minister and the finance minister.
Soon after arriving, a question which is very centrally economics question, a note comes saying that the finance minister would like to know the welfare implications of allowing futures trade in certain commodities and grains. If India allows futures trading, what will be the impact? So this was maybe 10 days, 15 days into the job.
And as a researcher, with a topic like this one, I know the challenges are huge. I would set aside six months. I would work on the problem, then have a paper ready.
I knew I would not have that luxury. So it would be much quicker than six months. And I sent back a note immediately to the finance minister saying that how much time do I have? And a note came back, can we have the paper by tomorrow evening?
[LAUGHTER]
And you realize that, first of all, you can't give a compelling answer. That's the nature of policy-making. And to me, it was a jolt. I mean, I knew it would be a week, two weeks maybe. But tomorrow evening?
I remember that what I did was I wrote to two of my colleagues at Cornell, Larry Blume and David Easley, who I knew knew a little bit about these markets. I asked Larry and David in the email, saying that, can you quickly send me a couple of things to read? I am scrambling to make best sense and make some recommendations which could translate into policy.
Larry and David very helpfully gave, I think, six papers from econometric [INAUDIBLE] from Journal of Economic Theory. Each one would take me a week or so to read. It came into my inbox. I thanked them, downloaded them.
But I realized I would not have time to prepare. I did prepare a note. Now I forget what. By next evening, I had six, seven pages.
I had my advisors. India has an economic service called the India Economic Service. These are-- in those days, it used to be 477 people who report to the chief economist. So you have access to them. They know a lot about the Indian economy. So with that, with some of my knowledge of theory and quick nighttime reading, we got the document ready.
So that was disorienting enough, to know that you have to cut corners. You don't want to say wrong things, put in the caveats. But given the short time horizon. this is the best that we can do. And the note went up.
There are other experiences, which were little experiences, which over time, you learn to realize that it really means nothing. In this job, I had a government of India that's very standard. I had a government of India chauffeur. I talk about him in the book.
This was also in the first week. He knew that I used to be a professor somewhere. I had come for this. And used to be the driver of the chief economic advisor for some time.
So I remember getting into the car once in the front seat and reaching out for my seat belt when he turned to me and said that, sir, actually, as chief economic advisor to the government, you don't need to use a seat belt. It's a sudden realization that his view of why seat belts are worn is completely different from why seat belts are worn. I got very close to him. Very sweet person with a very different world view.
This actually, I have said in a lecture soon after that, that among my sort of initial jolting experiences. And Wall Street Journal talked about this particular incident of mine. Experiences like that many. Let me just tell you one or two others which got me into this.
There's also, of course, the sheer politics of it, which would gradually dawn on me, that you're working with politicians. Some are good politicians, and some more maybe are bad politicians. And you know that there are people who are corrupt. You know that there are people who are honest. It's all kind.
But I've never worked in such proximity with people who are of especially the corrupt end, being there in proximity. You know that. And I have to say this was a sign of their respect for me, that coming as a professor from outside, in my presence, I never saw anything happening or being done or being discussed.
But you know them, and that does put some stress on you. My feeling in the beginning was that, really, the first, I would say, two months, three months, that if I could quietly slip out of the country back again as professor at Cornell, I would love it. I was finding it, the whole experience, very, very disturbing.
When I told myself that Malinowski could go to a faraway island, Trobriand Island, I think he was there for three years or something. If he can go and stay in a faraway island for three years, I can stay in the North Block Delhi for two years and take down notes like an anthropologist does, observe what's happening around me. So if I like nothing else, I'll at least have an anthropologist's notes on Delhi's bureaucracy and politics.
That's where my diary keeping started. And I actually started doing it diligently also because I discovered that the finance minister, who is a fairly cerebral person-- now the president, as I told you-- he kept a diligent diary. He was actually more diligent than me. Virtually every evening, he would write down the day's experience.
I would do it about twice a week, jot down, write down what I was experiencing. And that is what I could dip into when, towards the end of my India tenure, when I came back to Cornell for two months and before actually I moved to the World Bank, I signed this contract with MIT Press, started writing this book. I wrote, actually, the bulk of it during the two months that I was here at Cornell-- I had just finished my India experience-- using my diary.
