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When the Facts Change: How Can the Financial Crisis Change Minds?

When the Facts Change: How Can the Financial Crisis Change Minds?

This essay argues that pragmatism as a temporary prop to stabilise the crumbling financial system is distinct from pragmatism as a governing ethic. The emerging common sense worldwide and in India aims to be the latter. Yet, in the absence of sufficient grounding in a broad theoretical doctrine, this incipient pragmatism may be insufficient to dislodge the prevailing doctrine of neoliberalism and thus may, in fact, end up being a temporary reaction.


When the Facts Change: How Can the Financial Crisis Change Minds?

Arjun Jayadev, Anush Kapadia

This essay argues that pragmatism as a temporary prop to stabilise the crumbling financial system is distinct from pragmatism as a governing ethic. The emerging common sense worldwide and in India aims to be the latter. Yet, in the absence of sufficient grounding in a broad theoretical doctrine, this incipient pragmatism may be insufficient to dislodge the prevailing doctrine of neoliberalism and thus may, in fact, end up being a temporary reaction.

Arjun Jayadev ( is at the Economics Department, University of Massachusetts Boston, and Columbia University Committee on Global Thought and Anush Kapadia ( is at the Anthropology Department, Columbia University.

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Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to

  • to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
  • Alan Greenspan, Testimony to Congress, 23 October 2008 I see three outstanding dangers in economic nationalism and in the movements towards national self-sufficiency, imperilling their success. The first is Silliness – the silliness of the doctrinaire.
  • – Keynes, “National Self-Sufficiency”, 1933

    hen the prevailing theory of an age has been undermined by a shattering blow of contravening fact, a space is opened up for the reconsideration of alternative models for thought and action: crises are moments when thinking can shift abruptly. Just so, we are presently witnessing the emergence of a new common sense about financial governance, one that foregrounds pragmatism and prudential countercyclical operations on the part of national and international monetary authorities (see, for example, Brunnermeier et al 2009). Radical as some of these suggestions are, much of this “new pragmatism” remains at the level of improvements to an otherwise sound system; it is not grounded in an alternative theoretical or institutional analysis. This is very different from the situation at the end of the last great crisis of liberal capitalism, when Keynesianism and the second world war provided theoretical alternatives and political legitimacy that gave guidance to the establishment of new institutional forms of governance.

    Keynes has of course been widely cited during this crisis, almost as a reflex, and he is bound to contribute to the new common sense both directly and via his intellectual descendants. This is salutary as, among numerous other things, it will bring the often-submerged fact of institutions back to the centre of the discussion. A signal institutional feature that will frame the future discussions of financial governance is the networked hierarchy of global finance.

    Pragmatism as a temporary prop to stabilise the crumbling system is distinct from pragmatism as a governing ethic. The emerging common sense aims to be the latter. Yet in the absence of sufficient grounding in a broad theoretical doctrine, this incipient pragmatism may be insufficient to dislodge the prevailing doctrine of neoliberalism and thus may, in fact, end up being a temporary reaction. This insufficiency stems from the political necessity of doctrine, something Keynes understood well: “Words ought to be a little wild – for they are the assault of thoughts upon the unthinking. But when the seats of power and authority have


    been attained, there should be no more poetic licence”. Despite running the risk of “silliness”, grand theoretical flourishes appear to be a condition of achieving hegemony, while pragmatism a condition for maintaining it. In the west, especially in the US, there is little evidence that those in positions of power are drastically rethinking the management of the global economy, even while the excesses of unrestrained financial interests appear now to be widely recognised. Neoliberalism remains both the default architecture for global finance and the default way of thinking about that architecture; “it is astonishing what a bundle of obsolete habiliments one’s mind drags round even after the centre of consciousness has been shifted”.1 In some places, including India, neoliberalism has been on the ascendant till very recently.

    By way of suggesting a refocusing of our common sense, the discussion below is organised around a central feature of global finance – the fact that it is a networked hierarchy. Financial flows are global but intermediated through US and western European economic conditions, institutions and players, which thus maintain a disproportionate influence both on the direction of the world economy and on the policies undertaken in other countries. The first section outlines this feature and describes the various responses to it that have been suggested especially during this and other crises. The second section will discuss how the Indian debate has addressed the vicissitudes of this tangled, top-heavy web. We end by considering how these interacting debates, global and local, might contend with the new forms of global financial governance.

