“Really, extremely close to the point where we could be tipping into a major economic recession”
Geetanjali Minhas | January 10, 2020 | Mumbai
Nobel laureate economist Abhijit Banerjee has sounded an alarm on the economic crisis and compared the present situation to the 1991 economic crisis, stressing that to revive the economy it is important to stimulate demand.
Like elsewhere in the world, the level of trust in experts and the elite in general is at a historical low in India, he admitted. “The government should not have cut corporate taxes. The corporate India is sitting on a bunch of cash and not using it as there is no demand in economy which is a critical problem and you definitely want to stimulate demand. At the risk of being censored by my macroeconomic friends, I would say, forget about budget deficit targets and inflation targeting; which I think was a major mistake. I think we are really extremely close to the point where we could be tipping into a major economic recession,” cautioned Banerjee, adding: “I do think we don’t want to be open handed right now… I don’t think it’s hard for the government to be open handed, we still are pretty closed economy.”
Banerjee was speaking at the Express Adda held in Mumbai earlier this week along with fellow laureate Esther Duflo.
On computation of GDP, the renowned economist said that he does not believe in these numbers even at the best of times. With 80-85% population in informal sector the NSS does a survey where it measures the output of informal sector, creates a ratio between it and that of formal sector. The assumption is that the ratio is exactly stable over time. We take formal sector GDP that comes from IIP etc and multiply by a constant to get the informal sector GDP. This number has no reason to be constant. The margin of error has to be several percentage points. So we should never invest too much emotion into what GDP constitutes. We need to take a pause and look at what these numbers mean.”
On the question of ‘illegal migrants’, Banerjee said that low-skilled immigrants are not bad for economy and that it is important to create demand stimulus. While speaking on migration and comparing loss of jobs caused by migration of high-skilled vis-à-vis low-skilled workers Banerjee has said that there is overwhelming evidence that wages of low-skilled people don’t go down when other low-skilled people show up. Low-skilled immigrants tend to take up jobs no one wants in those economies and therefore create more opportunities for jobs.
“I say that is one of the great unfortunate successes of economics. People have brought the idea of basic supply and demand analysis. We should be teaching a bit more sophisticated economics. The fact that when new workers show up, the demand curve also shifts because new workers also buy things which create demand. They are also entrepreneurial and they create jobs. Interestingly, high-skilled immigrants who are welcome in most countries do depress wages of high-skilled immigrants. It is the people who everyone loves to hate that seem to be adding to the GDP,” he said.
He said that with the massive slowing down of real estate in India, a marker of growth, these jobs have dried up and young men working in the sector, mostly from north India, are now sitting in their villages wondering when it will revive.
Duflo said that policies should not only make easier for people to sustain locally but also make migration easier which can happen due to various reasons. “Policies must help these people ease the transition flexibility through training etc. The illusion that ‘if you try hard you can succeed’ clashes with old economic reality that ‘if you are not at the right place at the right time you might not be able to make it’. This is at the heart of discontent we observe in some of the western societies today,” she said.
Banerjee, who is originally from Bengal, said that it is hard for that state to attract investments and they are not necessarily incredibly sophisticated in doing that. “Part of the problem of being integrated into a vibrant economy is that it’s quite hard to compete for Bengal to attract investment. The challenge of low wages in today’s economy doesn’t do much for reallocation of investment. And not just Bengal, most of the eastern states have failed. Odisha, eastern UP, Bihar, Jharkhand (except for mining)… it’s across the board.”
China, Banerjee said, has much better labour force. Their real wages are only beginning to go up past hours and their productivity levels are much higher partly because their education and health are better. “We could invest much better in education and health. China is not a recipe. It is the guesses they made that happened to pan out, which around 1985-89 were severally criticized including by the Wall Street Journal. We are unwilling to accept our own failures. The Chinese are much more hard headed about failures and recognise their own failures much more than we do. Large projects that the governments do have failed one way or the other whereas the Chinese are upfront that they tried something and didn’t work. They have built a culture of actually admitting failure.”
Duflo said that India is different from China and similar to the rest of the world in the sense that there is a crisis of legitimacy in the government in general which has been brewing for a long time. We also need to acknowledge that difficulties are often coming from the problems that are hard to solve. Unless we are systematic and be a bit more honest about difficulty of issues and stumbling that will naturally happen along the way, the legitimacy problem is not going to be solved.
Banerjee, an alumnus of JNU which has been in news of late, said that the university has always been a remarkably safe space for dissent and extremely vibrant with a lot of diversity. It was always characterized as being leftist. “[Finance minister] Nirmala Sitharaman was there, [external affairs minister] S Jaishankar, Yogendra Yadav was there… more or less my contemporaries…. Sitaram Yechury, Prakash Karat were there and there was a wide range of views. Everyone got along. Coming from middle-class Bengal I didn’t know RSS in any form. In JNU you meet them….they were very engaged in conversation…. almost formally polite…..for the first time I encountered an enormous range of views. The diversity of views created for all of us to have diverse and often fraught space. I think the recourse to violence is extremely frightening for future polity because the youth of today will see that the way to resolve conflict is by beating up people. That’s the real worry to me,” said Banerjee.
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