The art of not paying attention to what economists have to say

Kaushik Basu, the former Chief Economic Advisor to the Government of India, during a recent visit to Bangladesh, made an interesting observation responding to the long-held criticism that governments don't listen to economists. 

"It is not only the case for Bangladesh. Even until the early 1990s, the Indian government was not particularly welcoming to the reform recommendations made by Indian economists. But when recession hit and the government finally decided to adopt path-breaking reform measures under the guidance of the World Bank, it was eerily similar to what local economists had been proposing for many years," said Dr Basu. 

But who is at fault for this delay in reforms? While some argue that economists often use jargon and are more journal-focused, Dr Basu thought otherwise. Dr Basu said, "It is, unfortunately, the reality we live in. I don't think economists are at fault here. It's simply that governments don't want to adopt risky reform measures unless circumstances force them to do so."

The rather pessimistic response from Dr Basu got me thinking. Why don't governments listen to economists? Should they even listen to economists? If they should, how can we ensure that they do? 

Bangladesh recently received the first instalment of the $4.7 billion loan from the International Monetary Fund (IMF). While the loan would indeed ease the pressure on the country's external sector, there is a caveat. The IMF wants Bangladesh to adopt certain reform measures such as setting a ceiling on the budget deficit and a floor on social security and net reserves; introducing a formula-based price system for petroleum products; reducing national saving certificates, leaving interest rates and exchange rates to the market etc. 

Interestingly, Bangladeshi economists, belonging to prominent think tanks and typically with vast experience in macroeconomics affairs, have time and again made similar suggestions to the government. However, the policymakers have been less than enthusiastic about implementing these suggestions. 

In a recent interview, Dr Debapriya Bhattacharya, Distinguished Fellow at the Centre for Policy Dialogue, expressed his frustration over this. He said, "It is embarrassing for the country that we are being forced to implement these reforms by the IMF. We have asked for these many times before, but the government did not listen to us."

When it comes to consulting economists, the GoB is usually not the most collaborative, regardless of the political party in power. Economists and think tanks usually have to navigate carefully when they evaluate the state of the economy so that they don't tread on the wrong toes. 

A lot of think tanks even rely on government projects from the Planning Commission or the GED (General Economics Division) for funds and tread even more cautiously. Those that don't often get shunted by the policymakers. The nature of the shunting may range from careless dismissal of their findings to outright callout by the Ministers. In the past, policymakers have also branded certain economists (and journalists) as amateurs and schemers when they criticised the rising expenses and delays in different mega projects. So it is fair to say there seems to be a disconnect between economists and policymakers in Bangladesh.

Is this the case for other countries as well?

Well, it depends on the country in question. On the one hand, there is Pakistan, where policymakers (actually the military) despise world-renowned economists like Dr Mahbubul Haq (one of the architects of the Human Development Index) for their fervent opposition to Pakistan's excessive investment in the military. 

In explaining why that is the case, Dr Birupaksha Paul, former Chief Economist of Bangladesh Bank, said, "Since policymakers primarily belong to political parties with the primary interest of getting reelected, their political priorities often overwhelm the economic realities of the country."

"While economists consider the state of the economy, politicians are often myopic and focus on short-term gains, especially before an election. This is why governments tend to introduce or inaugurate new mega projects or massive social security campaigns right before an election, regardless of the impact on the budget deficit," he added.

But this is not necessarily the case in every country; the degree of prevalence often depends on the quality of the institutions in each country.

Strong institutions are key

Joe Biden recently declared that student loans would be forgiven by $10,000, a widely popular decision among millennials and would grant them a much-deserved sigh of relief. However, it would also likely put pressure on the US's ever-augmenting budget deficit. 

Consequently, cases against the decision have been lodged and the Supreme Court has begun hearing them. Similarly, despite pressure from the Democrats during the mid-term, Jerome Powell, the Federal Reserve Chair, refused to budge and continued to raise interest rates to control rising inflation.

"The Founding Fathers of the US always thought about including checks and balances in every step of governance. This is why even the President cannot implement policies at his whims. The Congress and the Supreme Court are there to make sure the decision is indeed in the interest of the people," said Dr Birupaksha. 

"Even Shaktikanta Das, the Chairman of the Reserve Bank of India, exhibits great resilience under pressure from the government to not raise interest rates," he added.  

In Bangladesh, institutions like Bangladesh Bank often have to operate according to the directions of the Finance Ministry.  Up until Atiur Rahman, most governors of the central bank used to be former economists. However, after the hacking scandal in the central bank ($101 million of the foreign reserve was stolen from Bangladesh Bank's account), the governors have all been administrators, typically from the Finance Division. Given their prolonged connection with the Finance Division, they are more likely to rely on the Ministry of Finance before taking a decision than their predecessors. 

Furthermore, previous governors and chief economists of the central bank have also claimed on different counts that policymakers often do not listen to their suggestions. Many claim that the encroachment of the Finance Ministry into central bank business can also alter the initial position of the governor, irrespective of the economics behind said decision. This consolidation of power in the cabinet, especially in recent times, can lead to political decisions instead of economic ones.

Will including economists in policymaking solve the problem?

Another problem with policy making in Bangladesh is the lack of incorporation of economists into the decision-making process. While prominent economists like Rehman Sobhan and Nurul Islam have been at the helm of the Planning Commission, even Rehman Sobhan himself argued that it was difficult to get things done because of special political and economic interests.

Dr Birupaksha Paul believes that incorporating economists into the decision-making process and ensuring that they can take decisions independent of the political priorities of the ruling party can improve the quality of economic policies in a country. While there is a chief economist at the central bank, as Dr Birupaksha Paul said, they often play an advisory role and the policymakers often do not listen to what they have to say. 

However, there is a caveat. Many pundits argue that economists themselves are susceptible to lobbying from large corporations. During the 2007-08 financial crisis, there were allegations against former Treasury Secretary Larry Summers of taking kickbacks from Goldman Sachs, one of the financial institutions he was supposed to regulate.

Even when local economists had been at the helm of the central bank, their rule had not necessarily been the most successful. Some prominent economists who have been appointed to the boards of state-owned banks have also found themselves in the centre of controversy involving local scams. 

All in all, ensuring the accountability of policymakers, economists or not, is crucial to ensuring that the policies undertaken serve the ordinary people and not their corporate or political overlords. 

Seikh Rafi Ahmed. Sketch: TBS