    1 Connected on the Upside ... and the Downside

    Writing in the middle of February 2009, it is hard to recall that it has been barely a year and a half since talk of the “decoupling” of the world economy was very much in vogue. This thesis had at its core the idea that the world was sufficiently multipolar in its patterns of growth that a downturn in the core economy of the US would not seriously affect the prospects for global growth. In a November 2007 report on its outlook for the coming year, a report by Merrill Lynch confidently asserted that the world would not be adversely affected by the US downturn.

    The world does not build US houses … A sharp slowdown in the US economy in 2007 is unlikely to drag the rest of the global economy down with it,... The good news is that there are strong sources of growth outside the US that should prove resilient to a consumer-led US slowdown.

    This statement was remarkable not only simply for its misplaced cheeriness, but also because it completely elided the complex chain of interlinkages whereby what happened to US asset prices affected directly and systemically, virtually every country in the world. Events that have followed have meant that this hypothesis has more or less disappeared from the public view (as has, in fact the company). And while hindsight is 20-20, the viciousness with which the integrated global economy has seen a coordinated downturn has been stunning. Nowhere is this synchronised decline more obviously manifest than in the rapid unwinding of global capital flows.

    Capital flows to the developing world, it is now fairly well re cognised, are pro-cyclical. In the boom years of 2003-07, when the developing economies grew rapidly, driven by rising

    166 commodity prices, increased export volumes and in some cases larger domestic markets, there was a surge of capital flows into emerging markets to the magnitude of $2.6 trillion. In 2007, net capital flows stood at about $930 billion (Institute for International Finance 2009).

    Researchers have long observed the correlation of asset (often equity) prices across different countries and markets. Financial contagion (defined as a shock to one country’s asset market that causes changes in asset prices in another country’s financial market) has been the subject of considerable research following the Asian financial crisis. In a situation of unregulated, or mildly regulated global finance, with all the supposed benefits of diversification, country risks are correlated not because of any inherent similarities in growth patterns, but through the very simple institutional fact of being part of a network centred in the North. Economists have noted that a critical feature of financial contagion is the “common leveraged creditor” – hedge funds, or other financial market intermediaries who are important sources of capital for several countries (Kaminsky, Reinhart and Vegh 2003). When asset prices rise in one country, the leverage ratios on the balance sheet of creditors go down, allowing them to increase their exposure to assets in another country and bid up the price of these assets there. Conversely, when asset prices decline in one country, the margin calls these firms face make them withdraw capital from other countries, reducing asset prices in other countries which might otherwise not have been affected. As asset prices spiral downwards in both countries, this reinforces the dynamic. Krugman (2008) provides a simple model of this process, which can help explain the dynamics of asset price inflation and deflation as propagated through financial markets.

    Kaminsky, Reinhart and Vegh (2003) show that surges in capital inflows such as those experienced in the developing world during 2003-07 precede equally sharp reversals and contagion on the downswing. This said, the nature of correlated booms and busts across countries are often ignored or rendered invisible during the upswing, but only come sharply into focus, especially in policy circles, during the synchronised downswing. During the boom period, any countervailing pressures for reducing exposure to the downside risk, especially by capital account regulation, are dismissed as being simultaneously inefficient and ineffective. This has especially been the case in the most recent period, where a strong tide of liberal criticism, both by multilateral institutions and domestic pressure groups, has been intense.

    The coordinated downswing began when the crisis took serious hold in the US in late 2008. The resultant speed of the reversal of capital flows from virtually all developing economies, whether or not their growth prospects were otherwise diminished, has been startling. Spurred on by the fact that Europe and the US acted to protect their financial systems and ensure their stability, capital flows to the developing world and emerging markets have come to a hard stop. Volumes of capital flows have slowed considerably and the spread between developing market bonds and developed market instruments is sharply higher. This process has been further exacerbated by the reduction of global aggregate demand, which in turn makes export-oriented economies less desirable locations for investment.

