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A political leader is an explainer-in-chief: Andres Velasco

Dean of the LSE’s new Public Policy School explains the state of democracy, immigration, trade wars and the Indian economy
In Chile,  Velasco ran for President, and lost. But as Finance Minister, he won laurels for steering Chile through the Global Financial Crisis of 2007-2008
In Chile, Velasco ran for President, and lost. But as Finance Minister, he won laurels for steering Chile through the Global Financial Crisis of 2007-2008
Image: Wikimedia Commons

Rishi Majumder   |   Delhi   |   Published 18.02.19, 11:48 AM

Yet we have the US-China Trade War and different countries joining one camp or the other.

I was drawing a distinction between what happens on the ground and what certain politicians like (Donald) Trump are saying. On the ground the news is still very good. I emphasise ‘still’, because this could change. I do see it as a worrying trend that there is an anti-globalization backlash coming both from the extreme Left and the extreme Right in the world. Some of it is an expression of prejudice and ignorance. When one listens to Donald Trump it is hard not to entertain that thought. But I think there is also a set of very understandable claims underlying that frustration. Globalization has not always been pure bliss. The World Financial Crisis created a lot of ill feeling because bankers were greedy and irresponsible and taxpayers often ended up footing the bill and many people suffered as a consequence.

On immigration, I am a migrant myself. I’ve lived in several countries. My family was exiled from Chile by the dictatorship (of Augusto Pinochet) so my instincts are very much the instincts of somebody who believes people should be free to move around the globe. At the same time, I think liberals in Europe, and not only in Europe, underestimated the degree of large cultural impact that very large migration flows would have. In a place like the UK, on the one hand I admire the beautiful diversity of people who live in a city like London but at the same time it’s clear that for older Britons who’ve been on the losing side of economics this has been a disquieting trend in the same way that social change - when it’s very rapid - causes some people to feel uneasy. And I think it is incumbent on people who are in favour of liberal migration policies - and I am one of them - to come up with schemes which guarantee integration, fair access to jobs and which guarantee that prejudices don’t get spread. Along with a commitment to open borders there must be a commitment to the kind of social policies which make those open borders feasible. 

On the one hand, we want parliaments to be representative but on the other hand we want them to tackle issues that are increasingly complex. Climate Change, Financial Regulation, Labour Markets
- Andres Velasco
India will face a regular number of dilemmas that middle income economies have been facing for a while
- Andres Velasco

The 58-year-old professor, Andres Velasco, is that rare public figure who marries academic excellence with political and policy experience. Having held coveted academic positions in Harvard and Columbia University (with awards for his research), he has also worked with governments and international bodies around the world to formulate policy at the highest levels. In Chile, he ran for President, and lost. But as Finance Minister he won laurels and a soaring approval rating for steering Chile through the Global Financial Crisis of 2007-2008, relatively unscathed. In the middle of all of this, the economist also found time to write two best-selling Spanish novels.

It follows that Prof Velasco would be a man of compelling ideas, many of which he wishes to infuse into the London School of Economics’ newly launched School of Public Policy, which he has been appointed Dean of only months ago. After taking over, his first official visit outside of the UK is to India. Here, in the Delhi cafe optimistically named ‘Yellow Brick Road’, a sleepless Velasco sat down over a cup of coffee to discuss ideas that can impact the world, at large, and India, in particular. Excerpts.

Liberals in Europe, and not only in Europe, underestimated the degree of large cultural impact that very large migration flows would have
- Andres Velasco

In India, according to a Pew Research Center poll, 79 per cent said they were satisfied with democracy. 71 per cent polled by Latinobarómetro in Latin America said they were dissatisfied with democracy. How much should one trust such surveys? Also, why these trends?

If we had one survey that said such things and discordant evidence elsewhere I would be skeptical. I don’t know about India but, certainly, in Europe, North and Latin America, there are lots of surveys and evidence that suggest that people are, in fact, dissatisfied with democracy. Fortunately, most people make the Churchillian quip that it’s better than other systems, but this shouldn’t keep us from recognizing that we have a problem.

The problem is that many citizens have grown dissatisfied with democracy’s output in terms of social policy, welfare or economic growth but also with the optics of politics: the fact that there is insufficient renewal of people at the top. They’ve become skeptical about the influence of special interests in politics. Think of two places in the world where democracy was lost and regained: Eastern Europe and Latin America. In my generation, we were ecstatic about the fact that we had gotten rid of dictators and gotten democracy. Democracy could do no wrong. Twenty-five years later, we find that the next generation doesn’t feel the same way. 

While instituting free-market reforms in a developing country what key factors should one keep in mind so as to not compromise the stability of the economy?

I could teach a semester on this. But broadly speaking there are certain microeconomic and macroeconomic dos and don’ts that come to mind. Among the microeconomic, if you’re going to privatize, make sure there’s a regulatory framework in place before you do it. Many countries have privatized utilities only to see utility prices go through the roof because nobody thought of the impacts of monopoly pricing on water or electricity or trains. Secondly, if you are going to liberalize goods prices, which is a good idea, make sure you have consumer protection agencies and an anti-monopoly agency that will make sure that those goods prices are set in a competitive market and not in a monopoly market. Similarly, if you’re going to liberalize wage setting, which is also a good idea, make sure that those labour market institutions are inclusive and discrimination is punished. This requires a fair bit of legwork before reforms.

