Prof. Shanta Devarajan
Conversations with Sri Lanka’s Top Economists 1
We begin a new series on conversations with Sri Lanka’s top economists, penned by our columnist W.A. Wijewardena. These conversations will bring out how these economists were made, what beliefs they hold for life, why they have chosen the ‘dismal science’ as their career and what main contributions they have made and so on. We believe that Wijewardena is best suited to write this series, going by the twisted proverb ‘Set an economist to catch
An economist with academic training and practical training
For me, Shanta Devarajan, formerly the Acting Chief Economist of the World Bank Group succeeding the Nobel Laureate Paul Romer and presently Professor at Georgetown University, USA, was a legend by himself. When I met him in early part of the new millennium in Colombo, he was the Chief Economist of the World Bank Group overlooking the affairs in the South Asian region. He came to the Central Bank for a conference and I instantly got impressed by his ability to articulate his wisdom convincingly to a disbelieving audience.
Since then, I met him many times in Washington DC when I attended the Joint Annual Meetings of the WB and IMF and in Colombo when he came over here to deliver lectures or negotiate aid assistance to Sri Lanka. After retirement from the World Bank Group in late 2018, he has now returned to his most preferred profession, the academia. He is now a professor of economics at the Georgetown University in Washington DC.
Man with a smile
To pick this man’s brain, I met him in Colombo recently. Dressed in a casual tee-shirt and a matching pair of trousers and wearing a pair of sandals, he presented himself to me with his signature smile spanning from one cheek to the other. Except a few strands of grey hair on his head, he was the very same man I had met previously exuding cheerfulness and enthusiasm at all times.
Both local and international education
I asked him about his childhood. Where did he school? What was his father? “I was born in Sri Lanka,” he started the conversation. “My father was B.R. Devarajan, a former CCS officer in Sri Lanka Government service. Till Grade 3, I studied in Sri Lanka. Then, our family had to move to New York City after my father was attached to the UN System. In New York, I started schooling at the UN International School, a facility maintained for the benefit of UN officers. I completed till Grade 11 there. Then, my father got a placement in the UN system in Geneva and we all had to follow him. I got enrolled in Geneva International School and completed my high school there.”
A mathematician developing a liking to economics
Throughout, Shanta had had a good school education. Then, what about his university career? I asked him. “For my first degree, I joined Princeton University. I didn’t do economics but completed a special degree in mathematics,” he confessed.
It in fact rang bells in me. I had been teaching economics from around 1978. My best students had come from disciplines like mathematics, engineering or natural sciences. Only a handful of those who had studied economics previously could match them. Does it mean that one should have a good foundation in science to become a good economist in later life? I wanted to know Shanta’s view on this. “Not necessarily” he said. “A good background in science may be helpful. But it’s not necessary. If one has a good critical approach to issues, one can master any discipline.”
For any theoretical economist, it would have been an embarrassment because theory and practice had met face to face there. But, it was not so for this young theoretician who had just passed out from Berkley with a doctorate
Then, I wanted to know how he switched over to economics. “That was a funny coincidence. My supervisor at Princeton was a renowned mathematician cum economist called Harold W. Kuhn. He ignited in me the ember of passion for economics. I therefore chose to do my graduate work in economics at University of California, Berkley.”
He was referring to the famous mathematical economist at Princeton who worked in the area of game theory and won the John von Neumann Theory Award in 1980 for advancing game theory and bringing mathematical approach to economics.
Resource exploitation under uncertainty
What was his research at Berkley? I asked him. “Kuhn encouraged me to do my Master’s and Doctorate in economics and I accepted it. By this time, I also had developed a liking to the subject. So, I began my Master’s there and then proceeded to Doctorate. My supervisor was Tony Fisher,” he began to explain.
Shanta would have been fortunate to do his doctoral research under Anthony C. Fisher, the distinguished academic in agricultural and resource economics, I thought. His main expertise has been in making prudent economic choices under uncertainty. For instance, his current research programs have been on climate change and how decisions should be made today, under uncertainty, to reduce the emission of greenhouse gases to the environment. “Did you also work on how choices should be made under uncertainty?” I asked Shanta jokingly.
All real choices are those made under uncertainty
He looked at me as if he got the cue. “Of course, yes,” he said. “My doctoral research was on extraction and exploitation of natural resources, mainly oil resources, under uncertainty,” he paused for a moment and then continued again.
“There is uncertainty in tapping oil resources before they are discovered as well as after they are discovered. Before they are discovered, all have to work on guess work. That is because nobody can say for sure how big the deposit is. Even after discovery, until the oil is taken off from below the ground, all have to work under uncertainty. I therefore developed a theoretical model to identify how economic agents made their choices to optimise the return when accurate information was not available.”
“In fact, all choices which we make in real life are such choices. For instance, when we choose a career, we do so under uncertainty because we don’t know what that particular career would offer us in the long run. But we make those choices involving two time periods, today and tomorrow. I came up with a theoretical model to explain this in terms of economic optimisation.”
Shanta did not use technical terms but economists call such choices involving two time periods ‘inter-temporal choices’. As Shanta explained all choices that we make – may be on marriages, careers, governments or politicians – are all choices involving two time periods and they are made under uncertainty.
Learning from students
After completing his doctorate, Shanta had joined the academia as a professor at the Kennedy School of Government at Harvard University. For this young economist, it had quite been an experience because the students whom he met there had been senior public officers from both the developing and the developed worlds. They had come to the Kennedy School armed with a repository of experiences.
If one sees danger in his own action, one should restrain one’s behaviour to escape it. Governments in most of the countries find easy money available from the central bank to finance their extravagant expenditure programs. Central banks can do so only by printing money. That money finds its way to commercial banks which create more money.
