#
One of the great thrills in our lives comes when we gain knowledge about a subject for
#
Suddenly, we see things we did not see before – patterns, links, why the world it is,
#
Gaining expertise in any subject can fill you with the confidence that you can explain
#
the world and even change the world.
#
And this can lead to hubris.
#
In fact, I have come to believe that there is a bell curve of arrogance in the arc of
#
First, you know nothing, and you know that you know nothing.
#
And for a while, your learning fills you with confidence.
#
Just as you become full of new facts and ideas and frames, you also become full of yourself.
#
And then, as you know even more, you realize that you know nothing.
#
The world is complex, all explanations are simplistic stories, and all our certainties
#
are built on shaky foundations.
#
This is why I think that wisdom really amounts to humility, to accepting that you have so
#
Even when learn it, people process this humility, people who have degrees and credentials and
#
publications and papers, and yet accept that they will always be students.
#
Well, those are the kind of people I like to talk to on this show.
#
And I'm sure you'll enjoy this episode as much as I did.
#
Welcome to the Scene on the Unseen.
#
My guest today is Josh Feldman, an economist who graduated from Oxford, worked for the
#
IMF for many, many, many, many years, played a key role in Indonesia's recovery during
#
the East Asian economic crisis of 1997, worked on India and in India in various capacities
#
for decades, and is today revered by every economist I know personally as a giant of
#
Josh and I share a dear mutual friend, Ajay Shah, who has been on the show many times,
#
and Ajay set us up together.
#
And I insisted that Ajay co-host this episode with me, as he knows both Josh and his work
#
You will see the value this brought to our conversation, but Ajay, alas, had to leave
#
midway through the episode.
#
But this was a rocking conversation all the way through, with a man and a thinker I think
#
we can all learn a lot from.
#
But before we get to the conversation, let's take a quick commercial break.
#
Have you always wanted to be a writer but never quite gotten down to it?
#
Well, I'd love to help you.
#
Since April 2020, I've enjoyed teaching 27 cohorts of my online course, The Art of Clear
#
Writing, and an online community has now sprung up of all my past students.
#
We have workshops, a newsletter to showcase the work of students, and vibrant community
#
In the course itself, through four webinars spread over four weekends, I share all I know
#
about the craft and practice of clear writing.
#
There are many exercises, much interaction, and a lovely and lively community at the end
#
The course rupees 10,000 plus GST, or about $150.
#
If you're interested, head on over to register at indiaankar.com slash clear writing.
#
That's indiaankar.com slash clear writing.
#
Being a good writer doesn't require God-given talent, just a willingness to work hard and
#
a clear idea of what you need to do to refine your skills.
#
Josh and Ajay, welcome to the scene on The Unseen.
#
Happy to be here as always.
#
I want to, you know, initially, obviously, in the first half, we spoke about how we'll
#
explore Josh's life and get to know him a little better.
#
And you know, typically what happens is when there's an economist in the public eye, you
#
know, people would have read your pieces, they would have seen your bio, IMF, and you've
#
been in this committee, that committee, pieces are all about economics.
#
The impression people tend to have of economists is that they're boring people, right?
#
But on your blog, you've made it a point to sort of say that, hey, you're a fun guy,
#
You know, various of your pieces, you mentioned Hindi films and you mentioned other entertainment
#
So I want to start like before we get to sort of the chronological journey of how we got
#
from baby Josh to adult Josh and so on, why don't we, I want to start by asking you, like,
#
what do you do for fun?
#
Like, what do you do when you're not economic-ing as it?
#
Oh dear, what a question to start with.
#
Well, the most important thing that I don't know whether people should know about it,
#
but that many people know about me, is that I have a dog.
#
So I get up in the morning and my dog also gets up in the morning.
#
And before I can say, let's do economics, he says, no, no, no, let's go out for a walk.
#
And a very long walk, where we may go into a river, may climb a mountain, may jump around.
#
Maybe we meet lots of people and say hello to them.
#
So that's the first thing I have to do every morning.
#
Then when I actually get some time from him.
#
What is the name of the dog?
#
Oh, very good question.
#
The name of the dog is Alu.
#
Now, of course, the next question you're going to ask is, why?
#
Why is the name of my dog Alu?
#
And the answer is that he's a sort of tan dog.
#
And when we first got him, he was a baby.
#
And what he liked to do was just to sit in my lap for hours on end, something like a
#
And he kind of looked like a potato.
#
I was kind of hoping that you named him after Montex in Alu earlier, but no, that would
#
be far too clever of me.
#
So the mornings is Alu.
#
I should perhaps continue.
#
When I was working at an IPFP, even after I went into work, Alu would insist on coming
#
to work with me and he would attend all the meetings sitting on a chair.
#
And when somebody made a very good point, Alu would nod his head.
#
And then everyone in the room would feel very proud.
#
I recommend this to everybody.
#
The creativity levels go up and the stress levels go down when there is a dog in the
#
So I think it's an absolutely brilliant idea to always have Alu, a nice dog like Alu should
#
be there in every office.
#
I'm not sure that's even a joke because a dog being in the room would make people more
#
warm and empathetic, I guess.
#
No, no, it wasn't a joke.
#
I think it's absolutely true.
#
I have no doubt that stress levels go down and creativity levels go up.
#
Everybody's a little more willing to exercise their imagination in the presence of Alu.
#
And everyone would come by at an IPFP in the morning to say hello to Alu and it worked
#
out really, really well.
#
The only problem was that Alu didn't like the IPFP canteen.
#
So at lunchtime, he would call for the driver and he would go home for lunch.
#
And then in the afternoon, I'd have to work without him.
#
But you know, he was there in the mornings.
#
I censor a graphic novel in this here doing shows of Alu, The Economist's Dog, yeah.
#
I obviously, I do a lot of reading.
#
And since you're asking about non-economic things, non-economic reading, I read a lot
#
of history, actually, various things.
#
I'm particularly, a few years ago, I became extremely interested in the Byzantine Empire
#
because absolutely nobody knew anything about the Byzantine Empire and I decided that had
#
to be corrected, at least on my part.
#
And from that, I sort of moved into Roman history and then I'm still very interested
#
And then I also became interested in modern Italian history, particularly Mussolini.
#
So I do a lot of that kind of reading.
#
I do a lot of studies of art, reading about art, looking at paintings, going to museums.
#
And this kind of thing pretty much takes up my day because I also have to fit in work
#
around all this other stuff.
#
I've noticed, and it's a theme of, you know, maybe Ajay and I have also spoken about at
#
some point, but a question for both of you, which is that, you know, I realize now that
#
I look at the world very differently now than when I did when I was 20, not in the obvious
#
banal sense of having different ideas and knowing more stuff and all of that.
#
But it's just a different angle in the sense that, for example, you look at time differently.
#
When you're 20, the world seems to stretch out forever.
#
You know, a 30-year-old looks like an old person.
#
You know, the world is your oyster, as it were.
#
And when you kind of get to the sort of age we're all at, I'm guessing, you look at time
#
You know, someone who's 55 today might look back and realize that, you know, the difference
#
between today and their birth is the same difference between their birth and the First
#
World War, for example, right?
#
And it gets sort of compressed.
#
And you look at time, like one of the things that I've, when I look back, is that to me,
#
you know, 150 years seems like a frighteningly quick amount of time sometimes.
#
When I see the way the years pass by for me, you know, there's that saying about how the
#
days are long, but the years are short, which I would imagine is more and more the case
#
as you kind of grow older.
#
So on the one hand, there is that element of how just getting older perhaps changes
#
the angle through which you view the world.
#
Maybe you take some things less seriously.
#
Maybe you take other things more seriously.
#
And at the same time, another thing that I imagine would broaden the perspective and
#
change the angle is reading widely, right?
#
Like in any field, you can really divide the field into a vast majority of people who will
#
not know anything outside the field and a small minority of people who are still engaged
#
and curious and, you know, so they are into art, they are into history, into the Byzantine
#
Empire, all of those things.
#
So when you sort of look back at yourself, maybe 30 years ago or whatever, you know,
#
is this something that you've thought about?
#
Like how has your way of viewing the world, your angle?
#
In fact, and a question really for both of you, you know, how has that sort of changed
#
Are you able to step outside of yourself and, you know, take a look?
#
Let me answer that in two ways.
#
I mean, in some respects, I haven't changed at all.
#
And I don't, in some respects, I don't even see the distinction between studying Byzantium
#
and studying art and studying economics and studying India, because to me, these are all
#
different ways of trying to get at the same question, which is the fundamental question,
#
I think, that motivates all of us.
#
How do we understand the world?
#
How do we make sense of the world that we see?
#
And you can get at that question in so many different ways, but for example, any, to take
#
a really obvious example, to make my point a little bit clearer, if there's an Indian
#
student who goes to the United States and he comes back and you ask him, well, what
#
The first thing he's going to say is, I learned a lot about India by going to the United States,
#
because all these things which you never really thought about here, you suddenly realize they're
#
different in the United States, and then you start thinking about India.
#
Why are things the way they are in India?
#
And by studying other societies, you learn more about the world that you see yourself.
#
All art is created by people who want to send a message about how they look at the world.
#
There's a point to all the pieces that the artists are creating, and it's interesting
#
to sort of think about it.
#
Think about what the point is, whether that art was created yesterday, whether it was
#
created a thousand years ago.
#
They're still trying to make a point, and sometimes you can learn about your own society
#
by learning about the point that these people were trying to make.
#
Now, okay, to get on to your question about how my perspective has changed, without a
#
doubt, and I think this is probably true of all of us, without a doubt, I'm much more
#
humble than I used to be.
#
When I was 20, I thought I understood the world.
#
Other people were idiots.
#
If the world just listened to me, then the world would be a perfect place.
#
And of course, over time, you realize what rubbish that is.
#
So a good milestone for every economist is the question, how old were you when you understood
#
that it is an incredibly difficult thing being a finance minister?
#
So in my journey as an economist for years and years, I had the idea that, look, I know
#
how to fix it, and if only I was finance minister, I would solve all the problems.
#
And then there comes a date when you realize that, no, that is absolutely and incredibly
#
wrong, that the world is very, very hard.
#
And I have learned to feel empathy for every finance minister, that by God, what they do
#
How old were you when you learned it's hard?
#
And you actually had to be inside the beast, I'm guessing, too.
#
No, before I got into the beast, I started understanding that, wow, this is really hard.
#
So let's kind of start the chronology.
#
What was your childhood like?
#
I had a pretty good childhood.
#
I was born in New York City, in the United States, and pretty quickly, our family moved
#
out to New Jersey, which for people who don't know this, is the Indian capital of the United
#
I can tell you some stories about that a little bit later, but right now, I'll try to stick
#
So I guess I'll kind of add a question of my own here.
#
When did I first start to get interested in India?
#
And I would say, it was a long way back.
#
When I was a kid, virtually nobody knows about this, when I was a kid, there were really
#
only three channels in the United States.
#
And one of those channels, TV channels, and one of those channels actually, in what used
#
to be known as prime time, carried a show about India.
#
And the drama was about a little girl who became an orphan, and she was going around
#
India on an elephant, to make it very exciting, to find her parents.
#
Actually, no, she got separated from her parents, so that was kind of the idea behind the show.
#
And I was a kid about roughly about the same age as the character in the show, and I found
#
this just incredibly interesting and fascinating.
#
And coincidentally or not, the name of the show was Maya.
#
And when my first child was born, I named her Maya.
#
So in that sense, you can say that my interest in India started very, very young.
#
But that's kind of looking backward and in an operational sense.
#
My sense in India, my interest in India, really came much, much later when I did my graduate
#
work at Oxford University in the UK, which meant that I was a foreign student.
#
And at that time, there were really only two groups of foreign students.
#
Of course, as I'm sure most of your listeners know, if you're a foreign student, foreign
#
students hang out together because they're foreigners.
#
And so there are only two groups at Oxford.
#
One was American, two large groups.
#
One was American, at that time anyway, one was Americans and the other was Indians.
#
And I wasn't really too interested in hanging out with other Americans because what was
#
the point of leaving the United States and going to England if you're just going to hang
#
out with more Americans?
#
So I started to hang out with the Indians there.
#
And that's when I became very, very interested in India.
#
In fact, so much so that I actually explored, you may, I'm sure you don't know this, I actually
#
explored the possibility after I finished at Oxford of teaching at St. Stephen's.
#
Yeah, but that fell through.
#
They weren't really interested in hiring a foreigner.
#
So anyway, but it kind of started from there and only grew and grew, particularly after
#
I married my wife, who is from Calcutta.
#
One of the sort of journeys people make, which kind of interests me a lot is just the shaping
#
of the self, how do they become who they are?
#
And a part of that is the process of dealing with two separate kind of anxieties that can
#
come, especially when you go to college.
#
And one of those is the anxiety of just fitting in, right?
#
You want validation, you want to be popular among your peers, you want all of that stuff.
#
And the other one is that anxiety of finding yourself, like what do you really want to
#
Like a lot of people, they'll kind of, they'll let inertia guide them, you know, accidents
#
will take them from one place to another and then they'll let inertia guide them and they'll
#
go all the way through and they'll get their degrees and their PhDs and their jobs and
#
build careers around something that was never a really deep, intrinsic desire in that sense.
#
So, you know, and it strikes me that if you were sort of, you didn't want to hang out
#
with Americans in Oxford, and I guess you wouldn't have been worried then about so much
#
about the validation and all fitting in and all of that, but perhaps more into self-actualization,
#
I'm guessing, from the way that you, you know, describe that narrow aspect of it, who you
#
But take me through, you know, how these two processes worked for you, one, the kind of
#
process of, you know, dealing with the anxiety of what other people think of you and dealing
#
with that, which, you know, getting comfortable in your own skin, so to say, which some people
#
And then with figuring out what is it that you want to do with your life, like what drives
#
Like, you know, is it what you're interested in?
#
Is it what you're good in?
#
Or is it just that you happen to have taken a particular path and it works, why not just
#
Give me a sense of that.
#
In terms of people, I never really had to worry about this, because you see at Oxford,
#
you have a bunch of British people who know that they are the future elite of their country,
#
and they're on this path, and they know that if you're a foreigner, you're completely irrelevant.
#
So they weren't really interested in us, us meaning the foreign students.
#
And so the path to being socially accepted wasn't there.
#
So it wasn't something that I even could worry about, you know.
#
I just accepted the situation as it was, and I focused on my work.
#
You're describing it today in this analytical frame, that, you know, there is a British
#
elite in the Oxford political economy and philosophy programme, PPE, Oxford PPE.
#
I mean, the joke is all the prime ministers have done PPE in terms of it's not a joke.
#
PPE is the best leadership track of the whole world, and they are sorted, and in a way they
#
I mean, I experienced a bit of that at the early years at IIT, that the people knew that
#
something very exciting is coming their way.
#
Is that how you would intellectualise it today, or did you equally understand it at that age?
#
Yes, I was made to understand it.
#
I'll give you a small example.
#
We had these rooms at university for the students to sit in.
#
The rooms for the graduate students were called middle common rooms.
#
So there was junior for the undergraduates, middle for the graduates, and then senior
#
common room for the dons.
#
And I was coming out of the middle common room one day, and there was this sort of well,
#
and at the other end of the well there was an opening onto the quad.
#
So there were two people standing there looking outward to the quad.
#
They didn't see me coming.
#
And I overheard one say to the other, these are two British students, I've never really
#
met an American that I liked.
#
I didn't know what to...
#
I wanted to be swallowed by the ground, of course, right?
#
And they turned to me and they looked at me and they said, you're not American, are you?
#
And then, oh my God, I really wanted to be swallowed up by the ground.
#
And then I scurried away.
#
Well, they should have wanted to be swallowed up by the ground.
#
So, yes, I was made to understand this.
#
And you know, the second part of the question, like, how do you figure out who you are and
#
what you want to do in your life and so on and so forth?
#
Like I imagine for many of these British students who are doing a PPE, that itself is a kind
#
Because they are so shaped by circumstances that you're born into the, you're born into
#
relative affluence, you go there, you're doing the PPE, you know, everybody has, you're a
#
future elite of the country and you know it, right?
#
And I imagine that much as it can, you know, take away anxieties that others might suffer
#
from, it is also a trap.
#
It can also constrain you because, you know, maybe there's a different kind of life you
#
would have loved, which you no longer have access to because you've been put in a box.
#
You're a certain kind of person.
#
I feel that there is no greater burden than high potential.
#
So each of these individuals is actually running on a treadmill and it's not fun.
#
It's not pleasant, meaning from the outside in the modern hatred of the elite, it's easy
#
to throw stones at that sense of certainty that, you know, I've got a track, I've got
#
a career, I've got the social networks through which I'm going to end up being elite.
#
But it's actually a tremendous burden as well.
#
And yeah, so I went to Jaipur on a holiday recently and one thing that struck me, and
#
I'll tell you why it's relevant, is that it's known as a pink city, right?
#
And the reason it's known as a pink city is that sometime in the late 19th century in
#
honor of a visiting British monarch, they decided to paint it pink.
#
I mean, I don't know why that thought came from.
#
But once that brand got stuck onto them, the pink city, they embraced it, right?
#
Tourists know it as a pink city.
#
The entire tourist area, all the buildings are painted pink, you know, perhaps not elsewhere.
#
Even if somebody is rebelling against the pinkness of Jaipur by painting his own building
#
some other color, it is a rebellion that establishes that there is that convention.
#
And by embracing pink, by embracing its pinkness, what Jaipur therefore does is that it closes
#
itself off from other possibilities where it could have gone in different directions
#
and so on and so forth.
#
And I'm just using this as a metaphor for I think what happens to all of us in different
#
ways, in the sense that for these PPE, British students in Oxford, that's a kind of pinkness,
#
that career path, that narrative built around them.
#
If somebody tells a young 15-year-old Indian girl who is in a town somewhere that, hey,
#
you smile so well, you know, and it's so nice, you're so docile, you know, that could become
#
a pinkness for her where she embraces that part of the personality because that's where
#
you're getting validation from.
#
And I often think, and I think it's a trap everybody needs to watch out for because,
#
you know, you close yourself up to other possibilities when you let yourself be defined by one possibility
#
and that's kind of an aside.
#
And I think all three of us would sort of have the distance to be able to look at ourselves
#
that way and say that, OK, you know, but so in that process of, you know, the shaping of
#
you, figuring out who you are, what you want to do, and then eventually, you know, going
#
on to do whatever you did.
#
And you became an Asia specialist and you're known as an India specialist as well, you
#
know, and we'll talk about those phases separately.
#
But, you know, tell me more about the defining of yourself.
#
Was pinkness ever an issue?
#
Was it difficult to become comfortable in your own skin and, you know, be chilled out
#
How did that play itself out?
#
I know exactly what you're talking about.
#
Not because it applies to me, but because, yeah, obviously, I've seen it.
#
There were some of the people, some of the British people, Europeans whom I met at Oxford,
#
who did not succeed in a great way.
#
And they were crushed by this because you're expected, you're expected to make it big.
#
And that's very, very difficult because, of course, it's difficult to make it big.
#
And luckily, luckily, I never had that expectation.
#
I come from quite an ordinary family.
#
You know, nobody, nobody put any particular pressure on me to do anything.
#
I was allowed to do whatever I wanted.
#
As you, of course, I didn't, you know, when I was in school, I didn't know what I wanted
#
And actually, but I, I can kind of tell you the moment when I took the path of economics
#
and I was coming home from school with another friend of mine and my mother picked us both
#
up in the car and she was, she was going to drive this other kid home than me home.
#
And so we were talking in the car and he said to me, so when you get to university,
#
what are you going to study?
#
And I said, I don't know.
#
And I said, what are you going to do?
#
And then he proudly said, I'm going to study economics.
#
So I said, what's that?
#
And he said, well, it's a combination of history and math.
#
And I said, oh, wow, those were my two best subjects in school.
#
So when I got to university, I had to decide which courses I wanted to take.
#
And and then I remember this conversation and I said, OK, I'll take an economics course.
#
And but I have to tell you, I didn't really pay too much attention to it.
#
And one day I came to class and the instructor announced that today was an exam day
#
and I hadn't paid any attention.
#
I hadn't realized that there was going to be an exam that day.
#
And I went into absolutely full panic.
#
So we handed out the exams and then I looked at it and I thought maybe I might.
#
I had paid attention class.
#
I thought maybe I might have a chance of actually passing this.
#
And so I filled it out.
#
And then when I got back, I got really good mark.
#
And then I said, oh, OK, all right.
#
So maybe maybe this really is for me.
#
And so I just kept going.
#
And that initial impetus, I guess, is an impetus that comes from you're being good at it.
#
It's easy for you. I guess you don't mind it very much.
#
So you're you're kind of doing it.
#
But is there a phase during which you like fell in love with the subject in the sense
#
that one way to look at or feel like economics would be to see it as an end
#
and to say that I am good at this, I want to do economics.
#
You know, that's one way to look at it.
#
But another way would be to again perhaps take a wider view and say that there are problems
#
I want to solve. And economics is a great means to understand what the problems are there
#
and a great tool with which to solve it.