But I did tell myself that it would be ethically unethical of me to use the details of the diary where I was privy to information which others were not. So I dipped into the diary for interesting incidents, episodes, some personalities. Wall Street Journal recently took me to task in a review of this book, saying that too little on the personalities.
But that was a deliberate decision. I did not want to give out too much of that. But I also hope that there is a fair sense of the diary, which I was dipping into and writing. But in the end, actually, as I just said, it was policy was what I was trying to do.
When I was also, I just remembered when I was getting very [INAUDIBLE], this was all in the first two months that politics is making it difficult. I've never lived in such a political setting. One of my friends, and someone with whom I have had lots of interaction, is the game theorist Ariel Rubinstein.
I wrote to Ariel, knowing that he is not in the policy world at all, so sharing some of the tribulations of this world. He said, on your bad days, just remember departmental politics and you will feel much better. So I would try to do that and remind myself of departmental politics [INAUDIBLE]. And that's of another kind, but that's also there in the world that I was used to.
So let me turn to the question of policy and policy-making and preface that with one-- towards the end of my India tenure, some group of journalists asked me that, what was the single biggest thing that I took away from my Indian experience? Always a difficult question. But I gave an answer, which I actually stand by.
John Maynard Keynes, in the last chapter of The General Theory, has a very beautiful passage-- I mean, I can't repeat it because Keynes wrote very beautifully; I can't say that as beautifully-- where he says that vested interests, we keep talking about and ranting about the difficulties of vested interests. Vested interests are important. But in the long run, ideas are much more important. The countries' futures are shaped by the ideas that people carry in their heads.
And when I was a professor, I really did not quite believe in this. I thought that Keynes was writing something which was slightly self-serving of a professor to write. And I liked it. I would repeat it but didn't really believe in that. I thought vested interests, they are still very important, and I will give some examples. But in the end, that's what drives policy.
But during my 2 and 1/2 years in government, and now even in the World Bank, you realize people have set views. And usually policymakers, bureaucrats, who've had their life in that, the views have become very, very solidified. This is the way to deliver benefits to the poor. This is the way to manage a country's fiscal deficit.
And really, that's the biggest stumbling block. Before the vested interests hit you, to persuade these people to do things differently is extremely difficult. And I think it does shape policy. And time and again, I would have experience, and this is absolutely at the top level.
Some of their better politicians are extremely intelligent people. You talk to them about some policy-- and this is not just India. Subsequently, I have been having interactions around the world. I've had a very interesting one, for instance, in Dakar, Senegal, and around the world.
The top leadership, most places, they've got their extremely intelligent. They understand they are now reading virtually the same things. So when you try to explain some very basic policy matter, they will pick it up very quickly.
But then the objection becomes that, look, I have to persuade another 1,000, other 100,000 people to be able to carry this policy through. And that is the stumbling block, the ideas that have got sort of fossilized in people's heads. And you have to do a lot to change that. And I have come away with this experience, more than six years now in the world of policy, that that's very, very important.
So with that, let me tell you some of my policy encounters. The first one was, again, very early, a very small one. But it's very easy to see the economics argument there.
In India at that time, inflation, food inflation, was really high. It was going up into the teens-- 17%, 18% per annum. India is not a high-inflation emerging economy. India, when an inflation rate goes to-- overall inflation rate-- goes anywhere into double digits, 12%, 15%, it's crisis. The government begins to fear government will fall.
And food inflation going to 18%, 20% is extremely alarming for India. So this was very early. The prime minister called a meeting of seven, eight people to his chamber to do a short brainstorming on what could be done on food inflation in particular.
I was still very new, speaking very little. People were coming up. And the people I was with all was trained bureaucrats. Very intelligent people, but not enough experience, not enough knowledge of policy and analysis.
I felt that there was one mistake India was making in its food policy, which is a very simple mistake. I've got a full chapter on food policy. But here, in a nutshell, is what India does.
For basic grains-- rice, wheat-- which the common people consume, India has a policy where the government of India, through a government organization called the Food Corporation of India, buys up food from the market. This is done without any force. The government announces the price, sufficiently high price, and opens up a window. Any farmer can come and sell.
