Kenneth Rogoff, who outlined the idea of phasing out big currency, gives thumbs-up to Modi’s move but criticises implementation
GN Bureau | December 2, 2016
Like many of us in India, Kenneth Rogoff, a Harvard professor and former chief economist at IMF, backs the logic behind India’s demonetisation and balks at its implementation.
Rogoff should be pleasantly surprised since the idea he floated in his book, The Curse of Cash (Harvard University Press), only in August this year has been implemented at a big scale in India.
“Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely,” He writes in a blog post.
In the book, Rogoff makes a case for pushing digital money since (in the case of the US) “the vast bulk of physical currency is held in the underground economy, fuelling tax evasion and crime of all sorts.” That is also the logic the government of India has given for its radical move of banning high-denomination currency notes.
But Rogoff is not so impressed when it comes to the way the decision has been put into practice. “On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges.”
A swift exchange instead of a gradual one would entail “significant problems”. “First, there are formidable logistical problems to doing anything quickly... Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime.”
Rogoff advocates a slow gradual currency as it would be “far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences” – precisely what Indians have been complaining about now.
Meanwhile, the economist also clarifies that his plan of eliminating large notes and not replacing them “is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion.”
Also, Rogoff is not sure why Rs 2,000 note is being introduced after phasing out Rs 1,000. “Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes.”
On the final outcome of Modi’s ambitious move, Rogoff is ambivalent: “Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.”
Also, “The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.”