The increase in money supply over and above the required amounts will lead to the elevation of inflation. Inflation is an impediment for continued sustained growth. Hence, societies fail not because of anything but because they fail to rein in inflation. So, the current in flation targeting will deliver price stability to Sri Lanka and it will create an environment conducive for continued economic growth – Shanta Devarajan
For any theoretical economist, it would have been an embarrassment because theory and practice had met face to face there. But, it was not so for this young theoretician who had just passed out from Berkley with a doctorate. “I learned from them more than what they learned from me,” confessed Shanta. “They frankly shared their experiences with me and I helped them to convert their practice into theories. It was like going through an apprenticeship period by a raw graduate. It strengthened my muscles, solidified theoretical applications within me and helped me understand what is happening in the real world in a pragmatic way.”
Temporary attachment to the World Bank
Shanta’s stint at Harvard delivered a major breakthrough in his career. He was working in a water project in Malaysia as a rep from the Kennedy School and the World Bank too had some stake in it. He was able to work with senior Bank officers in the project. These acquaintances finally led him to spend his sabbatical leave from Harvard at the World Bank in 1991. This was how he was introduced to the Bank. “After I started working at the Bank on leave from Harvard, I began to like it. So, when they offered a permanent position there, I readily accepted it,” said Shanta.
Meeting Maoists in Nepal
He was first appointed to the Public Finance Division and soon rose to its headship. After a few years of service there, he moved to the Bank’s South Asia Division, and this time as its Chief Economist. This was during the first decade of the new millennium and most countries in South Asia had been engulfed in internal turmoil. Sri Lanka had been caught in its long standing ethnic war, while Nepal had been paralysed by Maoist insurgency. Opposition protests supported by intermittent hartals had crippled the Bangladeshi economy. Pakistan had its share of woes due to Taliban war in its neighbouring state, Afghanistan. What was the World Bank policy when its member countries had such devastating internal conflicts? I asked him.
The World Bank does not take sides in internal conflicts
“The policy of the World Bank in these cases is very clear,” he began to explain. “World Bank doesn’t take sides but remains neutral. It helps member governments to continue with economic recovery measures, while extending its hand, if a request is made, to support the reconciliation process. Guided by this policy, I even visited the Maoists in Nepal in one of their fighting bases in mountains. Contrary to what the media had projected, they were reasonable people willing to listen and generate a dialogue with the outside world. Their grievance was that the rulers had violated all norms of democracy and they pledged that they would establish a democratic regime in the country when they would come to power.”
World Development Report on how to make services work for the poor
In 2004, Shanta got the unique privilege to lead the team, together with Ritva Reinikka, that produced the World Development Report, the flagship publication of the World Bank.
“The theme of the report in that year was ‘Making Services Work for Poor People’. We found that despite the common understanding that services fail poor people in access, in quantity and in quality, there are some examples that they really work for the poor. That meant that if governments and citizens wanted, they could do better. That they can do by empowering the poor people. How can it be done? On one side, governments have to monitor and discipline service providers. On the other, they have to create an environment in which poor people have an amplified voice in policy making. The report was a handbook for governments to support poor people with quality services at all times and everywhere.”
He came to Sri Lanka to introduce the report as the Chief Economist covering the South Asian region. That was when I met him at the Central Bank.
Views on central banking
I diverted the discussion from his past to current issues in central banking. In this respect, Central Bank of Sri Lanka has been criticised by many for its daring attempt at introducing inflation targeting as the monetary policy framework. Though the Bank is being criticised today, it had started working on this policy framework as far back as 2002 when it had embarked on a modernisation project. After 17 years of hard work, the Bank is now in a position to put it into practice. I asked Shanta on his views about inflation targeting.
Inflation targeting is voluntary tying of hands by politicians
“What the Central Bank is doing today is what it would have started long time ago,” he began to explain. “It is actually a policy which forces one to restrict one’s behaviour so that he cannot do any damage to himself. It is like Ulysses in Homer’s Odyssey tying himself to the mast of the ship and plugging the ears of his sailors with wax to save his ship from being sea-wrecked. If one sees danger in his own action, one should restrain one’s behaviour to escape it. Governments in most of the countries find easy money available from the central bank to finance their extravagant expenditure programs. Central banks can do so only by printing money. That money finds its way to commercial banks which create more money.
“The increase in money supply over and above the required amounts will lead to the elevation of inflation. Inflation is an impediment for continued sustained growth. Hence, societies fail not because of anything but because they fail to rein in inflation. So, the current inflation targeting will deliver price stability to Sri Lanka and it will create an environment conducive for continued economic growth.”
Need for active and open debates on economic issues
Economists may talk about the virtues of an inflation-free world, but people too should begin to appreciate it. For people to do so, there should be an open discussion of the key economic policies being pursued. Economic policy makers on the government side should explain to people what they are doing and why they are doing it. Then, people should take it over from there and generate a lively debate. I asked Shanta about his experience in the issue, from a global perspective.
“Sadly, policy dialogue in Sri Lanka is very weak,” he opined. “This is not the situation in other South Asian countries. Take for example, India. There is a heavy engagement of Indian media and Indian people in policy debates. Same is true with Bangladesh and Pakistan. They also have open and lively discussions of policies compared to Sri Lanka. What we should do is to create more avenues for people to get engaged in policy discussions here.”
Returning to academia via the World Bank
I asked Shanta about his future plans. “I would be basically teaching development policy and doing research in that area at Georgetown,” he said. “Some ex-world bankers have got together and set up a think-tank that would work beyond borders of countries to assess and recommend suitable economic policies. I will be a part of that team.”
A person in the calibre of Shanta can never retire from active working life. That is the destiny they have got through life-long experience and discipline.
(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)