#
So when does you know, I mean, there wouldn't be a specific moment, obviously.
#
But is there a phase during which that sort of started shifting or did you always see
#
that kind of big picture view? And do you feel that others have that big picture view?
#
I think it's a combination of what you just said and what I said earlier.
#
Like most people, I'm very curious about the world around me.
#
I want to understand as much as possible about it.
#
I find that economics offers a very coherent and convincing way.
#
It's one way. It's not the only way.
#
There are many different ways to look at the world.
#
But the economic way of looking at the world really appeals to me.
#
I find it interesting. I find it convincing.
#
And then, yes, in terms of problems, when I was at university was an extremely bad time
#
in the world economically.
#
And I wanted to under, you know, unemployment was extremely high.
#
Inflation was extremely high.
#
Growth was extremely low.
#
And I wanted to understand why.
#
And can something be done about this?
#
It seemed really, really important to me.
#
It still seems important to me.
#
And I'm guessing there would be late 70s in the way you describe it.
#
Yeah, yeah, we're talking about early 80s, actually.
#
And Ajay, is that something that you've also noticed that a lot of people don't seem to
#
have that native curiosity, which you would imagine that they're on a track and they're
#
continuing down that track.
#
And that native curiosity is in there.
#
Like one of your laments, which really resonated with me in the past on a slightly tangential
#
subject is about how, you know, a lot of fine minds are lost to academia because they don't
#
engage enough with the real world as you guys do.
#
And therefore, they're lost to academia and they're playing that circle game.
#
Not your words, obviously my words, but they're playing that little kind of game.
#
But do you think that there's a fundamental sort of situation where most people in most
#
professions are just going through the motions and that quality of curiosity becomes really
#
important if you want to have an impact on the world?
#
The really, really difficult puzzle is why do some people wake up and, you know, in a
#
way, some people are slumbering and some people wake up and I don't know how to industrialize
#
So I have always settled on a more artisanal approach that, you know, each of us, we talk
#
to 16 people in our life and we try to help those 16 people think more about the world.
#
And I am the beneficiary of Josh.
#
I'm one of the people that Josh has talked to and that has helped wake me up.
#
When I hear your story about that economics exam, I just hate it because it is dumb luck
#
that at that right time, that right teacher was there and that one exam was there and
#
it terrifies me about the randomness and correspondingly the wastage of talent that is happening around
#
So for instance, I've always thought that girls and STEM is just a failure of those
#
That if we just get some of those conversations right, if we get the emotional structure around
#
There is absolutely nothing holding girls back from STEM subjects.
#
So this, you know, the way boys instinctively grow up into solving maths, puzzles and programming
#
I just think it's about the way we've created a society around them and it's truly wrong.
#
So I'm a great skeptic about all formal education because I think it wastes so much talent.
#
I think most of us are born gifted and we just fail to unwrap our gifts given the way
#
the world is organized.
#
Yeah, when looking back at my life, I've always wrestled with this question, right?
#
How much of this was just dumb luck and randomness and how much of this was inevitable given
#
sort of some deep intrinsic nature of me.
#
And I go back and forth on this question all the time.
#
I'll give you another example.
#
If you had to pick one reason why I joined the IMF, it was because Britain had an IMF
#
And so everyone was talking about this and I had never heard of the IMF.
#
And so I wanted to know, you know, what is this all about?
#
And then it seemed really interesting to me.
#
But you know, one could make the exact opposite argument that if I had not found economics
#
an interesting and convincing way of looking at the world, I would have stopped, even if
#
So maybe there was something sort of deep down intrinsic in me that led me to where
#
I mean, if you look at the role of circumstance, maybe when your mom was giving you a lift
#
and if the kid in the car had said something else and not economics, who knows, I want
#
to be a basketball player.
#
Well, I don't think that would have happened.
#
So here's another question sparked off from something you said, Ajay, about how, you know,
#
the conventional ways of thinking about these fields and thinking about gender roles can
#
just lead to this cascade where there aren't enough girls in STEM and it's not because
#
they can't be good at STEM, but it's just it's a vicious circle that's kind of happened
#
and equally you could have a virtuous cycle.
#
And what I wonder is that, and I see this across many other fields, where I see that
#
the mainstream and the mainstream way of doing things is gradually crumbling because
#
it was shaped by a response to previous, to constraints that once existed and now no longer
#
For example, if you look at it in the media, you know, if you wanted to write once upon
#
a time, you know, you don't have the tools of production open to you.
#
If you're in the 80s or the 90s, you have to go to a gatekeeper.
#
If I want to write an article, I have to, you know, go to a gatekeeper and a mainstream
#
newspaper and, you know, and their model is that they are aggregating eyeballs, selling
#
it to advertisers, giving me a pittance of that.
#
There's no direct way for me to reach people.
#
And all of that is a result of scarcities that no longer exist.
#
Today, we have the tools of production.
#
We are not bound to a particular format.
#
Like an article is 800 words, a book is 100,000 and there's nothing else.
#
A filmmaker is not bound by, you know, making a 22 minute thing for television or a 90 minute
#
A musician, you know, the conventions of the three minute song or the 40 minute album came
#
about because of physical constraints and those no longer exist and everywhere they're
#
I would say maybe perhaps even in the sense of nation states, you know, that whole concept
#
is also becoming a little more fluid because of globalization and technology and all of
#
So I see across, whether it's a creative economy, whether it's media, it feels to me
#
that an old way of ordering the world, ordering that profession is no longer relevant, but
#
nothing new has really come to take its place.
#
And I'm just wondering if, you know, what you said, Ajay, that it's also kind of true of
#
that in the sense that earlier, you know, like you and I think that's true of education
#
also, like nothing I learned was really from the formal education system, partly because
#
I'm not as well educated as you guys.
#
But I think for most people in India, it would be true.
#
You've really learned nothing in school and college.
#
And maybe if you went abroad to a good place or if you went to the IITs or whatever, but
#
for most people, all you're learning is elsewhere.
#
That mainstream system is completely irrelevant, you know, and therefore, if that mainstream
#
setup is irrelevant, then the question of women in STEM also becomes sort of a different
#
question now in modern times, because people can go online and they can just follow their
#
And, you know, if you're interested in math, you can watch one math video on YouTube and
#
you can enter a rabbit hole and you can watch like 50 others and you can choose your
#
directions in a different way.
#
You have access to communities of choice rather than communities of circumstance, you
#
know, and our generation in a sense is that transitional generation, which managed to
#
sort of move to that point.
#
So, you know, what are your kind of thoughts on all of this?
#
You're absolutely right.
#
We're a transitional generation, right?
#
I mean, think of it, think of it a little bit in terms of an Indian context where the
#
generation above us knew very, very little about the outside world, right?
#
You know, maybe there was some occasional article in the newspaper, maybe you had some
#
book about the outside world, but how would the people older, you know, a generation older
#
than us, they didn't really know much, aside from tiny, tiny elite, right?
#
But most people had virtually no idea.
#
We know a lot, but now consider the 20 year olds in India, right?
#
They grew up, all of them, all of them, you know, even people sitting in villages, they've
#
grown up in a globalized world, you know, everyone is watching YouTube videos, right?
#
And YouTube is a global phenomenon, right?
#
Everyone is on Facebook, everyone is on Instagram.
#
And the images that they see are from all over the world.
#
And this is this is what's inspiring the 20 year olds of this of this era.
#
It's it's really, it's really, really striking how how things have have changed in in in
#
this country. So, for example, so for example, they they think they they think both globally
#
in the sense that they they they want to produce content, say for a global market, or they
#
think the other way that, oh, I saw something on a YouTube video that looks really, really
#
cool, and I want to bring it to India.
#
And that process, which never occurred to the older generation, occurred to us, but it's
#
a little bit complicated and difficult for them is very, very natural.
#
It's just a completely different world nowadays than the ones that we grew up in.
#
And you know, one I had done an episode with Vinay Singhal of Stage.in, which calls itself
#
for Netflix for Bharat. And by Netflix for Bharat, they're not producing OTT content in
#
the Indian languages like Hindi and Bengali and all of that.
#
They're producing OTT in Indian dialects like Haryani and Bhojpuri.
#
Now, that is mind blowing to me.
#
And it was a revelation to kind of figure that out, because my impression always was
#
that there is a homogenizing effect that happens with progress.
#
You know, languages have cities have languages, dialects exist outside of that.
#
Obviously, we are urbanizing.
#
And that's a damn good thing.
#
Now, whenever you go to a city, there is pressure on you to speak the dominant language.
#
You know, in Vinay's case, he grew up in a village in Haryana.
#
He speaks about first, it was a struggle to him to understand English when he went to
#
school. Then when he went to a city, it was a struggle to him to understand Hindi, because
#
even though he's from Haryana and that's, you know, it was a dialect.
#
And one would imagine that alas, that is one of the poor effects of one of the side effects
#
of progress and growth and all of that, that you go to cities and this homogenizing stuff
#
happens. But now I'm beginning to find that there is a move in the other direction also,
#
where individuals get empowered to keep their microcultures alive.
#
And so he does content in Bhojpuri, Haryanvi, and I think they've added a third
#
language now. And there's a thriving industry of, you know, he charges Netflix prices.
#
And I think he has three and a half lakh subscribers by now, which I would never have
#
imagined. You know, and he's from a small town, so he didn't know that there are things
#
you're not supposed to do. Any traditional VC would have told him, hey, this is never
#
going to work. Right. But it's working spectacularly.
#
There is reverse migration from Bombay, in fact, where Haryanvi kids who came to Bombay
#
because they wanted to do filmmaking have now gone back to Haryana.
#
And there's a local industry of people making Haryanvi content, which I found incredibly
#
fascinating. And there is this one field in which I sort of have a sense of this happening.
#
But do you feel it can happen elsewhere also, that we no longer have to look at these
#
centralised institutions like a Bollywood or a Tollywood might be, but that there are
#
more localised ways to find your niches, to find your little communities of choice and
#
Yeah, that's true. That's a paradox of the times that we're living in.
#
Let's say you're sitting in a village and you're very interested in, I don't know,
#
plastic pigs. There's a pig sitting on the desk there. Right.
#
Yeah. And you can go online.
#
Nobody in your village or whatever is interested in plastic pigs.
#
But you want to have a collection of plastic pigs because you think they're really, really
#
cool. Right. And you think you're a misfit and you are the only one in the world who's
#
interested in these plastic pigs and everyone in the village is making fun of you.
#
You can go online and you can discover that there are thousands of people all over India
#
and the world who have the same interest as you.
#
And as you said, you can create a community.
#
So, yes, you're right that in some sense it promotes fragmentation because you can
#
pursue your own very individual interest rather than the interest of the village or the
#
city or the nation. Right.
#
The power of sort of elites to set a dominant trend and influence.
#
You know, everyone is interested in this one Bollywood film.
#
Right. That's the way it used to be.
#
Right. And everyone rushed to the cinema to see it the day it came out.
#
And if you haven't seen it, you would be unable to talk to your friends because that's
#
what everyone's talking about.
#
You know, that, yes, that era is gone.
#
But equally, to go back to my earlier point, if you're interested in plastic pigs,
#
you are not defined by the boundaries of your village anymore.
#
You can find similar friends all over India, all over the world.
#
And so even this kind of localization and this fragmentation, there's still a
#
Beautiful. And so here's a further question for both of you.
#
And I'll kind of take the focus on the economics profession right now.
#
You know, earlier you spoke about the economic way of thinking.
#
And that's, you know, become a popular phrase you'll hear from people who are not
#
economists as well now, partly because you had the popular economics successes of the
#
last 20 years, like your Freakonomics and Tim Halford's columns and books and so on
#
and so forth. And there's both a danger there and an opportunity.
#
And the danger there, of course, is that, you know, a little knowledge is a dangerous
#
thing and people can get sort of shallow knowledge and think they know it all, which
#
especially the young sort of tend to do.
#
And and therefore that permeates the discourse in a way.
#
But the opportunity there is that there are no gatekeepers to knowledge anymore.
#
So a lot of people can actually apply different kinds of lenses, including the
#
economic way of thinking, to look at the world and the problems and understand it
#
better. And that might especially be sort of relevant in a time where the economics
#
profession itself, and you'll be able to tell me if I'm being too harsh here, is
#
becoming more and more ossified.
#
Like, I think within the humanities, certainly one sees that there is often no
#
connection between what's happening in academia and with what's happening in the
#
real world. And the danger there in economics is that you can be under pressure
#
to follow the fashions of the day, you know, whatever a particular fashionable way of
#
thinking might be in your university or your group or whatever, or whatever, you
#
know, funders might be willing to fund at a particular point in time.
#
Like today, I guess any project with climate change in the title of blockchain in the
#
title is going to get funded, right?
#
Kind of. I mean, I know I'm caricaturing, but kind of like that.
#
So what do you feel about this democratization?
#
Because on the one hand, you are an expert who's, you know, got the degrees, done the
#
work, and it must be weird for you to randomly come across somebody on Twitter
#
correcting you and saying some half-baked nonsense.
#
I don't know if that happens to you.
#
But on the other hand, as someone who wants a whole world to think better, to
#
understand the world better, it must also be delightful that there are more people
#
getting into that. So, you know, what do you think about?
#
Then it's for both of you again.
#
Yeah, yeah. Actually, I'd like to hear Ajay first.
#
So I think that there is a very interesting question about the zone of generality.
#
So what is general and what is local?
#
And I think that the line is different in different disciplines.
#
So physics is universal.
#
The properties of a plastic pig are the same everywhere.
#
So, you know, the behavior of atoms and how they vibrate.
#
I got a point out that I read a while back that tomato juice is really popular on
#
planes and not on the ground because your taste buds at that altitude tasted
#
differently and it tastes better. But yeah, but leaving that aside.
#
But every lat long in the world, the same phenomenon will unfold.
#
So in the STEM world, there is really a reasonably flat world of global
#
knowledge. We all partake of that and the creators build into that.
#
And there, some of the old established institutional arrangements have worked
#
relatively well. I would.
#
I can spend a lot of time arguing about the innovation system and how the
#
innovation system has gone wrong.
#
But what's unique and different and difficult about understanding human
#
beings and human societies and human institutions is that you don't get that
#
level of generality. So each place is different.
#
Each place has its own data sets and its own mysteries and its own empirical
#
regularities. So the transplantation doesn't work very well.
#
So I remember once there was an economist who said to me that there was a
#
paper in Indonesia, Josh's favorite country, where there was a natural
#
experiment involving local governments controlling construction of roads versus
#
the central government controlling the construction of roads.
#
And X had worked. I don't even remember which.
#
And that person laid claim that therefore this is true universally.
#
And that's not a fair way to think about it, because there is so much subtlety
#
and detail in the precise design of how power is shared between a union
#
government and a state government and a local government.
#
And what are the checks and balances and what is the social context in which
#
road building is done at a village level versus controlled by a state government
#
So this stuff is not portable.
#
You can't take knowledge from Indonesia and transport it to India.
#
And yet, OK, Josh and you and I are card carrying economists in that we would
#
argue that there is something universal, which is called an economist's way of
#
thinking. So I just want to say that there is something glorious and
#
universal about economics.
#
And yet, how we think about a world that we are placed in and the questions that
#
surround us, we have to constantly challenge ourselves about the extent to
#
which generalizations are supported, what the what the methodology of science
#
folk will call external validity, that, yes, one paper is right in its tiny
#
context. It had better be right.
#
I mean, a good paper is correct in its tiny context.
#
What knowledge can I take away from that?
#
And my sense is that a lot of the global academic economics, a lot of the
#
American academic economics was too quick to assume that what works in the
#
United States works everywhere.
#
And I think all of us today would push back and say that because the U.S.
#
SEC did something and it was well studied and it had X outcomes, that doesn't
#
mean it will port to an India, Sebi setting.
#
And the puzzle for all of us is to find that correct mixture of partly being
#
grounded in some timeless principles, but partly being extremely particular and
#
extremely local. And when I think of India, I actually think things don't even
#
port within India, meaning Bombay is different from Pune, is different from
#
Patna. And, you know, we've got to constantly challenge ourselves that
#
what's the phenomenon that I'm examining?
#
What kind of theoretical constructs would be useful to analyze this phenomenon in
#
front of us? And how do we draw these lines?
#
And I think that the incentives and the credentialism and the machinery of
#
economics does not do justice to this question.
#
So in economics, you just got to get a paper in the AER and you are correct.
#
And I think we've lost a certain amount of the subtlety and the debate.
#
And very often the voices in Pune and Patna are just being crushed, whereas
#
actually there needs to be a lot more respect for local knowledge all over the
#
country. Of course, I would agree.
#
I mean, your original question was really about the limits of academic
#
economics. And, you know, partly this is a sort of function of getting older,
#
right? And your perspective shifting, right?
#
When you're 20 years old and you're in university, you're in awe of these
#
teachers because they're so clever and they seem to have figured everything out.
#
And so all you really need to do is ape them, memorize what they had to say and
#
then ape their methods.
#
And then surely the world will be a perfect place.
#
And as you get older, you realize, well, it's not really true that a lot of these
#
papers come about because these people have ideas and then they find the data to
#
As someone once said, they torture the data until it confesses.
#
And also, as you were saying, fashions sweep the world and people play into those
#
fashions. If people are convinced about climate change, well, why not do a paper
#
showing that climate change is going to affect X in a really, really big way?
#
Maybe true, maybe not be true, but you can really get a lot of attention if you
#
publish such a paper, right?
#
Whereas, for example, if you say that climate change will not affect Delhi,
#
whatever, that paper is just going to be ignored.
#
That's not a helpful paper.
#
So, yeah, that happens in academics.
#
But even so, the fundamental, as I said, as a sort of framework for looking at the
#
world, I find economics an extremely useful framework.
#
And then, as you were saying, the task is to figure out how to go from that broad,
#
very, very broad framework to the actual problem at hand that you're trying to
#
solve. And that is extremely difficult.
#
That requires a lot of experience, a lot of knowledge, and a tremendous amount of
#
judgment. It's really, really difficult.
#
And to go back to what you were saying earlier, it's really, really annoying when
#
people who think they know it all start criticizing you just because
#
what your conclusion is, is not in line with their prejudices.
#
And we can go into that because this is a big, big problem, not only for people who
#
aren't intelligent, but for intelligent people.
#
A lot of people use their intelligence in service of some particular goal, which
#
may have nothing to do with the search for the truth.
#
It's a big, big problem.
#
There's a great essay I linked from the show notes by Gurvinder Bhogal, a very
#
interesting thinker I discovered through Twitter, about why intelligent people are
#
drawn to bad ideas, you know, and a lot of sort of insights there.
#
And let's talk about the discourse a bit, since you kind of brought it up.
#
Like, I think that among the problems with the discourse, of course, is that, you
#
know, you only get heard and amplified if you are expressing something with certainty.
#
And the world, of course, is complex.
#
Most certainties need to be sort of nuanced or caveated or whatever.
#
And, but it is expressing certainties that actually get you some mileage.
#
So there is an incentive to be falsely certain than to be truthfully
#
nuanced in the public discourse.
#
And then tribalism plays out in two ways, where one, once you find an
#
ideological tribe, which is, you know, and it's seductive to be part of such
#
an ideological tribe once you hit social media or whatever, you adopt every
#
dogma of your tribe, so you're not questioning any aspect of, you know, it's
#
a package deal, it comes as a whole.
#
And then, like you said, if your conclusions go against what they have
#
only learned dogmatically and not thought about in an independent way, of
#
course, they will react harshly.
#
In fact, they will raise their status within their tribe by attacking you.
#
And therefore projecting themselves as more virtuous and more
#
knowledgeable at the same time.
#
And that poisons a public discourse.
#
And another aspect of tribalism that poisons a public discourse is, and we
#
see this in India, is that once you choose your political tribe, it is
#
not an ideological tribe anymore.
#
Once you choose your political tribe, then everything your party does is right.
#
Everything the other party does is wrong.
#
And it doesn't matter what the, you know, the specific might be.
#
If your party changes this position on a subject, like the BJP did on
#
FDI in retail, for example, a few years ago, you'll go along with them and
#
you'll find ways to rationalize it and kind of justify it.
#
And here again, it's a narrative battle.
#
It is not sort of a truth-seeking exercise.
#
So how much of a constraint does it then become to someone in your position
#
who is both a serious scholar who knows something about the subject, but also
#
at one level, a public intellectual.
#
And I'm sure you see that responsibility as well, or rather not responsibility,
#
but that calling to make some kind of a difference to that discourse.
#
But, you know, in one of your posts, you spoke about how there was a George
#
Garland routine called seven words you never say on television, and you have
#
many more words than that, that you've got to be careful of saying, right?
#
So, you know, so what is that process like?
#
Before that, I just want to amplify on that.
#
The way you've described it so far, it is that there's a bunch of free agents
#
in the world who choose to believe some things or not choose to believe some
#
things, it's a bit harder and more messy in academics because most people in
#
academics are running on a racetrack of getting publications, their careers,
#
their lives are defined by those pubs.
#
And now think of that political and power context surrounding the research
#
because the game is that of getting pubs in the right journals.
