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I do not recall any earlier incident in which the Reserve Bank of India clarified the Governor’s remarks in a press note that too issued on a weekend (June 28), and drew pointed attention to the written text of his speech “Going Bust for Growth”. I therefore went through the text with more than ordinary care. To be sure, the Governor has made the point about the need for greater international monetary co-operation more than once in the past. Towards the end of his speech, he raises several specific issues, giving his own comments on them.
For one thing, he seems to believe that unconventional monetary policies (UMPs) which the advanced industrial economies have been following, lead to undervaluation of their currencies. The reality is that since the financial crisis the US, the UK and the Euro zone have been following UMPs; Japan since much earlier. And, during this period the exchange rates between them have gyrated erratically in both directions. There does not seem to be any stable relationship between domestic monetary policies and the external value of the currency.
Another point he makes is that UMP “places a domestic mandate above an international responsibility”, and that “responsible global citizenship would require a country to act as it would act in a world without boundaries. In such a world, a policy maker should judge whether the overall positive domestic and international benefit of a policy, discounted over time, outweigh its costs.” “Love thy neighbour as thyself” is a venerable Christian virtue: one wonders how many nations, or even individuals, practice it in real life. Indeed, it seems to me to be unrealistic to expect this kind of behaviour in today’s political economy. It is also debatable whether the “domestic and international benefits of a policy, discounted over time”, are at all calculable. But no modern democratic government would be able to follow the kind of international co-operation which the Governor advocates – nor, indeed, laissez faire economics. Today it has become an accepted part of a government’s responsibility to create employment, to provide assistance to the worse off – of course within the country, not to every citizen in the world.
What is making headlines in the business media now is the crisis in Greece. (It is worth recalling that in the 20th century, both France and Germany benefited from debt write-offs from creditor countries more than once.) And, the UK will have a referendum on continuing within the European Union, one primary issue being the EU’s immigration policies. (Britain does not want free immigration from the new eastern member countries.) If co-operation, even within a part of the world which is geographically, culturally and historically so close, where the ultimate and agreed objective is political union, is proving so difficult, co-operation amongst much more diverse economies and sovereign countries seems difficult to hope for.
The Governor’s preferred solution is “multilateral institutions like the IMF should re-examine the “rules of the game” for responsible policy, and develop a consensus around new ones. No matter what a central bank’s domestic mandate, international responsibilities should not be ignored. The IMF should analyze each new unconventional monetary policy (including sustained unidirectional exchange rate intervention), and based on their effects and the agreed rules of the game, declare them in- or out-of-bounds.” However, one has serious question marks about whether the IMF’s Institutional Views are truly unbiased. Many economists like Dr Jagdish Bhagwati have questioned the independence of the IMF, accusing it of being too much under the influence of the Wall Street–US Treasury axis. And, will democratic sovereign governments accept a supra-national arbitrator of their domestic policies, otherwise than in a crisis?
Overall, I am pessimistic about the feasibility of a global political economy of the kind the Governor hopes for. I can do no better than end with a quote from Ha-Joon Chang’s Economics: The User’s Guide, “Economics is a political argument. It is not – and can never be – a science; there are no objective truths in economics that can be established independently of political, and frequently moral, judgement.”
avrajwade@gmail.com