The price is high enough that wherever these windows are open, farmers come and sell in very, very large quantities. And for some of these basic grains, between 1/4 and 1/3 of the grain is collected by the government. With this grain, the government does two things.
Part of it is kept as food reserve. If there is a sudden crisis, shortage, prices are spiking, they will offload that. And a part of that food grain is released to poor households at below market price. They come and ask for-- they have their cards. They show their card. And they are given this food supply.
So one is a reserve for the rainy day, and one is for people to get regularly as a sort of food ration. The rainy day reserves were being offloaded on the market at that time because food inflation was very high. So if you offload food, you will dampen down prices.
The way it was being done-- and almost unspoken. It was only when I would call up the Food Corporation of India people, sit down with them and talk, that I discovered they would go to big cities, big cities or just suburbs mainly in a city area, take each time 1,000 metric tons of wheat, say, have an auction. Someone wins the 1,000 metric tons, takes 1,000 metric tons.
Again, you put down another block of 1,000 metric tons. You do an auction. Bidding takes place. Another trader picks up 1,000 metric tons. 1,000 metric tons is large enough, so you will do 5,000, 6,000 metric tons in one place, then move over another 500 miles, 1,000 miles, to another city or another suburb and offload another block there.
There is a theory of economics that goes back to 1838. This is Cournot, writing extremely smartly in 1838. This is the theory of oligopoly, saying that if you have very few people controlling a resource and competing with one another, prices will be higher, whereas if you have lots of traders competing, prices will be lower. You don't need, really, Cournot for this. It's a commonsensical thing. If you are competing, you will bring prices down.
So while this discussion was going on, I remember feeling very self-conscious. And I knew that if I mentioned that there is a theory by Cournot, I would be asked to leave the room. It would sound too strange and academic.
So I tried to put it as intuitively as possible. I thought that the grain release policy was wrong. India should release grains in smaller blocks, 100 metric tons maybe. And it caught the prime minister's ear.
And he said, we probably are not managing to do that dampening down quite as much by releasing in big blocks, where you are creating little oligopolies, six people who will buy up. They can collude. They can do all kinds of things.
So actually, the decision was taken. It took some months for the decision to be effective. In India, these things move slowly. But it was changed. Smaller blocks were being released.
Now, do I take credit for inflation coming down? Not at all. It's too big a country. Too many things were happening. It is possible that the food price did take a bit off in these regions where the releases were taking place, they got dampened down by this. But yeah, I think it was a sensible policy. It feeds into the kinds of things that you want to do, bring to the table.
Other experiences-- I'm just picking up a bit at random. The book discusses India's policy but also quite a bit of global policy-making. And I wanted to start by telling you a little bit about the eurozone and the eurozone crisis, which I discuss in the book and its one picture. Which, actually, in my current World Bank job, in domains where it has nothing to do with India, this is a picture from my book, which I do use to explain something about the eurozone crisis.
And it's a picture, which if you-- I'll explain it to you. It really tells you in a nutshell, one picture, about the crux of what the problem with the eurozone was. But just to give you my India background, why I went into, in this book, into the eurozone problem, is 5th of August 2011 was a very important day, because the United States' long-term sovereign credit got downgraded by Standard & Poor's. United States being downgraded is major global news.
And that day in Delhi, I had at a full, very busy day in Delhi. In the evening, I have very vivid memories for me. I went to a fish market. I would rarely get-- have the time and the pleasure of doing that. Buying fish when my phone started ringing. Repeat once, twice, cell phone. And then I knew something was happening.
I called back. It was a journalist saying that there's big news. The US has been downgraded. And we are just concerned that will it have implications for India and what? I said, I can't speak just now. I would have to speak to others that evening. We were on the phone with other policy-makers discussing this.
And I remember a chief economic advisor, who used to do my job 15 years ago, telling me that how the world has changed. An incident, even in a big, powerful country like the United States, incident to do with Standard & Poor's rating change would not have you be, in India, be drawn in and begin to worry what could happen to India. And it is a globalized world we live in.
