The Hindu Business Line : `Reform-driven countries must formulate credible policies'

NOBEL laureate Prof. Finn E. Kydland on Thursday advised policy makers in reform-driven economies such as India to formulate credible and forward looking policies that can stand the test of time.

Transparency was paramount, he said and suggested the setting up of institutions so as to avoid the `time inconsistency' disease that struck many emerging economies in the eighties and nineties.

He was delivering a lecture on the modern framework for quantitative macroeconomics, organised by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The 2004 Economics Nobel Prize-winning professor said it is imperative to remember that foreign investors are looking at consistency of policy — low tax rates over a 20-year time span, along with incentives to business. This prescription would not only attract investment, but also act as a buffer against the flight of capital, the attendant job loss, and reduction in income levels, especially for the poor, he said.

Professor Kydland said the economic models developed by him and Professor Edward Prescott had conclusively proved that the creation and restoration of business confidence were dire needs in economies like Argentina, which had suffered from time inconsistency, devaluation, bouts of hyperinflation, defaults in Government obligations and the resultant lack of credibility among investors.

In the Indian context, he said, political optimism bordering on populism, which looks at a gross domestic product growth rate of 10 per cent in the long-term, is not to be scoffed at. In fact, such optimism would be needed if India tries to get close to nations it wishes to compare itself with, he stated.

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