Q&A with Lord Meghnad Desai

Q & A with Lord Meghnad Desai

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It was a pleasant afternoon earlier this week, when Lord Meghnad Desai kick-started the new academic year’s this Thursday. What was originally intended to be a predesigned speech-cum-info session was altered into a much more free-flowing Q & A interaction, with specific questions ranging from the impact of Brexit on the future of international economic blocks to broad-based themes surrounding the idea of black markets along with its more colloquially popular term – black money. Outlined below are the major ‘talk points’ of the day, including a brief biographical snippet on Lord Desai’s pursue economics as a career option.

What inspired you to study Economics?

Lord Desai: To be honest, I was always good at Sanskrit and the Arts. And contrary to the relatively recent emphasis on a mastery of Quantitative skills, economics in the 50s and the 60s was still nascent and a tad less quantitatively complex. Despite no absolute necessity to be a ‘numbers person’, economics never seemed to be one of my preferred options, as I literally hated math! Then, one fine day, I stopped by Ruia College in Matunga, and bumped into this gentleman who highlighted a particular job in the RBI (or similar such institution), and just the mere lure of taking up that job made me change my stream and take up economics!

And that is precisely the beauty of economics. You do not require a particular stream to fit in this field.

As a matter of fact, the power of this stream is the ‘position of the question’ that any economist is at full liberty to mold. To be able to truly delve into the realm of the abstract, without any preconditioned notion of righteousness associated with either side of the position, is a mark of the truly universal application of any carefully crafted economic theory. You can be pro-Marxian economics, as I was in my early career, or pro-Keynesian, in the same lifetime.

Another truly remarkable aspect of this field is the absolute lack of necessity of any specialized tools that are otherwise the foundations of other sciences, natural or social. You indeed require a certain amount of data to base your inferences on, but there is no explicit need to procure specialized instruments, such as the telescope in observational astronomy, or the existence of books of accounts in the accounting profession, or even the existence of past examples of similar legal cases in the realm of litigation and law. All you require at times are simplistic, fundamental thought experiments, even if they were to describe grandiose entities like the State or complex interactions like the commodities marketplace.

For instance, the remarkably brilliant David Ricardo had no formal education in economics, starting instead as a stockbroker. His subsequent diverse range of exposure was one of the foundations to his famous Theory of Comparative Advantage. In fact, his initial rumblings on ‘The Idea of Trade” were part of a thought experiment conducted in a vacuum from other prominent lines of thought of the time.

What according to you constitutes Japan’s meteoric rise post the Second World War’s extremist conclusion?

Lord Desai: You need to understand that Japan was not always rich and that the bombings in 1945 were not the first major setback in the bigger picture. In the Medieval Age, a few centuries ago, average productivity of each nation and the rest of the world were roughly the same. Due to an absence of dramatically advanced technology, the most productive, and consequently, the wealthiest nations in the world were most likely also the most populous.

Japan was always isolated due to geographical reasons, and that is also the reason why their adoption of Western value-systems was gradual and at times approached with sufficient caution. Around 1868, however, Japan adopted the market economy and laid foundations to some of the major sectors and companies still in operation.

In terms of the idea of which stakeholder is best suited to ‘run the economy’, I believe the Japanese state put off this responsibility to the business organizations of the country, empowering them with various pro-capitalistic reforms over the years, instead choosing to focus on ‘running the country’ themselves.

Moving beyond the context of Japan, isn’t the notion of a monopoly frowned upon by economists?

Lord Desai: The first person to innovate in market that has not yet developed is a ‘monopolist’.

Look at Bill Gates. He opened up the market for computer software when none existed in the personal computing space in the era of IBM’s market-wide dominance in enterprise computing.

Even the Japanese Model that, among other reforms, empowered corporates to consolidate market-share in various sectors was successfully emulated in South Korea, and to a lesser extent in China. Recently, even Vietnam has found some success emulating the export-driven, pro-markets approach by the original model.

Should we focus on Export or Indigenous Consumption?

Lord Desai: Wherever the money lies.

2 interesting examples:

  • IT Outsourcing: Quite remarkable. This wave defied the traditional rules of “hardware preceding software”, entering the services space without a major foundational grounding in manufacturing.
  • Indian Cinema: An area which was not ‘planned for’, and remained globally competitive regardless. While it started off with pure domestic consumption, it has made major strides internationally in recent times. Despite this development, the domestic market alone makes the industry internationally competitive.

The question does not entirely depend on whether you planned for an export-based economy. It comes down to various other metrics.

There have been a number of discussions on why ‘black money is bad’ or ‘black markets are deleterious’. What are possible benefits?

