Cause Effect Paradigm 004

Full Convertibility Example

G: To progress in our discussions in more meaningful way, we need illustrations of Cause-Effect Paradigm, Cause-Effect Obsession Syndrome and Cause-Effect Inverse.
S: Fine. Let us go through some real life examples. Let us reflect all these three through our dialogue. Can we explain why Indians fear Full Convertibility of the Rupee?
G: One reason can be that China has not done this. China with a larger population has continued to peg its currency with the Dollar and still runs a largely State controlled economy. If such a big country which has been growing much faster than India for long does not have full convertibility, why should India take such a step whose consequences can be bad?
S: So the scientific prejudice says that it is advisable to follow someone who is more powerful than you are.
G: Yes, it is better to follow good examples. Why do you call this prejudice?
S: Because the example is not relevant from the point of view of Cause-Effect Paradigm. Such examples reflect Cause-Effect Obsession Syndrome. First, we only know of the past of China but we do not know of the future of China There is no certainty that China will follow the same policies all the time to come or that China will continue to do well with the same policies adopted in the past. If China’s pegged to dollar currency and restricted currency convertibility policies are to be good examples, we have to wait and check all the time in future if China is continuing to do well and/ or whether China is changing its exchange rate and currency convertibility policies. If future is what will prove whether certain policy or set of policies are good or bad, we cannot just follow examples of the past. To overcome this obsession syndrome, we have to paint a picture of the future and work backwards to the present.
G: Fine. There are other examples that show that many Asian countries that had adopted policies of free exchange rate determination by the market forces of demand, supply, etc., later suffered the Asian financial crises. But India and China escaped because they did not adopt such policies.
S: Association of events may not imply that a straightforward cause and effect relationship exists. Those countries that suffered the financial crisis in 1997 also did many other things that were not necessarily consistent with or necessarily complementary to full convertibility. So which is the cause of what is not very clear. Besides many of these countries survived the crisis without much real damage. Normalcy returned in a short period of time. Why should some one worry about such short-term crises that make the economy stronger soon? Unless afflicted by Obsession Syndrome, we need not worry and invent logic to avoid what we fear.
G: Yes, Indians are generally afraid of full convertibility. Why risk full convertibility if we can avoid it for longer period?
S: Indians avoided markets, competition and liberal external trade for over four decades since Independence and remained a poor, slow growing country. The cost of such a policy turned out to be huge on the economy and the people.
G: Why do say that past economic policies forced the Indians suffer a great cost?
S: I do not have to say this. Those who are afraid of full convertibility today know this fact. The much faster economic growth of India since the time India started liberalizing and opening up is a pointer that they should wonder about. The cost of avoiding full convertibility can also be great.
G: It is better to pay such costs when we do not know what exactly will happen in future. India must get stronger before she adopts full convertibility. Otherwise, who knows how strong western countries will start dominating India soon?
S: But full convertibility itself can help India become stronger by growing at a faster rate and effectively deal with any threat of foreign domination. How many countries with full convertibility are foreign dominated in the world today? You do not know. So you develop apprehensions about what is strange and unfamiliar to you. So, you build up a cause-effect relation between Full Convertibility and foreign domination. You are affected by obsession syndrome. You start misusing the cause-effect paradigm even without being conscious of doing so.
G: You know who I am and you accuse me of obsession syndrome.
S: All these are but natural forces that are inherent part of the Universe or Creation. You are also part of the Universe and therefore can reflect Cause-Effect Obsession Syndrome.
G: That is all the more true of you. Whatever you are saying may also be because the same Syndrome affects you.
S: According to my understanding of the Creation, that is quite natural. But you are required to defend Full Convertibility.
G: Yes. Look. India is already on the verge of full convertibility. India can wait for a while before the last few small steps to Full convertibility.
S: In that case, the last few small steps can as well be taken immediately.
