Economists to the ‘Core’?: Humor and Creativity at the World Bank NUMBER 081 ORIGINALLY PUBLISHED: DECEMBER 2012 January 2016 The World Bank Group Archives Exhibit Series contains exhibits originally published on the Archives’ external website beginning in 2002. When the Archives’ website was transferred to a new platform in 2015, it was decided that older exhibits would be converted to pdf format and made available as a series on the World Bank’s external database, Documents & Reports. These exhibits, authored by World Bank archivists, highlight key events, personalities, and publications in the history of the World Bank. They also bring attention to some of the more fascinating archival records contained in the Archives’ holdings. To view current exhibits, visit the Exhibits page on the Archives’ website. Economists to the ‘Core’?: Humor and Creativity at the World Bank The records of the World Bank Group maintain and communicate the Bank’s institutional memory through their evidential and informational qualities. These records, in the form of correspondence, research materials, reports, meeting minutes and countless others, are the products of business activities and can therefore seem, at times, bureaucratic and dry. This is, however, not always the case. At times, the collegial nature of the Bank environment and the clever, creative, and comedic personalities of its employees shine through the otherwise esoteric materials. Take the following example. This correspondence is taken from a subject file created by Benjamin King who, at the time, was a member of the Economics Department. In the mid-1960s when these particular records were created, King and a number of his colleagues were participating in the research, planning, and writing of “The Report to the President […] on India’s Economic Development Effort” – also The contents of Benjamin King's subject file known as the Bell Mission Report. Headed by Bernard Bell, “the mission’s purpose was to conduct a comprehensive study of the Indian economy and advise the Bank and the partnering aid consortium on the Indian economy and its challenges.” King’s subject files on the Bell Mission Report cover a variety of topics, including India’s industrial and agricultural production, debt repayment, trade, and a variety of economic forecasts. In the correspondence reproduced here, the issue of India’s shortage of foreign exchange is discussed between King and his colleagues in the Economics and South Asia Departments. These records would be of interest to any number of academics and historians studying the development of India’s economy in the middle of the twentieth century and the World Bank’s role in it. However, these letters are also a fine example of both the intellectual vitality of the Bank experts who wrote them and the respect and humor shared between colleagues. This is most evident in the final pieces of the correspondence chain. What started as a serious conversation about India’s “core” industries, evolves into a series of inside jokes and puns based on the word “core.” Spurred on by Mr. King’s “last piece of coreography” ("Core [Anglais]"), Mr. Jean Baneth of the New Dehli Office of the South Asia Department replies with a pun-filled missive ("A last tour of Corecorean Gallery"). Mr. David Holland, a colleague of Mr. King’s from the Economics Department, responds in turn ("Why shouldn't I have my two bits worth?"). Finally, Mr. Bernard Bell, the coordinator of the Indian research report and, consequently, the superior to all those previously referred, decides that he must “get into this act” with a poem that may not put him in the direct line of “E.E. Cummings” but which does a lot to prove that the prototypical stodgy Bank economist may have more interests than just models, theories, and numbers ("Transformation [Core to Bore]"). • FORM No. 57 INTERNATIONAL DEVELO, ASSOCIATION ,T I RECONSTRUCTION INTERNATIONAL BANK FOR AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION OFFICE MEMORANDUM TO: Mr. B. King 'i 1 .~ ~ DATE: April 29, 1965 FROM: J. Baneth ~~ SUBJECT: The Core, encore! A mathematician friend of mine once heard his professor say: "Now, it is evident that this set is directly derived from that set". My friend said: III am very sorry, sir, I do not seem to see thi s offhand ll • The professor replied IILook, I shall show you II , and he covered 200 square feet of blackboard with equations before arriving to Q.E.D. Then my friend said: III am so sorry, sir, of course this is evident!" This is just to say that it is often good to be forced to state explicitlf what one thought to be evident. I instintively knew that the core of my case was good. Precisely because of this instintive feeling of evidence, I was caught off balance by your very pertinent objections which are so well grounded in welfare theory. And I am afraid I made a very bad defense of what I still think is a very good case. It is implicit in your arguments that after devaluation of the effective rate we are back to equilibrium. I knew that your argument was based on this, and mine therefore rested on the contention that this is not true equilibrium; it is short-run only, not long-run/on nature. I still