Financial inclusion – a cautionary tale

Financial inclusion – the process via which the ‘unbanked’ are integrated into the formal financial system – is a laudable goal. The G20 has signed up to it as have many central banks in the developing world. Multiple studies have shown that it can be effective way of reducing poverty

However, as with all good ideas, sometimes a conspicuous gap can emerge between aspiration and implementation. In India, the current government announced a new financial inclusion plan (‘Jan Dhan’) which promised basic bank accounts for all Indians.

A close friend and former ILO colleague drew my attention to a report in The Economist (September 17, 2016) which turns out to be a cautionary tale about how a highly publicized poverty reduction scheme can become a public relations exercise …except that it seems to have become a public relations embarrassment or a ‘one rupee trick’ as The Indian Express dubbed it.

Apparently, many bank managers used their own money (1 Indian rupee or about 20 Australian cents) to open accounts and reduce the share of ‘zero balance’ bank accounts. Not surprisingly, the share of ‘zero bank accounts’ fell sharply causing the Indian government to proclaim that its financial inclusion plan was a success. One hopes that this embarrassing episode will not tarnish the role of financial inclusion as an important anti-poverty initiative.


Something to cheer about…

I co-authored a paper in 2010 on the ‘Great Recession’ with Dr. Sher Verick (now Deputy Director, ILO, Delhi) which was released as a discussion paper by IZA

It became the second most downloaded paper in the history of IZA

Now, the Social Science Research Network (SSRN) advises me that the 2010 paper is in the ‘top ten download’ list.  Macroeconomics: Monetary & Fiscal Policies eJournal Top Ten.





The trouble with macroeconomics ….according to Paul Romer

Paul Romer offers a scathing critique of modern macroeconomics that has ‘has gone backwards’ in the last 30 years and has evolved into a ‘post-real’ pseudo-science. (

He holds Robert Lucas, Thomas Sargent and Ed Prescott for being the key figures that led the development of ‘post-real macroeconomics’, despite important scientific contributions that they made prior to 1980.

My inference from this wide-ranging critique is that ‘post-real’ macroeconomics has little to offer to policy-makers in the developing world. What one needs, as Paul Romer puts it, are practitioners who can put useful knowledge to work.

Structural reforms – promises and pitfalls

Structural reforms entailing interventions to deregulate labour and product markets can engender ex-ante long-term gains in terms of higher output and more jobs, but their short-run consequences cannot be ignored. This reminds one of the Keynesian dictum that in the long-run we are all dead.

The latest (model-based) conclusions based on an IMF evaluation (2016) are that, while there are likely to be ex-ante long-term gains in terms of higher output and more jobs, a lot depends on the state of the business cycle.[1] If structural reforms are pursued during a recession and periods of slow growth – as is the case now in some BRICS (Brazil, Russia, India, China, South Africa– it will worsen prevailing economic conditions by reducing output and employment that might persist for more than a year.

In the case of India, expected long-term gains from labour market reforms need to consider high short transition costs as noted above. As one study observes: ‘There is a fall in GDP, a rise in unemployment, and a fall in the share of formal firms in the first four to five quarters post labour market reform’ (Anand and Khera, 2016: 36, italics added).[2] If these results hold, the political ramifications are, to put it mildly, rather uncomfortable. Would an incumbent government seeking re-election be prepared to argue that ordinary citizens should suffer for a year or more because there will be a lot of gain after enduring such pain? As a former British (Harold Wilson) observed:a week is a long time in politics.

[1] IMF (2016) World Economic Outlook, April

[2] Anand, R and Khera, P (2016) ‘Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India’, IMF Working Paper No.16, The authors note that this can be mitigated by focusing on product market reforms.


Macroeconomic policy, growth and job creation – the case for a dual mandate

Growth and job creation is the product of a complex and collective process requiring complementary interventions across a wide range of areas. Our view is that macroeconomic policies are necessary, but not sufficient, in promoting sustainable growth and employment. This necessarily modest formulation thus eschews a fundamentalist approach to the role that macroeconomic stability plays in national economies. Of course, there will be situations and episodes when concerns about lack of macroeconomic stability become paramount – such as cases of hyper-inflation, out-of-control government budgets. Yet, these are the exceptions rather than the norm.

There is also the issue of what might be called perverse incentives. If, for example, central banks and finance ministries are given so-called ‘single mandates’ in which all they need to care about is the attainment and maintenance of macroeconomic stability guided by specific nominal targets, then they will indeed care about those targets to the exclusion, or at least  insufficient consideration, of broader economic and social goals. Hence, we argue that key macroeconomic policy-making agencies should be empowered with a ‘dual mandate’. They should be guardians of stability, but they should also be active agents of development and structural transformation.

Having a dual mandate entails a specific implication. Given that the goals are now broader, there should be a correspondingly broader range of policy instruments. Otherwise, governments will be faced with painful trade-offs. For example, if a central bank wishes to pursue the goal of financial inclusion, it needs specific instruments to pursue that goal, while other instruments – such as the policy rate – can then be assigned to pursue the goal of price stability.