The dangers of external economic advice

Given the debate on economic advisory in India (and elsewhere), one obviously wonders how global should economic advice be? Here too much of discussion is biased as Global or International advice essentially means advice coming from US based think-tanks and universities.  Globalisation should also mean that the US (and rest of the west) be open to hearing  views from other countries, but that of course is a joke. The rest of the world is hardly good enough to advice the best in the world. But how is it that those based in rest of the world are not even seen worthy of advising their own economies? Is it possible that experts based in US ivy league think-tanks and universities will know about most economies in the world?

The usual discourse in media is how external economic advice helped save some of the countries from an impending economic disaster.  One thing which is missing in such discussions is how the external advice has brought ruin as well.

Peter Bauer in this tribute to Prof B.R. Shenoy points how Indian govt’s second five year plan was equally supported by the distinguished external experts. He warns against relying too much such expertise:

I said earlier that I had never heard of Shenoy before reading the literature of the Second Five Year Plan. Yet I had heard of several other members of the Government’s Advisory Panel, notably D. R. Gadgil, B. N. Ganguli, K. N. Raj, and V. K. R. V. Rao. This reflected the much closer international contacts between socialists or dirigistes on one hand and market-oriented economists on the other hand, a situation to which F. A. Hayek drew attention many years ago. The overwhelming preponderance of supporters of the Second Five Year Plan among foreign visitors to India, including consultants to the government, also reflected this phenomenon, which exacerbated the difficulties of Shenoy in securing acceptance for his views.

There is an important practical lesson to be learned from this experience. Why should the Indian Government or its off-shoots and agencies rely on external economic advice?

The tools of trade of an adviser on economic policy are microeconomic theory, macroeconomic theory (primarily applied monetary economics and public finance), and a knowledge of institutions and magnitudes. There is in India ample indigenous talent in analytical and applied economics.

In recent years Indians have occupied some of the most prestigious university chairs in economics at Oxford, Cambridge, the London School of Economics, Harvard, Yale, and the University of California. And, of course, Indians are likely to have a far better knowledge of institutions and magnitudes than have foreigners.

If an Indian Government uses external advisers, it should recognize that the advisers are likely to be people whose advice will be in the direction of the maintenance or expansion of the role of the institutions sponsoring them. The government may wish for political reasons to rely on such external advisers, especially if it thinks that by doing so it is more likely to secure external financial support. But the government should be aware of the substantive direction of the advice, which may often differ from the lip service paid by the advisers to the market and to traditional institutions.

Superbly said and superbly continues to be ignored as well..

This paper by Prof. Peter Boettke warned anyways against assuming economists as saviors. They could actually just be serving their rational interests..

2 Responses to “The dangers of external economic advice”

  1. Jim Rose Says:

    Excellent post and the links too, especially to PT Bauer’s

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