G: Why hurry? Foreigners are happy that Rupee is fully convertible. All Indian businesses can buy foreign exchange to meet their import requirements and also invest abroad in setting up factories and buying ownership of foreign companies to set up their foreign subsidiaries. Indians can freely import whatever they want and go abroad whenever they like by purchasing reasonable amounts of foreign exchange for buying goods/ services during their stay abroad and remitting money to their children for education or as gift. They can also invest abroad up to certain amounts through banks and mutual funds. Only thing that remains to be done is to allow Indian citizens in general to buy and sell foreign exchange freely and without limits.
S: If that is the small step, why not India takes it now?
G: Indians have two reasons. First, India’s growth rate is not going to increase dramatically if Indian citizens are allowed unrestricted freedom to buy, sell and hold foreign currency or financial assets abroad. Second, if such freedom is given Indian businessmen and the rich will take away Indian wealth abroad and endanger a financial crisis.
S: Both the reasons do not seem to be based on scientific cause and effect relationship. We have no proof that Full Convertibility will not sharply increase India’s growth rate. We also have no proof that rich Indians will take away Indian wealth abroad. These are pure guesses. If we are worried about Indians investing and holding assets abroad, Reserve Bank of India is already doing that. Where are our foreign exchange reserves? If Reserve Bank can hold such huge foreign currency assets, they can be held by individual resident Indians as well.
G: So, you are supporting the case for Full Convertibility.
S: I am not simply interested in supporting any thing. What I am trying to say is that the case against Full Convertibility is weak from a strictly scientific standpoint. The same may be true of the case for Full Convertibility as well. Science has not yet helped us with adequate knowledge to come to a definitive conclusion about Full Convertibility. So we should say we do not know the Truth.
G: You do what you would like to believe as true. It’s simply a matter of faith. It is not a matter on which Cause-Effect Paradigm is as yet able to give an unambiguous, scientific answer. The matter is therefore to be solved unscientifically and based on which faith is more popular among those who will decide.
G: Your concept of Cause-Effect Inverse has no role to play in this.
S: It has. One can construct many types of Inverses to experiment. We will now construct one such Inverse. Let us assume that for some (n+1) periods, namely, “(T+n), (T+n-1), (T+n-2), ……., (T+1) and “T” the economy has sustained with Full Convertibility (FC). This causes less than FC in period (T-1). What features of FC now are lost?
G: That you have to answer.
S: You are not cooperating with me. Fine. I say that the features of FC that will be missing in (T-1) depend on the dynamics of the economy in the periods T, (T+1), etc. So, we must assume something on this. Let us assume that the economy is experiencing progressively higher current account deficit as percentage of National Income as one moves backwards in time from (T+n) towards T and to a few periods near T like (T-1), (T-2), the economic growth rate falls as we move closer to T, foreign investments falling in absolute terms and rising foreign exchange inflows and reserves. The effect of this dynamics on period (T-1), I suspect, would be restriction on domestic resident nationals to invest abroad or on holding of foreign exchange in banks.
G: You are trying to be clever. You are assuming scenarios and dynamics that would imply that India should remove restrictions on resident Indians investing in foreign currency assets now.
S: You know how clever people can be. But isn’t the scenarios desirable and dynamics a possible reality.
G: Yes. It is one of the many possible scenarios.
S: Why then are Indians reluctant to attempt to make such a scenario become a reality. Why are they afraid of moving to Full Convertibility immediately?
G: You should explain.
S: It is only natural. First, some are wedded to the thought or ideology that the process of liberalization and globalisation is an evil that cannot be avoided altogether but must be resisted: the only way to safeguard national interest and Indians future is to keep minimum openness to international capitalism, to control citizens’ economic freedom through State intervention and to uplift the economic condition of the poor by State efforts only.
G: That may be the socialist or communist view. But there are many other Indians who do not subscribe to the ideas of socialism or communism.