And it is really a sign of the changed globalized world that one of the things that during my time I was keeping track of very closely was the Indian economy and the eurozone. Eurozone, if you take as a block trading partner, for India is among the three biggest trading partners. There is China is now the biggest trading partner, United States, and the European Union. These are the three block trading partners for India. So a slowdown here could hit India very hard.
I should just clarify, in case there are people who are into these numbers, UAE will show up in our statistics, Indian statistics, as a very major trading partner. But that's because that's where the hub trading takes place. Indian goods go there, and then fan out.
So it's not the destination trading. It goes in through there to a lot of places. But in terms of destination trading, it's China, the United States, and the European Union. So it is of concern.
But what happened after that gave me an insight into what had happened in the eurozone and a bit of the global economy, which is quite interesting and intuitive. And these are the kinds of things that if I had been in the academic world, with my papers and all, I may not have spent enough time on. Now, quite unexpectedly, the thing that began after United States was downgraded, some of you will know, money from around the world started flowing into US Treasury.
So the source of the problem, seemingly, is where the people are parking their money. So what's happening? And in retrospect, we know what happened. And the Indian currency was beginning to lose value because money was being pulled out of India, pulled out of all over the world. Germany was the only country that was not being hit too badly. But virtually everywhere, including Europe, money was headed to the United States.
But now we know what had happened. First of all, there was, with US being downgraded, you worry about global economy uncertainty. All kinds of things can happen. Stock markets could be hit. People want to take their money to a safe zone.
In the olden days, the safe zone would be considered all the major European economies. You park your money there, United States, a couple of other countries, you feel reasonably safe. But something had changed in the eurozone. And this is, this picture is going to explain which was not fully understood in the beginning.
If you park money in the United States, you give money to the US Treasury, you know that when the time comes for you to collect your money back, very, very high chance the US will pay you back, because the US has one advantage. It also has a Fed and its own printing machinery for printing money. So push comes to shove, US will not want its reputation knocked down by saying we have defaulted. US will pay you back.
But the European eurozone countries no longer had their own central bank. If you put money in a eurozone country, whether it be Italy, France, or Germany, for that matter, no one of these countries has a central bank. To guarantee a repayment, they will have to turn to the ECB.
And the ECB has all kinds of restrictions from the Treaty of Lisbon's clauses that the ECB may not be able to do that, and suddenly not for a single country. Greece calling up ECB and saying that we are about to default. Can you print some more euros and pay someone? The ECB would not come in.
So the usual safe haven, a huge block of 18, at that time 18 countries, was no longer a safe haven the way it used to be. Money started coming to the US. In the US, you have one safety is that outright default won't happen. It has its own Fed.
The other risk, whenever you put money in another country, is the exchange rate could depreciate and fall. But you don't expect such a big depreciation on the US for another reason to do with the globalization of the world. China has the world's biggest foreign exchange reserves. It's fallen rather sharply over the last few months of the fluctuations. That time, it was $4 trillion.
Even now, it will be $3-point-some trillion dollars. I'm sure Henry will know the exact number. But it was around $4 trillion worth. Large part of it is in US dollars. So if the US dollar loses value sharply, it's dreadful for the United States. But it's also very bad for China, because a part of the wealth that China is holding, it's going to shrink.
So you know that the two biggest economies in the world have an interest in not letting this value fall too much. So the US turned out to be a safe haven. And people were putting in money.
Now I want to show you this picture why this particular aspect of the eurozone-- whereby that individual eurozone countries, when they borrow money, they could have difficulty in repayment-- was not understood, not just by the policy-makers but virtually by no one. So when the eurozone crisis started full, the sovereign debt crisis from 2011, 2012, some damage had been done. And this is captured beautifully by this picture.
1999 is where the euro has been created. And what you're seeing on the vertical axis is the interest payment that different governments have to make. Greece, Spain, and other governments. Greece joins in a little bit later into the euro. But all these eurozone governments would have to make to borrow money.
Usually what happens is, if you're considered a bit of a risky destination to which where I'm parking my money, I'll ask for a higher interest rate. Look, you may default. Pay me a higher interest rate.