#
So there is so much incentive to understand the fads of the age and the
#
biases of the age and carrying the right kind of paper to the right editors and
#
the referees and this kind of paper is likely to work and this kind of paper
#
So truth seeking gets a low priority because now it's no longer just your
#
hobby to seek the truth, but it's your business.
#
It's careers are made and unmade on your ability to get a few papers into the
#
And that is an even bigger distortion on the journey of discovering the truth.
#
And, you know, by default, we give so much prestige to academics and the top
#
journals, but it's ironic that the top journals are the ones most affected by
#
the game of how do you navigate the maze and get a paper in?
#
This is a big, you've touched on a really big problem, really big problem.
#
Academics is a whole separate one, which I think it's in a bit of a mess right
#
now for the reason that Ajay mentioned, but the problem is that what bothers
#
me is to the best of my ability in my life, I try to get at the truth.
#
That is my objective, right?
#
Now I may fail and in many cases I thought something was the truth.
#
I discovered it wasn't, right?
#
You know, I had argued in favor of X and now I look back and I feel that
#
that was a mistake, right?
#
So I'm not, you know, of course, right now I believe I am in complete
#
possession of the truth, right?
#
That was before I made these mistakes.
#
Now I have it all, but, and it is important, I think, to fight for
#
what you believe is the truth, right?
#
At the same time, recognizing you might be wrong, right?
#
And I'll get back to that, but what bothers me and, you know, as I said, I
#
could be wrong in what I'm saying and if other people come up with evidence
#
that shows that I'm wrong, I will accept it.
#
Maybe not graciously, but I will accept it.
#
What bothers me, that doesn't bother me at a deep fundamental level, of course,
#
at the time it bothers me tremendously, I get really annoyed, right?
#
But what bothers me is tribalism, to use your word, where people come at and
#
argue against you using their intelligence purely on tribal grounds.
#
And the essence of their attack is, sorry, you failed the loyalty test, right?
#
So that it's not a search for truth.
#
Everything, every, every issue is just a loyalty test.
#
Are you with us or are you against us?
#
And I want to step back and say, no, no, no, it's not that I'm with you or against you.
#
I'm in search of the truth.
#
Maybe in some cases, my belief will be that yes, on this issue, I agree with you.
#
But please allow me on this other issue where I say, I don't.
#
And what bothers me is that this possibility of discourse globally is being shut down
#
because all people are interested in this loyalty test.
#
And this really, really worries me because shouldn't we all be aiming to get at the truth?
#
Why is loyalty test more important than truth?
#
I mean, as that famous dialogue from that film goes, can you handle the truth?
#
So, you know, let's sort of get back to your kind of your career track, as it were.
#
You've done your thing at Oxford and how did IMF happen?
#
You mentioned it was a sort of an accidental kind of thing, but take me
#
through that process and, you know, what you did there and how did it shape you
#
in the sense that, obviously, if you weren't there, you'd be somewhere else
#
doing something else and perhaps, you know, becoming a different kind of person.
#
You know, how much does how much you find your work has, you know, in that sense,
#
shaped the person that you've become.
#
Like here, of course, with IMF, a lot of your work is looking at Asia closely,
#
looking at Korea, looking at Jakarta, looking at India.
#
And that ties in with your interests as well, I'm guessing.
#
But, you know, that might not necessarily have been the case.
#
You could have, you know, it could have tied in with some other interests elsewhere.
#
Does that have you been in one place all your life?
#
It could have perhaps made you a less open person or you would have been
#
you would have had you would have met a different set of people,
#
not the same set of people.
#
So take me a bit through, you know, that part of your journey.
#
And what did IMF mean to you?
#
What was that work? What did it mean to you?
#
Yeah, IMF has shaped me very profoundly.
#
I'll give you one. I'll give you one example.
#
When you're at university, the standard approach that they teach you
#
is you come up with a theory and then you examine the you take it to the data
#
and you employ sophisticated mathematical tools
#
and that tells you whether your theory is correct or not.
#
That's what you're taught at university.
#
That's the that's the scientific approach in economics.
#
What I discovered when I went to the IMF was something
#
that never occurred to me at all when I when I was studying
#
that if the data does not support your theory,
#
there's a possibility that the data is wrong.
#
That never, it never, never occurred to me.
#
And, you know, when you go out, as I was saying, into the real world,
#
you discover, oh, it's not so simple as they say.
#
So I mean, that was a really profound lesson that I learned very, very quickly.
#
A lot of the data published all over the world is rubbish.
#
It's just sorry, can't be relied on, does not correspond with the truth.
#
The other thing that I would mention, I mean, is
#
well, I'll mention two more things.
#
One is it helped me a lot with with the standard,
#
the standard problem, compare and contrast.
#
Right. This is the standard essay question
#
And so I saw many different countries.
#
I saw I saw that there are many different ways to to to handle problems.
#
Some things work in some countries, some things don't work.
#
I learned the truth of what Ajay was saying was saying earlier
#
about the the tremendous importance of local knowledge.
#
And that's one reason why why I decided to study India very, very intensively,
#
because I realized I couldn't actually say anything useful
#
unless I understood India very, very deeply.
#
So that, you know, that's a that's sort of a second
#
And then the third thing that shaped me very profoundly was
#
I got Ajay mentioned Indonesia is my favorite country.
#
That's not technically true.
#
But what he really meant to clarify for the listeners
#
by that comment was that I keep bringing Indonesia up in conversations.
#
And the reason I keep bringing Indonesia up is not
#
is is is not because Indonesia is a model country that everyone needs to emulate.
#
No, it's it's because I was heavily involved with the East Asian financial crisis.
#
And in Indonesia, more than 200 banks failed.
#
And I was heavily involved in and all the major conglomerates failed.
#
And I was heavily involved in.
#
Reconstructing an entire economy from ground zero
#
with no working banks and no working companies.
#
an experience that has shaped me very, very profoundly, because
#
you know, it is not something you study in school
#
It was an incredible experience.
#
I'll come back to that experience in a moment, because
#
But here's sort of question about IMF itself and how your mindset evolved
#
while you were there, like the caricature way through which common people
#
look at the IMF and the World Bank and institutions like that
#
is that they are remote operations,
#
you know, headed by clueless Westerners at best and evil capitalists at worst.
#
And they are, you know, in a top down way, imposing their ideology
#
on a poor country, which is not being able to kind of fight back.
#
And you have all these bizarre caricatures of institutions like that.
#
And while those caricatures take it too far, at the same time,
#
I'm guessing that sitting in a place like that, there must be sort of
#
the temptation to take that grand view as well, you know, to sort of
#
when you look at something like India, for example, where you know that
#
all the data is unreliable and no one actually working here
#
and policy seems to know what they're doing.
#
And governance is such a disaster.
#
It's very easy for you to therefore, I'm guessing it's very tempting
#
for you to then have a list of these are the things that we must do
#
and we must use whatever leverage we can to kind of take it forward.
#
But everything that you've described about yourself really
#
is a journey towards humility, you know, as you as you mentioned.
#
So, you know, how how did people at IMF and so on
#
look at the problems within them?
#
Because on the one hand, yeah, sure.
#
A lot of the data you're getting is crap.
#
A lot of these people you're talking to are doing the wrong things
#
or acting with the wrong incentives.
#
And, you know, it is harming their countries and so on and so forth.
#
But at the same time, there is a danger that that can then just make you
#
condescending and paternalistic and all of that.
#
And that can't possibly go down well.
#
So tell me a little bit about this, about what you saw your experience with this.
#
And I would imagine that even then, being in Indonesia with the IMF,
#
for example, having a say in restructuring the entire economy
#
when everything has basically fallen apart.
#
You know, what is the interaction there with the local elites like?
#
What is because the scale of the challenge is not just an intellectual
#
challenge of figuring out what has gone wrong, but also the sort of the social
#
and political challenge of dealing with the way that other people see you
#
and of working within those systems and all of that.
#
When I started at the IMF, I was in my 20s.
#
I was actually the youngest economist in the IMF, the entire building.
#
And because I was in my 20s, I naturally thought that I knew it all.
#
And that if I could get the world to listen to me, then the
#
world would be a perfect place.
#
And absolutely brilliantly, I was at the IMF.
#
So I had the leverage to make the entire world listen to me.
#
So I thought, I thought this was absolutely fantastic.
#
And, you know, I would be spending the rest of my life with people coming up to me
#
from all over the world, thanking me for my great contributions to, to, to mankind.
#
And I was really looking forward to this.
#
Didn't take very long until I was disabused.
#
First, as you said, the rest of the world does not thank you.
#
They have a very jaundiced view of the IMF, but much more, much more importantly,
#
what I, what I discovered was that no, the problem was not that the IMF has
#
insufficient power and it has very little power, believe me, the, the problem,
#
the problem is more that as Ajay was saying, as you were saying, that there's,
#
there's limits to how much someone sitting far away can advise a country.
#
What I decided was that two things, that the best that I could do sitting in
#
Washington, which is the headquarters of the IMF, was to intervene in policy
#
debates that already existed within the country on the side that I thought was.
#
It wasn't, it wasn't to go in and say, Oh, you guys are a bunch of idiots.
#
This is what needs to be done.
#
I don't understand why you haven't figured this out for yourself.
#
I, I, I hear the two arguments that are going on in this country right now.
#
And if you ask my advice as a neutral outsider, I think this one is the correct
#
And I think that's broadly the function of the IMF.
#
I think most of the people in IMF have come to that understanding that that's the
#
most the IMF can do and that that's actually a useful role because you are
#
unbiased, you are an outsider and at least you have that to contribute to the
#
The second thing, but then I, I, I grew dissatisfied with this and I came, I'm
#
sure we'll get to this later.
#
And I, I, I came to run the IMF office in, in, in Delhi.
#
And then at that point I decided that I really need to know a whole lot more
#
about India and that's when I met Ajay.
#
And I mean, that was part of my way of learning about India.
#
And of course I learned a tremendous amount just by, by talking to him.
#
And what was the Jakarta experience like?
#
I didn't sleep for two years.
#
And I mean that almost literally.
#
You can imagine why it was the most traumatic experience for, forget
#
for me, for the country.
#
Like set a context for my listeners who may not be aware of the Asian crisis
#
and all of that, you know, what went wrong and, you know, and when you were
#
there, what was sort of your ambit?
#
So what happened was that, and excuse me if parallels suggest themselves, but
#
I won't, I won't mention them.
#
The model in Indonesia, the economic model in Indonesia was to promote
#
national champions and what they did was they, they took entrepreneurs who
#
seemed very, very skilled and they were skilled, they were very clever people
#
and, and give them licenses, you know, you do this industry, you do this
#
industry, you do this industry, or actually they're all conglomerates.
#
And in order to allow them to grow rapidly and thereby allow the nation
#
to grow rapidly, these people were encouraged to borrow and they, they
#
borrowed tremendous amounts of money.
#
The problem was that this, this borrowing was all based on a, on a, on a, on a
#
certain bet, which was, which was that the, a lot of, a lot of industries that
#
they were in were domestically focused.
#
So the revenues were in local currency, but a lot of the borrowing was in
#
dollars, so the bet was that Indonesia would be able to maintain the peg of
#
the local currency against the dollar.
#
Then what happened was Thailand got into trouble and Thailand was August, 1997.
#
And when that happened, pressure came on the Indonesian rupiah and eventually the
#
central bank ran out of reserves and wasn't able to hold the local currency
#
against the dollar, and then it started to slip and then people absolutely began
#
to panic because these companies were extremely highly leveraged.
#
That means they had borrowed a lot of money and if the currency depreciated,
#
they wouldn't be able to pay it back.
#
And so capital began, then began to go out of the country, meaning the
#
businessmen themselves realized that if this continued, they would be ruined.
#
So what they needed to do was get their money out of the country where no one
#
could touch it and get it to Singapore and other places as fast as possible.
#
That intensified the pressure on the currency.
#
The currency absolutely collapsed.
#
It started from about July, 97 and by December, 97, it was basically all over.
#
And the exchange rate had gone five times, right?
#
Yeah, it went from 2,500 to 15,000 per dollar.
#
So it was complete collapse because the companies collapsed and then the banks
#
collapsed and there was no economy.
#
And that meant the economy couldn't import and it was absolute disaster.
#
So Josh, you've told me a nice idea, which I've used many times, which is that if you
#
have a gigantic earthquake in Bombay, what do you do next?
#
And his point has been the first thing you want to get going is the financial
#
sector, because finance will fund everything else.
#
So you want to rebuild the entire city that requires finance.
#
So when you get this devastation, the first piece that has to come, the
#
primal force in every economy is finance.
#
You've got to get finance up and running and then it will get everything
#
I'm sure that's a fair description of Indonesia.
#
So that was our initial focus.
#
We had to find ways to get the banks up and running.
#
And it was a race against time.
#
I don't know if I can be permitted to give a somewhat indelicate story, which
#
you can edit out if it's too indelicate.
#
The more indelicate it is, the more certain it is to stay in.
#
Well, just to make you know, this most people in this world have not
#
experienced what I'm talking about.
#
So to make it concrete, one day I was at the central bank.
#
That's where my office was.
#
And one day the central bank deputy governor, who was a woman, came into
#
office crying and we asked her, what's wrong?
#
And she said, I went to the store today and there were no sanitary products
#
because Indonesia had no cash.
#
It could not import the raw materials to make them.
#
It could not import the product.
#
That's what the crisis meant.
#
That the central bank governor was reduced to this.
#
You cannot imagine how horrible it was.
#
And we were under tremendous pressure to fix it and fix it fast.
#
And that's why, as I said, basically we could not sleep.
#
We used to have a joke at the central bank, you know, late at night, we'd be
#
working there and some guy would meet you and he said, ah, so you're a
#
member of the nightclub too.
#
Because, you know, this is all we could do, like joke about the situation.
#
But we knew we had to do it.
#
People were depending on us.
#
In more recent times, many people in India have watched the economic
#
crisis in Sri Lanka, in Pakistan.
#
And I think Jeffrey Sachs has this nice way of characterizing it, that the
#
entire society comes unhinged.
#
You know, just basic things completely stop working.
#
It's a collapse of civilization, as you know it.
#
And for people like me who have never experienced that, it's really difficult
#
to even imagine a world where the economy breaks down like that.
#
And in a sense, I think it's a sign of great progress that people like us
#
are, you know, our people have never experienced that, because all through
#
human history, you've seen breakdowns all the time, you've seen shortages
#
and scarcities all the time, and we just take this beautiful standard of
#
living that even people like us have.
#
Of course, we are among the very privileged elites in India, but we even
#
Although there, let me recommend a book to you.
#
It's a very short book, pretty easy to read.
#
It's by an academic at Oxford named Brian Ward Perkins, and the short title
#
is a bit longer, is The End of Civilization.
#
And in the year 410, the Roman Empire started to fall apart and they had to
#
withdraw their troops from Britain, and he describes what happened and how a
#
civilization that was so prosperous can fall apart in no time at all.
#
And as you said, it's not something that you think about could happen.
#
In Indonesia, they never imagined.
#
Indonesia has long been a very prosperous country with a relatively
#
high per capita income.
#
It never occurred to them in a million years that anything like this could
#
happen, but rarely it does, and it's just shocking what can happen.
#
And what did you do there then?
#
What was sort of your role?
#
I mean, apart from not sleep?
#
Oh, it's very hard to explain because you can't swan around and say, I was
#
the one who single-handedly did X.
#
It never happens like that in the real world.
#
There was a team of people who worked to put the economy back on its feet.
#
I was part of that team, right?
#
I don't want to single out any particular contribution by myself, but we had to
#
come up with a strategy for doing this.
#
So we realized quickly the first thing we need to do.
#
We couldn't do everything at once.
#
The first thing to do was to focus on the banks, and then within the banks, you
#
needed to figure out sort of which ones should we just forget about, right?
#
Just too, too hopeless.
#
Which banks should we inject some money into and save and let them remain in
#
private hands, essentially, which ones should the government just take over?
#
So it was a sort of gradual process of coming up with it.
#
Those sound like deeply, deeply political questions.
#
Each of the powerful businessmen who have taken loans from a certain bank or
#
control a certain bank would be moving every lever of power trying to
#
influence those decisions.
#
It must have been a nightmare of trying to solve this in a hurry under horrendous
#
levels of political complexity.
#
And that's why I mentioned, I mean, it sounds like something you can
#
decide in five minutes.
#
I mean, first, you had to amass data.
#
You had to truly understand the position of the banks, which in a crisis is not
#
And the banks have no incentive to give you correct information.
#
And what was correct yesterday may not be correct today.
#
And then there were huge political pressures.
#
This was a very, very difficult process.
#
So you can describe it in a way that makes it sound very simple and easy.
#
When Monte Carlo Valia was at the Independent Evaluation Office at the
#
IMF, I think one of the first reports that he worked on was a review of the
#
Korean program in 1997, 1998.
#
And I remember one thing he said to me is that what leaped out of that story was
#
the staff capabilities in South Korea that he said, when you put together the
#
economists and the civil servants and the politicians of South Korea, they were
#
Very, very high quality.
#
And, you know, we in India always worry about these kinds of capabilities.
#
What is your sense of that landscape that you faced in Indonesia in that time?
#
The teams that were assembled, the academics, the technicians, the economists,
#
the civil servants, the politicians, how did all of them come together?
#
What were the kinds of people?
#
Do you felt that there was honesty and capability in the room?
#
Were they able to get shit done?
#
This was a big problem in Indonesia.
#
You know, some of it was understandable.
#
Obviously they had no idea what to do because they never faced a crisis like
#
this before that is clearly understandable.
#
But some of it was that the state had operated under some very, very simple
#
rules for 30 years, keep the budget balance.
#
Let the private sector run the country.
#
Don't have the government medal in anything.
#
This basic framework, they just follow these simple rules and this basic
#
framework had delivered 7% growth for 30 years, every single year, year in,
#
What was the per capita GDP and PPP terms in Indonesia in 1997?
#
Would you think it's ahead of where India is?
#
So you're talking about a country more prosperous than India, having this kind
#
For all of us, our mental model should not be some helpless, poor country.
#
This is a country with an economic complexity and capability that is
#
superior to where we are in India today.
#
Yes, I should have mentioned this, but the government itself had done extremely
#
well, just following a very simple playbook.
#
And so as far as they were concerned, they didn't need to learn anything more
#
sophisticated than that because, hey, it was working.
#
But this whole, you know, choosing national champions and doing all of that,
#
which your right does have parallels, was in a sense a digression away from it or
#
a perversion of this, right?
#
I would say it was one aspect of the model that they hadn't paid attention to,
#
which turned to be their undoing.
#
You know, it worked really well until it didn't.
#
I want to comment on the problem of things that work well for 30 years.
#
We in India have had a good run from 1991 to 2011.
#
In those 20 years, we got the best growth episode in India's history ever.
#
But I also saw late in that journey, there was a lot of cockiness.
#
There was a lot of complacency.
#
There was sort of a lack of critical thinking because you've got people who've
#
spent from age 30 to age 50 in that paradise of high Indian economic growth.
#
And it becomes a part of the person.
#
Just assume it's going to continue.
#
It becomes a part of my identity.
#
It becomes a part of who I am.
#
My entire self-esteem, my stand before the world is I did this.
#
I am part of this machine.
#
We have delivered such great prosperity.
#
So I fear that there is this curse of economic success, that it becomes hard to
#
question things when they worked well for so long.
#
It becomes a kind of pinkness till it's bleeding red.
#
It becomes a kind of pinkness.
#
It's just, it's orthodoxy.
#
I've had the scene of famous people say that we in India have figured everything
#
out because our growth rate is higher than that of the United States.
#
So growth rate for 20 years.
#
Now we're a dirt poor country.
#
But the fact that for 20 years, we got a growth rate that was higher than that of
#
the United States was seen as the absolute truth that therefore we know what to do.
#
And we are right in all aspects of what we do.
#
And so they were completely in, they became, they literally became paralyzed.
#
They just didn't know what to do.
#
And that was a big problem because while IMF had great experience in dealing with
#
crises, well, first, no one had ever seen a crisis like this.
#
But the other, the other was where was the domain knowledge that Ajay was talking
#
about, you know, that's what they should have contributed, but they didn't have it.
#
No, they meaning the Indonesian officials.
#
So they needed to assemble those teams.
#
So again, I'm reminded of 2008 that, you know, I think that the Indian
#
ministry of finance did a good job of the collaboration between RBI, SEBI and
#
MOF, and also assembling the right capabilities and skills from outside,
#
both the economists and the practitioners.
#
And that whole thing came together and there was an ability to bring knowledge
#
So, you know, if there was an incipient run on a certain bank, literally within
#
12 hours, there was a fair situational awareness about what was going on and so
#
on. I think these are the hallmarks of how one can diffuse these problems.
#
Ajay, does assembling this kind of talent when a crisis comes, does it also depend
#
on having played the long game earlier and actually having that kind of talent
#
available to begin with?
#
So it takes years to build those teams, to build those institutions, to build the
#
safety and the confidence where there are individuals who've just chipped away at
#
developing specialized knowledge.
