Solitary lectures can seldom sell an idea unless the audience is besotted with the speaker or what he has to say. The “Mumbai Consensus”—an undefined term broadly understood as a government-spurred spending binge in a populist, if not plebiscitary, democracy—is one such idea.
The New York Times defined Mumbai Consensus as, “a developing state driven not by mercantilist capitalism or exports, but a people-centric focus on growing levels of consumption based globally”. That sounds suspiciously like India today. A senior Barack Obama administration economist, Lawrence Summers, first coined the term in a lecture in Mumbai last week. It has caught the fancy of some while dismaying others.
It is natural that Summers should espouse the idea, especially just before an Obama visit to India. For one, it implies that no jobs are exported from Boston to Bangalore. For another, it comforts a government—one that is already comfortable with high inflation—that it is OK if there’s high inflation. While it would be imaginative to say that Summers is “OK” with inflation, there is evidence of his ambivalence, if that is the right expression in this context, towards inflationary concerns.
To understand what he said in perspective, it is worth reading an interesting paper that he co-authored with Stanley Fischer (“Should Governments Learn to Live With Inflation?” The American Economic Review, volume 79, number 2, May 1989).
In that paper he argued that governments whose ability to maintain low rates of inflation is uncertain should not reduce the costs of actual inflation. In contrast, governments with impeccable anti-inflationary credentials have little reason to fear indexation (for wages). In India, the government’s ability to control inflation is limited at the best of times. It also has few incentives to do so as it is spending gigantic amounts on populist schemes. While the government’s managers can’t be expected to read Summers’ academic writings, his approbation for what India is doing has a context.
The Union government could hardly get more marks for its mismanagement. A supply-constrained economy with huge demand pressures and unending inflation is hardly worthy of praise, let alone being emulated as a model by others as the expression “Mumbai Consensus” suggests. Summers’ applause for India has other reasons.
Mumbai Consensus: a good feeling or a tangible idea? Tell us at email@example.com