But you will see from 1999 to 2008, all the eurozone countries are borrowing money at virtually the same cost. The price is the same. Everyone thinks that now you've got a monetary union, whether you give money to Greece or Spain or Germany, it's a union. So the same risks.
It's with the Lehman crisis that people started trying to scrape into the details of the eurozone. And you realize the eurozone is a monetary union. It's not a fiscal union. So when a government borrows money from you, it's the government's responsibility to pay you back.
And in fact, now that the government does not have a central bank, if anything, it's riskier. Once that realization started, the borrowing costs just fanned out. Greece was finding it very, very expensive to borrow money. No one would give money. Ireland was finding it difficult. Germany, this is an average of a couple of countries. In fact, the borrowing costs went down.
So this is the realization that strikes the market. But something had happened during this big period from here to here. Whole lot of countries were being able to borrow money so easily because people were misunderstanding the market that there was overborrowing that had taken place.
And some of the prices, the price that we were paying later in the sovereign debt crisis of the eurozone, is some of the damage that has been done during this period through no one's deliberate wrong intention. But it is a genuine misunderstanding that took place. Now people know that. They are trying to make corrections for this.
And since I find this graph just so illuminating with one picture. And you can see if you go to earlier dates, before the eurozone is constructed, where there is no monetary union, actually again borrowing costs were different. So let me see if I-- yeah.
So up to here, they were borrowing at different rates. Eurozone gets constructed. All of that collapses. Then you realize that, actually, when it comes to default, the world has not changed very much. In fact, if anything it's a bit worse because they don't have their central banks anymore. And it fans out once again.
And in fact, Greece joining in over here. Greece joined the euro a few years later. Greece is a bit higher, and then it comes down. It sort of falls into place very beautifully. Rarely do you get data looking as neat as this.
But I'm going to show you one more. And this is from India now. So here is another power of policy and thinking, which I think is important and you need to bring into the space of policy-making. And I have to say the world over, from the United States, where of course, there's a huge amount of expertise that goes in, but also political pressures. And fossilized ideas also have a hold, so that you have to perennially try to bring the best ideas to the table.
This is India. And there's, of course, a lot of discussion of this kind of material in the book. This is India's foreign exchange reserves. And you will see one very clear pattern. India's foreign exchange reserves-- this is from 1974. I wanted it, actually, from a bit later, but it doesn't matter. From '74 take it, come all the way up to 1993, 1992.
It's virtually the same. It's hovering around $3 billion, $4 billion, $5 billion there. It begins to change after that 1993, and it goes up to $300 billion. So basically from $5 billion over 15, 20 years, it suddenly changes, the foreign exchange reserve, and it shoots up.
What happened then? It was a very important policy change. Again, things don't play out as neatly as this one. This one I feel very good about, because those days-- this is 1991-- I hadn't still moved to Cornell. I used to be a professor at Delhi School of Economics. I moved to Cornell in 1994.
But by 1991, I began participating in policy debates by writing in newspapers I was writing. And I was giving one argument why what India was doing in changing the policy in the foreign exchange management was the right policy. And I used to get a lot of criticism on that. But these were newspaper articles.
Let me tell you what India did in a nutshell between 1991 and 1993. India's foreign exchange reserves would always be very low. As I just said, $3 billion to $6 billion most of the time. It's a major crisis if it dips down to $3 billion. It's fine if it's $6 billion.
Actually, in 1991, it was a huge crisis, a crisis that was precipitated by the remittances going down. In those days, remittances were extremely important for India. The big chunk of money was Indians sending money back.
That failed because of the first Gulf War. Workers scattered from there. And that precipitated a crisis and forced India to take stocktake of its policy, foreign exchange management policy.
And here, I think there was a clear thinking for, again, the Keynesian ideas being [INAUDIBLE]. India's foreign exchange reserves being so small, there was a rule that you can't take out foreign exchange out of India easily at all. Lots of rules. You can take $20 with-- you're going to United States, I've forgotten. The amount used to be that 1 and 1/2 haircuts, and you've used up all your dollar allowance that government of India would allow. So lots of restrictions you can take your money out.