#
And then when that moment comes, there are people who are ready with that
#
knowledge. And, you know, he'll tell us more about that.
#
Yeah, no, and also, this is not relevant for Indonesia, but a very, very key point
#
is, if there are people in this country with domain knowledge, you have to be
#
humble enough to tap them and not say, thanks, we'll do everything ourselves.
#
This is really, really critical.
#
On that note, let's take a quick lunch break and we'll come back after a few
#
Long before I was a podcaster, I was a writer.
#
In fact, chances are that many of you first heard of me because of my blog,
#
India Uncut, which was active between 2003 and 2009 and became somewhat
#
I love the freedom the form gave me and I feel I was shaped by it in many ways.
#
I exercise my writing muscle every day and was forced to think about many
#
different things because I wrote about many different things.
#
Well, that phase in my life ended for various reasons and now it is time to
#
Only now I'm doing it through a newsletter.
#
I have started the India Uncut newsletter at indiancut.substack.com,
#
where I will write regularly about whatever catches my fancy.
#
I'll write about some of the themes I cover in this podcast and about much
#
So please do head on over to indiancut.substack.com and subscribe.
#
Once you sign up, each new installment that I write will land up in your email
#
You don't need to go anywhere.
#
So subscribe now for free.
#
The India Uncut newsletter at indiancut.substack.com.
#
Welcome back to The Seen and the Unseen.
#
I'm co-hosting this episode along with Amit Verma and our guest is Josh
#
Josh, let's get back to the Indonesia story.
#
I was just thinking about the devastation that you describe where the non-financial
#
firms have borrowed overseas.
#
The exchange rate has gone up by 5x.
#
So all the balance sheets are broken.
#
So all the banks are bankrupt.
#
So the economy is paralysed and, you know, elementary consumer goods have
#
vanished from the stores.
#
And you were describing an economics team of many people who had to put
#
Humpty Dumpty together again.
#
I was just trying to apply myself into that environment.
#
There would be interest on the table.
#
There would be very rich businessmen who own those non-financial firms which
#
There would be businessmen who own those banks.
#
There would be deep connections between them and the political bureaucratic
#
They would all want an IMF program to bring money in to bail them out.
#
And because there is never enough money, there would be jostling around who
#
So when you started describing triaging the banks where some banks should just
#
be let to die and some banks should get some injection of capital but stay in
#
private hands and some banks should get expropriated, should get nationalized
#
And also in my mind's eye, I was then thinking of the people that those banks
#
have lent to because these decisions would have consequences for the rich
#
people who have borrowed from these banks.
#
So help us see and understand that political economy landscape because life
#
is very complicated when you have truly rich people in this game.
#
Yes, that was a huge problem.
#
And one of the main reasons why it took a long time for the problem to be sorted
#
out, the most of the banks, virtually all of the banks were just taken away
#
There are a few banks at the margin that went either were shut down or were left
#
in private hands, but these were truly marginal.
#
All the banks were nationalized.
#
All of the companies were taken away from bankrupt owners because the owners
#
were just looting these firms.
#
They understood they were bankrupt.
#
So their only interest in their firms was to loot them and that had to be stopped.
#
So the companies were taken away.
#
The authorities devised us some new language to indicate that they were not
#
planning at all to keep them in the public sector.
#
So, for example, there was a concept of a BTO, bank taken over.
#
It was not a nationalized bank.
#
So, but what happened was that that meant that in effect, you were taking all the
#
cards off the table and you were going to be reshuffling them.
#
And that meant that there was intense lobbying to make sure that the reshuffling
#
happened in ways that favor oneself.
#
And remember that a lot of these businessmen had kept money overseas in
#
Singapore, they had plenty of money to spread around in this effort to make sure
#
that the assets wound up in their own hands.
#
And this created an absolutely tremendous problem for the state, which was...
#
So there are really two problems.
#
One was lack of technical expertise because they hadn't seen any crises before.
#
And the IMF could help, but only up to a point because the IMF had no detailed
#
domain knowledge of Indonesia.
#
So that was one sort of problem, a sort of technical problem.
#
And the other was a political problem.
#
Was there some equivalent of like the NIPFP DEA program where there was a
#
specialized team in India that embedded data and research capabilities and was
#
able to backstop the Ministry of Finance in thinking about macro and finance policy?
#
It's a very interesting question.
#
In fact, there was, but not the way you or I or any normal person would think about it.
#
They hired an investment bank and this investment bank actually, believe it or
#
not, it was Lehman Brothers and they did a spectacular job.
#
I have to say, I was thoroughly impressed by the detailed knowledge that they put
#
together in no time at all.
#
They put out on every one of the major conglomerates, they put out these thick
#
binders detailing the financial situation so that all of us were making decisions.
#
And then they made presentations to us.
#
All of us could make decisions based on actual, genuine, detailed knowledge.
#
They did a fantastic job.
#
Just to zoom out from the question of rescue, what was, so you said a moment
#
ago that the Indonesian per capita GDP in 1997 was ahead of where India is today.
#
What was the institutional landscape there in terms of the economic policy
#
Was there a capable treasury?
#
Was there inflation targeting?
#
Was there a bankruptcy code?
#
Was there a stock exchange?
#
Was there sound securities regulation?
#
And in the process of the crisis, were many of these things fixed up?
#
Was it an opportunity to fix up things?
#
Did they have less wise capital controls, for example, as was present in South
#
Korea, where short-term capital was welcomed, but many other kinds of capital were not?
#
So alongside moving to a more flexible exchange rate, were there many other pieces
#
of the institutional apparatus for economics that got done in this period?
#
Before the crisis, they had a policy framework that worked well in many,
#
Their attitude was broadly, I'm simplifying, of course, broadly leave
#
business up to the private sector, and the government should follow a few simple
#
There was no domestic borrowing of any kind to ensure macro stability.
#
The exchange rate was pegged so that monetary policy was just imported from,
#
The capital flows were completely free.
#
There were no capital controls, so a businessman could do what they needed to do.
#
These sort of simple rules stood the economy in good stead, and the economy
#
grew very, very rapidly for many years with low inflation.
#
As I mentioned previously, the one absolutely critical mistake was in promoting
#
these national champions who borrowed from abroad because that interacted with
#
In fact, one of the reasons why they had a fixed exchange rate was in order to
#
facilitate the capital inflow to the national champions.
#
That combination proved to be extremely toxic.
#
Then, after the crisis, the fiscal position was ruined because they had to bail out
#
the banks, and therefore they had to start borrowing domestically.
#
All of these sort of things, all the institutions had to start developing.
#
For example, you mentioned treasury.
#
The government needed to have a treasury for the first time because they had a
#
debt for the first time.
#
Then it realized it needed to do a much better job of regulating the banks and
#
monitoring the situation.
#
It floated the exchange rate, so it needed to develop monetary policy expertise.
#
All these things came as a result of the crisis, and so far it's broadly worked.
#
They haven't gotten into trouble since.
#
Is it fair to say that the two areas which you pointed out where they went wrong,
#
like you pointed out why it worked for them for 30 years, where the state is not
#
interfering in business, the private sector looks after business, the state
#
balances its budgets, debt is not out of control, all those are great things.
#
But the two key factors in catalyzing the crisis, as it were, were actually, in a
#
sense, anti-market thinking, the interference of the state.
#
One is the intention that you create national champions, and the other, of course,
#
is the fixed exchange rate instead of just letting the market decide what your
#
So the real mistake was in actually moving away from these principles.
#
And I'll often look at things that are blamed on free markets across the world,
#
and really at the crux of it also is cronyism and state overreach.
#
People talk about, OK, the Soviet Union collapsed and blah, blah, blah, but is it
#
a victory for liberalism?
#
Look at what happened in Russia.
#
You have all these oligarchs and the big mess, but that isn't free markets.
#
There's no rule of law happening there.
#
There's cronyism, there's state overreach.
#
So again, is that a correct characterization of it, that it was a state
#
overreach and the cronyism that was at the crux of the problem?
#
And similarly, when we talk about markets, say, in India today, and we'll obviously
#
talk about this in more detail later, that what we also then need to look at is what
#
is the level of cronyism here?
#
Because we again seem to be going down the national champions route.
#
And there are so many things going wrong that have all to do with restricting
#
Yeah, well, I'll stay out of Indian politics.
#
But if we go back to Indonesia, there were two other things which I'd want to
#
stress were where they went wrong.
#
And at that time, Indonesia was a dictatorship and there was no press
#
So what that meant was that, yes, markets, businessmen were allowed to operate
#
independently of government, aside from these national champions and these other
#
deviations that you mentioned.
#
But the problem was there was no transparency to the operations because the
#
So one might have thought that if there had been more transparency about what
#
these companies were really up to, I'll make it much more concrete, right?
#
The domestic banks did not understand how much money these companies had been
#
borrowing from abroad, nor did the foreign lenders understand how much had
#
been borrowed from domestic banks.
#
And so finance was operating very much in the dark.
#
It was said in Indonesia that these companies had three sets of books, one to
#
show the financiers, one to show the tax authorities, which showed, of course,
#
that they never made any money.
#
And the third was the real set of books, which was only shown to the promoter.
#
And that situation was also a big, big cause of the malfunction, right?
#
You have to ask, you know, why was so much lent to these companies?
#
And it was because there was no mechanism for information to flow so that people
#
could make good lending decisions.
#
And that, of course, was another state overreach problem.
#
Let's sort of talk about your India journey now.
#
After all of this has gotten over and you can finally get some sleep, tell me
#
about your sort of coming to India as a head of IMF, being, as you mentioned
#
from the time you saw Maya riding an elephant, being a fan of India, what was
#
it like and what was sort of that relationship between you and India and
#
that journey of getting to understand this incredibly complex country, which,
#
you know, any reasonable Indian will also tell you that, hey, we still don't get it.
#
You know, people will often ask me about this election or that election or this
#
state or whatever, and I'll be like, I don't have the slightest clue, right?
#
And therefore for you, the danger of somebody coming from outside is that you
#
want to make sense of this madness.
#
So you need frames, but at the same time, any story you tell yourself about this
#
madness is necessarily simple and therefore simplistic and therefore wrong.
#
And how do you then sort of deal with all of this?
#
Because if you just acknowledge the complexity, you could be
#
paralyzed into inaction.
#
So it's, you know, so when do you feel that you have enough of a grip on things?
#
You know, so what was that whole process like of understanding India and like as
#
a head of the IMF in India, what were you, what was the ambit of your job?
#
And how did you approach it?
#
Because by this time, obviously you've got enough experience to
#
really tread with caution.
#
And what year did you move to India as senior Res Rep?
#
So, so I moved to India in 2006 because my wife wanted to come back.
#
And yeah, it's the usual, the usual story, right?
#
I thought, because I've been married for a long time, because I've been
#
interested in India for a long time, that I had some fair understanding of the country.
#
And what I discovered was that, no, I just gone down a rabbit hole.
#
And, and, and, and the more, the more you go down the rabbit hole, the more you
#
realize, oh, I thought the end was there, but actually it's far, far away and I'm
#
no closer to the end and I don't know that I'm ever going to get to the end.
#
And on the one hand, that was really, really discouraging.
#
I, but, but I never, I never even contemplated giving up.
#
And the reason I didn't contemplate giving up was because there are 1.4
#
billion people in this country, in this country, and every day there's at least a
#
few of them that's doing something wild and crazy and really, really interesting.
#
You know, people, people, people say this, you know, that, you know, you can say
#
whatever you want, you can insult India or you want the one insult that you can
#
never apply to India is that it's boring.
#
You just can't say that, that's factually untrue, right?
#
So, so, so I, you know, I just found it fascinating.
#
So I just kept going down the rabbit hole.
#
And the other thing that kept me going is that I met some people who, who had
#
some frames that helped me understand things that I found very, very convincing.
#
And one of them is sitting right here.
#
So you mentioned, you know, before we started, when Ajay was at a loop
#
break, that when you met him in the mid two thousands, you knew within five
#
minutes that you were going to be friends.
#
So why don't both of you tell me about what clicks?
#
Yeah, I know that moment.
#
So, Ila Patnaik and I had written a paper about the exchange rate exposure of
#
firms in India, and we had emailed it to him and said that we want your thoughts
#
and comments, and he showed up at NIPFP, lots of scrolling all over the paper.
#
And we talked through the paper in some detail.
#
And so that was our first face to face.
#
Yeah, I'm very intrigued by that.
#
I mean, I'm not trying to produce an awe moment here or something like that, but
#
I'm just sort of intrigued by the nature of friendships, how friendships form.
#
Like, you know, there is a time and we are from the generation where you are
#
restricted to circles of circumstance, right?
#
So you make friends in your school or your neighborhood or whatever, and
#
And then what the internet and globalization does is that suddenly
#
you're making friends from all over the world.
#
And I'm curious about what is sort of like at one surface level, one could say
#
that both of you have the similar interests in terms of economics, perhaps
#
similar leanings, you know, you're on a similar journey of understanding.
#
And that is one thing that kind of brings you together.
#
But both of you are people who in your case, Josh, I sense in Ajay's case, I
#
kind of know, that you never stop making friends, that as you go through life,
#
you're always open, you're meeting new people, you're looking at them with
#
interest, people aren't just instrumental to you, you know?
#
So what is sort of your approach towards that, towards those sort of personal
#
relationships and just that whole aspect?
#
Because like I've had guests on the show who've told me that, hey, we haven't
#
made a new friend since 20 or 25, right?
#
And that is clearly not the case for all of us.
#
So just your, I know it's not an economics question, but.
#
It's a really, it's a really, really difficult question answer, right?
#
I mean, you know, that's why people use words like chemistry, you know, nonsense
#
words, because they can't explain it to anyone, right?
#
Um, but since you've forced me, I, you know, I have to come up with something.
#
Uh, so, so, so let me, let, let me try this, right?
#
Uh, at the beginning of the show, I kind of made a distinction between people
#
who want to enforce loyalty tests and people who are actually searching for
#
And as I explained, I find it hard to deal with people who are just
#
enforcing loyalty tests.
#
Uh, so when I find someone who's actually searching for the truth, then I, I
#
naturally want to kind of hold onto them because they're precious to me.
#
There are so few people like that.
#
Because there's so few people, right?
#
I mean, you know, let's, let's be honest about it.
#
Most people just get tremendous, I mean, look, I do too, in certain
#
aspects of my life, right?
#
I, you know, you may support a sports team and a cricket team, whatever, in
#
the IPL and, and you know perfectly well that it's completely irrational that if
#
you actually meet these cricket players from your team, you might not actually
#
like them in the slightest, but still, you, you know, you, you feel this
#
emotional connection to your, your, your, your team, right?
#
So I, you know, I have aspects of me that are, are, are like that, of course.
#
But in my intellectual life, it's a search for truth.
#
So that's, I, you know, I, I find people like this very, very rare and valuable.
#
And then you also look for, you also look for people who are, who, who, who
#
were curious about the, about the world.
#
And, and then finally, you, you, you know, you look for, you look for
#
people whom, whom you consider are, are, are good people, right?
#
Whom at a, at a certain almost moral level, you, you, you want to be associated
#
with, you know, if somebody, if somebody were, were, if you wanted to, you know,
#
if, if you meet someone and he's really, really clever and he's got some
#
fantastic ideas, but, you know, I don't know, he's in, he's engaged in dubious
#
activities, then you can't, you can't actually be friends, right?
#
I also want to say one more thing that, so Ila and I were on a journey of deep
#
thinking on Indian macroeconomics and we, we felt that the changes in the economy,
#
the emergence of financial markets and a private sector and cross border flows
#
and greater international integration had disrupted a lot of traditional
#
Indian macro thinking, and it was time to figure this out from scratch.
#
And we knew that we did not know.
#
And in a very selfish way, we found it incredibly useful to be able to meet
#
Josh twice a week and argue about the world.
#
So Josh was ahead of us in our knowledge and it was a dream because we, we were
#
just endlessly chipping away on figuring out, we were world building.
#
So, you know, the community in India is weak.
#
The literature is really poor.
#
So we were figuring out the whole thing from scratch, that each dimension of
#
Indian macro and finance, we were doing the work from scratch.
#
Only a subset of all that work has come out as papers.
#
But we were basically engaged in a world building and it was really important to
#
us and incredibly valuable to us that in those years we got to meet Josh
#
continuously and argue about everything.
#
And we found that happy rhythm, you know, I think the best of the
#
conversations are where both sides are comfortable saying to each other, I
#
don't agree with you, this is wrong.
#
So you don't have to pussy foot around and you don't have to worry
#
about what you say to the other person.
#
We found that rhythm with him and that really was very important to us.
#
So I don't think Josh has ever quite understood the value that he carried to
#
us in terms of really being the advisor and the talking board and the
#
argumentation point around our world building, meaning many people externally
#
see our world building, but he was an engine that made that possible.
#
I just want to also call out two other people, Richard Clarida, who's an
#
economist in the U S and the late Thomas Laubach, we're just so incredibly
#
unlucky that he died early, but these are the three people that Josh and
#
Richard Clarida and Thomas Laubach who were incredibly valuable and influential
#
for us in terms of those opportunities for the conversations and the honest
#
And just imagine all of this may not have happened if, you know, the boy
#
sitting inside the car with him said, I want to be an economist because it's
#
So, you know, one more question to you about him.
#
I don't want to embarrass you, but I'll ask anyway, which is what is one
#
quality of Josh that he underrates or may not even be aware of?
#
I think he doesn't see how effective his arguments are.
#
I think maybe it's just a carefully studied strategy, but he understates
#
himself a little too much.
#
He overdoes the understatement.
#
As in he is not emphatic enough or?
#
Yeah, he will always present things in a quiet, cautious way.
#
And in the modern world, everybody's a little too bright.
#
And in that background noise of bright, emphatic people, he tends to get lost
#
Is that intentional or is that just the way you are?
#
I mean, certainly the way I am, that's for sure.
#
But it's also that when I'm talking in India, particularly, I do realize that
#
many people perceive me as an outsider.
#
I don't actually perceive myself that way.
#
I first came to India almost 40 years ago.
#
You make amazing parathas.
#
It's never been confirmed.
#
But so I do feel that I need to be quiet.
#
I for that reason, for example, I've never ever written a single authored piece
#
in any Indian newspaper, never.
#
And that's a deliberate decision.
#
I mean, if you were to say avoid politics and avoid personalizing anything just to
#
write on policy would be fine, wouldn't it?
#
Maybe, but I don't feel comfortable.
#
I feel more comfortable staying back.
#
I don't want to argue, but.
#
So I'll ask you a version of this question I asked Ajay about you, but not
#
about Ajay, but about India as a whole, in the sense that when you come in here,
#
your outsider's gaze is showing you things which people within the system
#
would have completely normalized.
#
So tell me about what you saw, which nobody else seemed to see or some
#
fundamental core insight, which others could not see because they were just
#
restricted by, you know, by having normalized it, by it being like, you
#
know, the water a fish is in.
#
I think, I think one thing I, you know, I don't want to claim this as a unique
#
insight, in fact, actually the one who emphasized this a long time ago was again
#
sitting right next to me, but I think that people still have a very closed
#
economy mindset that in their, in their view, exporting engagement with the rest
#
of the world is very peripheral activity.
#
The central activity of India is Indians producing things for other Indians.
#
And what Ajay pointed out to me, and I think it's increasingly true is that
#
that used to be the case, sure, but it's not the case now.
#
For example, exports make up a fifth of the economy and there's virtually no
#
industry in this country that could operate, no modern industry that could
#
operate without imports.
#
And if you look at the most dynamic sector of the economy, for example,
#
IT, that's almost entirely global.
#
And if you look at what the 20 year olds are thinking and doing, they are plugged
#
into a global network, they're watching YouTube videos, they're on Instagram.
#
You know, how many companies have in India have told me that their entire
#
marketing campaign is on Instagram?
#
But that's a global network.
#
You can see pictures from, from all over the world.
#
And so, so particularly, you know, our transitional generation doesn't, doesn't
#
quite realize how globalized India has, has really become.
#
So, you know, so what, what were your early experiences with the IMF?
#
Like, like what was the IMF's role over here?
#
What was your role as the head of it?
#
Were you supposed to advise people?
#
Were you supposed to bring out reports?
#
What was your interfacing with the government?
#
Like, you know, just give me a sense of, you know, what you did here and what the
#
IMF did here, unless it's classified, in which case, tell me even more.
#
You want the classified stuff.
#
Actually I left it, you know, Brown briefcase, while I occupy you in another
#
eight hours of conversation, I'll send my boy to get it.
#
Oh, now, now I'm beginning to worry.
#
I was really doing, I was really doing two things, right?
#
Uh, one, one was just a, a PR job where I went to up and down the country, uh,
#
publicizing the IMF and the IMF's views, uh, to, to, to everyone and anyone who
#
would listen, I went to all the, all the four corners of India and that, that was,
#
that, that, that was actually great for me because, because I began to understand
#
the country, you know, you, you, you go to places, you see, see places, you, you
#
meet people and you, you, you got out of this sort of Delhi centric world and, and
#
understood that things are very, very different once you go outside the Capitol.
