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Former Senior Economic Advisor Arvind Subramanian, in his new book Of Counsel: The Challenges of the Modi-Jaitley Economy, attempts to explain why demonetization is considered a political success soon after its implementation. Excerpts have been reproduced with the permission of Penguin Books India.
At the time (early 2017), elections in Uttar Pradesh – the most populous of India and the eighth largest "uncertain country" in the world – were widely considered a verdict on demonetization , no doubt the government's landmark political action, expressed personally and forcefully by the Prime Minister.
The demonetization experiment speaks of the more intrusive and fascinating global phenomenon of the question "What's Matter with Kansas?", Entitled a famous book of the year. American historian Thomas Frank. This book explores the apparent paradox of citizens voting against their own economic interests. For example, why do poor white men vote for the Republican Party and President Trump while the political agenda does not bring them any benefit (tax cuts for the rich) or is positively damaging (weakening Obamacare and the benefits? social more generally)? This same question seemed relevant after the resounding victory of the NDA government in the UP elections. This article in particular attempts to understand this result as a disinterested observer, armed only with facts known to the public. This is not an explanation of the motives for demonetization, but simply a post facto badysis of a seemingly fascinating political result badociated with it.
How a demonetization that is supposed to have affected many Indians – millions of people dependent on the Monetary Economy: so strongly supported by the (very many) victims of politics? I emit the controversial hypothesis that imposing significant costs on a wide range of people (and the fact that the Rs 500 bill and not just the Rs 1000 bill has been demonetized has increased the number of people in the bank. magnitude and magnitude of the impact of demonetization), as unexpected and unintended as it might have been, might have been indispensable to political success.
The canonical model of the political economy of commerce explains the persistence of protectionism in terms of imbalance between winners and losers. Protection – which raises domestic prices – helps many domestic producers a lot, while spreading the damage between many consumers, who each lose only a little.
Producers therefore have both an incentive and the ability to lobby for protection, while consumers have little incentive to press against it. The case of demonetization has been very different: difficulties have been imposed on many people, even to a large extent, and yet they seem to have been its biggest cheerleaders.
A Response to Demonetization The riddle is that the poor were willing to disregard their own difficulties, knowing that the rich and their poorly begotten wealth faced even greater difficulties. large: "I lost a goat but they also lost their cows". poor were inevitable collateral damage to achieve to achieve a broader goal.
This is not entirely convincing. After all, the collateral damage was in fact preventable. Anti-elite populism, or "smearing of the rich," according to the economist, could have taken the form of other punitive actions – imposition, appropriation, search – targeting only the corrupt rich. Why entangle the innocent mbades and impoverish them? As I wrote in the 2016-17 Economic Survey, while subsidies are an extremely inefficient means of transferring resources to the poor, demonetization appears to be an extremely ineffective way of removing resources from the rich.
Understanding the political economy of demonetization can force us to deal with a neglected possibility, namely that the negative impact on the greatest number, far from being a bug, might have been a characteristic of political action. Not necessarily on purpose or in real time, but in retrospect it seems that the negative impact on the many people might have been intrinsic to the success of the policy. Think why.
First, the magnitude of the impact could have been a credibility signaling device. The American economist Thomas Schelling has argued that to convince the public or opponents of the credibility of its actions, it was necessary to incur costs. It can not be done cheaply. Hernan Cortes, the first conquistador, reportedly destroyed all his ships after landing in Mexico in order to urge his fellow soldiers to fight boldly, as there was no possibility of return. By imposing near-universal costs, demonetization would also have been a means of signaling a regime change especially against the black currency and the corrupt rich,
If a regime could bear such huge costs, it could certainly provide for it. followed. similar actions against corruption. In fact, to demonstrate that the measure was audacious and therefore more likely to be effective, the estimated costs may have had to be high.
Second, the magnitude and depth of the impact could have served as an additional goal. To be credible, we must let the mbades believe that the corrupt have been wounded.
With demonetization, it may not have been easy to do, at least in the short term. How better to convince the mbades that the corrupt rich were hit hard than to hit hard the mbades themselves?
"If it hurts so much, it must do a lot more harm to the rich" could have been the thought process of the typical victim.
Third, the quasi-universality of impact has created a sense of solidarity. By sparing some groups, we would have undermined this spirit and raised questions about the good faith and legitimacy of decision-makers, who could have been perceived as favoring one another while harming others. If only a few had been negatively affected in the demonetization process, they would have mobilized and, according to the theory of trade, they would have been very encouraged to do so.
Moreover, if only a few had been touched, suspicion might have arisen about those who were spared: were they connected?
Were they even "taken into account" in the decision? Did they contribute as a counterpart to be spared? By impacting the greatest number, these difficult decisions were avoided. In the light of the zeitgeist of stigmatized capitalism, such questions would have invariably been raised and would have been politically sensitive.
The fourth aspect (and the related point) is cultural. One of Mahatma Gandhi's legacies was to inculcate the spirit of sacrifice as a necessary condition for achieving a greater and nobler purpose. Especially if it is recognized that the elimination of black money is not an easy task, since it has existed for seventy years, the need for sacrifices – and shared sacrifices – could only be strengthened.
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