On the macroeconomic level there is one overwhelming message. Typically, the liberalization of trade ought to come before the liberalization of finance. And the liberalization of finance has a lot of requirements because if there’s one sector that’s particularly prone to instability, excessive risk-taking and often even fraud, it’s the finance sector. In all sectors, it’s key to have a regulatory apparatus in place and in finance it is ten times more essential. I could rattle off 25 experiences in different countries in which international finance, debt, borrowing and lending were liberalized and proper rules were not in place and in that bubble you had banks doing all sorts of funny things and the economy tanked and the tax player paid the bill. In Eastern Europe and Latin America we have lots of those experiences, so the lessons are pretty clear by now. 

These newer public policy actors raise other questions. Civil society groups, for instance, often represent specific interests over others. Similarly including private businesses as stakeholders could result in certain sectors lobbying to get undue benefit. While they have a right to be heard, unlike politicians they haven’t been elected.

True. These are representatives of individual interests, whether an NGO or a social group or a sector of business. And as you say it is but natural that they should all be represented in the debate. The question is, first of all, how do we avoid a ‘capture’ by any one group? And also, how do we make decisions understanding that any policy will have consequences that will be good for one group and not necessarily for another group. Economists call it “the aggregation of preferences”. And what makes the process good or bad, fruitful or fruitless, is the details of the rules of democratic relations.

This falls upon things that may seem very arcane. What is your electoral system? Is it majoritarian or is it proportional (where divisions in an electorate are represented proportionally in the elected body)? Is it a parliamentary democracy or a presidential democracy? Do you have freedom of expression? What sorts of standards do you apply for truthfulness among media? These are difficult questions. But fortunately we see many countries tinkering with different rules and making progress. There is no recipe that you can summarize in one sentence and say, “This is the way to make things work.” But there are democracies that work better than others and we can learn from their experience.

For example, certain democracies are presidential like the US or parliamentary like India, some countries have proportional electoral systems, some have first-past-the-post like the UK. That gives you four kinds of combinations. Not all four are equally good. For instance, proportional voting works well in parliamentary systems but not so well in presidential systems because you could end up with a President from one party and the parliament could be controlled by another party. And therefore you can’t govern. So there are things one learns along the way that can help us craft the rules of the game. 

What we have in common is not that speak the same language or have the same skin colour but that we live in a society that has certain values that we share
- Andres Velasco

Talking of immigration, a growing feeling of anti-globalization has fuelled anti-immigration politics and protectionist economics. This confronts Indian polity too. What are the reasons and consequences?

One must draw a distinction between political rhetoric and the reality of everyday life. Because it’s true that the political environment in many countries have become such that these issues are contentious and controversial, but it’s also true that despite these political agitations globalization, in terms of movement of goods, services and capital, has not been severely set back. There was a great deal of concern that after the World Financial Crisis you would have a collapse in world trade and, yes, there was a temporary setback but world trade has recovered, if not all of its steam, a good deal of it. And you have countries like the US making protectionist noises but you also have a lot of emerging economies integrating and not detaching from the world economy. You can look at successful countries in Africa or countries in South Asia, like Bangladesh, who have joined the world economy, and the same is true for Latin America. 

From what you’ve studied and seen of it, what is your impression of the Indian economy today and what challenges lie ahead?

For years I’ve been critical of experts who, within 24 hours in a country, begin to pontificate. But I will say two things. One should not lose sight of the bigger trends. In politics yesterday’s discussion is the only one that matters, but I’ve been coming to India for 25 years and India from 25 years ago and India today are vastly different countries and India has improved for the better in the economic and quality of life domain. It is easy to lose sight of that in the midst of political skirmishes but one shouldn’t.

The second thing is that India began as an agricultural country with reasonably low income and today it’s becoming a middle income economy. It will face a regular number of dilemmas that middle income economies have been facing for a while. There are many but let me give you two examples. One, how do you enlarge school attendance and use both private and public providers while providing equality of access? Some of that is happening in India already. You deregulate schools and get lots of schools but there are issues of access and issues of equality and quality. Second, urban issues. India is home to some of the biggest cities in the world and, like in many developing countries, cities that grow in a fairly horizontal way would lead to traffic that causes people to spend a few hours in the bus every day, to get to work and from work, and that of course would be terrible for productivity and family life. Nicholas Stern is very articulate on the subject. He says in the next 25 years the world will pour more concrete than it has in all of history and big cities are being built in China, India and Africa and whether they are green cities, cities with good public transport or cities that are organized in fairly rational ways will dictate the quality of life for hundreds of millions of people in the centuries to come.