#
So, so, so that, that, that was one big activity and one huge benefit for me.
#
And the other, the other was, uh, engagement in, in, in policy debates.
#
And I got pretty, pretty, pretty heavily, heavily involved because at, at that time
#
there, there was a tremendous, in the mid 2000s, there was a tremendous boom in
#
India and I had seen this story before.
#
I, I'd seen it in East Asia.
#
I worked not only on Indonesia, but on Korea, on Philippines, on many other
#
countries, and all of them had followed a sort of similar trajectory where when
#
the times were good, companies wanted to invest and they borrowed, borrowed,
#
And then of course things started to go wrong and there was a big disaster.
#
A lot of companies would go bankrupt.
#
The, the country would go into recession.
#
We at the IMF and some other people tried to try, try to sound the alarm
#
because credit, credit growth was, was, was growing very, very rapidly in this
#
country, uh, in the span of three years, a non-food credit doubled.
#
And we saw that as a red flag.
#
We, we had a very, very bad thing feeling that things are going to go wrong.
#
And it was worse because capital was being attracted into India by, by this
#
And instead of allowing the exchange rate to appreciate the exchange rate instead
#
was, let's call it pegged.
#
And this was encouraging even more, uh, capital, uh, to come.
#
The, the, the amounts were truly astounding.
#
You may remember, I think it may have reached 10% of GDP in, in, in 2007.
#
That's a huge number, right?
#
And, uh, we were absolutely petrified about what would happen.
#
And then, you know, like Cassandra, you know, our warnings were ignored.
#
And, and then the disaster.
#
There was a favorite solution, which was capital controls.
#
So there were many people in India who didn't want to see a price based and
#
a market based explanation who wanted to solve the epiphenomenon by reducing
#
And, uh, and they, they actually implemented, uh, many, many capital
#
controls, but, but, you know, we, we know from the sixties in, in India, when,
#
you know, you, you put all these controls, all they do is, is distort the economy
#
and they don't, they don't solve the problem.
#
Uh, so that, that just generated an even bigger mess.
#
And the end result was we wound up with 13 lakh crore non-performing loans.
#
And I, you know, this, I was very, very upset about this.
#
Um, and also we got an inflation crisis.
#
We also got an inflation crisis.
#
We got to the worst of all worlds.
#
We have a giant mess on the credit market and a giant inflation crisis.
#
And, and, and, and this is a late auties basically.
#
And then, uh, and, and, and, and then I, I came back partly, partly determined to
#
apply what I learned from Indonesia, uh, to, to help, uh, how, help sort out the,
#
the, the mess, but, but that was very, very difficult because w even when I came
#
back and this was 2015 and I know I'm jumping ahead in the story here, uh, the,
#
the, the extent of the denial was absolutely astounding.
#
I, I mean, before you solve a problem, you have to recognize that one exists.
#
And even though the problem had, had occurred a long, long time ago, even in
#
2015, they were still denying that, that, that there was, that there was a bad
#
asset problem and, and so a lot of my effort, this was a little more successful,
#
but I, I had to spend a huge amount of effort just to get people to recognize
#
that there was a problem, much less figure out how to deal with it.
#
And just at the moment that we've reached Ajay's favorite topic, which is
#
India's credit crisis, Ajay has to leave.
#
So thank you for joining us.
#
We'll continue this later.
#
So tell me a bit about this credit crisis, because you're right that even in the
#
national media at that time, or even today, honestly, I don't think through
#
all these years, there's really been a recognition of it.
#
I remember, you know, I think one of the one or two times that I've met you,
#
there used to be these book club readings in Bombay, which Ajay would organize.
#
And I remember in one of them, both you and Ajay expounded at length about the
#
depth of the credit crisis and how it is a cancer in our body, virtually.
#
I think that's a term that you used.
#
And yet at that time, which was probably three years ago, or today, or any time
#
in between, it's not really mentioned so much.
#
So assume that I am one of these sort of clueless or unknowing, rather
#
unknowing bureaucrats or policy people.
#
And you're explaining it to me from scratch that what is the problem?
#
Why is it so freaking bad?
#
We have to go back to the genesis of the problem.
#
And that's still, there's still very much, I would say debated, except
#
there's a new debate, as you said, people, people just ignore it.
#
The genesis of the problem was that in the mid 2000s, people became absolutely
#
convinced that this was India's time, that China had been growing at 10% for decades.
#
And now it was India's turn.
#
And the logic then was that if India was going to have several decades of 10%
#
growth, then it was obvious to anyone with eyes to see that the country needed
#
a whole lot more infrastructure.
#
And so everyone decided that there needed to be a huge expansion of, of
#
infrastructure that, you know, that meant more power plants, that meant more
#
roads, more cement capacity, more steel capacity, in some sense, it was, it
#
was pretty obvious, right?
#
And sorry, let me, let me backtrack that to the extent that anyone focuses on
#
these, these bad loans, the story in people's minds is kind of a Nirav Modi
#
story, you know, there are some bad actors and they went to the banks, they
#
stole money and then they ran away with all that money.
#
And really what needs to be done is, you know, chase these guys and get the money
#
back that this kind of the way people think about it.
#
And, and, you know, if you're a kind of optimistic store, you say, well, there
#
weren't that many people so, uh, like that.
#
So the, this problem can't be that bad.
#
And they're right that there weren't that many people like that.
#
Um, these were regular businessmen making a business calculation, which
#
made sense at the time and I cannot blame them.
#
I was there in, in India during the boom and I believed it too.
#
So it's not, you know, I mentioned some cases where I had some insight and others
#
didn't, but this was a case where, where, where I had no visibility either.
#
Uh, I was wrong and these guys were wrong, uh, and they paid for it because
#
what happened was, you know, I mean, if you just think you, you double capacity
#
in expectation that that capacity would be needed and it turns out that, that
#
it's not needed, then you have a problem.
#
Like how are you going to repay that, uh, that plant or the money you borrowed
#
for the plant and that, that, that's, you know, in the simplest terms, what, what
#
happened, I mean, there was the, and they faced many, many problems.
#
It's not just that after the global financial crisis, things slowed down.
#
It's that there was high inflation as Ajay was just mentioning, and then
#
interest rates had to go up very high to, to combat that inflation.
#
So, so the, the, the cost of servicing those loans went, went skyrocketing and
#
then the exchange rate depreciated.
#
So the guys who borrowed abroad, uh, got killed, they had to come up with many
#
more rupees to repay their dollar loans.
#
And, and as I said, there was no demand.
#
So they got hit from all possible sides.
#
And the end result was the, this, um, 13 lakh crore non-performing loans.
#
And then, and, and then what happened was that the immediate response was, oh,
#
well, why don't we give these companies more time to repay the loans?
#
So the loans were rescheduled and the banks that meant that the banks didn't
#
have to show this as non-performing assets on the books.
#
And I was trying to argue that this was complete nonsense, that giving these
#
com companies more time to repay just meant giving it more the whole time to
#
get bigger and bigger and bigger.
#
Because if you have, I mean, again, to, to use a very simple example, if you
#
have a plant that's sitting idle, right, every year interest is accruing on that
#
loan, right, the more time you give to the company, the greater the interest
#
it has to pay, it's not helping the company, it's, it's making the situation
#
worse because it can't pay the interest.
#
So, so then the debt will just climb and climb and climb.
#
And, and that's, that's, that's, that's actually what happened until finally,
#
finally they recognized that, that no something else needed to be done.
#
And they forced the banks to come clean.
#
And, uh, and then the, the IBC, the, the, the bankruptcy new bankruptcy law was
#
introduced to, to, to force companies to, to resolve these problems.
#
And the, the, the, the, the IBC hasn't worked that well, but with some
#
combination of writing these loans off, uh, which was of course, of course, a
#
huge cost to the taxpayers because these are public sector banks, PSU banks, uh,
#
they're writing off and where they're getting the money, they're getting the
#
money from tax taxpayers.
#
So this kind of combination, the, the problem has been diminished, but I'd
#
point out that even today banks are sitting on six lakh crore of non-performing
#
loans, people are not aware of this six lakh crore, so w w w which will have to
#
be, which will have to be sorted out one way or another.
#
So, uh, in, in less, so this problem and this kind of really discouraging this
#
problem, which originated say in the mid two thousands is still not been
#
adequately resolved today.
#
That's more, way more than a decade.
#
So, so this is a whole, and during which time for, for most of the decade, this,
#
this created a huge, huge problem for the country because, because banks were very
#
reluctant to, to lend to these ailing companies and ailing companies were very
#
So there was very little investment and therefore very little growth.
#
So ordinary Indians paid at both ends and in the sense that growth was low and
#
then their taxes had to be used to sort the situation out because it wasn't sorted
#
out properly, um, a decade ago.
#
And what are the sort of downstream consequences of still having, you know, six
#
lakh crores, as you mentioned, of non-performing loans on the books?
#
Does it mean that there is less money to lend to other genuine enterprises?
#
Does it mean that, you know, what exactly are the consequences?
#
There are any number of consequences.
#
So for example, let's say, let, let's say you have a company that's, that's on, uh,
#
It's got some loan, it can't repay it.
#
It knows it can't repay it.
#
The bank knows it can't repay it, but nothing is being done.
#
But the company is still there.
#
So what that does is it distorts the market because, uh, it, it, it's holding a
#
certain market share that could be grabbed by other healthy, uh, companies.
#
So if that company say were to, were, were to disappear, then other companies
#
could take that market share.
#
They could expand their employment.
#
The, because they're, they're taking market share, they, they could invest
#
and the, the, the economy, the economy would be healthier and grow faster.
#
And, and there would be more employment.
#
So just, just the mere fact that these companies, these, uh, you know, as they
#
call them sick companies, they, you know, there's an old phrase, but, uh, which
#
no one uses anymore, but they're still around, as I said, in a way, six lakh
#
crore of them, as long as they're around, they're, they're hurting the healthy
#
parts of the economy and making it more difficult to grow.
#
Point two is that it, it, it diverts the bank staff, right?
#
Uh, bank staff who, who, who should be focusing on making loans have to,
#
have to deal with these cases, right?
#
You know, they have to go talk to the companies, see if any payment
#
arrangements can be made, harass them, spend time looking at their books.
#
Uh, this is just a huge waste of, of talented people who could be
#
doing something useful for society.
#
And so, and, and as I said, uh, ultimately, ultimately it's, it's,
#
it's going to cost, it's going to cost someone this, this, this money, this
#
money has to come from somewhere.
#
Uh, when they were ultimately, they're gonna have to write those loans off, right?
#
And that money has to come from somewhere.
#
And in large extent, you know, that's, that's a bill that's, that's,
#
that's coming from the taxpayers.
#
And, you know, six, like crying, kind of imagine, you know, a good social
#
spending program is what 30,000 crores say, right?
#
I mean, imagine how many useful programs could be funded with this money.
#
And, you know, it's, it, it's very, you know, and I don't want to exaggerate.
#
This is not actually the main problem facing the Indian economy today.
#
It was the main problem a few years back.
#
It's not the main problem today.
#
I'm not, I'm not making that claim, but it is still a problem.
#
So I'll, I'll dangle this bait.
#
It's not the main problem.
#
So at some point I will ask you what the main problem is, but, you know,
#
just to dig a little further, then what are the reasons that people refuse
#
to acknowledge this problem?
#
Is it the incentives at play?
#
Because I would imagine that the incentives for the politician is kick
#
the can down the road, you know, you don't want to be the guy who's, you
#
know, costs a taxpayer so much money.
#
So the intention for the banker would again be that evergreening kind of
#
incentive where you kick it down the road.
#
You know, you're not the guy who gave the bad loans, let someone
#
else deal with the problem.
#
Are these the incentives within the system?
#
And if so, these and whatever other incentives lead to the problem getting
#
worse, don't, don't the same incentives remain at play unless you actually
#
have a systemic change, like, you know, one reason, of course, that all of
#
this balloon was, as you mentioned, a, the irrational exuberance of the
#
maid auties where people thought our growth story will last forever.
#
But there were other perverse incentives as well, you know, the
#
evergreening incentives, for example, or what was called phone alone scheme
#
where PSUs would be controlled by politicians and you'd have a phone,
#
phone alone kind of situation where people who would otherwise not have
#
passed a credit worthiness test at a regular bank suddenly get loans, which
#
is why PSUs had, you know, far, far greater problem of non-performing
#
assets and private banks did.
#
So, you know, a, what are the kinds of reasons that we never even acknowledged
#
it and are slow in tackling it even today?
#
And B, aren't we just begging for a repeat of the whole thing, unless those
#
incentives at the heart of this are fixed?
#
Well, the first thing, the way you answered, you answered the question
#
already, I mean, fundamentally, no one wanted to deal with the fact that such
#
a huge sum of money was lost to the banks.
#
And so, you know, it's a little, a little bit like a gambler, you know, who's
#
gone, gone, gone to the casino.
#
He's, he's lost his, he lost his saving.
#
And the only thing that he can think of is, ah, well, maybe if I gamble one more
#
time, then I can win all that money back.
#
That's the only thing that he can think of in his mind.
#
He can't think of any other solution.
#
So it's very much like that.
#
And then in terms of the incentives, yeah, I mean, this is a sort of specific
#
example of a problem that has long plagued the Indian economy.
#
The way, which is the exit problem, right?
#
What, what do you do when a company fails, right?
#
Everybody knows that all economists know that it is in the interests of a
#
healthy economy, that that company disappear and the capital is used by
#
others who, who, who can make, who can use these resources in a much better way.
#
But the incentives are, are always to say, you know, Oh, bichara, give them another
#
chance, and because then you sound very kindhearted, whereas of course, in the
#
back of your mind, you're thinking, Oh boy, Oh boy, I better get that money back
#
somehow, and so if he says he'll, he'll repay me if I, if I give him a little extra
#
time, uh, okay, yes, yes, we'll agree on that.
#
So in less, unless people kind of under understand and accept the logic of the
#
market, this is, this is going to reoccur.
#
Now the kind of good news, and I put that in quote, you know, I'm making quote
#
marks with my hands as, as I say that is that there's no immediate danger of that
#
because there hasn't been much investment.
#
This is a problem that, that we will see again when, when there's another
#
big investment cycle, but so far, so far, fortunately, and I'm doing quote
#
marks again, where we've been spared this.
#
Uh, and I hope that by the time there isn't a renewed investment boom, because
#
there will be at some point that this incentive problem is fixed and people
#
begin to accept market logic.
#
One of the idea was talking about how Montic was so impressed by the Koreans.
#
And there's no doubt that the Korean officials, I worked on Korea and I
#
met these people myself, they're exceptionally talented.
#
There's no doubt about that.
#
But I would say more fundamental point about Korea is they accept market
#
logic when five out of their top 10 companies, uh, went bankrupt in, in
#
the East Asian crisis, and they dealt with those companies immediately.
#
They did not wait 10 years.
#
They, they dealt with them absolutely immediately.
#
And, and the problem was over, uh, in no time at all.
#
And that, that's what so impressed Montec.
#
And I guess that then there is also a mindset issue here where, you know, I
#
often make the distinction between business friendly and market friendly.
#
And market friendly is you put in, you put policies in place where you have a
#
free market, which is functional, functioning well, there is competition,
#
there are no barriers to entry.
#
And there is a rule of law, whereas business friendly is that you pick a
#
champion and you promote the champion and you put state resources into that.
#
And it's over each and the completely opposite thing.
#
You'd have opposite kind of policies.
#
And it seems to me that the difference that you're describing then in dealing
#
with a crisis like this, what Korea would do and what India would do is an
#
illustration of exactly that where the Korean response seems to be that how do
#
we keep the market functioning inefficiently?
#
All these businesses have failed.
#
Let them go out of business.
#
Let's quickly move on their capital, move on their resources.
#
Whereas the Indian approach seems to be more about keeping those specific
#
businesses going or favoring specific businesses.
#
And here, of course, there are a whole set of incentives that in any case,
#
you know, make the problem worse, even if you don't care about a particular
#
business or whatever, you are still trying to kind of save your ass.
#
So is that an accurate summation?
#
And then is it at some level just a broader mindset problem where one could
#
argue that what difference would it make if we had great talent, if we had
#
the wrong mindset or is having the right mindset part of how you would
#
Again, it's a really good question.
#
This goes back to something we were discussing at the outset, right?
#
No country has monopoly on intelligence, right?
#
There are intelligent people in every country.
#
It's all a question of how this intelligence is applied.
#
Every country has its own objectives.
#
Korea's objective is they want a very strong economy, as strong as possible.
#
And the reason they want a strong economy is because they have a hostile,
#
nuclear-powered neighbor sitting right on their doorstep.
#
They know that if they display any signs of economic weakness, this could be
#
fatal to their national security.
#
So when they see economic weakness, they need to solve that problem right away.
#
That is their mentality.
#
And as you said, they accept that the way to solve economic weakness is through
#
market-friendly policies, business-friendly policies will not do it.
#
So that's their broad approach that comes out of their specific circumstance.
#
I would say that India, to the extent that you can describe an objective of a
#
country as large and diverse as India, but I would say traditionally, and it's
#
changing now and that's a completely separate matter, but the traditional
#
objective has actually been stability.
#
The notion that this is a large country with many, many interests, many different
#
groups, and the job of the people running the country is to preserve stability.
#
And therefore their intelligence is directed toward that goal.
#
Economic growth may come third, fourth, market, respecting the rules of the
#
market, respecting the logic of economics.
#
This comes way down on the ladder.
#
The first thing is stability.
#
So I'll give you an example, a specific example.
#
Whenever there's, talking loosely, a crop failure and wheat or rice prices go way
#
up, the immediate step is export bands.
#
Every government that has ever existed in India, they've always
#
done the exact same thing.
#
They know perfectly well.
#
They don't need me or anyone else to come in them and explain how economically
#
harmful this is to the farmers.
#
That if your goal is to improve productivity in the farming sector, to
#
improve part of incomes, you cannot tell them that, oh, when prices are high,
#
sorry, you can't sell your products.
#
It's not that these people are stupid.
#
It's not that they're ignorant.
#
It's that their goal is something else.
#
Their goal is stability.
#
They want to make sure that there are ample supplies domestically so that
#
people can afford the basic products and don't say riot.
#
So it's not, you know, this bit about intelligence and talent is a little overdone.
#
It's what is your framework and what are your objectives?
#
It's just different in different countries.
#
It goes back to what Ajay was saying, that you can't just take a playbook.
#
And I think the law is the same for in India and Korea.
#
It is economically beneficial to have market friendly policies.
#
That's a general point that economics teaches you and remains true for all
#
countries, but it's much more easily applied in Korea than in India.
#
That's what I'm trying to say.
#
Just thinking aloud, is this a false dichotomy between stability and economic
#
growth? And if it is, is there then a fundamental misunderstanding of economic
#
principles by our policymakers here?
#
Yeah, this is really, this is really actually in a way, deep question, right?
#
Yes, I would argue that in the end, social stability comes from economic
#
success, that a prosperous people is a happy people.
#
If you kind of push my argument further, what I'm talking about is sacrificing
#
longer term objectives for shorter term objectives.
#
And so that's why I would still push back when governments ban exports.
#
And I would say, please do not underestimate the long term costs of
#
And here's a follow up question.
#
Like, if you're talking mindsets, at some level, there are certain approaches
#
and frames which seem almost culturally hard coded, but it's not so simple.
#
Like I remember Jagdish Bhagwati once making an observation that people in
#
China were profit seeking while people in India were rent seeking.
#
And, and whatever, I mean, it's a generalization, whatever one might
#
think of it, and I know nothing about China to be able to comment on it.
#
But in India, it certainly seems to be true that even after all these years of
#
liberalization, you know, I still meet a lot of people who will talk of going
#
into business with the mindset that I'm going to exploit someone and not with
#
the mindset that, you know, it's going to be a positive sum game, I'll create
#
some value in the world and create a double thank you moment, all of that.
#
And I wonder if that sort of short term exploitative rent seeking mindset really
#
comes about not because it is some inherent part of Indian culture, but
#
because of the institutions we adopted after independence and perhaps the state
#
we had before independence as well, where the state has so much power that
#
the best way to get ahead to accumulate power and money and everything that
#
comes with it is to use the state apparatus to, you know, if you're a
#
businessman to be a crony, if you're part of the state to take whatever and
#
seeking opportunities, come your way.
#
And then that becomes sort of your default mindset.
#
And while there are young people today who don't have that mindset because,
#
you know, they're young, they haven't lived through those times.
#
Is there something to that, that, you know, that it is sort of, it's dangerous
#
to do essentializing and say that the Indians are like this and the Koreans
#
are like this, and the truth is a little more complex.
#
The truth is that the institutions that we have, the society that we have,
#
the economy that we are part of shapes us to think in particular ways.
#
And it can become either a vicious circle in India's case, as used to be
#
the case, or in a virtuous cycle, perhaps in Korea's case.
#
I tend to think that people start with certain objectives.
#
You start with objectives, then you build institutions to fulfill these objectives.
#
Then you create a civil service to make sure that these objectives are realized.
#
And as I said, Korea has adopted a certain approach because it faces a
#
certain very real security situation.