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    – – – –

    Figure 1 depicts net capital flows into all emerging markets from 2000 to 2009. The projected capital inflows into 2009 are at about a fifth of the 2007 peak. The flight of capital had the most immediate impact on stock markets, with intense turmoil in

    Figure 1: Net Private Flows into Emerging Market Economies (billion dollar) 1,000 –

    800 –

    600 –

    400 –

    200 –

    0 – 2003 2004 2005 2006 2007 2008 2009

    (estimated) (forecast)

    countries exposed to capital flight. Russia saw such sharp withdrawals that it stopped its stock market from trading twice. Brazil, India, South Africa, China and other recently desirable markets saw equally sharp reversals. Figure 2 depicts the evolution of Morgan Stanley’s index of emerging markets (MSCI) which includes these stock markets, from 2004 to 2009. At current, the index trades at half off its peak.

    As a result of this harrowing unwinding, there has been a pushback from the calls to move towards a completely liberal global financial regime and renewed calls for remaking the current global financial architecture. These have included long-range ideas,

    Figure 2: MSCI Emerging Markets Index (Adjusted value at close) 60 –





    10 –

    0 – 15/4/03 15/10/03 15/4/04 10/15/04 15/4/05 15/10/05 15/4/06 15/10/06 15/4/07 15/10/07 15/4/08

    such as instituting a global financial authority which will aim to minimise the dislocations induced by capital flight, or creating multilateral agreements to prevent global imbalances from becoming too serious and allowing exchange rate coordination, to much more immediate and specific ones – such as the re-institution of capital controls. Such an idea, till very recently considered overwrought or Luddite (or both), are now being reintroduced into the discussion by mainstream academics and regulators. Willem Buiter, a very prominent monetary economist and regulator, recently, suggested the following:

    The emerging markets of CEE and the CIS (and indeed emerging markets everywhere) have been progressively cut off from new external funding as the crisis deepened. At this stage, imposing capital controls (only controls on capital outflows really matter, at this stage; controls on capital inflows should have been imposed earlier) would not bring

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    with it a heavy cost in terms of a sudden stop on capital inflows. That stop has happened already. Imposing capital outflow controls may discourage future capital inflows. The example of Malaysia, which imposed capital controls during the Asian crisis of 1997 suggests that foreign capital either has a short memory or can be convinced (Buiter 2009a)

    To observers of the recent history of global finance, this scenario provides a sense of déjà vu. Following the Asian economic crisis of 1997-98, and the attendant contagion to different economies which were otherwise soundly managed, there were equally vociferous calls for the reformation of global finance. Several suggestions were floated to this end, with attendant proposals for more transparency, the need to create international and multilateral agreements to manage currency arrangements and liquidity shortfalls, allowing for the use of selective controls on “footloose” capital, whether price based (Tobin taxes, unremunerated reserve requirements), or quantity based (direct controls on outflows), and other ideas. A variety of mechanisms were proposed to deal with the skittish nature of global finance. However, other than slowing down the momentum towards a wholly liberal financial regime, these general proposals were not acted upon in a multilateral framework. As a result, countries learnt their own lessons and undertook their own actions to manage the dysfunctions of the existing global financial regime. Indeed, the political debate in many countries, including India, has been about the management of the exposure to global finance.

    Perhaps the starkest lesson that seemed to come from that

    crisis was that importers of capital, especially importers who do not have the reserve currency or are not hegemonic, are always at substantially more risk than is easily verified because of the network effects of the global financial system. As a result, east Asia broadly took the route of a “neo-mercantilism”. The countries moved from being importers of capital to undervaluing their exchange rate (already low after the crisis) and earning export revenues. As export revenues soared, several developing countries became exporters of capital, especially to the US. Large developing and emerging economies, such as India, Brazil, Russia and China, as well as other countries gathered an enormous stockpile of reserves

    15/10 15/12

    as self-insurance, although, especially in the case of Russia, such insurance appears to be rapidly being run through. Finally, other commodity producers riding the boom have also tried to manage their risks by becoming capital exporters. As many have noted, these self-insurance policies are enormously costly, but the cost of insurance is weighed against the benefits of security, export-driven growth, and technological development.

    Developing nations deal differently with this problem as the nature of their tradable sectors and relative openness of their capital accounts vary considerably, not to mention the political economy of these features. At one end of the spectrum is China, with an export-led economy and a highly managed capital account, allowing for differences between the exchange rate and the domestic interest rate. A controlled banking system efficiently effects sterilisation and massive foreign exchange reserves accrue as self-insurance.