think this is true, and I do not reject my past argument~, however, they are incomplete. Your argument implies that the short-term equilibrium price of foreign exchange will leave us, on the transformation curve of foreign to domestic resources, over a portion of roughly unitary slope (in absolute value). Transformation, at that price of foreign exchange, is feasible and easy; domestic productive capacity will be fully employed, or, at least, i f not, this will not be due to a shortage of foreign exchange. My position is based on the contention that we may well be placed at a unitary-sloped part of the long-term transformation curve --in this direction I seem to be going further than Mr. Bell, in fact-- in the short run we are at a point where the curve is almost asymptotic to the "domestic resources" axis for the economy as a whole. This would mean that, if no selective measures are taken, the shortage of foreign exchange would not allow National Product to rise beyond a certain point, even i f other resources were available. 1/ B-J the way, I never thought that managers could be "induced to measure the merits of alternative processes in terms of costs of inputs and prices of outputs which correspond to the long term equilibrium rate ll , simply by 1I0ffering them the correct requirements for construction without paying the surcharge ll • (Para.7 and 8 of your Memo~ The important point is that they should be assured that the foreign exchange content of their current inputs and outputs should, now and in the future, be valued at the long term equilibrium exchange rate. - 2 ­ There can be no doubt about plenty of labour remaining available. As for capital, at present we have ample evidence of capital goods being underutilized for lack of imported production materials. We may hope that a devaluation would release some imports from uses where easy substitutes are immediately available. It is unlikely that so much would be released, in the short run, as to allow productive capacity in every sector to be fully utilized. What is more likely to happen is that both in production good and consumption good producing sectors some capacity would be left unutilized for lack of indispensable imported inputs. This is the macroeconomic view; on firm level, what happens is that demand is insufficient to justify the least efficient firms' (in both sectors) buying foreign exchange at its very high price; they would therefore leave their labour and capital idle. To switch back to macroeconomics, i f global demand w'ere raised, some firms would want to start producing again and bid for foreign exchange; The price of foreign exchange would go up, prices would rise, but the same underutilization of productive capacity would persist. Over the long run, of course, new technology will be developed, adapted to the higher price of foreign exchange, which will reduce its scarcity and ultimately do away with its being a bottleneck. This is not just a pious hope; it is a guideline for action. Surely, there can be no purpose in building up productive capacity if, because of the shortage of foreign exchange, it cannot be used. But we do have such~ capacity now, and are still likely to have it, in the short run, after devaluation, i f the level of net imports remains unchanged. .~~~ There are three conceivable sets of action we can recommend to deal with this situation. We can say that we cannot do anything about it; a wrong set of investments had been made. We ensure overall equilibrium of demand and supply of foreign exchange, and only of overall demand and supply, not of any specific ones; i f this leaves some capital underemployed, wherever it be, we deplore it equally. I do not think anyone would seriously take quite this position East of the Chicago School --certainly not you, despite what I have, at times, naughtily pushed you into saying. Surely, in India, some demands for foreign exchange are more equal than others; we would ban travels to Monaco rather than deprive HMT from spares. The second position would consist in saying that the adaptation is a temporary problem; after a while, new technologies will come into use, the shortage will subside. In the meanwhile, it should be overcome through increased aid. This argument has much to recommend itself, including its appeal to those of my insticts which whisper: '~en in doubt, soak the rich". But how would the rich react? Even leaving aside the easy-to-eliminate frills of the Monaco type, would, say, the Bank not object to an increment in aid used in good part for imports of consumer goods or materials for consumer goods industries? Opposition to this sort of imports was strong even when the need for aid was claimed to be based on a savings-gap argument. Then, of course, the - 3­ opposition was irrational. However, the argument for extra aid would now be based on the import-content argument. Then, it is only too easy to reply that certain consumer goods may well have a high and incompressible import content, but India can do without these goods for a few years. The third position, which has been taken by Mr. Bell, and I think by David, is to recognize these objections, and propose that certain imports of final consumer