#
If you look at the trajectory of India over many years, I would say that for
#
many, many years, the objective was stability and all the institutions were
#
built around that objective and all the bureaucrats were instructed.
#
You know, think of the dilemma faced by, by bureaucrat.
#
You have 1.4 billion people living in the country and they're doing also,
#
each one is doing very different things.
#
It's impossible, it's impossible to solve all of their problems.
#
What you do is if you're a bureaucrat is you wait till a problem becomes a crisis.
#
And when there's an actual crisis, then, then you react and deal with it.
#
How do you define a crisis?
#
A crisis in their book is defined as a threat to social stability, right?
#
So the goal is stability and you act to, to, to diffuse crises and, and you act in
#
ways that diffuse the short term crisis, even, even if it has longer term
#
So this is the way the whole system has been set up in my opinion.
#
Now, one of the things this government has been doing, and it's been engaged in
#
a very interesting experiment is it's, it's said on the economic side.
#
No, we've passed all that.
#
We don't really need to worry about, about stability.
#
The, what, what we want is to become rich and powerful and those should be our
#
objectives and the government should act in line with these new objectives.
#
I mean, you still have wheat exports being banned.
#
So the old system, it's, it's not, it's not that there's a completely new system
#
here, but this is the new sort of thrust.
#
I mean, you can see it, you can see it very, very easily in, in the attention
#
that's been paid to building up infrastructure.
#
You know, if you're going to become rich, you're going to become powerful.
#
You need the infrastructure to go with this.
#
And, and, and so the state has been told, the bureaucracy has been told, go out
#
there and build the infrastructure for this and other, other things have been
#
happening so that, so it's not so much that Koreans are like this and Indians
#
It's, it's that society in this inchoate way defines an objective and that
#
objective can shift over time.
#
And then the institutions and the persons come about in order to achieve that
#
objective economists like me, uh, like to think, like to assume that the
#
objective is economic growth, uh, always.
#
But that's not really true.
#
People, people are comp complex and they have many objectives.
#
Getting rich is an objective.
#
There's no doubt about it.
#
Um, as I said, I think economics is a very useful frame for viewing the world.
#
And Indian is, is, is, is exactly the same as, uh, you know, someone from
#
Argentina in that, you know, in their lives, they, they want to prosper.
#
They want their children to prosper.
#
I mean, that's true all over the world.
#
But, you know, again, going back to a theme of, of, of this chat, I, you know,
#
eh, people, people have other objectives and these can differ.
#
Yeah, no, no, that is very insightful.
#
And, you know, it reminds me of the old saying that where you stand
#
depends on where you sit.
#
And, and, and I forget who told me this, but someone once told me that if you
#
really want to understand someone truly figure out what he's scared of, and you
#
know, this would apply to Korea, like you said, and this is why they
#
act how they act, it would apply to India.
#
Because part of the reason that we centralize so much of the state and
#
that we, you know, and it's in the constitution that it is so centralized
#
and so on and so forth is that at the time our constitution was being framed,
#
the country was in danger of falling apart.
#
Today with the hindsight bias, we can look back and say that, hey, you know,
#
uh, the center held, but at that time it was not certain that the center would hold.
#
Everything could have fallen apart.
#
So that centralizing impulse and the drive towards stability is kind of
#
understandable there, though, you know, if this dispensation is, you know,
#
saying stability is not that important, growth is, I agree with that as a
#
statement, but their means of seeking growth, uh, sometimes seem truly bizarre
#
to me, but that's, that's another matter.
#
And you don't want to comment on politics.
#
I mean, yeah, I, I mean, uh, that's, uh, that's, uh, you know, I want to
#
just leave it at the high level for the moment.
#
Let me ask you another high level question.
#
Uh, something that you've written about eloquently in, in your pieces is about
#
India's hardware and India's software.
#
And what you've pointed out is that, Hey, listen, the hardware is pretty good,
#
but the software, there are bugs all over, right?
#
So elaborate on this, you know, what do you mean by hardware and why do you say
#
it's good and what do you mean by software and what are the bugs that you see there?
#
Yeah, one of the really interesting and, and puzzling facts about the Indian
#
state is that when this shift happened from promoting stabilization as the, the,
#
the main objective, and by the way, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I,
#
I would argue, I mean, of course, things are, things are much messier.
#
I mean, you could argue that the Vajpayee government, they, they wanted to shift
#
towards growth and, and certainly the UPA government enjoyed growth and certainly
#
didn't want to do anything to stop it.
#
And, you know, you can even argue, you know, both these governments
#
took some reforms to promote growth.
#
I mean, it's not, it's not that it's not the growth was, was never an objective.
#
I was just, I mean, my comment was really, I think the last couple of governments,
#
I mean, I agree with Ajay and we've done many episodes together about how it was
#
really a 20 year golden period between 91 and 2011 when things were really good.
#
And it's not the fault of any one party.
#
It's just a series of governance mistakes.
#
So, so what, what this government has proved is that the state has tremendous
#
capacity to deliver tangible goods to people.
#
So you want roads, you can build roads.
#
People, people need toilets.
#
You can deliver toilets.
#
People need gas cylinders.
#
You can deliver gas cylinders.
#
These sort of things that the state is, has proved quite capable of, of achieving.
#
The problem has come on the intangibles.
#
There's been no commensurate improvement in education.
#
There's been no commensurate improvement in health.
#
And despite the improvements in hardware, there's not been the response of private
#
sector investment that was anticipated.
#
So the, the, the economic theory was this field of dreams theory, build it and they
#
You build up the infrastructure and you build up the hardware of the country and
#
the investment will follow.
#
This is even the theme of the current budget, where there's been a big increase
#
in infrastructure spending.
#
This is all in accordance with the thinking that to use some, some economics jargon,
#
that this will crowd in private investment.
#
But so far it hasn't happened.
#
And, and I don't think it will happen because if you think of a, of buying a
#
computer, a computer will not operate unless the hardware is accompanied by
#
software and that software has to, has to work and work without bugs.
#
Otherwise the computer is useless.
#
And the, the same thing applies for, for investment.
#
It goes back to the policy framework.
#
So if you're, if you have the objective of economic growth, of, of making the
#
country rich, then you, you need to build a policy framework that will encourage
#
people to invest and thereby create the jobs and the incomes that make people rich.
#
The problem is that, that, that those policy frameworks aren't there.
#
This was, this was what we, Arvind Subramanian and I have written.
#
And so go back, go back to my talk about wheat exports.
#
So you have an objective of doubling farm incomes, but at the same time, the
#
minute the prices to farmers become remunerative, you, you, you, you ban
#
exports, which has a short-term impact of reducing farm income and a long-term
#
impact that if you're a farmer, it's going to be very, very difficult to sign
#
any long-term contract with anyone because how did they know that when
#
they're, when they desperately want that wheat, you won't say, sorry boss, the
#
government has banned it, I can't supply it, right?
#
If, if you're at the other end of this, you need a reliable supplier, right?
#
I mean, imagine that you're a mill and, and you're baking bread and, and suddenly
#
the guy says, well, I can't, I can't give you any wheat and you're in deep trouble.
#
Your business is in deep trouble.
#
So you can't, you can't deal with a supplier like this, right?
#
So, so it affects, this affects the farmer, not just at that moment, but forever.
#
And so that, that, that gives you right away, one of the conditions of a good
#
policy framework, you know, I want to call it the three C's to simplify, right?
#
So one C is consistency.
#
When somebody undertakes an investment, particularly a large investment, you go,
#
somebody, somebody has this idea, you know, demand for X is really, really growing
#
boss, why don't we, why don't we build a plant and double our capacity?
#
Uh, I've done some spreadsheet analysis and it shows that if, if current trends
#
continue, then we're going to make a huge amount of money.
#
In fact, we need to double capacity.
#
And the boss looks at the spreadsheet and he says, all the numbers add up.
#
Uh, uh, this looks like a great project, but then you won't okay it.
#
And the reason is yes, but how do I know the government won't change the
#
economic framework in the meantime, right?
#
If you're a farmer and you're thinking of doubling your capacity to produce
#
wheat, uh, because you know, there's a large export market out of, out of there.
#
Uh, that would be, that would be insane because just as that second field of
#
wheat, uh, harvest comes, uh, you won't be able to sell it and, and then, you
#
know, everything goes wrong.
#
Uh, there are many, many examples where the government has changed policy very,
#
very radically in ways that, uh, that destroy profitability.
#
The retrospective taxation.
#
Retrospective taxation is, is, is, is one, is one good example, but, but there,
#
there are also others, including even within the telecom sector where the, the,
#
the basis for the basis for the spectrum fee, uh, was at one point re redefined
#
to, to include non telecom income to the detriment of, uh, of one of the
#
major companies, so there are many, uh, the e-commerce policy is constantly
#
under, under review, which makes it very difficult for any e-commerce player
#
to, to, to know whether they should invest or not, uh, there are many, many,
#
there are many, many examples where, where policies have not been consistent.
#
So the, the three C's that, that you really need, uh, to have a good policy
#
framework is that the policy should be clear.
#
So, so when, when you're thinking about an investment based on a certain set
#
of understandings, you may, you need to be sure that your understanding of what's
#
allowed is exactly the same as government's understanding.
#
Otherwise you're going to get into big trouble, right?
#
So it has to be clear, whereas we, we know many of the laws are, are
#
poorly drafted, many of the implementing regulations are very, very unclear.
#
So that's an area that, that needs to be worked on, uh, consistency is
#
an area that needs to be worked on.
#
And the third thing that the third C is correct.
#
So clear, consistent and correct.
#
What do we mean by correct?
#
Correct means that it treats everybody equally.
#
The, that a policy is not, is not geared to promoting a firm, a group of firms
#
at the expense of, of other firms.
#
And the, the, the problem with promoting one firm is that yes, you encourage
#
investment by that firm, but you discourage investment by all its competitors.
#
And normally, you know, there, there are three, four, five, six, seven, eight
#
competitors for that, that one national champion and on aggregate, you end
#
up discouraging investment.
#
So you really, people need to understand the policy framework.
#
It needs, if it, if it follows these three C's, if it's, if it's clear,
#
if it's correct, if it's consistent, then people have the confidence that,
#
okay, I can invest, uh, if it's not, you, you will naturally hold back.
#
So you can look at things another way, right?
#
That investment is based essentially on two variables.
#
What's my expected rate of return and say a PLI scheme, for example, will
#
improve your rate of return because it's a subsidy, but you also look at the risk.
#
And the risk, the risk comes from these regulations that are ambiguous, the
#
risk of policy reversals, the fact, the fact that the playing field may not be
#
level, and I would argue right now, it's, it's this risk that is holding back
#
And so what you need to do to kind of end, end this very, very, very, very,
#
very long winded answer is that, that a lot of attention has been paid to
#
hardware, but you need to pay attention to the software other, because you need
#
the two to go together in tandem.
#
Once the, the software has improved to match the level of the improvement in
#
the hardware, then you'll get the investment, then you'll get the growth.
#
But not before you can't, you can't just focus exclusively on hardware while
#
completely ignoring this software.
#
And even as far as the hardware is concerned, like you wrote this recent
#
piece on the budget, where you spoke about the capex push of the government.
#
And you pointed out there at, okay, you know, they can spend some of that money
#
on roads, which is a great thing.
#
Some of it can go on railways, maybe things like bullet trains, but a
#
significant sum is going to be spent on PSU telecoms like BSNL and MTNL.
#
And that's completely pointless, right?
#
That is not really the kind of hardware you want to spend on, which leads me
#
to wonder if there is a larger problem out there apart from the hardware and
#
the software, which is, I don't know whether I should call it the operating
#
system or stretching the metaphor too far, but it's perhaps a intellectual
#
software, the mindset of, you know, the intellectual capital, the understanding
#
of the elites of our country.
#
I won't even say the people in charge because it's not necessarily
#
about this party or that party.
#
But our elites who've run our country for decades, which is a lack of
#
understanding of our market's work.
#
Like surely any government in charge would say that, Hey, we need economic
#
growth and for that, we need the software.
#
Let's build this software.
#
Let's get the job done.
#
But instead what we find is just really confused, muddled thinking like, and
#
again, I won't ask you to comment on it because it's current politics, but like
#
the cronyism that we see today and the favoring of national champions at
#
the software end and at the hardware end, like, you know, this bizarre investment
#
into BSNL and MTNL like why on earth that that is not a problem that
#
It's it's so, so do you find that there is that deeper kind of issue?
#
Like earlier you said that one of the reasons, like when you were talking about
#
Ajay, you said that there are very few people who are drawn to the truth like
#
that, you know, and that's something that I see in my experiences with whoever I
#
meet that, you know, the easiest thing to do is once you have a frame to explain
#
the world, which makes you feel good about yourself and possibly, you know,
#
gives you a tribe to which you can belong, then that's your frame.
#
Everything is fixed around that.
#
And if that frame is a flawed frame, which involves a lot of state
#
involvement, which involves an almost reflexive and seemingly cultural
#
distrust of the market, though obviously it is not a cultural distrust of the market
#
because we all embrace the market in our lived reality.
#
But, you know, if those frames are flawed, then, you know, whether the problem
#
is with a part of the hardware, whether the problem is with the software, it's
#
not really going to change, is it?
#
I mean, luckily a lot of the crappy software was, you know, we got rid of it
#
during the liberalization, partly due to the influence of the IMF and we were
#
in a crisis and all of that, but we still have a lot of shitty software, some of
#
which you've detailed out, and that doesn't, at least in the limited circles
#
with whom I interact, even seem to be the realization that this is shitty software.
#
So I want to separate out a few things here.
#
One is that there's a tendency to think that you don't understand the
#
logic of other people's thinking and therefore you think that they're stupid.
#
One of the things you asked me earlier, what I learned at the IMF, and one of
#
the things that I learned at the IMF is that a lot of times people appear
#
really, really stupid to you.
#
And I remember there was a government official, I had asked him for some data.
#
It was sitting right there on his desk and I could see it, and yet he
#
couldn't seem to find it on his desk.
#
And then I realized this guy, he's not, he acted as if he was really stupid,
#
but he knew exactly what he's doing.
#
He just didn't want to give me the data.
#
Yeah, I'll clarify quickly that I wasn't calling anyone stupid.
#
I was just saying that where you stand depends on where you sit.
#
Given the incentives that they operate under, in their place, I might do the
#
same thing, just kind of to clarify that.
#
The people per se aren't stupid, but we know that their vision for what makes
#
an economy work or their policy prescriptions are wrong, which is a
#
completely separate statement.
#
I think that some of what's going on is exactly that, that their frame for
#
understanding the world is not the same as our frame for understanding the world.
#
And I think my frame is superior, right?
#
And so obviously I'm going to fight for this view that, you know, just for
#
example, right, you know, I believe that if you operate a liberalized economy
#
where the state stays out, except to provide a good economic framework, you
#
know, these three C's that I was talking about, then that's going to give you the
#
That's my basic frame, right?
#
Now, of course, there are other people who have completely different beliefs.
#
And, you know, I will argue vociferously against them, right?
#
But there are also people, as I said, with just very different objectives that
#
they don't, they're on a different topic.
#
They're really aiming for something else, right?
#
You know, stability instead of growth.
#
Or it could be that you're a bureaucrat and you're operating within the
#
constraints that you see.
#
So let me, let me go to, to, to BSNL since you mentioned it.
#
See, the way a government official would think about this is we need to have three
#
strong telecom companies because that's good for competition.
#
Now we are where we are.
#
Uh, and so there are two, only two possibilities, right?
#
Make sure that the existing players are strong.
#
Or if you can't, revive BSNL, right?
#
So to a certain extent, you, you, you know, I don't know.
#
I don't know, but what I'm saying is, you know, you, you pursue these sort
#
of objectives under constraints.
#
And now, of course, of course, then you, the immediate question is, wait a
#
second, why are there these constraints?
#
Why, why is that our, our choice here?
#
I mean, don't we have a better choice somehow?
#
Reviving BSNL seems a very difficult task here.
#
And then, and then that, that, you know, that, that takes you, that takes you
#
into a far, far field, you know, why, why, why is it the way it is?
#
Is it, what's, what's really going on here?
#
And the, and, and you need to understand that before you can make a recommendation
#
that will actually work, I mean, be adopted.
#
I mean, what, so what you're essentially saying, and I agree with you, it's
#
that we're talking past each other, that you and I might have, you know, one
#
set of objectives, which, you know, flourishing economy and blah, blah,
#
but different people, depending on where they sit, stand in different places.
#
So a bureaucrat might just be, you know, might have the status quo bias.
#
He's got to save his own ass.
#
He's got his own incentives in play.
#
He wants to build his department, Parkinson's law, blah, blah, blah.
#
A politician will necessarily be a slave to short-termism.
#
He's got to look at winning the next elections and therefore he wants
#
immediate gratification in the case of say, farming, farm loan waivers are
#
an immediate gratification, deeper structural reform could end his
#
So why even try and so on and so forth.
#
And that, and that is a deeper problem itself.
#
I mean, then the root cause of the flawed, then the flawed mindset I was
#
talking about is not the root cause.
#
It is just one symptom of a wrong set of incentives to begin with.
#
And I don't know how we would kind of begin to change that.
#
Like what I would imagine that you do and other people within policy that
#
I've had on the show and all of that speak of is just aiming for small
#
incremental changes, because at scale in a country like India, even an
#
incremental change in the right direction can have a massive impact on
#
So do you feel that, you know, it's that, that is the only way forward
#
through incremental changes or do you think that there can be possibilities
#
of, you know, shifting from one equilibrium to another as it were?
#
Well, so what I'm saying is that there are two possibilities.
#
One is just sheer floor flawed thinking, not understanding how the world works.
#
You know, you command the sea to rise, but it's not going to work.
#
Any, you know, any, any, any rational person can tell you this, right.
#
That's just bad thinking.
#
Or there could be, there could be rational thinking, but in an environment
#
where, and where you just have so many constraints placed on you, right.
#
I mean, you know, you know, for example, for example, in the old days, when they
#
were deciding where to, to site a plant, they had to satisfy all the different
#
states, so they needed to make sure that, you know, each state got its own plan,
#
whether this made any economic sense or not.
#
And they perfectly well understood it made no economic sense, but there was a
#
certain political reality and they had to deal with that, right.
#
It wasn't flawed thinking.
#
It was just a recognition of a reality.
#
There's a lot of that still, still, still now.
#
Now, in terms of your question about incremental change, well, what I find
#
really interesting, see, is this, is this shift in the, the, the shift in objectives,
#
right, that, that, that it's very, very clear that the current objective
#
is to make India rich and in principle that, that should actually give an open
#
Ah, okay, if we all agree this is the objective, then I can tell you as an
#
economist, what you need to do is one, two, three, four, five, right.
#
So that's, that's my expert, that's my expert advice since we're all agreed on
#
the objective and so, so because we're agreed on the objective, I'm, I'm sure
#
you're going to take my advice and then I guarantee you that everything's going
#
And so in some sense, it should be a golden year for economists, right.
#
But, but of course, obviously the world's a little more complicated than that.
#
And one of the, one of the things is that, um, that it turns out there, there are
#
different, there are different frames for understanding how the way, the, the
#
way the world works and it's not necessarily the economic frame and, but
#
still, still we try, this is why, this is why we write these articles to be
#
constructive, to, to say, uh, you guys have done a great job on that, why don't
#
you focus on this in, in the hopes, uh, and these are not small things and we
#
know that, we, we know that the software does not get approved overnight, but
#
you know, you want to point people in the right direction and you hope, you
#
hope that this gets followed up and, and then they're really good results, right.
#
I mean, so since you came to India 2006, in a sense things have kind of gone
#
I mean, as you mentioned, you came with unbounded optimism as well.
#
The growth story was going to continue and things kind of went backwards
#
2011, 2012 onwards and, and, and when you think of this period, when you
#
think of the journey, does it sometimes feel frustrating that you can be an
#
expert in a field where you can see something going wrong in advance, often
#
you know what to do to turn it around.
#
Often you have plans on how to make things better and get out of this
#
hole and no one's listening to you.
#
You know, does it feel like that?
#
And even the small successes that you might have, like I'm sure that, uh,
#
you've probably had some part as part of teams in bringing about policies, whether
#
in Jakarta or here, which would have benefited people at scale, but in an
#
invisible way, so there's no immediate gratification for you, you can't wake
#
up in the morning and see a puppy and say, you know, I brought that puppy
#
into the world as alu perhaps could anyway.
#
I don't know where I came up with that, but there's no, there's
#
no immediate gratification.
#
There's no smiling puppy there for you.
#
It's, it's just that moral conviction in a sense that this is the right
#
thing I'm doing and therefore I have to keep doing, is that the correct
#
term, moral conviction?
#
You know, yeah, at some points I've, I have felt as a, as I mentioned, like,
#
like Cassandra, who knew what was going to happen and try to warn people
#
and no one listened, I, and then you, you feel, you, you feel horrible
#
about this because you turned it in on yourselves, right?
#
You know, as Ajay was kind of hinting, you know, maybe if I'd been a
#
little more forceful, I might've been able to have more people listen.