    India, on the other hand, runs an “intermediate” regime of a managed exchange rate subject to a porous, some would say de facto open, capital account, and is faced with flows that are generated, in the main, by portfolio inflows and “external commercial borrowings” rather than export earnings, its current account returning to its habitual deficit in 2005 after a brief stay in the black (Acharya 2008).2 Thus, India has opted for an ambiguous solution to the “trilemma”: a managed capital account inhibits full arbitrage between the two prices of money, the exchange rate and the interest rate, and a repressed but developing financial sector is less absorptive of currency interventions. Sterilisation is thus partial, especially beyond a level of inflows, since offsetting tightening of the interest rates is not always something that is either economically or politically feasible.3 The inflationary potential of this situation coincided with last year’s commodity-driven spurt in global prices and increased domestic inflation, a fact that led to very severe criticism of the Reserve Bank of India (RBI) by the neoliberal section of the financial world. Seemingly technical on the surface, this has deep ideological and political roots. The radically different modes in which the competing parties in the debate seek to have the country interact with the systemic properties of the global financial system have serious ramifications for both local and global growth and well-being.

    2 Pragmatism after Fetishism?

    On a host of issues, from capital account convertibility, exchange rate flexibility, financial sector development, and inflation targeting, the intellectual climate in India was increasingly characterised by market fundamentalism and finance fetishism. The crisis has now allowed a long overdue pushback to these developments, a pushback that would otherwise have been derided as Luddite and dirigiste. It is not that finance is unimportant or that markets should be spurned. It is rather that the influential devotees of finance and markets need to heed Talleyrand’s wise counsel: “Above all, not too much zeal” Subramanian (2009a).

    It is in the nature of crises that measures that were thought beyond the pale before their occurrence are considered standard in their wake. Even so, it is no doubt heartening to those votaries of hitherto heterodox notions to witness the apparent adoption of their views by the policy mainstream. For instance, from the suggestion of a “moderate/serious mercantilism” that would generate the “Powellian self-insurance” of significant foreign exchange reserves, to lock-in periods for foreign investors in the bond market, to the counter-cyclical pricking of asset bubbles and counter-cyclical hiking of capital provisions, to a reticence towards formal rule structures for monetary policy, and, finally, to the call for a “watchful eye on rapid increase in leverage”, Arvind Subramanian (2009a) neatly outlines what he calls the emerging orthodoxy, a pragmatic “Mark III” to the strident Mark I of full and immediate capital account liberalisation and the more sedate Mark II of gradualism.

    Watchers of the Indian scene will of course recognise attributes of the RBI under the governorship of Y V Reddy in this new pragmatism. Indeed, some might note that the danger in India is not that this new pragmatism is too incipient but that, with the passing of the Reddy era, a view represented by various reports

    168 coming out of the Ministry of Finance – a committee-report consensus if you will – might prevail in the midst of the crisis, and an opportunity to push through favoured reforms might be seized. Thus a Business Standard editorial back in November was outlining the pre-crisis state of affairs when it noted,

    Intertwined with the play of individuals and new institutional arrangements is a sharp ideological divide. On the one hand are economists and committee chairmen (Raghuram Rajan and Percy S Mistry) who argue the western orthodoxy that RBI should focus on a single objective, namely achieving a target rate of inflation ... Over the past year and more, some of the economists kept up a relentless media attack on Dr Reddy’s RBI, portraying it as ignorant, obfuscating and/or antediluvian. The counter-view has been that the financial crisis that has gripped the western world is not an advertisement for financial integration, that India can do without the periodic financial crisis that has consumed other developing countries with open capital accounts, and that the opening up of the financial sector is in any case constrained by rising fiscal and current account deficits. In defence of Dr Reddy’s policies, it is argued that they have given the country high growth, low inflation and a foreign exchange cushion that is a result of RBI intervening in the currency market. Further, the western orthodoxy on central bank goal-setting has already given way to more creative, ad hoc and ideology-free positions. Just as those holding the first view see the Reddy years in RBI as a disaster, the counter-group thinks that the country should be grateful to Reddy for what he believed in and acted upon.

