Economic policy

A change in economic policy outlook

Waterfall vs. Agile: A Change in Economic Policy Perspectives

Every year, the Indian Ministry of Finance publishes an overview of the economy.

Any serious student of Indian economics will want to spend some time with this report, but it also helps amateurs like me keep up to date. the Economic Survey 2021-22 is now available. Here, I will limit myself to a general theme that guides the report on how to think about economic policy.

An event like a pandemic is a particular challenge for countries like India, where the government has long relied on developing a series of five-year plans. Perhaps fortunately, India completed its last five-year plan in 2017 and moved on to another vision of policy-making, which is described in the preface to this Economic survey:

The default mode of policy-making in India and much of the world has always been to rely on a pre-determined “cascade” approach – prior analysis of the problem, detailed planning and finally meticulous implementation. . It is the framework that underlies five-year plans and rigid urban master plans. The problem is that the real world is a complex and unpredictable place, rocked by all sorts of random shocks and unintended consequences. The response of mainstream economics has been to create ever more detailed plans/regulations and build forecasting models despite more than enough evidence that this does not improve outcomes. In his Nobel Prize acceptance speech, economist Friedrich Hayek dubbed this “The Pretext of Knowledge”.

This economic study aims to explain the alternative “Agile” approach that has informed India’s economic response to the Covid-19 shock. This framework is based on feedback loops, real-time monitoring of actual results, flexible responses, safety net buffers, etc. Planning is important in this framework, but primarily for scenario analysis, identifying vulnerable sections and understanding policy options rather than as a deterministic prediction of the flow of events. …

Some form of feedback loop-based policymaking has arguably always been possible, but the Agile framework is particularly relevant today due to the explosion of real-time data that allows for constant monitoring. This information includes GST [goods and services tax] collections, digital payments, satellite photographs, electricity production, movement of goods, internal/external trade, deployment of infrastructures, delivery of various programs, mobility indicators, to name a few. Some of it is available on public platforms, but many innovative forms of data are now generated by the private sector.

I’m not sure that the “Cascade” or “Agile” approach is the most appealing or intuitive nomenclature for this distinction! Alternative suggestions are welcome. But I think putting more emphasis on real-time data is a big shift in economics. For a readable example of what becomes possible in an American context, I recommend “Tracking the Pandemic in Real Time: Administrative Micro Data in Business Cycles Enters the Spotlight”, by Joseph Vavra, in summer 2021 Economic Outlook Journal.