Wednesday, February 25, 2015

Ajay Shah — Become a public policy thinker in three easy steps

Step 1: What's the market failure?

When should the State intervene? The technically sound answer is: When you are certain there is a market failure, and when you are confident you know how to setup the correct State capacity for the intervention.

Market failures come in four kinds: 1. Asymmetric information, 2.externalities, 3. market power and 4. public goods. These are technical terms in microeconomics and each needs to be carefully understood.

The first hurdle that must be crossed in policy thinking is: "Is there a market failure?" Every proposal to do something in public policy faces this test.

Step 2: What's the proposed intervention?

Once we agree there is a market failure, we have to figure out what we'd like to do about it. Here, it's important to understand the anatomy of the market failure, and solve it at its root cause.

If there is a causal chain x -> y -> z, and there is a problem with the outcome z, don't use the power of the State to change y or z. Understand the root cause, and solve it there.…

Step 3: The hurdle of public administration

Okay, you are all dressed up and ready to go, with a demonstrated market failure, and a minimal intervention which solves it. Now the question arises: Can you design a feasible solution with real world public administration?
Ajay Shah
Become a public policy thinker in three easy steps
Ajay Shah | Co-Lead of the NIPFP-DEA Research Program, India


Ramanan said...


This guy is a major neoclassical "free market economist".

Like look at his statement: "Decades of Indian socialism have starved us of capabilities in economics."

What's the reason for linking him, Tom?

Tom Hickey said...

Hi Ramanan,

First, I thought it was a clear summary of this type of thinking about public policy based on markets being fundamental.

Secondly, I assume he wrote it because this is a topic in India currently. The way Modi is presented in the media, his "promise" being a neoliberal who agrees with neoclassical economics and sees "socialism" as perhaps the chief issue in India. In this view is as much political as economic and based on "laziness" and corruption, the antidote for which is instituting neoliberal public policy in order to create a market-oriented state. In addition, this is viewed as making India more globally competitive.

Shah's post seems to be based on the replacement of the welfare ("corrupt socialist") state in which India now finds itself with a market state in which the market is the ultimate criterion and arbiter. The subtext is that capitalism and democracy are joined at the hip. Socialism is based either on totalitarianism or else corrupt politicians bribing the shiftless with handouts.

I imagine that Shah would likely object to my characterizing it that way, and object that history shows that replacing a welfare-oriented state with a market-oriented state increases growth and raises all boats through trickle down.
This is likely the advice that Modi is getting and the policy he will try to implement. But Indian politics is "complex" so it remains to be seen how he does. Moreover, it's complicated by social issues as well as political and economic ones, and Modi's base is pretty far to the right. The question is whether Modi can "tame the tiger" of Indian politics enough to advance his vision.

What's up with that trouncing his party took in the recent election in Delhi? Looks like the honeymoon maybe over and his mandate for introducing radical change weakening.

Assuming is more or less successful through, it will then be an interesting experiment to compare and contrast the development of India and China, both of which are potentially superpowers owing to their size. Of course, many more factors than economics will be involved, but economists and neoliberal politicians will be looking at economics as determinative.

What this assumes is that India will attempt to build a neoliberal market state under Modi, based on market fundamentalism, whereas China will continue on its path of market socialism. The conventional presumption is that China won't be able to "compete" with India owing to the market imperfections that government involvement creates, including corruption.

I think that one reason for the push toward a neoclassical solution under a neoliberal regime in India is that it will reduce corruption, since in this corruption comes from the side of government intrusion. So reduce government intrusion and reduce corruption.

At least this is the way I am reading developments since Modi's landslide election. So far I don't see much of the anticipated success but I am long way away and it's also still early in his term.

Ramanan said...

Oh you've been reading a lot!

Yes Modi did get defeated in Delhi but it's a lot because almost everyone voting for the INC voted for the AAP. Of course BJP's vote share also reduced compared to the General Elections in May last year. So it is also a vote against them. But too early to tell.

I think people are slowly realizing that his promises were too high. In the middle of this, his party is full communal and treats minority like dirt. Morever they have also been saying things like Ancient India had planes which could travel to other planets (!!) to make people feel nationalist. But people have understood that it's all stupidity.

It's fun: I am quite interested in politics these days.