Lord Desai: There are a number of benefits, interestingly.

Until 1998, Bollywood and similar industries had little to no access to white money channels. Banks were just not sure of lending money to the industry on a whole. Pure cash is what used to run the industry.

Even today, the real estate sector as well as the political system will virtually collapse without an existence of major cash reserves. It comes down to how some major structures in society work. Until we enter a utopia where we can pay labor wages in cheque, and some much more radical changes take place, we would need to depend on the existence of cash.

I once put forth this simple primer on “How to Capture Black Money”. You simply de-monetize existing currency. Let us say you print new currency with, say, a Kasturbha Gandhi print. You offer these “Kasturbha” notes one-to-one for every Mahatma Gandhi de-monetized note in existence, up to INR 1 crore. Beyond INR 1 crore, you offer a monetarily-equivalent sum of 0% Interest Rate Government Bonds.

Simple solution? Why has it not been implemented yet? Because structures in broad-based society depend on the existence of black money.

Indirect taxation or Direct taxation – which is more effective?

Lord Desai: There is a saying that goes, “Direct Taxes are Progressive. Indirect Taxes are Regressive.”

Goods, services etc. that are being taxed at the transaction-level affect the poor much more than they affect the rich. One way to increase efficiency of these taxation policies is to focus on a set of more aspirational goods and services offered in society, and charging them a higher ‘luxury tax’.

At the same time, tax evasion is a priority for most governments worldwide. The challenge there however, lies in the loss of precise definition of what constitutes ‘income’ at the highest orders of wealth. You may have types of unrealized income on investments, or on equity, that are difficult for different jurisdictions to define on a common platform.

In light of the Sovereign Debt Crisis as well as Brexit, what is the future of economic trading blocks like the Eurozone/the European Union?

Lord Desai: The EU was founded as a customs union and the adoption of a common currency extended the relationship to that of a monetary nature.

When countries lose monetary sovereignty, they indeed believe in a greater benefit arising out of the commonly agreed terms. Why else would a nation lose its interest rates’ control? Why else would they lose certain fiscal policies’ true autonomy?

The future of such common currency trading blocks rests on the terms agreed by any future set of nations, and should not necessarily depend on the impending failure or long term success of the Eurozone.

In recent times, officials from the People’s Bank of China, the Chinese central bank, reflected on a long-term push for the yuan to be the reserve currency.

Considering how the Great Britain Pound was dominant in the first half of the 20th Century, and the United States Dollar has been the de-facto reserve currency for almost the entire period post-Second World War, what specific situational scenarios are required to attain reserve status, and what are the benefits?

Lord Desai: None whatsoever. No specific scenarios are required to attain reserve currency status, apart from the strength of the economy at times.

In the present system, the USD is over-valued all the time. And only the USA benefits from this phenomenon. And indeed, most countries want their currencies to be over-valued, which is quite an unrealistic proposition. In fact, the current generation or two are unique, being part of the ATM-era.

Earlier, the Dollar was pegged to gold, until one fine day the USA refused to meet the gold-equivalent requirements and not many could do anything about it.

The Economist highlighted earlier this year the notion that ‘economic sanctions have suffered a dilution in their impact’. In international diplomacy, diplomatic channels exist, strategic warfare avenues exist and yet despite economic sanctions by a majority of the countries in the United Nations, rogue nations like pre-2015 Iran and present-day North Korea did not change major policy decisions as a consequence. Do you believe in this premise?

Lord Desai: On the contrary, I believe Iran crumbled under economic pressure. Their economic progress was ruined over the next decade due to the sanctions in place before the agreement with the United States.

Russia, for instance, has been suffering from major consequences after its annexation of Crimea. Their economy looks to be in doldrums for a while, especially if they do not succumb to international diplomatic pressure.

As for North Korea, for a leader to accelerate its country’s nuclear program in the face of its citizens suffering from acute starvation is a remarkably surprising feat.

As they say, “One of the biggest benefits of sovereignty: You can choose to very well ruin your own country”.

Should the unorganized sector in India be allowed to thrive because it does not create a burden on the government to create jobs?

Lord Desai: Businesses create jobs. The government does not ‘create’ jobs, except majorly influence the creation of the jobs through whichever channels possible.

With regard to the FDI influx in India, it will only result in a larger pie to be shared by everyone, stimulating growth in areas where we exhibit efficiency independent of the efficiencies brought on by the international retail firms. If we were to shut down pockets of domestic retail, we would only be moving on to areas we could better suit the current labor.

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Date(s) - 11/08/2016
3:00 pm - 4:00 pm

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