Archive for October 31st, 2018

Remembering Albert Hirschman’s tunnel effect

October 31, 2018

Prof Timothy Taylor in his blog remembers Hirshman’s tunnel effect and links it to inequality debate:

Hirschman was focused on issues of economic development. He offers examples of a number of countries where many poor people welcome signs of economic development before it touches them personally in any way–presumably because they are in the position of that driver stuck in the left lane who is taking hope from the movement of the right-hand lane.  He also points out that this tunnel effect can lead to a sense of complacency among leaders, when most people seem to be supportive of the processes that are leading to inequality, so that the leaders are unprepared when people start to denounce those same practices.

“Providential and tremendously helpful as the tunnel effect is in one respect (because it accommodates the inequalities almost inevitably arising in the course of development), it is also treacherous: the rulers are not necessarily given any advance notice about its decay and exhaustion, that is, about the time at which they ought to be on the lookout for a drastically different climate of public and popular opinion; on the contrary, they are lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Writing back in 1973, Hirschman offers examples of “development disasters,” in which those stuck in the left lane have come to strongly suspect that economic development will not benefit them, and thus a high degree of social unrest emerges. and he cites Nigeria, Pakistan, Brazil and Mexico as facing these issues in various ways.

I find myself thinking about the tunnel effect and expectations about future social mobility in the current context of the United States. Rising economic inequality in the United States goes back to the 1970s, and the single biggest jump in inequality at the very top of the income distribution happened in the 1990s when stock options and executive compensation took off. But my unscientific sense is that at that time, during the dot-com boom of the 1990s, many people who were either pleased, or not that unhappy, with the rise in inequality of that time. There seemed to be new economic opportunities opening up, new businesses were starting, unemployment rates were low, cool new products and services were becoming available. Even if you were for the time stuck in the left lane, all that movement in the right lane seemed to offer opportunities.

But that optimistic view of high and rising inequality came apart in the 2000s, under pressure from a from a number of factors: the sharp rise in imports from China in the early 2000s that hit a number of local areas so hard; the rise of the opioid epidemic, with its dramatically rising death toll exceeding 40,000 in 2016; and the carnage in employment and housing markets in the aftermath of the Great Recession.  In Hirschman’s words, it seems to me that many politicians were “lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Of course, no country is really one big tunnel. When people look at high or rising inequality, their views will often depend on the extent to which they feel some commonality–Hirschman calls it “shared historical experience”–with those who are moving ahead more briskly. In turn, this feeling may depend on the extent to which those who are moving ahead more briskly segment themselves off as a special and separate guild, with an implicit claim that they are just more worthy, or the extent to which they act in ways that embody broader and more inclusive outcomes.

Hmm..

Hirschman was from a different league altogether. What a thinker and communicator of economic ideas…

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The history and importance of Section 7 (1) of RBI Act (1934)

October 31, 2018

Lot of talk in media about Section 7(1) of RBI Act 1934. As per media reports, Government has invoked this section to give certain orders to the central bank. See this by Ira Dugal.

Section 7 of RBI Act states:

1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider
necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of
Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this
behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank.]

I  had blogged about the history of Section 7(1) in an earlier post. Reblogging it:

(more…)


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