    An odd situation has occurred. By weakening the orthodoxy internationally, the crisis has cast the international debate in the image of the pre-crisis debate in India between fundamentalists and pragmatists, with the latter carrying the day. Meanwhile in North Block, the crisis struck just as the committee-report consensus was gaining the upper-hand in the Indian debate, not only in ideological but also institutional terms. The fact of elections complicates matters, but the Indian debate remains unsettled, as the editors of the Business Standard are acutely aware. Thus, in India, we are in the situation that, despite the truly epochal scale of this financial crisis, the committee-report consensus has not been decisively dislodged. It is this remarkable fact, we would argue, that animates both the editorial’s and Subramanian’s concerns. Where the Business Standard bemoans the dwindling autonomy of a central bank that is being used as the battleground for the debate, Subramanian issues a plea for pragmatism to “influential devotees of finance and markets”.

    In the absence of a robust theoretical underpinning, this Y V Reddy-style pragmatism – successful as it most assuredly was in insuring us against this crisis – will remain an essentially defensive formation and thus continue to run the risk of being criticised Luddite, dirigiste, ignorant, obfuscating and/or antediluvian. It is one thing to play defence when one holds the fort. But if the institutional stakes have changed, then a robust new financial common sense is going to have to be based on more than a simple pragmatic interpretation of the prevailing views. Take, for instance, Subramanian’s appeal that policymakers ought to take a view on asset prices.

    The wreck that is today’s financial system is testimony to the catastrophically flawed nature of that doctrine [that market values are best]. Policymakers have no choice but to have a view on what constitutes a reasonable or equilibrium level of all asset prices. Of course, determining such levels is subject to uncertainty. The most it is prudent to

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    contemplate is that policymakers should determine not reasonable levels but reasonable zones for asset prices. One of us has in the past argued for exchange rates to have target zones with a margin of 10% around the central estimate. Perhaps that is too narrow, and perhaps it is unwise to specify hard target zones with an obligation to intervene to prevent rates moving outside them, but it is wrong to say there are no guides for where targets should be set...Policy should strive to be as anticyclical as good judgment and common sense will allow (Subramanian 2009b).

    There is much to agree with here, but the critique does not go far enough. There is indeed uncertainty involved in undertaking this necessary enterprise, therefore some error will only naturally result. The point is not to avoid the unavoidable error but to be able to justify it; for that one needs more than the claim that one was doing one’s best. How, for instance, is something as ad hoc as “10%” defensible in the absence of a full theoretical and political reason for its necessarily contingent assertion? Further, how might such a necessarily judgmental and discretionary system be held accountable?

    None of these questions can be posed precisely because what is being offered here is not a counter-theory but a crisis-driven bending of the prevailing doctrine in a more activist, pragmatic and less doctrinaire direction without questioning its fundamentals. Calls for pragmatism can stand without an accompanying doctrine only thanks to the contrast-effect generated by present crisis. Subramanian senses that “the Zeitgeist has changed, and the intellectual climate is shifting away from a no-questionsasked-embrace of financial globalisation. In this climate, sensible and pragmatic policies are unlikely to send the wrong signals”. Surely a true paradigm shift would call for a more full-bodied assertion of the counter-view? This laudable brand of pragmatism might have insufficient momentum once the immediate crisis recedes and inevitable errors of judgment accumulate. Any new set of measures have to be able to outlive the crisis; to do so, the new pragmatism requires a new set of theories.

    Being the default theoretical and institutional framework, an orthodoxy can only commit “error”, it can never be fundamentally wrong in the way a heterodoxy can. Without theoretical hegemony, a pragmatist will be unable to resist his errors being framed as originating in some deep-seated theoretical shortcoming; even after a withering crisis, the orthodoxy, per contra, can still meaningfully cite a “flaw”.

    If a new pragmatism is indeed beginning to prevail in the international debate, the question will remain: on what grounds will the central banker act? Even the most skilled pragmatist needs an ideology: towards what end is he acting, and with what guideposts? Arguably, one of the reasons pragmatism has been on the defensive in India is because, post-liberalisation, the paradigm from which it drew its particular justification, was eclipsed, this notwithstanding Reddy’s RBI determinedly leaning against the prevailing ideological winds.

    As Deena Khatkhate (2007) notes,

    The five-year plans were based on the premise that prices would be constant and exchange rate being one of the myriad prices, had of necessity, to remain fixed. This was the rationale that underlay…the government’s aversion to change the fixed exchange rate, even though the conditions had vastly changed.

