Kaushik Basu, chief economist of the World Bank, talks about its research priorities as well as the emerging public policy trends in India. Edited excerpts from an interview:

The chief economist of the World Bank is probably the most prominent position from which to set a global agenda for both research and practice in growth and development. What would you characterise as your main intellectual and policy thrusts since you have taken over in the past 15 months?

First, an important change in the economics profession is that some of the extreme thinking that was ideologically rooted has become weak. The extreme right and left fringes have fallen in relevance. There are two important recognitions. First, leaving it all to the free market doesn’t work and, even if it does, it can lead to such gross inequalities that it is going to put ordinary life and political stability in peril. On the other hand, the belief that the state can take over and do it all has also gone out because you realise that the market, individual enterprise and creativity are very powerful forces. When I joined World Bank, I was keen to have our thinking reflect this.

Second, the World Bank has for long been engaged in poverty and poverty eradication policies, but it is now going beyond that to say that sharing the pie is also very important. In April 2013, the bank formally included shared prosperity as one of its two major goals, giving it a lot of salience. This means that for every society, special attention ought to be paid to the bottom 40% of the population.

Another important move at the World Bank, in which I played a role, is to say that economic development depends not only on getting your fiscal policy, monetary policy and taxation right; but it is also rooted in human psychology, sociology, culture and norms. In the economics profession, there is a bit of resistance to this because it is sort of giving ground to the neighbouring disciplines. The recent World Development Report (WDR) focuses on the behavioural and social foundations of development, and is being very well received.

Probably the biggest pivot in the policy space in India in the past decade was the pivot towards rights-based legislation of trying to secure precisely the interests of the poorest 40% that the bank is now targeting. But the general sense among economists is that these may be well-intentioned but are poorly designed. Why do you think economists lost the battle in terms of the design details of these programmes, conditional on wanting to do something for the poor?

First, let me step back and mention that my own view on rights is that certain rights are extremely important and ought to be enshrined as rights. But with this comes a responsibility and obligation that what you are enshrining as a right, you must be able to deliver on those. To write things down as rights and not deliver is to do disservice to the very concept of rights.

On design, the economists have lost the battle - if you want to put it that way – or rather the policymakers have lost the battle because the political economy of this was not appreciated enough. This is one area where the economics profession has a lot to offer because we have experiments from around the world. These, together with economic theory, give us pretty much of a consensus of broadly the way of doing things. You have to win over the people and the political decision-makers on the importance of the design—not to push the design aside and run on slogans. This is a challenge that we have to take on and I hope that economists will be able to work with politicians to be able to deliver on these better.

Take the example of the PDS (public distribution system), which many economists believe is poorly designed and can be improved. While vested interests are an important reason for why it is difficult to change the programme design, even more important are ideas that are ossified in the head. People who have run a particular programme for the last 20 years may not have a direct vested interest in it but they are totally committed that this is the only way to do it. We have to engage people in deeper discussions, where ossified ideas begin to break a little and we begin to think afresh.

I am pleased to see that the World Bank is now officially saying that improving the lives of the bottom 40% is an explicit policy objective because hopefully that then creates the space for economists to come in and say that give us credibility for working in the space and trust us to do more on the design, and perhaps move anti-poverty policy towards instruments like universal minimum incomes or transfers that do not distort commodity prices. Is that something you broadly agree with?

I fully agree with the first line that you took, treating the status quo as right does abdicate something very important to others. Fortunately, I feel there is a shift beginning to take place in economics and I do believe that our shared prosperity focus talks to that. In particular, there is a range of inequality at birth. If you compute inequality at birth – and I have just done some back-of-the-envelope calculations - a large part of today’s inequality is inequality at birth. Given that babies are not distinguished by hard working babies and lazy babies, this is just a gross injustice to start with. This fortunately has now come to the table—and you are probably right that this space was being given up too much to other groups - but once the mainstream comes on board to say that we need to recognise this great injustice, this can be corrected.

How much has recent academic research contributed to some of the priorities you are setting at the World Bank?

Randomised control trials (RCTs) have played a very important role. The World Bank is trying to strengthen that, do more of that. RCTs are giving us several important insights in areas ranging from governance to education, and health. Examples include Duflo and Chattopadhyay’s work on the impact of women panchayat leaders, Kremer and Miguel on the impact of deworming on education, and your own work with Niehaus and Sukhtankar on biometric smartcards. Before the RCT it would be really difficult to establish the causal impact of these important policies. However, it is possible to over-claim the benefits of RCT’s, and to drown out other methods, which would be a pity.

For instance, micro-interventions tend to have fiscal and monetary implications that RCTs will not be able to pick up, at least not at this stage. An element of macroeconomic analysis is required to pick up those systemic effects. This micro-macro interaction is a hard agenda and something that I am pushing for at the World Bank. When there is a long-term macroeconomic development challenge, it sort of falls between two stools—the World Bank does not go in enough (because it is too macro), and the IMF does not go in enough (because it is too long term). This is an area which needs strengthening and we have begun talking about it quite a bit across the Bretton Woods organisation.

I think that not enough attention is being paid to the state’s capacity for implementation of policies and that is turning out to be a binding constraint for the government in sector after sector. How much is the World Bank thinking about not just policy but implementation and ways in which you could systematically boost this?

The World Bank is doing a lot on this. The Bank’s president Jim Kim is very keen on the last mile of delivery. If you set up a system and you don’t do the last mile right, the benefits do not reach the people. The World Development Report that I mentioned earlier focuses on the social and psychological dimensions of how to deliver something better. Human psychology is such that how you frame what you are offering to people, makes a difference. The next report will be on the use of digital technology for the last mile. India is a prominent player in this with Aadhaar (India’s unique identity number programme for resident). We are also thinking of a third report on organisations and the management of systems. So these will be like a trilogy, all focusing on last mile delivery; how do you get the benefits into people’s hands with as little leakage as possible on the route.

A big part of the rights-based movement is also, in some sense, the intervention of the courts. The courts in India over the past decade have been particularly active in terms of stepping into what would otherwise be policy space. Their interventions may be well-intentioned, but in many cases feature recommendations such as blanket bans that most economists would consider sub-optimal. So you have this powerful, unelected entity with few self-corrective mechanisms, and no capacity for analysing the empirical consequences of its actions. So it seems that there is a genuine need for a legal tradition of economic analysis of the law. Do you see any such movement in India? There seems to be a massive lacuna here.

Right now, for me personally, law and economics is the major research agenda. Law and economics is very rudimentary in India. For a range of fields including anti-trust legislation, the people who are going and enforcing these interventions need to have a bit of an understanding about what the law does to the economy. This is one area where we are trailing behind the industrialised countries. Some people at World Bank are working on it but there isn’t much happening; given my interest in this area, I will give it a bit of a push while I am there.

Karthik Muralidharan, associate professor, department of economics, University of California, San Diego

Published with permission from Ideas for India, an economics and policy portal. This is a short abstract of an extended conversation. The full transcript and video of the interview are available here

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