The Hindu Business Line : `World prepared for oil price fluctuation'

HIS Nobel Prize winning work linked the existence of business cycles to technological innovations or `shocks', one of which was the oil price rise of the 1970s. But Prof Finn E. Kydland, who won the 2004 Nobel Prize in Economics along with Prof Edward C. Prescott, believes the current oil price hike isn't in the same league.

"The first time it happened, during the '70s, it was a big shock. No one was prepared for it. Now, we are more prepared to the idea that the price of oil will fluctuate. It certainly has negative effects, but not calamitous effects," he said, addressing the media in Chennai.

Also, technological advances in the last decade have enabled a period of steady growth, unlike the ebb and flow of earlier years, said Prof Kydland. "In a way, it has been a benign period... Policy makers haven't really been put to test."

Apart from pointing out that technological innovations and external shocks cause business booms and busts, contrary to the then popular thought that linked business cycles to demand, the duo advocated the need for stability in long-term policy, helped by independent central banks. Prof Kydland reiterated this while addressing students of the Great Lakes School of Management (GLIM) earlier on Tuesday. He said the Government's commitment to a long-term policy and the creation of a stable environment to promote future innovations will be key to growth.

It can certainly help a country like Argentina, which has seen two major depressions in the past two decades, he said.

Argentina, whose economy Prof Kydland has studied extensively, has started to recover from the morass of its latest depression but its "capital stock is 20 per cent lower than in 1982... real wages are much lower than it should have been."

With 40 per cent of the population said to be in poverty, income distribution in the country is likely to be more and more skewed, said Prof Kydland, who is currently the Professor of Tepper School of Business Administration, Carnegie Mellon University.

Ireland's feat, on the other hand, is worthy of emulation, he said. The country, in the '70s and '80s, "increased the number of years in which people could be educated for free." Also, "the Government decided to give incentives for business in Ireland. And these tax incentives were for the long term."

Prof Kydland, who is in Chennai for the foundation ceremony of the Great Lakes Institute, will be the honorary co-Director at GLIM's research arm, the Yale-GLIM Centre for management research, set up recently in association with Yale University, announced Mr Bala Balachandran, the institute's founder.

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