#
Um, I don't believe for a minute, but you could make that argument.
#
Doesn't stop me from feeling horrible about it.
#
I mean, there are other times when I fought for things and then later
#
I realized I made a mistake.
#
And then there, there are other times when I fought for things, I remain
#
convinced that I'm right, uh, but I accept the outcome.
#
Look, let's just start with the premise that I know how to make endurage.
#
Obviously, I mean, that's, that's a joke of a premise, but, but let's
#
just go with it for the moment.
#
Um, that doesn't mean that the country should adopt my advice because, as
#
I mentioned, there are other objectives, right?
#
I mean, let, let, let's, you know, let's take an extreme, extreme example, right?
#
Um, let's say, let's say that, I mean, in a ridiculous example, right?
#
That I could prove without a shadow of a doubt that, that if everyone
#
cut off their left hand, the country could become rich.
#
That's too much of a sacrifice, right?
#
Whenever there's a change, there are winners.
#
I mean, let's be a little more realistic now, right?
#
Whenever there's a change, there are winners and losers, right?
#
Society has to decide, uh, you know, even if an economist can prove on
#
aggregate their, their, their winners and everyone, you know, on, on, on
#
balance, society is much better off.
#
It doesn't mean they're not going to be losers.
#
You know, when, when you allow, when you allow Uber, Ola, the taxi
#
drivers lose and the society has to decide, right?
#
Maybe in certain circumstances, they care more about the losers.
#
So I'll give you the example.
#
I'll, uh, and that's for society to decide, not for me, right?
#
I can, can, you know, I, I can tell you my honest view as, you know, how to
#
make India rich, but it's for society to decide whether to adopt these recommendations.
#
And I, I, as an individual have to respect that social decision.
#
I mean, let's, let's kind of take it out of Italy and go to France, right?
#
France has been stuck for years, low, low growth, every error, error, every,
#
every president that gets elected to that country gives a speech saying
#
the country needs to change, but when it comes right down to it, the French
#
enjoy their way of living.
#
In there, the way they look at it.
#
Yeah, they could be a bit richer, but not worth it.
#
They'd rather live the way they're living right now.
#
That's for them to choose.
#
Not, not, not for economists, not for any outsider.
#
Um, so, you know, the same thing, the, the, the, the same thing applies here.
#
And so, as I said, there, there are all these different circumstances and, and
#
it's not necessarily true that I wish more people listen to me.
#
No, you mentioned the, the, the sort of collective noun, the French are happy
#
living the way they are.
#
And, and I know that must, uh, collective nouns must disturb you as much as they
#
disturb me, because I'm sure many French aren't, many French would want to work
#
harder and be richer and whatever.
#
And I think, you know, in India, I just think that once you decide that the state
#
picks winners and losers, it can become problematic because ideally, for example,
#
in the case of Uber plus Ola versus taxi drivers, I would say voluntary action
#
should win, that you always go for voluntary action and freedom and let
#
people decide by themselves, which they want to use, and then the pieces fall
#
where they were, you know, and people's productivity goes up, perhaps to save
#
money that goes back into the economy.
#
Eventually we are all better off, but if you, you know, if this, if we get into
#
the precedence, which we've already have always had of the state deciding who
#
wins and who loses, and that's a bit of a problem.
#
My next question is about, you know, I thought I'll take a digression because
#
you mentioned people's arms being cut off, which is a delightful image and a
#
bad, a bad, a bad economist could commit to what Basia called the broken window
#
fallacy and say that, look, if everyone's left arm is cut off, everyone will have
#
to take medical treatment and get an operation and all of that.
#
So doctors make a lot of money and the GDP goes up, right.
#
Which of course, you know, it's a shitty argument because it's, it's, you're
#
looking at the scene and not the unseen effects of everyone's arm being chopped
#
off and there the question comes, who does the chopping?
#
You can't chop off your own arm.
#
So is there a, are there two certified choppers who at the end simultaneously
#
chop off each other's arms?
#
But leaving that aside, my question is therefore about, clearly
#
I hadn't thought this through.
#
If ever a policy brief is being made on cutting off everyone's left arm to raise
#
the GDP, I don't think they'll come to you, but, but my question is really
#
about measurement now, and you alluded to data earlier, and I want to ask this
#
question at two levels and one of them is just a philosophical level outside
#
the particular context of India is it strikes me that something like the GDP,
#
for example, or any conventional ways we have of measuring anything seem
#
inadequate for the task because one GDP of course takes government spending
#
into account and you could just dig a ditch and fill it up and dig a ditch and
#
fill it up and, you know, that has an impact on the GDP.
#
So really that part of the GDP we should come perhaps completely ignore.
#
I don't know if economists do that.
#
And the other aspect is that a lot of the ways in which we are materially way
#
better off and by materially, I mean, tangibly, not in terms of material
#
goods cannot be measured by GDP, you know, a laptop that I buy today for
#
say a lakh can give me way, way more productivity, which also a lot of it
#
cannot be measured than say a laptop of an equivalent cost, which I could have
#
There is so much that technology has done for us, which is not even
#
measured in the numbers.
#
So it's a, it's a broader question about, you know, again, like you said that
#
sometimes what happens is that we take things for granted.
#
Things have been a particular way we assume it is set in stone.
#
Even the GDP really started before the second world war.
#
In a sense, it was the end of the first world war, which made people
#
realize that, Hey, we have no way of measuring national income.
#
And I have an episode on this, which I'll link from the show notes.
#
And I'm just wondering if these are again, like many of the other things we
#
discussed and outdated convention and nothing has taken its place.
#
So just at a broader philosophical level, I'd like to know what you think about
#
metrics and ways of measuring things.
#
And because they also, they therefore affect our frameworks.
#
If you are saying that economic growth is a big deal, then how do we measure?
#
How do we quantify it also kind of comes into place.
#
So forgive me for a naive sort of non-economistic question, but it just seems
#
that that measure itself is so flawed in its foundations that, and I can understand
#
that we have no better measures.
#
People have tried to, you know, come up with measures that indicate development,
#
welfare, et cetera, et cetera.
#
What are your thoughts on it?
#
So sorry, I'm going to give a very long answer here, but, and partly because I
#
want to go back to something you were saying earlier, you're absolutely right.
#
When I, when you start using collective nouns, like the French, immediately
#
you get into big trouble.
#
And unless you're talking about the French defense in chess, going out of
#
fashion and nobody plays the French anymore, then it's fine.
#
So one point I just want to mention there is when there's a policy change,
#
there are winners and losers.
#
And then the next, or when there's a change in the economy, sorry, when there's
#
a change in the economy, there are winners and losers.
#
And the question that you always need to ask is who's deciding this and how?
#
The huge advantage of leaving things to the market, as is done, for example, in
#
the United States is that you just let people vote with their money, right?
#
And that's a sort of fair vote.
#
If they're, you know, if they prefer bakery A versus bakery B, well, you
#
know, that's just the way of the world.
#
Too bad for bakery B, you know, you should have improved your products, right?
#
That's just the logic of the market where you accept the vote of the people, right?
#
Once, once you interpose the state in this decision is often as in France and
#
in France, the state is very extensively involved, things, things become very,
#
very problematic because, because the state can decide to favor one side or
#
another on any number of grounds, which may not reflect the preference of the
#
people at all and may, it may reflect the preference of the bureaucrats.
#
He knows the guy who owns this.
#
It may, it may, it may have a certain non-economic logic.
#
That's what I was highlighting earlier.
#
Or, or maybe that actually the people it's, for example, here's, here's a
#
very good example from, from France.
#
What happens is that when the state decides things get politicized and so, so
#
a group comes out and they protest to the government and say they, they
#
paralyze the roads and then just for the sake of social peace, the whole country
#
backs down and says, okay, leave it, right?
#
We, we won't make this change.
#
Even though the country wants the change, but because it has been
#
intermediated through the political process, the thing gets blocked, right?
#
Whereas if it had never been intermediated through the political process,
#
the change would have gone through because that's what the people actually want.
#
So yes, in many, many cases, they're just, it sounds very nice at almost a conceptual
#
level, you know, you, you imagine a kind of wise man balancing all these economic
#
and non-economic considerations and coming out with the best solution for society.
#
But that's not the way it works in the real world.
#
And, and, and all very often when you intermediate things through the state,
#
you get terrible results and, and really the state should just stay out.
#
So now, now I'll add a bit to this before you answer the second part of the question,
#
which is, you know, I love the way you speak about markets, allowing people to
#
vote with their money because in this aspect, in one aspect, markets are the
#
same as democracy, but way better in democracy.
#
Everyone gets to have a voice, but there is only one winner.
#
So if, if, you know, me and 10% of the people have voted for a particular
#
candidate, that's not enough.
#
The guy loses out, we get a leader we didn't want, but in markets, you get
#
what you want most of the time, unless you're a niche of one or a really small
#
niche, but if you're even 0.1% of the people who favors a particular product
#
or a particular, whatever, you are going to get it.
#
So it's a, that granularity of response to individual needs and desires, which is
#
something so beautiful and almost miraculous.
#
I think when you think about it, but it's taken for granted, but I'm sorry.
#
I had to kind of get that out of the way.
#
No, no, it's a very good point.
#
I I'm not so worried as you are.
#
Yes, today's computer is infinitely better than computers of even 10 years ago.
#
Uh, in the, in, in, in the U S they, they make these quality adjustments to the
#
numbers so, so they, they, they recognize the, this fact and, and adjust the
#
numbers so that this gets reflected in an increase in GDP.
#
Well, let me sort of refer to, sorry, I didn't want to interrupt you, but one
#
aspect, which I think can't be quantified, which is for example, in 1990, I'm
#
a kid in India, I want to listen to the music that I want to, I spend a lot of
#
time and money putting together a mixtape from a very limited sample of
#
music available to me today, I can go online and listen to any music in the
#
world, read any book in the world, watch any movie in the world, and you cannot
#
put a price to this and you cannot quantify what this does in terms of value.
#
But sorry, that was, I agree with you.
#
This is a, this is a tremendous benefit, which you're, you're right, is, is not
#
being quantified in terms of GDP.
#
And it's, it's, it's a real, it's a real pity because, you know, as we were saying
#
earlier in the conversation, this is, this is changing the country and the, and
#
the, and the world, it's not, you know, it's not some marginal activity.
#
And it's too bad that it's not, it can't be captured in GDP.
#
But I'm generally say in the United States, it is true that, see, the GDP is
#
meant to be one summary measure of people's economic wellbeing, right?
#
The other summary measure that's often used as the unemployment rate, right?
#
And these, these measures have, have proved, let's focus on GDP.
#
GDP has proved to be an exceptionally useful measure.
#
Because as you point out at a conceptual level, you can, you can
#
list any number of problems with it.
#
But at a practical level, it works very, very well.
#
Because it is correlated, highly correlated with all the other measures
#
that one could think of to measure economic wellbeing.
#
So when a measure is, when all the measures are pointing in the same
#
direction, you feel a high degree of confidence that that measure is
#
reflected in reality, right?
#
You know, you're putting a lot of weight on, on, on GDP in the United States.
#
And I'll come to India in a minute where I'm talking about United States for a
#
very specific reason, right?
#
Because I want to compare and contrast.
#
So, so in the United States, GDP is trying to summarize the economic
#
well-being of 300 million people.
#
Now, obviously, just if you think about it, that's, that's ridiculous, right?
#
How can you summarize 300 million people in one, in one data point that, that,
#
that can't be, but because it's highly correlated with all sorts of other
#
measures, you feel, okay, all right, it's an approximation, but not a bad one.
#
In India, there is, what I regard as a really distressing, and I think it
#
probably comes from school, a tendency to view numbers as truth.
#
You know, people will cite inflation last month was 6.52%, right?
#
Not 6.51, not 6.50, 6.52, right?
#
But that's ridiculous, right?
#
We're not measuring with that degree of precision.
#
Actually, if you look at the papers that I write, I make it a point to round
#
numbers wherever I can, because I think that they're going out into decimal
#
places is spurious precision, right?
#
We cannot measure where 1.4 billion people are doing so precisely to the
#
second or third or 20th decimal point.
#
Is a crazy act of hubris, right?
#
We only, that's even in the best possible circumstances, right?
#
And these are not the best possible circumstances.
#
I don't, I don't want to get into all the data problems that exist, but
#
suffice to say that the GDP numbers in, in, when you try to do the same
#
correlations between GDP here and other indicators of economic activity,
#
you do not get the same nice correlations that you get in, in, in the U.S.
#
And that, that, that's a warning signal that you need to be very, very careful.
#
Part of it is just sort of the inherent nature of the economy, but there are too
#
many people trying to draw very strong arguments from data that may not support
#
the weight of those arguments.
#
And if what you're trying to do is reach truth as opposed to supporting your
#
team, you need to be very, very careful.
#
In, in making your assessments, this brings me to my second question about
#
data, which in fact is about justice.
#
It's about the peculiar Indian problem of how unreliable the data is.
#
And it's not a peculiar to India, by the way, I only know India.
#
So I assume that God, all my pride in our peculiarity is completely gone now.
#
Let me shatter it right now.
#
Let me shatter it right, right away.
#
Oh my God, you busted it.
#
But here's the question.
#
And the thing is that in India, somehow in the kind of bizarre nationalistic
#
rhetoric that we have, somehow the GDP has become a metric to boast about.
#
And the moment you decide on a metric like that for political reasons, it
#
is obviously going to be gamed.
#
And I sense that that's a problem that we've had with data in India, that
#
politics has obscured or obfuscated most of it, that data is either not
#
released or it is unreliable.
#
And what we have is a very fuzzy picture.
#
In addition to that, we have the, the issue of the large informal sector,
#
now perhaps less large, sadly, but the large informal sector, which was only
#
being, you know, estimated by proxies and so on and so forth.
#
And we know that demonetization hurt it badly.
#
The botched implementation of GST heard it badly.
#
COVID hurt a lot of informal employment, but we have no way of actually
#
measuring that informal sector.
#
And even as far as the rest of the economy is concerned, you know, the
#
data becomes unreliable.
#
Different people have different kinds of measures.
#
I had a guest a few weeks on RLJ Raghu Jaitley, who was talking about how
#
India is doing better than it seems because credit growth has gone up,
#
which is one area he follows really closely.
#
And so, you know, so therefore in modern times, what we are involved in, as we
#
mentioned earlier, is not truth-seeking, but narrative battles and anything.
#
And it seems that for those narrative battles, experts are being pressed into
#
service of one side or the other.
#
And you see so many economists, for example, co-opted by establishments,
#
face those pressures and so on and so forth.
#
So what is your sense of this and how difficult is it then to navigate for
#
someone who sincerely wants to make a difference and is basically bipartisan?
#
Like, I'm sure you don't give a shit who's in power as long as the country is
#
going in the right direction.
#
But all these pressures nevertheless, you know, exist and you've been within
#
government, you've been an advisor to the ministry and so on and so forth.
#
You worked very closely with Alvin Subramanian, who was also on my show.
#
So what is your sense of these poles and the pressures?
#
Because if nobody seems to give a damn about truth, then what is this whole
#
And to ask a more concrete question and not end on a lament and doom and
#
desolation, you know, how hard is it then to make an actual difference in the
#
system where all expertise is actually being pressed into service of narratives?
#
I wouldn't be so pessimistic.
#
It's not that all expertise is pressed into the service of narratives.
#
I think that people, when I was at the ministry of finance, I found that the
#
people within the government had a fairly good idea of the actual situation.
#
They, of course, to the outside world, they always spoke positively, but they
#
just sort of, they knew that everything was not perfect and rosy.
#
So, but there's still this, there's still a problem.
#
And, and, and the problem that I feel is that when you have these ideological
#
teams, no, no one is concretely trying to think of ways to make things better.
#
Because one side is arguing that everything is perfect now.
#
And the other side is arguing that everything is a disaster now.
#
And the only thing that can be gone is change the government.
#
And, but, you know, neither is how neither that that's the
#
essence of the arguments, right.
#
But neither one is helpful for improving the situation.
#
I mean, can we have some concrete practical ideas for making things better?
#
Nobody's really even interested in coming up with these ideas.
#
They're just trying to prove that everything is perfect or everything is terrible.
#
So that, I have to say that kind of leaves me and a few others in a
#
very sort of lonely position.
#
It's always nice to have a monopoly, but, but seriously, I, you know, this is
#
not the kind of monopoly that I really want, right.
#
So that's very, you know, you kind of sense the irony here, right.
#
That this is a government that has prioritized making India rich, but at
#
the same time, the sort of a key precondition for improving the software,
#
namely a robust policy debate, which, which then leads to a consensus, which
#
then leads to good policies that one could implement, right.
#
Something that India did have.
#
That's kind of vanished because people are not seeking the truth anymore.
#
And that's really, really sad.
#
I mean, like, can't we kind of connect the, you know, the
#
work with the objectives here.
#
But, you know, what to do, right?
#
And, you know, I'm not going to, that there's some things are, as
#
they say, above my pay grade.
#
I can't, I can't change this.
#
So let's take the lens up a little bit and look at how the world looks at
#
India and the neighborhood.
#
And there's been a lot of hype over the last perhaps decade or more than a
#
decade about, you know, India being the next emerging superpower and so on and
#
so forth and in this, and this is something you've pointed out in your
#
columns as well, that in this people looking from the outside, miss a lot
#
of home truths about India.
#
One is, of course, the issues with our software, the way the three C's aren't
#
there, the way that policies can change anytime, even partnering with a local
#
player can be dangerous because of all the dynamics that you've written about
#
in such detail, and also that actually our markets aren't as big as people
#
think they are, that the middle class really is a small chunk of the country
#
and elites, the elites are just the super rich, a very tiny sliver on top
#
of that, most of this country, 90% of the country, perhaps is like sub-Saharan
#
Africa, you know, and you have to look at, and you have to look at all the
#
complexities of the country before you get that.
#
So speaking at how the world looks at India and, and we'll speak about, you
#
know, China and the neighborhood later, but speaking at how the world looks in
#
India, what do you think the optimistic accounts kind of get wrong?
#
Like in a recent piece that you wrote with Arvind, you know, you quoted
#
Michael Spence, a Nobel laureate saying, India is the outstanding performer
#
now, you know, quote unquote, and, and so on, economists ran a cover story
#
about is this India's moment?
#
And obviously the logic behind that is hey, that hey, China is fading and, you
#
know, manufacturing can only go so far and they've kind of reached their
#
kinds of structural crisis, and we'll talk about that, but what are they
#
getting wrong when it comes to India?
#
I think that some of this is, is, is just not even serious analysis.
#
The world wants India to, to, to succeed.
#
The world wants India to succeed for several reasons.
#
One is there's a huge Indian diaspora.
#
This Indian diaspora is very, very successful, particularly in the
#
U S and the UK, and so people in these countries have close ties with Indians.
#
And that gives them warm feelings about India as a country in, in, in a way that,
#
you know, they may not have any emotional connection with, I don't know, Kazakhstan.
#
You know, nobody knows any Kazakhs.
#
You, you, you don't count.
#
I have many Kazakh friends.
#
I would like to have many Kazakh friends.
#
So it's, yeah, I would like to have a, a, many Kazakh friends.
#
So like, they can invite us there and we can see what it's like.
#
I have no idea what it's like with both arms, with both arms, with both arms.
#
But so, so I, you know, don't underestimate that, right.
#
Another, another, another, another, another, another, another, another,
#
another, and very closely related is that countries care about other
#
countries with similar cultures.
#
It's, it's, it's, it's natural.
#
You know, you know, the circle sort of, you know, it starts with your own family
#
and then it expands to, to your city, to your state, to your country.
#
And then to other countries who similar cultures that, that, that's
#
the way the world works.
#
W-E-H-L-E-K-E is the expanding circle.
#
So people in the United States and the UK find that Indian culture is very
#
comprehensible at a, at a certain level, or let's put it this way.
#
Let's a little less controversially.
#
There are enough similarities that people feel a connection.
#
That's why it is so easy for Indians to go to be educated here and then go to
#
the United States and succeed there because it's not, it's not such an
#
alien culture that you feel you can't operate in it, right.
#
If, if you or I were to go to Kazakhstan, we know we would not succeed.
#
We don't have the faintest idea how to operate in that culture.
#
Whereas, you know, I can guarantee and you know it, right.
#
If you go to the U S you will do quite well.
#
It's not, it's not an issue.
#
And, you know, and it works the other way.
#
Americans feel the same way.
#
So, so naturally, obviously people want similar cultures to succeed.
#
Why, why do they want similar cultures to succeed?
#
Because in, in the end, all cultures feel threatened by the, by, by the outside.
#
And one of the ways that you, you increase your sense of security is to
#
know that there are other cultures like you that are strong and powerful.
#
Why on earth does New Zealand still have the King of England as their King?
#
I'll tell you why it's obvious because precisely because they are an island on
#
the other side of the world and they feel very lonely there, they want to
#
stress their cultural similarities to the UK because it gives them a sense of security.
#
So that's the way the world works.
#
And that's why fundamentally the United States, Britain, particularly the
#
English speaking countries want India to succeed now.