Many of these dilemmas are key to India today, which is also fortunate to be able to count on a great deal of human capital. As a Latin American student in the US I was always struck by the quality of institutes. What we need now in India is to take that human capital and marry it with a process that provides some very good answers to these questions. 

If you’re going to privatize, make sure there’s a regulatory framework in place before you do it
- Andres Velasco

A great fear, of course, is that if that that human capital won’t find adequate employment after.

I understand that. It’s especially frustrating when you get a degree but can’t get a job. In Latin America there is a joke that, in some countries, to drive a taxi you have to get a PhD. 

That’s economics. What about the socio-cultural or political Left and Right? Where is liberalism failing? In this context, could you explain your idea of 'patriotic liberalism'?

Precisely because liberalism is about tolerance and inclusion, there is a risk of believing that liberals have nothing to say about how a society ought to function. This is not good politics because ultimately a political leader is a moral leader. The Americans say the presidency of our country is a 'pulpit', putting before the nation how we all should live together. So historically this hasn’t been easy for liberal leaders to do, but it can be done.

The way it may be done in India need not be the same way it is done in Canada and Brazil as there’s an element of ‘national identity’ in this. But an identity that is not ethnocentric, xenophobic or exclusionary but one that says: what we have in common is not that speak the same language or have the same skin colour but that we live in a society that has certain values that we share, such as strong and admirable pride in the country’s democracy. For instance, there’s tremendous pride in India about the fact that many ethnicities and languages co-exist and don’t always get along but mostly get along.

The challenge for liberals is not to do away with a notion of national pride and national identity but to work to build that sense of patriotism, not on something that is exclusionary but on common values shared. For example, (Emmanuel) Macron says I am a patriot of France because France articulates the concepts of liberte, egalite, fraternite. (Justin) Trudeau says that one of the things that make me proud of being a Canadian is that Canada is one of the countries in the world most open to immigration, with 20 per cent of Canadians born outside of Canada. So you can be a Canadian patriot and internationalist at the same time. 

You’ve written about centrism as a good way forward. But that for this it must have its own ideas and not be a mix of ideas from the Right and the Left...

This is a key point. When countries do well they are guided by leaders who are centrist: not beholden to an extremist ideology, pragmatic and trying to find solutions, and pluralistic in their outlook, understanding that their own solution may not be the best one and therefore good ideas come from discussion and interaction.

But it’s not the case that the ideas of the ‘centre’ are simply some combination of Left and Right. Take ‘equality’. One could say that the conservative world thinks that equality is not really a problem, that the outcomes of the market economy are what they are and if somebody does well or not it’s because they have more or less human capital or they deploy more or less effort. People on the Left put a heavy emphasis on redistribution and think the way to equality is ‘tax and spend’. People in the Centre say clearly there may be some role for fiscal policy, but when we think of equality we have to think not only about post-distribution - tax and spend - but also pre-distribution. Why do we have the labour outcomes that we have? What can we do to improve people’s productivities? What can we do to ensure that there are more men and women joining the labour force?

It turns out that India is a bit of an outlier when it comes to the question of women’s participation in the labour force. Not only is it low, it is falling. There’s an optimistic view that says this is because women are going to university and getting more education and therefore this is a temporary trend but the truth is nobody can be sure. So a centrist approach to equality is very much one that says we need to get people into jobs, we need to get skills, we need to make sure the labour market operates in a way that doesn’t discriminate against women and the young. This is a distinctive perspective from the traditional Left and Right. 

At the launch of LSE’s School of Public Policy you spoke about training not just politicians and policymakers but also members of civil society and private business because “power is more diffused than ever before”. What benefits and challenges does this bring?

Power is more diffused and that’s something I celebrate. One thing that makes you a developing or emerging nation is that traditional hierarchies are in place and individual talent is not always recognized or rewarded. The fact that today these hierarchies are being gradually dismantled and individuals or small businesses or NGOs have more weight in common decision-making is a great thing.

One challenge is to make sure that, now that there are many more actors in the national debate, that debate remains good and doesn’t become either too nasty, or short-term oriented or unnecessarily contentious. Secondly, if politics is the art of making collective choices, with a lot more people in the room that collective decision-making is more difficult. This is a challenge to democracy. On the one hand, we want parliaments to be representative but on the other hand we want them to tackle issues that are increasingly complex. Climate Change, Financial Regulation, Labour Markets. These are debates that need a great deal of practical and technical knowledge.

Putting two things on the table - on the one hand, pluralism and inclusion on the other hand, practical and technical knowledge - this is not very easy to accomplish. But one way to do it is to train a generation of leaders who are aware of this and can talk the language of technique as well as the language of democracy and inclusion. That’s why we have crafted policy programmes in which we teach necessary economics, statistics, econometrics and theory and at the same time we have introduced compulsory political philosophy classes, and will try to endow students with skills in political communication. A political leader is, in effect, an ‘explainer-in-chief’. The world is complicated and many things are affecting the quality of our lives and somebody has to weave a narrative together that explains why things are happening in the way they are happening. At one time that role fell on religious leaders: bishops or pundits. Today it falls upon democratic leaders. 

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