goods be banned or discouraged by means of high custom duties; that imports of production materials clearly and solely destined to certain consumer goods industries be similarly banned or discouraged; and that demand for consumer goods which make hea~J use of imports, should be discouraged by means of excise duties. This latter position is, I believe, diametrically opposed to your stand, which is based on Paretian welfare grounds. What I reproach to it is that customs duties on final goods alone build up a vast, strongly protected area of intermediate goods production which is of doubtful utility and urgency within India's development strategy. This is in fact recognized when excises and customs duties on certain production materials are also urged. The latter would only displace slightly the area where intermediate industries grow up. The former would not discriminate between hea~J and light users of the scarce factor. Surely, there is not much economic sense in discouraging per se the demand for a good if there is idle capacity for its production? An excise duty on cars to keep down the manufacturers' overall demand for foreign exchange would not distinguish between the make which has a low total import content and the make which has a high one. An excise on output, as compared to an excise or import content, would therefore reduce total welfare. My three conceivable sets of proposals, are like the three Musketeers, four. The fourth one is a tax on the import content of inessential indus tries. In effect, I say: those industries which are known with certainty to be essential should be allowed to fully utilize their capacity; they should be given as much f orei gn exchange as they reguw for full capacity utilization. Thisfore1gn exchange should be giVen at its long-term equilibrium price .. Only those productive capacities should be left unutilized in the essential sector whose full utilization is not remunerative at the long-term equilibrium rate of foreign exchange (considering only their short-term costs). This rate may allow the essential sectors to forego some present substitution possibilities which could be exploited without sacrificing either short-run capacity utilization or long-run technological efficiency. lam afraid this cannot be helped. The nonessential sectors should be given whatever foreign exchange remains available at the price which would clear the market. The only remaining doubt concerns the sectors which we do not precisely know how to classify, including those which supply both the clearly essential and the clearly inessential sectors. This would partly depend on the degree of scarcity of foreign exchange. Aid givers might accept that some additional aid should be used for maintenance imports by such intermediate industries. If such additional aid is available, and cheap, it may be good to include the mixed with the essential. However, I - 4 ­ would on balance favor not including them, especially i f this would mean pushing up extremely high the price of final goods imports, and thereby constituting a very protected, excessively profitable area of consumer goods production. If the mixed sector is not included with the core, intermediate goods could still be given some protection by means of special "infant industry" import duties. The one remaining serious danger, that core industries would be tempted to import intermediate goods rather than buy them from the high­ cost "mixed" sector, can similarly be overcome by means of import duties and subsidies. As you see, I am still fully convinced that the multiple exchange rate system answers best to the situation where foreign exchange is scarce. Thanks to the discussion, however, I see better than formerly what is meant by this scarcity after the devaluation and institution of an equilibrium exchange rate. In the long-run, I too, like David, am on the side of unitary rates and all an~s ; could this be due to our being, in the long run, all dead? c c : Mr. B. Bell Mr. D. Holland Mr. s. Please FORM No . 57 INTERNATIONAL DEVEL l ASSOCIATION .NT I RECONSTRUCTION INTERNATIONAL BANK FOR AND DEVEL OPMENT INTERNATI ONAL FINAN ~ CORPORA TI ON C OFFICE MEMORANDUM ~ TO : Hr. Ben jamin King DATE: May 4, 19 65 FROM : J. Baneth ~ L SUBJECT: Encore encore c ore Overwhe l med by my poetic enthus ia sm, in my last note I failed to do ju st ice to your positi on and in t he process al s o did not make c lear how my old a rguments- we r e conne c te d wi t h th e new ones. Le t me take it up at the po int where, after deval uation and the removal of a l l controls, we s uddenly f ind the"core" sectors having excess capacity because they can no t afford to buy all the imported inputs t hey need a t the prevailing high price of foreign exchange. You would the n , I believe , provide direct subsidies to t he core firms in such amounts as would be nee de d to enable them t o operate at full ca pacity. I pass over the diff iculty of computing and actually providing t he amounts needed. Once the subsidy has been provided, the core will raise its bid for foreign exchange; i f money incomes in the economy a re not left to rise in pace , a t some level o f s ubsidiza t ion the pr ice of fo reign