#
So getting back to economics.
#
So, so the, you know, the child is father to the man, right?
#
You want it to succeed.
#
The government is saying it is succeeding.
#
So you accept the argument, right?
#
You don't want to investigate further because you might discover
#
something that you don't want to hear.
#
And I guess geopolitics also plays into this because China is such a threat.
#
And especially now in the, you know, in the Russia, Ukraine war with China moving
#
closer to Putin, there is again this deep desire that, you know, what do we do about
#
China, who are again, you know, with the theme of what you said, almost an
#
inexplicable culture, both for the Americans and for us, right?
#
And therefore it is much easier to think of for India is there as a counterbalance
#
Except when you look deeper, it's not such a rosy picture.
#
So can you talk a little bit about that?
#
What is the reality check you'd want to give?
#
You know, people outside who are bullish on the India story.
#
And of course you've also written optimistic pieces about India and all the
#
things that are going right for us.
#
But you've also recently written pieces, you know, giving that reality check and
#
talking about, Hey, it's not quite so rosy.
#
And we are not necessarily going to be a global superpower that fast.
#
Yeah, I'd want to phrase things in a positive sense.
#
I think that India has an historic opportunity and the historic opportunity
#
is that two things are going on.
#
One is that during COVID firms discovered the joys of working from home.
#
Now, if you're a firm in New York and you're going to allow people to work
#
from Boston and you're an entrepreneur, it clearly has to occur to you that
#
it clearly has to occur to you that if people can work from Boston, why not
#
Bangalore, what is the fundamental difference between work from home,
#
from one and the other?
#
And of course, Indian labor is much less expensive.
#
So if you're going to have a work from home model, why not outsource to India?
#
If you look, this is something, this is an opportunity that India is actually,
#
and this is a positive story that's shockingly got very little attention in
#
This is an opportunity that India is actually, even as we speak, seizing with
#
Before the pandemic, service exports from India were running at about 6
#
During the pandemic, they increased to 9 billion per month.
#
Then after the pandemic, they increased to 11 and the last two months, 16
#
Wow, from six in just a short span of time.
#
It's not just an opportunity.
#
It is being seized even as we speak, right?
#
This is fantastic for the country.
#
The only, I'll give you to make it concrete before, even more concrete,
#
before the pandemic, JP Morgan had 30,000 people working in India in the back room.
#
That's a lot of people.
#
That's a really big increase.
#
So the only, but then we get back to software and sort of more broadly
#
I mean, so to make sure, I would say there's no, there's no real limit to
#
this, except on the supply side, and it has to make sure there are enough
#
talented people that can be brought into the system, right?
#
You know, if you're going to keep growing 10, 20% per year, that means the
#
number of people working for these companies needs to grow 20% every year.
#
Where are these people going to come from?
#
You have to, you have to improve the educational system.
#
Otherwise the country will run out of talented workers, or it will get stuck
#
at a sort of lower end of the IT services and not be able to improve to the higher end.
#
But so far, so good, right?
#
Really, really, really good stuff.
#
Now let's turn to goods.
#
Goods, the opportunity is absolutely enormous.
#
There's a $36 trillion global market for goods exports, of which India only has 2%.
#
Compared to India's population, that is the worst ratio of any country in the world.
#
There is huge, as the teachers like to say, huge scope for improvement.
#
Which you basically say to the student who's come last because like, duh, yeah.
#
Exactly, exactly, right?
#
If you want to put a positive spin on things, right?
#
Now, and it's only going, there's huge scope for improvement.
#
Because in particular, China's seeding export space, so over the past decade,
#
it's given up export space worth about $150 billion, primarily in businesses like apparel
#
and footwear and ceramics, all things that India can easily do.
#
It can take up that export space that's being vacated by China.
#
Now, so there's a huge opportunity here.
#
But so far, India has not been able to seize this opportunity.
#
And one, the government is trying with the PLI, but the PLI is heavily skewed
#
toward prestige industries like semiconductors.
#
It needs to be reoriented towards industries that will employ low-skilled people.
#
Because really, that's India's comparative advantage.
#
Many, many low-skilled, low-cost people.
#
As I said, the risk with the services is that you may run out of high-skilled people.
#
So how is India going to provide jobs for the low-skilled people?
#
You need to build these textile plants and these footwear factories.
#
But there are several problems with that.
#
One is this software problem that I mentioned.
#
The other problem that I'll mention is that India has taken an inward turn.
#
Over the past two years, tariffs have been raised on more than 3,200 items,
#
affecting 70% of total imports.
#
And even before that was done, India still had the highest tariffs in Asia.
#
Well, higher tariffs than anyone in East Asia, let's put it this way.
#
That's completely incompatible with the way that modern factories work.
#
Because modern factories are good at something, but they need to import a lot of parts
#
from all over the place in order to produce a competitive process.
#
So if you make it difficult to import these parts, then you make it difficult or expensive
#
to import these parts, and you make it impossible to make a competitive product.
#
You see, in the 1960s, it was basically a binary decision.
#
Produce everything domestically or import everything from abroad.
#
Now, nothing is binary anymore.
#
Every product that you see is some mix of domestic content.
#
It's true in every country in this world.
#
We live in an eye pencil world.
#
Everything is mixed of domestic and foreign.
#
Even when you see these tags made in so-and-so, well, they have these regulations.
#
If it's more than X, you can put that label.
#
But nothing is 100% made in any country.
#
That's not the modern world anymore.
#
So you need to be open.
#
If you look, and I'll say one last thing here.
#
Vietnam's exports are now higher goods exports are now higher than India's.
#
This tiny little country exports more than India.
#
What do they have that India doesn't?
#
Essentially, what they have is they have free trade agreements
#
with just about every country that matters in the world.
#
That means they can import things at low cost.
#
In the markets, they can export them without the foreign importers having to pay any duties.
#
And that has made it immensely attractive for anyone to put their export base.
#
India, it's too difficult for the policy reasons that I mentioned
#
and also because of the restrictions on trade.
#
And a classic illustration of how politics plays into this
#
is when the labor laws were sought to be scrapped by UP a year or two ago.
#
And because Adityanath was rolling the straight,
#
everyone who opposed him reflexively came down against it.
#
Though the move, I think, has consensus among anybody who's been in the field forever
#
that we needed this, that the labor laws actually hurt workers more than they helped them
#
and were part of the reason that we didn't become a manufacturing superpower in the 70s itself.
#
And that this great advantage of cheap labor that we have has just simply lain waste.
#
So, you know, politics also plays such a huge part in this.
#
And to add to this, there is also the fact that China,
#
which at one point people were saying, oh, they'll catch up with the US and blah, blah, blah,
#
has actually, as you pointed out, reached an inflection point.
#
And they are, in a sense, deeply troubled on multiple margins.
#
So tell me a little bit about that and all of it, of course,
#
in different ways is an opportunity for us, which we don't seem to be taking.
#
But just, you know, what's going on in China, for example?
#
You've written eloquently about it, so you should know enough, come on.
#
Okay, one way to tell the story, if you go back to the distinction that I drew
#
between hardware and software, China built a lot of hardware.
#
They built airports all over the place. They built beautiful roads.
#
They built the best railways. They built housing all over the place.
#
And they've kind of reached the end. You know, how many airports does any city need?
#
And yet they never fix their software, and they're not going to fix their software
#
because the party doesn't allow it.
#
And also, Xi Jinping has, through a series of policy reversals,
#
one day you're the darling of the party, and the next day you're in jail.
#
He's created enough risk for entrepreneurs so that entrepreneurs are very reluctant to invest.
#
And so you've kind of...
#
So the software, instead of being fixed, has actually deteriorated.
#
And they've reached the end of their hardware story.
#
They've discouraged private investment. So now they're now a bit stuck.
#
And this goes back to what I was saying about different countries having different objectives.
#
For many years, while India was prizing stability, China was prizing growth.
#
Communist Party officials were promoted on the basis of whether they could
#
deliver growth first in their municipalities. If they did, then they got promoted to their state.
#
And if they did that, then they got promoted in the center.
#
That was the incentive structure, promote growth.
#
Now, clearly, Xi has other concerns, other objectives, foreign policy objectives in particular,
#
and control. He wants to centralize. He feels that in this drive for growth,
#
power was decentralized too much. Power had seeped away from the states and gone toward the
#
businesses. And he wants to grab that power back and centralize power away from the cities
#
and the states. So centralization of power does not work well with the decentralization
#
of an economy. And growth suffers. So at some deep level, this is what it's all about,
#
the struggle between control and growth. And they've shifted the objective toward control.
#
So growth suffers. So they've moved away from GDP to GDP.
#
Yeah. There we go. I've taken a lot of your time today. So a couple of final questions
#
before I let you go. And thank you so much. This has been so incredibly insightful,
#
but a couple of final questions still to go. And my penultimate question is this,
#
that having studied India closely for so long, having understood the different directions which
#
people are moving in, having seen the kind of intellectual capital there is in the country to
#
take it forward, if I ask you to project, say, 15 years into the future, what is the best case
#
scenario and what is the worst case scenario? Or if you want to answer it in a different way,
#
I can reframe the question for you as what gives you hope and what gives you despair?
#
You can choose whichever formulation you want.
#
You know, these questions are not the same kind of questions that you see on the talk
#
show hosts when they ask you things like your favorite color. These are difficult questions.
#
No, no. In every single talk show, if you get to the fifth hour, they'll ask you this.
#
Oh, oh, I see. I see. I've never got to that on those talk shows.
#
And they cut off an arm in the sixth hour.
#
Well, I have to tune in for that. No, seriously. Sorry. Best case and worst case. And then you
#
rephrased it to say what? Sorry. What gives you hope? What gives you despair?
#
Ah, okay. So either of those, because the first asks for like almost a concrete kind of scenario.
#
The second can be a little more abstract. I'd prefer to be concrete. Actually, it's much more
#
colorful. I think the best case scenario goes something like this, right? That I feel
#
that to a large extent, societies get what they truly want deep down.
#
China, in a period when China wanted growth, it got that growth. The US has always been dedicated
#
to growth. Europe has always been much more ambivalent about growth. In the era when India
#
was very concerned about ensuring social stability, it got that social stability. It achieved this,
#
and now people take it for granted. And I think now that there's an emphasis on growth,
#
in the best case, it will happen. Just because people will will it to happen.
#
And you can see any number of reasons. Somebody asked me the other day,
#
is India short of entrepreneurs? You know, I almost fell off my chair laughing at that one,
#
right? I see particularly the 20-year-olds as the most entrepreneurial generation in history.
#
All of them have been watching YouTube and getting all sorts of ideas of things that they
#
want to do. And if you just go around Bombay and spend any, you know, 15 minutes walking,
#
say around Bandra Village, you can see some of the things that they're doing.
#
Of course, a lot of things, you don't even have to walk. You just go online,
#
you can see what they're doing. So you have this combination of a young India,
#
an entrepreneurial India, a globalized India, and a country that has said our priority now
#
is economic growth. And then you can believe it will happen. India will become rich before our
#
eyes. It can happen. Absolutely. You know, I truly believe in this, that it can happen, right?
#
The other scenario, though, is that kind of reminds me of this old cynical joke about Canada.
#
They used to call Canada the great unfinished country, and yet many people would leave
#
and they asked one guy, why are you leaving? He said, I'll come back when they finish it.
#
This reminds me about a joke about Mark Waugh. Do you follow cricket by any chance?
#
Very poorly. So Australia had two Waugh brothers,
#
Steve Waugh and Mark Waugh. No, no, that's Shane Waughn.
#
Shane Waughn, sorry. Oh, Waughn. W-A-U-G-H?
#
Yeah, yeah. So they had Steve Waugh and Mark Waugh and Steve Waugh was always a bit more high
#
profile. And Mark Waugh's nickname was Afghanistan because he was a forgotten Waugh.
#
You reminded me of that. Anyway, sorry. My stomach is paining now.
#
My stomach is paining hearing you say that nonsense. So give me your worst case.
#
Okay. So the worst case goes like this, that while growth is an objective,
#
it is not clearly the overriding objective. And that carries the kind of risk that
#
we've been talking about again and again during our conversation, that when it comes time
#
to choose a policy, for example, that it won't necessarily be done in a way that the decision
#
will not be taken on the basis of whether it promotes growth or not. It will be taken on
#
other grounds. And just the sheer fact, I mean, to sort of summarize at a very high level,
#
just the sheer fact that it could be taken on other grounds creates risk and therefore people
#
don't invest. And then the growth does not happen. And then if you really want to push things,
#
all the dreams and expectations of the younger generation are not fulfilled.
#
And then either one of two things happens. Then if we really want to push this, then you can also
#
have a positive case and negative case. The positive case being the younger generation
#
absolutely insists, no, growth has to become the top priority. Or they can be defeated,
#
so to speak. Their voice is not heard. Their wishes are not respected. And then
#
we go back to social instability. So that's the worst case. You know,
#
clearly, you can see that, you know, a safer bet is a kind of muddling through scenario,
#
right? I mean, that's always a safe bet in India.
#
And the more likely, but...
#
Is there ever a chance that we could end up in a situation similar to where Jakarta was in 97,
#
because they were doing better than us in terms of per capita GDP at the time, like they were doing
#
better than we are now. And so is there ever a chance a governor of our central bank,
#
Shakti Kanta Das, can go to a medical store and not find sanitary products? I don't think
#
he would be looking for them. But you know what I mean? Is there ever a chance that,
#
you know, that things could get so bad that in our current complacence, we can't imagine it right now?
#
You know, one of the things, one of the many things, because I keep pulling them out of this
#
bottomless well, one of the many things I learned at the IMF is that, sure, these things can happen.
#
I mean, we've seen again and again, all over the world, that countries that thought this was the
#
kind of stuff that only happened to other people finds it out. I mean, what American would have
#
thought in 2005 that the United States would experience a financial crisis when the United
#
States was the leading financial power in the world? That would have made no sense to any American.
#
Then completely unimaginable things happen. This is why I found this book that I recommended
#
earlier quite fascinating because it explains how an extremely high level situation, this was a
#
civilization that 2000 years ago had indoor plumbing, which many people still don't have today.
#
All right. You could take heated, if you were rich, of course, not everyone, but, you know,
#
they had aqueducts to bring in the water. If you were rich, you could get into connection to the
#
aqueduct and you could have heated baths at home. Now, and that's the way it was all across the
#
Roman Empire. The Roman Empire fell apart and suddenly civilization, just as we define it,
#
disappeared. People became illiterate. There was no trade. There was no evidence of pottery made on
#
a potter's wheel for hundreds of years after that. That's how bad civilization fell apart.
#
These things can happen. Actually, coming to think of it, they did happen during COVID.
#
In parts of COVID, things were pretty bad in India in terms of scarcity, shortages,
#
just a healthcare situation, people's mental conditions.
#
Yeah. People assumed that if you got ill, you can go to a hospital. They discovered in COVID,
#
not necessarily true. I mean, not just in India, but all over the world.
#
That's the other reason why people like me think that economics is so important and needs to be
#
given high priority because we see the positive scenario and we see the negative scenario.
#
That how much further a country can go up, how people's aspirations can be met with the
#
right policies, and with bad policies or bad luck, how things can really, really fall apart
#
and how easily and how often it happens. I mean, look at what's going on in Sri Lanka today,
#
just down the road. That's why we always feel that it should be placed front and center.
#
My final question to you is a traditional one for guests who come on the show. For me and my
#
listeners, I recommend books, films, music, which mean a lot to you. Don't have to do anything to
#
do with economics. No, they can, but they don't have to. Just stuff that you feel so excited
#
about that you want to share them with the world. Yeah, my tastes are so unusual. I never feel the
#
need to... I recommended one book twice over the course of this podcast. I think I'd really want
#
to leave it at that, except possibly to say that if... Well, I make a slightly different point
#
that just as I was saying earlier in the podcast, you can learn a lot about your own country
#
by going to another country, and you can learn a lot about your own civilization
#
by studying other civilizations, even ancient ones that had nothing to do with your own story.
#
And if anyone is interested in Roman history, there's one great book that serves as a great
#
introduction, and that is SPQR by the Cambridge historian Mary Beard. That is a history book with
#
an incredibly high standard. To be a historian at Cambridge, you have to be pretty good and
#
pretty rigorous, but at the same time, it reads like a novel. You can just turn the pages.
#
I'm just in awe of that achievement because normally it's one or the other. If it's rigorous,
#
it's slow reading, and if it's fast reading, it's a bit sloppy.
#
Why don't you write a memoir sometime? I think it'll be both, and it'll be very fascinating
#
because the kind of life you had and the kind of things you've seen would be something... I
#
would certainly buy the book and read it, not because I know you, but you should.
#
We'll let your listeners vote on this. If I actually sense there is a genuine demand,
#
I might do it. Jesus Christ, you don't know what you're in for. Everyone listening to this,
#
kindly go on Twitter right now and tag Josh and ask him to write his book. Kindly do it right now.
#
This could be a glorious moment. You could be responsible for the book coming into being.
#
Any more books, films, music? Just things that make you happy so you want to share them. Don't
#
overthink it. I would recommend another book. This is part of my general theme that you can
#
learn a lot from other countries and in other time periods. I think people should put
#
one person in global history who has been inadequately read about, inadequately understood,
#
but who is tremendously important is Mussolini. There's any number of biographies. Actually,
#
I take that back. There are very few biographies of him because he's inadequately studied.
#
There's one by Dennis Mack Smith. There's another one by an Australian academic whose
#
name is escaping me at the moment. I really think that here's somebody who needs to be studied
#
just because actually he did have a vision. He did have a strategy.
#
Of course, he's not a figure to be emulated. It's very, very interesting to think about
#
what his objectives were and what his strategy was and to what extent we see or do not see these
#
reflected in our own times. Wow. I haven't read any books on Mussolini.
#
My only impression of Mussolini is from the Charlie Chaplin film, The Great Dictator,
#
where he played, I think, Napolini was the name of the character based on Mussolini.
#
And there's this glorious scene where Napolini and the Hitler character,
#
have you seen the film? Yeah, a long time ago.
#
So they're in a barbershop and sitting side by side, the Hitler and Mussolini characters,
#
and you can take your chair up a little bit. So one of them takes his chair up so he's taller
#
than the other guy and it's a psychological advantage. And then the other guy takes his
#
chair up and they continue this way till I think Hitler hits the ceiling and crashes back down,
#
something like this. Yeah, God bless Charlie Chaplin. So films or music?
#
No, I mean, of course there are films I like and music that I like, but none that I
#
feel is necessary for me to impose my own taste. What was the last film which made you cry?
#
Oh God, I don't break down and sob on any film, but...
#
Josh, it's okay for men to cry at school. But that having been said, there's a film nobody's
#
going to watch, but there's a kind of interesting film called Far Far Away. It's a film made in
#
Hong Kong, I don't know, a year ago. And it's a sad film and it can make you cry in the sense,
#
not that anything happens in the film. Actually in the film, guy gets the girl.
#
Okay. Shock, I probably shouldn't have told the end.
#
Spoiler alert, it's too late now. It's okay.
#
But of course that's not really what the film's about. The film is ultimately about
#
what it's life in Hong Kong now that its autonomy has been revoked.
#
And what do you do? And how do you live? So it addresses very, very deep questions.
#
And the title of the film is Far Far Away because, of course, in a way it's a joke.
#
Hong Kong is a tiny place. And one of the things it tries to point out in the film
#
is that actually there are these unexplored... Hong Kong is a little bit bigger than you think.
#
There are these unexplored corners of Hong Kong and it takes you to all these unexplored corners
#
that probably even people in Hong Kong probably don't even know about. Little villages on the
#
border with China, which normal people can't even go in because there are security regulations,
#
you have to stay below that village. So it tries to say, okay, well, if you're confined
#
in Hong Kong, there are actually places for you to explore, places for you to go. Don't feel that
#
the world is completely closed and encased you in this tiny prison cell. Yeah, okay, it's a prison
#
cell, but it's a little bit bigger than you think. And the other thing that I found absolutely
#
astonishing was that they were allowed to say... I mean, it was subtle, but it was clear
#
that we're in a prison cell. And I was amazed that this filmmaker was allowed
#
to say this. And if you're paying at all attention to the film, there's one guy,
#
lead character in the film. He's a really nice guy. He's very calm. He's the one looking for a girl.
#
He's a great guy and you're rooting for him. And one time in the film, he gets really,
#
really angry and starts yelling. And this girl asks him, like, what happened to you?
#
And he said, that was my father on the phone. And she said, why are you so angry with your father?
#
And he said, because my father abandoned his family here and found a new family on the mainland.
#
And anyone sensitive knows exactly what that filmmaker is saying at that moment in that film.
#
Why did he put that scene in there? And you feel it. You feel his pain
#
when you see that scene. And yeah, you can get emotional about it if you care about these
#
kind of things. If you care about Hong Kong, care about freedom.
#
Sounds beautiful. Thank you for that. And I love the title. I mean, in a sense,
#
we are all far, far away, aren't we? Yeah, right.
#
Josh, thank you so much for coming on the show. It's been a delight talking to you.
#
Thank you for listening.