I was arguing-- and I was in a minority; a few other people arguing-- that, look, I mean, think two steps. If you don't allow people to take that foreign exchange out, yes, right now it's safe because you've got very little. You don't want that to exit the country. But no one will bring that foreign exchange into the country. If you want people to bring foreign exchange into the country, you have to make space and then to feel confident that they can take the foreign exchange out of the country.
And the basic reform that took place from 1991 to '93 was making it possible for freer movement of foreign currency in and out of the country. And there were initially nerve-racking moments, because as soon as you allow, it will suddenly dip with people exiting. Their first reaction is, you've never had the experience where it's easy to take out. You're allowed to take out, you run with it.
By then, India was with IMF. There was an IMF program on in India. So IMF would stand as a backup. If there was a problem, IMF would step in. But what happened was just sheer magic, that for IMF, this agreement with the IMF could be taken off after two years. It was, I think, a five-year agreement.
Things stabilized there very quickly. Money started trickling in with this, and the Indian government making it very clear we will not stop the exit. And you see foreign exchange reserves build up. And that is the story of India's foreign exchange policy.
And to me, again, this is a very, very clear interaction between a policy between the world of thought and world of action. It doesn't happen so neatly. I mean, you have to have your common sense there, that the real world is so complex.
There will be problems you will encounter, so difficult that you wouldn't know what to do. You still fumble, you make policy, you will get things wrong. But occasionally you'll get, and that occasional benefit can be just so very large that it is worth getting into.
I'm taking a bit more time than I had thought. So let me just jump to one more example. And I will stop. And then, depending on questions I will get in.
Another area which, for me, turned out to be a great experience, very exciting experience in India. And I'm so lucky I made this mistake very early in India, because a little later I would never do this. I would have been sufficiently politically careful not to get into a problem of this kind.
Lots of people were giving me lots of advice when I was going to India. One I have talked about, Amartya Sen, who's been very prominent in public life in India and the world over. Amartya told me-- Amartya was my PhD advisor-- saying, it's a great thing you're going for. But be very sure when you speak in public to the media, not only must your sentence convey the right meaning, but every consecutive set of words must convey the right meaning because journalists will drop words in the beginning and the end and take clusters of words. So as you're speaking, you have to keep constructing these consecutive sets of words conveying the right meaning.
In fact, in my book I say that I realized later that that's not good enough, because occasionally journalists drop words in the middle as well. So it's these dropped sequences which have to be correctly constructed to speak. But I did not realize the media sensitivity to it.
And this was more than a few months, maybe five, six months into my work in Indian government, I posted a paper on the Ministry of Finances website, a very, very well-meaning paper. Let me just tell you this story, and I will end with this.
This is on corruption control in India. Corruption is rampant. It's all over. And you want to put an end to it. There was one kind of corruption which stressed and troubled me. And I was very acutely aware of this. And India's top politicians and bureaucrats would not be aware of this because this is the corruption that you face if you're an ordinary citizen.
If you've had your life in the bureaucracy starting from the age of 25, as Indian bureaucrats have, you rise to the top. You've been sheltered from this all your life, whereas if you've been a professor and you've gone for a driving license, you're perfectly capable of having the experience where you'll be told that you drove very well, excellent. Now give me a bribe, and I'll give you the license.
These briberies, I call them harassment bribe, where you're asking for a bribe for something that a person deserves to get. And I found something in the Indian law, which I felt that makes it difficult to stop harassment bribery. India has a law called the Prevention of Corruption Act 1988.
The Prevention of Corruption Act 1988 has a clause which says that for cases of bribery, the giver and the taker are equally liable. So the punishment, which is from a certain amount of fine or from 12 months jail to five years jail, is for giving or taking. There are some exemption clauses, which don't work.
If you're interested, I'll tell you the only way those exemption clauses are used are by journalists planning to run a sting operation. You can use those exemptions. Apart from that, you can't use the exemptions.
So in effect, the giver and the taker are equally liable. And one thing that you do get in India is every time there is a bribery case and a charge comes up, you never find anyone coming up with evidence. No one comes up and says that, look, I gave the bribe.
And to me, it's very easy to see. Once you have given a bribe in India, the taker and the giver are partners in crime. So you will work together to hide that information.