S: True. There are others who may not subscribe to the ideas of communism or socialism but would still support the communist and socialists because their vested interest. They want the State domination over citizens’ life because such a system gives them a chance to use State power in a manner that benefits them in many direct and indirect ways at the cost of the exchequer and the economy. Greater openness to global economy for individual Indian citizens implies loss of an income, wealth and social image building opportunity these bases and supporters of Indian political parties used to abuse of the dominating and pervasive power of the State. It is natural that they will resist Full Convertibility.
G: What about the rich Indian businessmen and the capitalists?
S: They will naturally be for or against FC depending on what they anticipate as the favourable or adverse consequences of FC on their future business prospects. But most businesses cannot really figure out the consequences. As any other human beings, some of them do not like uncertainty about the future consequences of FC. So, these people are against FC. The adventurous like to face the challenges that FC might bring and therefore support FC.
G: But the intelligentsia, the academicians are also divided on the issue.
S: They may be in one of the groups that we have already discussed about and will reflect their natural interest.
G: What about the common mass?
S: They follow whomever they happen to consider as their leader irrespective of what the issue is.
G: So, what is the result?
S: The result depends on popularity and not on arguments and scientific truth. And, the popularity depends on the strength of the political parties, the quality and reach of the media, the new evidence and theory that come to the fore over time and the bargaining among the political parties over different issues. Thought of FC would have been a national nightmare in 1992, a great relief in 1997, a debatable issue in 2003 and a likely future in 2006. Soon, most Indians may become indifferent to the issue of FC and FC will become a reality in India.
G: How does Cause-Effect Inversion help in this case?
S: Once you recognize that you do not know the Truth with certainty, then you admit of your prescription being based on faith or belief. Then, you allow for people to vote based on their desires as well. For example, some Indian citizens of the country may simply desire that the international financial markets and foreigners recognize the Rupee as one of strong currencies in which they should hold their assets and simultaneously the Indians desire to hold assets in other stronger currencies. If most people think in that way, the national economic policy will have to be geared to making Rupee fully convertible at the earliest. Such an objective makes fast economic growth or reduction in poverty as results from the pursuit of the objective to attaining full convertibility rather than as objectives to be pursued. Your perspective change dramatically.
G: So, you say that Cause-Effect Paradigm, Cause-Effect Obsession Syndrome and Cause-Effect Inverse may work simultaneously as processes in individual and social behaviour.
S: Yes. And, which of these processes become stronger at what time determines the individual’s and societies choices over time.
G: Does this process apply to all social and economic issues?
S: Yes. The natural process is that the popularity of the debates on various issues as well as the popularity of different opinions on any particular social, political, economic, national and international issue, fluctuate over time with a cyclical, if not a secular, trend towards nil.
G: To summaries at this stage, you seem to suggest that
(a) Whatever happens in a society over time is a natural process;
(b) Whatever controls or directions that individuals or leaders or elite groups or different sections seemingly exercise or impart over that natural process is actually an integral part of the natural process itself;
(c) Cause-Effect Paradigm, Cause-Effect Obsession Syndrome and Cause-Effect Syndrome are examples of interactive sub-processes of the natural process that determines how a society moves over time; and,
(d) The social, economic or political choices that societies seem to argue for or seem to make are actually not choices based wholly or fully on scientific truths but the result of interactions of natural sub-processes over which neither individuals or groups or the society as a whole has/ have any control.
S: You are absolutely right. I also say that whether I support a particular economic policy or is against it or I remain indifferent to policy issues for whatever reason, is not my independent rationally chosen decision but the outcomes of natural processes over which I can really have any control.
G: And, you also say that these outcomes result from interactive processes that are stochastic in nature.
S: Yes. It is merely a chance that I happen to support or criticise a particular policy. And, it is merely a chance that the society or the nation adopts a particular policy at any time.
G: So, you come back to your Stochastic Destiny Principle.
S: You are absolutely right. That happens to an obsession that I reflect by chance.
G: But we need to discuss more examples of social and economic policy.
S: If you agree we will do that in the next few sessions.