2018 Nobel Prize in Economics - Relevance for India

What is the issue?

The ideas of this year's Nobel Memorial Prize in Economic Sciences are relevant for India in terms of handling its growth.

What were the prizes awarded for?

• The Nobel Prize for this year has been awarded to two economists in two different fields.
• William Nordhaus has worked on climate change and economic growth.
• It is more on the ‘negative spillover’ of emissions and damage to the environment as a result of growth.
• Paul Romer had worked on innovation and growth and is on the ‘positive spillovers’ of knowledge and technology.
• Notably, both works were related to economic growth.

What are the key ideas of Nordhaus?

• Observation - As the world strives to bring about high growth, it tends to damage the environment.
• This, in turn, comes back to haunt people and retard future growth.
• E.g. land gets less fertile due to excessive use of fertilisers and overgrazing
• Carbon emissions affect health, damage the ozone layer, cause erratic rainfall, affect ocean life, etc.
• Measures - Nordhaus hence spoke of ‘DICE’ (‘Dynamic Integrated model for Climate and Economy’) as the way forward.
• The obvious solution is a carbon tax, which is now quite popular in the world.
• It discourages emissions or makes entities use better technologies that lower such emissions.
• Concerns - The problem here is that countries, at times, make such compromises for short-term gains.
• Also, the externalities caused by damaging the environment are often assumed to be everyone’s problem and not just that of the nation.
• Given this, carbon tax is a softer option that may not really bring an end to the polluting process.
• It only increases the cost of damaging the environment, which will be passed to the consumer.
• Way forward - Outright bans are the only way out.
• There should ideally be ban on the use of certain material or technology that damages nature.
• Importantly, this should be agreed upon by all the countries.
• It is important here for government intervention as the market system is less likely to ensure such a solution.

What are the key ideas of Romer?

• Argument - Romer talks of a positive stimulus to growth, which is based on knowledge or technology.
• This is logical because across countries technology has been the differentiating factor in the strategies pursued for higher growth.
• Evidently, going by this, the African countries remain slow-movers in terms of growth.
• The East Asian economies were able to gallop on the back of innovation.
• In fact, a lot of progress in India can be attributed to innovation.
• E.g. the Green Revolution in agriculture, the IT revolution, etc
• An interesting observation by Romer is that when technology brings about growth, it is non-exclusive.
• This is because the benefits do percolate to other companies and countries.
• Measures - There is thus the need for Research & Development subsidy to be given by governments.
• The power of new ideas is quite supreme and cannot be contested.
• So here, one can leave it to the market to drive such innovation as it is intrinsic to the business models that focus on growth.

What are the apprehensions?

• The works of the two winners raises a key question regarding the link between technology and climate change.
• For innovation to succeed, it is hard to ensure that such technology is consistent with sustainable growth.
• E.g. the technology of mobile phones has brought in a broader debate of radiation emissions
• Here the tenets of Nordhaus and Romer would collide.
• Another concern is that if technology which becomes labour-displacing can really lead to meaningful higher growth.
• Addressing this is crucial especially in labour-surplus economies.
• Also, the practical feasibility of innovations in several countries in Africa and South Asia where there is power shortage is uncertain.

What could be done?

• For India, the ideas of both these economists are very relevant.
• Innovation must be tailor-made to suit local requirements so that it does not disturb the ecosystem.
• When talking of inclusive growth and creation of jobs, the focus has to be on using innovation in a balanced manner.
• The climate change issue is more challenging; there needs to be internal rules to ensure that environment is protected.
• Laws need to be in place to ensure that there is a proper balance of technology with carbon emissions.

Source: Financial Express