## Saturday, February 14, 2009

### The ecosystem of ideas in public policy

Suman Bery has an article in Business Standard today on the nascent beginnings of a world of ideas in Delhi. I agree with him that Delhi is ahead of other cities in India in having more activity: more people, more interesting lunches, seminars and other meetings. I also agree with him that Delhi has gained considerable momentum in the last 25 years in this regard - things are much better than they used to be.

Centripetal forces are starting to come about: the relatively liquid market in Delhi pulls in people to give talks, supply labour, and give out contracts. These agglomeration externalities have helped shrink the staff quality and intellectual life in other cities. Just as young people in India who are interested in making money gravitate to Bombay, and young people interested in science and technology gravitate to Bangalore, young people in India who are interested in economics gravitate to Delhi.

One important thing that has gone right is the creation of effective think tanks that are disconnected from the universities. In an ideal world, the universities would have been good. But places like DSE or ISI, which used to be good a half century ago, have fared badly for the last 25 years. Given the absence of effort in putting the universities back on track, the world of policy discourse has hinged on the relative success of the think tanks. One key element of this was the effort led by Rakesh Mohan at NCAER many years ago, of breaking away from government wages, which has since percolated to a few other places like ICRIER and IDF. Higher wages have helped pull in better people.

But at the same time, I feel the situation is quite weak in absolute terms. The two symptoms which, to me, convey weakness, are as follows:

1. As Suman says in his last paragraph, we haven't yet begun on a good fusion of an empirical economics literature and the policy process. Most of the empirical economics done in India is focused on the Western journals and not on the domestic discourse. People who are closer to the discourse tend to not do the hard work of looking at data; the people looking at data are other worldly and could equally be sitting in the US. Writing stuff that sells to the journal editors is seldom an effective way of writing stuff that matters for realworld issues in India. As an example, there is almost nothing going on in India in financial economics today, of the sort described here.
2. There is a real shortage of people. As a fair thumb rule, by the time you get down to one focused question (e.g. the Goods and Services Tax, or banning futures trading in wheat, or capital controls on debt capital), it is impossible to put together a panel of five people who can do a high quality discussion on it. With fewer experts occupying any one niche, competition is lower, and individuals tend to inefficiently defocus into too many fields.

1. "People who are closer to the discourse tend to not do the hard work of looking at data"

Why is that? Is it because data may not be able - I remember your post on not having decent data on inflation measures; and, probably more importantly, the person who actually does the work is seen as no better than people who simply talk ( in general terms) - ie., incentives, and hence interest for number crunching which is solitary work, may be missing.

2. Yes, it is of course about incentives.

And that's about two things. First is the lack of competition. A modestly intelligent person in India can spend a few months reading in any field and he is one of the top experts in it. There isn't much expertise out there.

The second is the rewards structure. The powerful people, who determine careers, appointments, funding, etc., don't know enough to discriminate between the various players in the landscape.

So there is a tiny community of serious, technically oriented economists in India, who are "living in the Midwest" (as I like to say): doing other-worldly economics that is mostly irrelevant to India. They're focused on the Western journals which shapes a rewards structure involving appointments abroad. And then there is a domestic community which is technically weak.

3. The other issue is what you yourself have enumerated. That people who want to make money go to Bombay and the others remain in Delhi. The cross pollenization between the real world and academia and think tanks is very low. The quality of economist in the real world is awful because they are not trained as economist or are just of the school.

The economists which most financial services firms have are not serous number crunchers nut aggregators of info (not even data). I was once told by a head of research and economist at a bulge bracket firm which does not exist since the beginning of the year that interest rates do not matter in India and the CEO of the firm agreed. This ties into the point that the decision makers in the real world in Bombay do not value the number crunching guys, that is why they move to Delhi.

4. Why only economists? In India, ordinary decision making in business does not look at data. The senior managers just come up with one decision after another without analysing data. I have seen it firsthand and it is pathetic.

5. Getting facts straight:

I think there is a problem with the education system in India which works against the economics profession.

In India career pursuit is based not on interest but necessity. Without true passion, one can achieve a very high level of competence. But excellence at the world level is out of the question. The result is that we produce very highly trained top class people, but fail to produce outliers.

The result of the above is that the economics profession, generally speaking, does not get the best people in India. Even those who are interested do not pursue it.

First things first, everyone needs a job. That comes before ambition. No undergraduate economics degree can get you a job. Even going to a top Delhi college won’t. So most smart people (not often by choice but necessity) choose to go to IIT or any other top engineering college.

There are certainly a few genuinely interested in economics who join Delhi University, but they take a huge risk. After the undergraduate degree, students are forced to choose between the IIMs and Dschool, ISI, etc.

What is the probability of getting a really good job after an economics focused Indian graduate school? Not surprisingly, economics loses out to the IIMs.

There are indeed some who choose to go to Dschool or ISI etc. But afterwards, the truly talented and ambitious want to pursue a top PHD in the US not in India. Why?

Most people are motivated by the following:

1. Making money
2. Genuine interest and the prestige of being called the best in their field

Academia loses out on both fronts in India. If you are a tenured professor at Chicago, the prestige element is huge and you are one step higher than some Wall Street structured security sales person who by all means earns multiples of what an academic does. Is that true for India?

So at every level of career choice, talented and genuinely interested people leave to do something else. With the result that overall the quality of economic discourse is extremely poor – both academic or in the private sector.

Response:
“The other issue is what you yourself have enumerated. That people who want to make money go to Bombay and the others remain in Delhi. The cross pollenization between the real world and academia and think tanks is very low. The quality of economist in the real world is awful because they are not trained as economist or are just of the school.”

I agree with the first point about cross-pollenization between academia and the real world. Yes, the quality of economists in the real world is not that great, but the same can be said about academia in India. Some papers I read make me laugh and the quality of newspaper articles is even poorer.

“The economists which most financial services firms have are not serous number crunchers nut aggregators of info (not even data). I was once told by a head of research and economist at a bulge bracket firm which does not exist since the beginning of the year that interest rates do not matter in India and the CEO of the firm agreed. This ties into the point that the decision makers in the real world in Bombay do not value the number crunching guys, that is why they move to Delhi.”

In I-banks, research is mostly a sales function. So I do not expect serious rigor from them. The other issue is that most people in banks gain little from GDP forecasts, however accurate. The skill requirement is different.

One point in defense of real world economists: I can bet you that a person like Stephen Roach has a better understanding of economics than a lot of serious academics in India. A lot of bank economists have academic credentials which are outstanding.

Bio of a former Lehman Economist
http://faculty.chicagobooth.edu/christian.broda/website/vita/BrodaCV_0708.pdf

Lastly, rubber has to meet the road. Economics “gyaan” has limited value. A number of professors in the US start their own hedge funds or consulting outfits. The market is the final arbiter of your understanding of the economy and markets. If you are that good, prove yourself. Respect and quality will follow.

6. An interesting take by Clive Crook in FT

http://www.ft.com/cms/s/0/bf4d46d4-f648-11dd-a9ed-0000779fd2ac.html

7. No competition indeed. Who's keeping you honest then? :)

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