DR.VASUDEVAN

  "  Macroeconomic Policies for Emerging and Developing Economies " by Dr. A.Vasudevan and Dr.Partha Ray. 

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The book under review has twin Fathers. Dr.Vasudevan’s two earlier books are “ Central Banking for Market Economies”  and “Monetary Governance” ( both reviewed by me ). He was Executive Director of R B I, Adviser to the Executive Director for India at the I M F. He held with distinction exalted positions in the Central Bank of Nigeria. In addition, he has written two Novels.

Dr.Partha Ray has almost identical qualifications.  He too held high positions in  the  Department of Economic Research and Policy of R B I and worked as Adviser to the Executive Director for India at the I M F. Ray is currently Professor in  the I I M, Kolkata. He has several books to his credit, the latest being, “The Global Economic Crisis through  an Indian Looking Glass”.

The volume under review is a thorough discussion of the Global Financial Crisis of 2007-2008 and its impact on the fiscal, monetary and  exchange rate policies for financial stability in emerging developing economies. The downfall  of the modern macroeconomics consensus springing from  the global financial crisis has opened up space for creative rethinking about macroeconomic policy .The authors view macroeconomics as much more than the theoretical postulates of academicians who fashion out economic policies. The volume tackles problems posed by fiscal, monetary, exchange rate and financial stability policies and their inter-connection with  strategies of the country’s development. The authors relate efforts of rapidly emerging economies, such as India, to face up to the economic challenges of today's closely  interconnected world. Indubitably  the economy is more than economics. It incorporates  finance and behavioural sciences and takes into account people and their unfathomable behaviour, as well as the politicians' search for measures that would improve general welfare and enhance the longevity of political leaders themselves.

The authors opine that in spite of voluminous literature on the subject, the  understanding of the solution to such crisis is quite incomplete.  

The  “Foreword” which is at once succinct and brilliant  is by Dr.Y.V.Reddy. All of us are aware what the Nobel Laureate Joseph Stiglitz wrote of Reddy—“ If America had a central bank chief like Y.V.Reddy, the U S economy would not have been in such a mess." .So Dr.Reddy’s words are worth their weight in gold. According to  him—“The response to the crisis and the introspection about the crisis have led to re-balancing of thinking and policies in several directions. The “Old Ideas” are being replaced by the wonderland of macroeconomic policies. There has arisen a more nuanced approach than before on the thinking on macro—issues. Price Stability forms the primary objective ;Flexible inflation targeting has become appropriate; Focus of models on the role of money should be on important relevant development; There is a need to supplement counter-cyclical monetary policies with counter-cyclical macro-prudential recognition; Monetary policies have to be coordinated within the country and with counterparts in other countries.

We are furnished a clear background to Development Strategy. Strategies  owe much to the ideas that have found place in the literature on economic development. One of the interesting aspects of the literature is that it sprang from two events: one, the consequences of the October Revolution of 1917 in Russia and the second is the Great Depression leading to the decline of classical economics and upsurge of Keynesian economics. Classical economists had unshakeable  faith in markets and their infallibility, whereas the Keynesian economics laid stress on state intervention to usher in  economic recovery and progress. There emerged a plethora of Growth Models. Four major development strategies were pursued by developing countries;

Industrialisation with emphasis on production of consumer goods including agriculture ; Emphasis on production of heavy and capital goods ; Export promotion; Development through reliance on foreign capital. The authors provide a succinct analysis of the Indian experience—the different Plans, etc.

In contrast was the Washington Consensus which emerged from the experience of the economies consequent to the severe debt crisis at the end of the 1970s and 1980s. In sum, there emerged a comprehensive macroeconomic and structural policy programmes ever since the second half of the 1980s. The authors emphasise that it is vital that institutions are developed to  ensure that development goals are achieved in each period and by the terminal year. Fiscal and monetary policies should be regularly revisited and these could be in the form of an internal exercise or an evaluation by outside experts.

Fiscal policy assumes a commanding role. It covers three aspects of government activity---Taxation, Public expenditure and Public borrowing. The conclusion is inevitable that the fiscal side of Monetary Economic Policy cannot on its own drive up growth; it needs to be buttressed by other components of  monetary, economic policies and structural measures.

Monetary policy should help keep commodity price inflation under control and within a tolerable level. The twin objectives are inflation control and growth in output and employment. In recent times there has been one more aim—securing of banking and financial stability. The two  economists are of the firm view that cooperation with the government should be the raison d’etre of central banking, and differences in views on economic conditions and corrective actions should be settled in a manner that positively promotes overall economic and social welfare.

When Queen Elizabeth visited the London School of Economics to open its New Academic Building in 2008, she asked the assembled distinguished academicians, “If these things related to the global financial crisis were so large, how come everyone missed them?.”

After due deliberations a number of leading economists from LSE gave a detailed reply. Read their clever reply.

"So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

It is hard to  assess the book better than  has been done by Dr.Reddy. His verdict-“ The book carries the imprint of rich experience of the authors at the policy level both at home and abroad, and deep scholarship of the most critical aspects that underlie not merely the conventional macro-economic policies, all placed in the development context of most emerging and developing economies”.

This unusual and elegantly  written volume  springs from the rich global experience of the writers but also in reality. It stays true to their aim “essentially to lay bare the processes, institutions and analytical underpinnings of macroeconomic policies”.

The book is a veritable gold mine not only for postgraduate students and teachers of macroeconomics but also for policy makers and analysts and   deserves to be read by  those  associated with  policymaking—students of economics, planners and teachers as also those of the Fifth Estate.

P.P.Ramachandran

07/10/2018.