So I put up a little suggestion, saying that, look, let's break this unity between the giver and the taker. Let's make this a law that the giving of a bribe is not-- a harassment bribe, where you're being harassed-- is not illegal at all. You can give and talk about it freely. But the taking of that bribe is wrong. You can make it doubly punishable.
It seemed like a lovely idea. I wrote it up. And then, I was still into the life of writing very quick papers from my academic life. So I wrote this up as a chatty paper, just pure 7, 8 pages of conversation, posted it on the Ministry of Finance website, where I had learned that, as chief economic advisor, I was the final authority in what can go up.
[LAUGHTER]
So I authorized that, and it went up. I really did not anticipate what happened after that. This was learning by fire. Some journalist first picked it up. Then newspapers began to carry. Then an opposition member writes to the prime minister, saying that this is a completely immoral suggestion that is up on the government's website. The finance minister begins to get letters. I'm getting calls from television shows to go and discuss about this abhorrent, awful idea.
[LAUGHTER]
It was actually quite nerve-racking, this experience. But there were things which comforted me. I talk about this little incident. There's a very prominent Indian journalist, Barkha Dutt. She has these television programs. And I don't know if you've watched Indian television programs. It's just shouting and raging and people getting angry on television.
Barkha Dutt called me, maybe it was a Saturday evening-- it was a weekend evening-- and said that we have this program. Will you come on this program? I felt like going and arguing that, look, what I argued is perfectly sensible. I am not saying that bribery is fine. I'm saying one side should be held guilty for these and punished doubly.
But I thought I was beginning to give so much grief to the government that I would call up the prime minister. The finance minister was away in Vietnam at that time. I would call up one of them and ask whether I should debate this or clarify this or just let it go.
I phoned up the prime minister's home in the evening. The person said, I'll talk to the prime minister and see if I can get a message back. Then 15 minutes later, the prime minister was on the line.
He said that-- I explained to him that I was being asked to go on television over this, and this would rake up more discussion. And I wanted to know his views, knowing that a member of Parliament had written to him objecting to this. To which he said that I actually don't agree with what you've proposed.
I still feel he had not read the actual paper. He had seen newspaper reports and had made up his mind what it was. But then he said, but as an economic advisor, you are supposed to bring ideas to the table and discuss. So it's fine. It's up to you, being in public space with the idea.
I have to say I appreciate this. This is rather unusual. Even in many industrialized countries, governments speak so monolithically that you don't have that space. I feel it makes for the possibility of better ideas to come, even if ideas churn up some discussion.
The end story on that is I actually said no to Barkha Dutt. After that, getting the permission, I decided I won't do it. But I continued to speak a lot about that.
And then a couple of very good outlets picked it up. The Economist magazine ran a piece on that, actually very supportive of my idea. Le Monde carried a piece on that. A couple of Indian industrialists began to speak.
This was one change which did not happen during my time, the amendment of the Prevention of Corruption Act. But there are some things which happen quickly, usually the easier ones. This one, I have not given up on.
I do now see occasionally in the mainstream media, occasionally a politician will make reference to this, that in India it's too much of a collusion between the giver and the taker and you can't crack this problem. So I'm still hopeful that I did the right thing by putting this in public space, that there will be maybe some more discussion, and someday the policy will change. I've taken much more time than I had intended to. Thank you very much.
[APPLAUSE]
SPEAKER 1: This has been a production of Cornell University Library.
In 2009, award-winning economist Kaushik Basu took temporary leave from the world of academia at Cornell University to become economic adviser to the Government of India and then assume the position of Chief Economist of the World Bank and Senior Vice President of the World Bank Group. In his book An Economist in the Real World (MIT Press, October 2015), Basu describes the art of economic policymaking and offers a unique perspective on India's economic development that is both rigorous and personal.
In this Chats in the Stacks book talk Basu describes his years as chief economic adviser and reveals the complex challenges facing India, a subcontinent with more than a billion people. Bringing his background as economic theorist, scientist, and anthropologist to his role as practicing economic advisor, he discovers how difficult it is to apply economic models to the real world of deal-making and corruption. He soon learned that effective policymaking integrates technical knowledge with political awareness.