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    Being shorn of this rationale, only unvarnished pragmatism was left available to a central bank that, ironically, had more room for manoeuvre post-liberalisation but lacked a doctrine to render this new freedom cogent enough to combat a new opponent. Has the latter view finally arrived with the committee-report consensus, or does the crisis afford us an opportunity to frame prudent pragmatism in alternative theoretical frameworks?

    It is only by setting the pragmatic art of central banking in a novel and sufficiently institutional framework that such a system can be legitimised in a democratic polity. In this limited space, and at the current fluid juncture, we can only indicate elements that this possible framework might contain. At the outset, it would be one that understands the origin of crises in both conjunctural features like global flows and resulting contagion and the structural fact of collective decision-making under uncertainty. In this context, the central bank ought to have the ability to “take the punch bowl away from the party”, that is, undertake counter-cyclical actions, for which it needs both independence and the discretion to act. Cleaning up the inevitable mess cannot, therefore, be construed as a “bailout” but a necessary collective function that must be performed with minimal threat of political capture.

    Our challenge, then, is to design our institutions to reflect whatever our collective preference is for embracing uncertainty. For instance, central bankers empowered with discretion and necessary ambiguity ought to be held accountable in the manner of senior judges, with long tenures granted only after they have been thoroughly scrutinised to meet the highest ethical standards. This is at once a theoretical, political, and moral effort.

    Further, the extent of leaning against the wind cannot be decided by an algorithm unless we are content with the volatility that has produced this crisis. It was not, for instance, that the “Greenspan put” was simply asymmetric, pace Subramanian. Rather, it was that it gave a clear signal of the move that the central bank would make under all conditions (Mehrling 2007). The Greenspan put was a rule; the fact that it provided a one-way bet merely aggravated the inherent pro-cyclicality of transparent rule structures. If the central bank is to be a market-maker of last resort, as the pragmatists rightly seem to be suggesting, it can hardly play the game well if it consistently shows all the other players its cards.

    In this piece, we have tried to make the case that the signal institutional fact of network effects resulting from participation in an international web of financial institutions might be the ground on which this new theoretical common sense it built, the resources for which exist, partially submerged, within the discipline’s mainstream. It is precisely because this global networking results in the systematic fragilities indicated in Section 1 – volatility in the core and the risk of sudden stops in the periphery – that financial authorities in all areas ought to be able to conduct themselves in the prudent, pragmatic, and discretionary manner suggested by Reddy, Subramanian and others. If the framing of the desired pragmatic behaviour is anything short of systemic, it will be vulnerable to neoliberal criticism once the dust from the crisis has settled.


    Unfortunately, the patent success of India’s monetary pragmatism has provided insufficient as a ground to defend these policies. There is an important difference between a recalcitrant, defensive gradualism and a prudent gradualism informed by the inequalities in the world system. The way that the new pragmatism is framed will determine its viability as a counterweight to neoliberalism. Keynes: “I do not believe in the inevitability of gradualness, but I do believe in gradualness”.4

    3 Conclusions

    I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom (Buiter 2009b).

    That collective economic life is lived in the face of continual uncertainty leads to competing demands on the economic selfgovernance of society. On the one hand, we need heuristics to guide us through the fog. These heuristics range from simple mental rules of thumb to broad-based societal institutions. On the other hand, uncertainty demands flexibility, openness, and an ethic of experimentation. The historical succession of dominant ideologies of economic governance suggests that the former demand tends to trump the latter over time: institutions created to deal with the void seem to congeal into fixed ideologies. Part of the reason for this tendency is the political necessity of doctrinaire rhetoric. If, on achieving the reigns of power, such “wildness” does not cool into a pragmatism that can countenance experimentation, societies run the risk of being locked into impoverished situations by dirigisme. How can this balance be achieved?

    In India, we thought we escaped dirigisme in 1991. But Charles Sabel and Sanjay Reddy have recently deployed the broader sense of the term thus,

    In practice, the dirigiste mentality presents a set of policy recipes for determining how investment funds will be allocated, tax rates set, and

    currency conversion managed.


