Policy & progress
The book combines sound economic theory and intimate knowledge of the formulation and implementation of economic policies.
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N the foreword, Y.V. Reddy, a former Governor of the Reserve Bank of India, states that the book is “unique in its approach, scope and perspective, and a rich contribution to the burgeoning literature on serious macroeconomics”. Anyone who goes through the volume will find that this is not an overstatement.
The book is a rare combination of sound economic theory and intimate knowledge of the formulation and implementation of economic policies. The authors are highly qualified academics who were also closely associated with policymaking.
Macroeconomics is now a familiar expression even for the general public, but a distinction between macroeconomics and microeconomics may be helpful to understand the argument of the book. Economics, as it was taught in universities for long until about the Great Depression of the 1930s, was about individual decisionmakers, households and firms, and it maintained that left to them, and via the coordination of the market, the economy would function well. However, the Depression showed that workers were not able to find jobs at the going wage rate and there was excess capacity in firms.
The Cambridge economist John Maynard Keynes at that time pointed out that the basic problem was inadequacy of aggregate spending in the economy because of the “liquidity preference” of households, and that the solution was for the state to rectify the deficiency through its spending. From then on, macroeconomics, which deals with the role of the state and economic aggregates (growth, savings, investment, money supply, foreign exchange, etc.), has become the basis of economic policies. Developed economies (such as the United States and the United Kingdom) and developing economies (such as India, Indonesia and Brazil) differ in the em- phasis on macroeconomic policies, and the book concentrates on the latter but does not exclude the former.
Policymakers consist of three categories of people—policy formulators, policy detailers and technocrats. The policy formulators are political persons (Prime Minister, Finance Minister et al). Policy detailers are competent in economics, statistics, history, philosophy and so on (Chief Economic Adviser, for instance). Technocrats have the responsibility to implement the policy. Of course, these are not exclusive categories. Often, policy formulators are competent enough to spell out some details as well. There have been rare instances of those who have combined all three. The authors belong to the second category, policy detailers, and they maintain that macroeconomic policy is not an exact science but essentially the art of the possible.
“Development” is the essence of macroeconomic policies in emerging and developing economies. However, it is a conveniently vague expression for policy formulators. Even when it is made more specific as “growth” or “growth plus”, for it to be spelt out as a policy statement it will have to be more sharply spelt out, such as “for whom?”.
What the book does is to go into the details of development as a policy objective. It will not be possible to go into all the details, but even a selected treatment will show the magnitude of the problem. For instance, which sector of the economy should get priority, agriculture or industry? And if it is the latter, should it be basic industries or consumer goods industries? Should the economy be a “closed” one, or should it be open to the rest of the world? Should employment generation be considered a special objective?
Or, consider the field of public finance. Gone are the days when it used to be held almost as a commandment that the government must “live within its means” and balance its budget. Deficit budgets have become common as a deliberate policy measure. But how exactly is it to be done? Reduce taxes or increase government spending? And if it is the latter, what are the modalities? If the government increases investment