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Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

Opinion | Our economy needs a systems thinking-based solution

Surgery on the economy with blunt instruments like free trade can cause great harm

Mounds of anecdotal evidence, supported by the government’s own macroeconomic data, say the Indian economy is in a slump. The question for policymakers is how to revive and sustain inclusive growth. Many things must be fixed: the financial system, manufacturing, agriculture, infrastructure, health and education. The problem for the government is how to determine the right solution for a complex problem.

Many solutions are being offered but the debate is stalled by ideological differences. Recently, I witnessed a discussion between one of the country’s best-known economists and a leader of the country’s largest industry association. The economist asserted that India’s commerce minister should be more enthusiastic about joining the Regional Comprehensive Economic Partnership (RCEP) because free trade was good for everybody. He asked the industry leader why his association did not support the RCEP. The reply was that industry was broadly in favour of it. Only some firms in the manufacturing sector (in which he was not) were worried about China. They should improve their own competitiveness and not complain, he asserted. Pushed further, he said he was more worried about the dairy sector (in which he was interested) and dairy imports from Australia and New Zealand, which could harm India’s rural economy. It was too embarrassing to examine these contradictions publicly, so both repeated the mantra that free trade is the only solution.

Some macroeconomists propose surgery on the economy with blunt instruments, which can cause great harm. A bold solution of more free trade across the board is a very blunt instrument. It does not distinguish between healthy and weak parts of a complex economy. To use another health metaphor, exercise is generally good for the body. However, when a person who has started exercising complains of pain, the solution is that the exercise be suspended and the patient examined before proceeding further. The health of the Indian economy must be assessed with more sensitive instruments before proceeding with more free trade for the sake of free trade. Whatever trade agreements India enters must ensure that jobs are created in India, and its exports increase. Sensible people suggesting caution should not be simply dismissed as “protectionists", as they are in a “black-and-white" debate about trade which will not admit that those examining the large swathes of “grey" areas in between are better policy doctors.

Any good doctor prescribing a strong medicine must also prescribe medicines to prevent its side-effects. More free trade will have side-effects within the economy. Those sectors that are not strong will suffer, and some may disappear. Therefore, policies to strengthen important but weak sectors must accompany policies for free trade. In fact, because the ultimate purpose of a country’s trade policy is to strengthen the country’s economy, trade policy must be designed to support an industry policy (with “industry" defined broadly to include agriculture-related enterprises and service sectors too). India joined the global free trade bandwagon in 1991 without a sound and well-supported industry policy. China took a different course: Chinese industries first, and more trade to follow suit. Now many fear that India may be becoming an industrial colony of China. What India needs urgently is a sound industry policy to drive its trade policies.

India needs a holistic policy to revive its economy and put it on a sustainable path. Just as the ultimate purpose of a trade policy is not just to create more trade, but to create more industrial activity, the ultimate purpose of an industrial policy is not to just create more industry, but to increase employment and incomes of citizens. Many aspects must be considered together to improve the economy’s health—industry, trade, infrastructure, the environment, the financial system, and human development. Experts in many fields must think together. It is imperative that they listen to people on the ground.

A policy process for combining many perspectives must be founded on two disciplines. The first is strengthening the diminishing skill of listening closely to “people not like us"—those who have other knowledge and other views. Unfortunately, policy debates shut out others’ views too quickly. Economists are derisive of other social sciences—too inexact, they say. Experts are derisive of less educated people; now populists around the world are deriding economists. What, they ask, have economists got right? Not even their numbers.

The second is the discipline of “systems thinking". Scientific knowledge has advanced by breaking up knowledge of the whole. Sciences are breaking apart into specializations. Specialists know more and more about less and less. Systems thinking is the discipline of seeing connections between various parts and of understanding how change in one part can affect others and the health of the whole.

Policy processes are generally held hostage by lobbies—for vested interests in industries and for ideological preferences. Linear solutions within intellectual compartments and ministry silos cannot improve the economy’s health . The government must use a well-crafted process, founded on systems thinking and deeper listening, to lift solutions above these limitations. Knee-jerk solutions in response to the demands of lobbies will not do.

Arun Maira was a member of the erstwhile Planning Commission

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