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The bipartisan predicament

Arvind Panagariya

October 22, 2004

Few proponents of reforms had thought that in a controversy between the Planning Commission deputy chairman Montek Singh Ahluwalia who symbolises pro-market reforms and the Left that abhors them, they could side with the latter. Yet, sadly, that is where some of us find ourselves in the controversy over the appointment of foreigners and employees of multilateral institutions to the consultative groups of the Planning Commission.

Admirers of Mr Ahluwalia, among whom I count myself, are acutely aware of his rare ability to figure out solutions to complex economic problems and mobilise support from diverse political constituencies to implement them. It was this combination of intellectual capability and practical sense that he brought to bear on the reform programme that was so successful in the 1990s. As such the recent misstep is likely to prove an exception to the many 1990s style reform initiatives that are to come in the near future.

Turning to the subject at hand, there is no doubt that India has a long way to go toward opening up to new ideas generated both within and outside the country and by Indians and non-Indians. To give just one telling example, today, India imposes severe restrictions on the outside scholars who wish to conduct research in India on almost any topic and on conference participation by foreigners to the point that international agencies prefer to hold their conferences in the neighbouring countries even if the majority of the participants happen to be from India. True, national security interests must be protected but that is not inconsistent with nurturing foreign scholars who can be our most effective ambassadors in their respective countries.

Likewise, in policymaking, we must learn from the experience and knowledge of all. The US Congress and governmental bodies routinely invite “testimonies” and “briefings” from scholars irrespective of their nationality or the identity of their employer. For instance, I have been invited to give briefings to the US treasury and deputy treasury secretaries as also the Congressmen on the Capital Hill.
Yet, there is a fundamental difference between the targeted advice sought at arm’s length by the US from top outside experts and the appointment of outsiders to official committees that directly feed into policymaking. In so far as I have been able to ascertain, the US government does not appoint the employees of institutions such as the World Bank to its official committees. In many cases, the committee members must undergo strict security checks even though they are US citizens, a practice that is rare in India.

Given the intense competition from private capital that now flows into countries such as India and China without the baggage of conditionality, today, the ADB and World Bank are struggling for their survival. In turn, they subject their employees to considerable pressure to explore new avenues for expanded lending. The Five Year Plan, on the other hand, is a major policy document of the government of India. Therefore, the potential for the conflict of interest facing the ADB and World Bank employees, when called upon to serve as the members of the Planning Commission consultative groups, is quite real.

Thus, for example, suppose India’s interest is best served by minimising borrowing from multilateral institutions because the interest paid on such loans would be much higher than what India earns on its vast foreign exchange reserves. Will an ADB or World Bank employee then have the courage to advice India to suspend such borrowing? Not really. More likely, he will invoke every conceivable argument in favour of expanded borrowing to secure his next promotion.

Indeed, by far the most astonishing aspect of the controversy has been the utter failure of the ADB and World Bank leadership to recognise such conflict of interest. Some years ago, the World Bank would not appoint an Indian national as its country economist for India for the fear that he might compromise the Bank’s interest in favour of India's. And in so far as the ADB is concerned, as its chief economist in 2001, I have personal knowledge that three years ago, citing possible conflict of interest, it would not allow its employees to serve on the official advisory committees of its member countries even at the state level. But under the current “lend or die” pressure, these institutions have now conveniently abandoned the “good governance” principles that they so eagerly preach their developing country members.

The argument made by Mr Ahluwalia in his letter to the Left leaders that “multilateral institutions in any case interact regularly with Central and state government agencies” is not persuasive. In these interactions, employees of the multilateral institutions represent their employer in the negotiations for loans and projects with the representatives of the Indian government. But as members of the consultative groups, they would carry out the function of oversight of the policies proposed by the ministries of the Central government. The two roles are fundamentally different and must not be confused.

Mr Ahluwalia also argued in the letter that the commission couldn’t do justice if it relied “solely on the work of civil servants in the commission commenting on the work of other civil servants in the ministries.” This too is a misleading defence since there is no dearth of talented Indians that are not handicapped by a conflict of interest between their employer and India and are capable of such reviews. Indeed, even the commission’s own past practice has not been to rely exclusively on the civil servants.

The near-unanimous vilification of the Left by the press in this episode is puzzling. Equally regrettable is the dissolution of the consultative groups — a good idea in principle — by the commission. The Left is bound to view the commission’s decision as a hostile move to “get even” with it. That will only add to the obstacles the prime minister already faces in carrying the Left with him on the road to reforms.