    1 Keynes (1933). 2 This is an important difference as it makes India’s reserves borrowed rather than earned, as China’s are, something those seeking to use these reserves for anything other than insurance ought to be aware of. 3 These flows were very substantial, increasing, according to one estimate, tenfold to $108 billion in five years between February 2003 and July 2008, thus making the peg-and-sterilise option, so successful in the early/mid-1990s, much harder to effect. See Acharya (2008: 15). 4 Keynes (1933).


    Acharya, Shankar (2008): “India’s Macroeconomic Performance and Policies since 2000”, Working Paper No 225 (New Delhi, India: ICRIER).

    Brunnermeier, Markus, Andrew Crockett, Charles Goodhart, Avinash D Persaud and Hyun Shin (2009): “The Fundamental Principles of Financial Regulation”, GenevaEconomy, 11.

    It is these recipes that suppress the diversity of forms of life, by defining which ends of humankind are “feasible” and accrediting some sources of knowledge while discrediting others. Such a straitjacketed conception of the order of things diminishes the attainment here and now of human potential, and accentuates the propensity to misapply technology and ideas, with too often disastrous consequences – discovered, and admitted, too late. No wonder development by dirigiste stages and recipes seems to many to be more an invitation to collective self-abnegation than a reliable promise of regeneration (Sabel and Reddy 2007: 74).

    The emerging world has of course been subject to various development recipes for a long time now; neoliberalism is merely the latest. Yet it is a dirigisme all the same, a recipe for growth propounded by an “expert agent”. D M Nachane has made the very same point, noting, with reference to the Indian debate over capital account convertibility,

    The unchallenged sway that the doctrines of new classical economics have acquired over the policy advice emanating from academic institutions, international think tanks and multilateral bodies. This mould of thinking translates into blanket policy recipes, often of an extremely drastic character, which are religiously followed by many emerging market economies and least developed countries under “persua sion” from international organisations – with no attention to local conditions ... The actual results of such policies are often mixed. Capital account convertibility seems to be one such instance of orchestrated harmonisation (Nachane 2007: 3633).

    While the world is suffering the consequences of this latest recipe’s untrammelled ascent, we in India might be one crisis behind the rest. As Subramanian rightly notes, “In terms of highlighting the importance of self-insurance, this crisis has done (or should do) to India what the AFC did to the east Asian countries” (2009a: 32). The challenge therefore, both in India and elsewhere, is twofold: to hold dirigisme, in all its forms, at bay while making room for pragmatic and experimental forms of economic governance that foreground the radically unequal structures of our world. It remains to be seen whether this crisis has further enabled or greatly impaired

    this task.

    Reports on the World

    Business Standard (2008): Editorial, “A Devalued Central Bank”, 6 November.

    Buiter, Willem (2009a): “The Return of Capital Controls”, available at 2009/02/the-return-of-capital-controls/

    – (2009b): “The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics”, available at 2009/ 03/the-unfortunate-uselessness-of-most-state-ofthe-art-academic-monetary-economics/ #more-667/

    Institute for International Finance (2009): “2009 to See Sharp Declines in Capital Flows to Emerging Markets”, available at press+90.php

    Kaminsky, Graciela L, Carmen M Reinhart and Carlos A Vegh (2003): “The Unholy Trinity of Financial Contagion”, Journal of Economic Perspectives, American Economic Association, Vol 17 (4), 51-74, Fall.

    Keynes, John Maynard (1933): “National Self-Sufficiency”, The Yale Review, Vol 22, No 4, June, 755-69.

    march 28, 2009

    Khatkhate, Deena (2007): “Reserve Bank of India: A Study in the Separation and Attrition of Powers” in Devesh Kapur and Pratap Bhanu Mehta (ed.), Public Institutions in India: Performance and Design (New Delhi: Oxford University Press).

    Krugman, Paul (2008): “The International Financial Multiplier”, Mimeo, available at http://www.

    Mehrling, Perry (2007): “Why Opacity Is the Best Policy”, American Journal of Economics and Sociology, Vol 66, No 5, November, 870-76.

    Nachane, D M (2007): “Liberalisation of the Capital Account: Perils and Possible Safeguards”, Economic & Political Weekly, 8 September.

    Sabel, Charles and Sanjay Reddy (2007): “Learning to Learn Undoing the Gordian Knot of Development Today”, Challenge, September-October, 73-92.

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    – (2009b): “Put the Puritans in Charge of the Punchbowl”, Financial Times, 11 February.

    vol xliv no 13

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