exc ha nge wi l l have r is en so high, and wi ll have discouraged so many non-core buye rs , th a t, takin g into account whatever i mport-su bs titution t ha t ha s been po s s ibl e, enou gh foreign exchange is l ef t to the cor e s ector to a llow it t o fu l ly uti l ize its capacity. The core se ctor t oo would there fore have to pay abnorma l l y high price f o r for e i gn exchange, a nd thereby be induced to adopt a wron g technol ogy according to an argument develope d at l ength elsewhere. Just a word more a bout t he da nger of taki n g dec i s ions in the light of an underval ued exchange rate. Even a s sumi ng, as t he Indi a~ do at ti me s , that the balance of payments problem is so ser ious t hat any import su bs t itution that is phys i c a l l y possib l e shoul d be undertaken, does not mean tha t a very depr ec i a t e d e xchange rate s hou l d be us e d to guide decisi on ­ making. Every i mport- saving may be worthwhile; but some are more worth wh il e th an ot hers. An undervalue d exchange rate, similar in this to t he present "indigenous angle" clea r a nce , wou ld a l l ow import s ubs titution possibili ti es whi ch are not among the most favora ble to be chos e n, and there fore more favorab le opportuniti e s to be ne gl e c ted. St an l ey Pl e ase dr ew my attention to the fu zz i ness of my referen c e s to subs t ituti on curve s . The attac hed figu re wi ll show what I mean. Line AA ' s hows t he quant ity of fo r e i gn exc h ange ava i l a bl e, BB' t he ava ilabili t y o f domestic r e sou r ces . LiL ' i is the lo ng-te rm tr a nsforma ti on map; SS' t he - 2 ­ snort-term transforma t i on curve. At time I we are at point PI ; t he prevailing foreign exchange rate $I RI full y determines technolo gy by its tangency t o the LIL'I line (this is an over s imp li fication, o f course; in reality, technology is no t full y adap t ed to the 1:4.76 r ate) . Forei gn exchange resources are ful ly utilized ; t here are unutilized domestic resources (both labour and capital) meas ured by NIB'. If we adopt the exchange rate $2R2 , litt le short-term saving of fore ign excnange will be achieved (none on the figure as drawn) because the short-term transforma tion curve i s almost hori zontal to the r ight of PI (the kink which appears on the figu re is not material to the argument). In the long run, techno lo gy will adapt to the new exchange rate; the new equilibrium point on LIL'1 will be at P 2 ; domestic resour ces will ha ve been substituted to foreL gn ones and the f o reign exchange thus saved al l ows to move up to a hi gher transformation curve L 2L'2. The new equilibrium point is P '2 1 f oreign e x c hange is fully utili zed and unemployement of domestic resources has been reduced by NI N2 • As t he gr aph stands, onl y an i nf i nitely depreciated exc hange rate --a horizontal line-- would achieve both equilibrium in the forei gn exchange market and the full employement of domestic resources in the short run. With this rate, the technological adaptation point would be on the far right ; as adaptation proceeds , domestic resources would tend to be exhau sted an d t he e conomy wou ld tend to be pushed lower on the substitution map. Considering t ha t domest ic resources inc l ude both labor and capital this is not an absu r d outcome; it wou ld m ean t ha t t otal capital avail able now f al ls short of the requirements of the import-su bst itut ion progr am. cc : Mr. Bel l Mr. Pl e a se Mr. Hol land JBaneth : bpn. FORM No. 57 INTERNATIONAL DEVELC INTERNATIONAL BANK FOR NTERNATIONAL FINANCE AS SOC IATION RECoNSTRUCTION AND DEVELOPMENT CORPORATION OFFICE MEMORANDUM DATE : June 9, 1965 TO: Mr. Benj amin King !? (( FROM: Jean Baneth / }~ SUBJECT: A last tour of Corecorean Gallery Coreblimey, exclaimed-I upon receipt of your las t note, let mine be the las t too. let us end this discussion with decoreum a The waste in the name of core was not only India's i f time is also included. Not to speak of nervous tension. If the discussion drags on, I shall have to seek succore fr om licore. A f irst draft of ~ segment of the rep ort, cont aining a corepus of mw findings and recommendations is bemg typed nowo I put my hear t in it: core meum misi in eum (St. Paul, letter to Coreinthians) . t1e m ay resume our discussion when it is reaqy; but I hope we won't. We should all be very satisfied even with those solutions which we do not abs olutely prefer; and it is for the Indians to decide upon the corese they want to follow. JB:sb • J / • • • ,UI.I• • FORM No . 57 INTERN ATI ONAL DEVEL l ASSOC IATI ON .. • T I INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATI ONAL FINAN CE CO RP ORATI ON OFFICE MEMORANDUM TO : Mr. Benj amin King­ DATE : June 10, 1965 Mr. Davi d G. Holland FROM : Mr. Jean Baneth t> SUBJECT: Mr. Bernard BelI r? Transformation (Core to Bore) I guess I have to get into thi s act : wi th apologies to E.E. Cummings and for has te : Misters y ouse needn't be so spry concernin ' que stions corey Each has his tastes and as for I , I t end to be a Tory Give me Chi cago 's s olid bless for youse i deas I ' ll match yez A single rate which f ixed is is worth a million catchs BRB : sb CoCo Mr. K. Bohr