1. Demonetisation resulted in chaos and loss of trust in govt: Lawrence Summers

Demonetisation resulted in chaos and loss of trust in govt: Lawrence Summers

Like everyone else, we were surprised by the dramatic action taken by Indian Prime Minister Narendra Modi to demonetise the existing Rs 500 and Rs 1,000 currency notes.

By: | Washington | Published: November 22, 2016 4:19 AM
In his blog written jointly with Natasha Sarin, Summers said most free societies would rather let several criminals go free than convict an innocent man. (Reuters) In his blog written jointly with Natasha Sarin, Summers said most free societies would rather let several criminals go free than convict an innocent man. (Reuters)

Describing the Indian government’s demonetisation steps as the “most sweeping changes in currency policy in the world in decades”, a top global economist today said without new measures, this is “unlikely to have lasting benefits” and that it has resulted in “chaos and loss of trust in the government”.

“Like everyone else, we were surprised by the dramatic action taken by Indian Prime Minister Narendra Modi to demonetise the existing Rs 500 and Rs 1,000 currency notes.

“This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades,” Lawrence ‘Larry’ Summers, a former chief economist of the World Bank and ex-economic advisor to the US President, said in a blog.

In his blog written jointly with Natasha Sarin, Summers said most free societies would rather let several criminals go free than convict an innocent man.

“In the same way, for the government to expropriate from even a few innocent victims who, for one reason or another, do not manage to convert their money, is highly problematic,” the blog said.

Moreover, the definition of what is illegal or corrupt is open to debate given the long-standing commercial practices in India, Summers added.

He and Sarin said there are also questions of equity and efficacy.

“We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead, have long since converted it into foreign exchange, gold, bitcoin or some other store of value.

“So it is petty fortunes, not the hugest and most problematic ones, that are being targeted,” Summers wrote.

“Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits.

“Corruption will continue albeit with slightly different arrangements,” said Summers, who in the past had advocated a similar measure for USD 100 and Euro 500 currencies.

“On balance, nothing in the Indian experience gives us pause in recommending that no more large notes be created in the United States, Europe and around the world.

“We were not enthusiastic previously about the idea of withdrawing existing notes from circulation because we judged the costs to exceed the benefits.

“The ongoing chaos in India and the resulting loss of trust in the government fortify us in this judgement,” Summers wrote.

  1. K
    Kumar
    Nov 22, 2016 at 12:27 pm
    Summers has to see the winter to realize the facts
    Reply
    1. Samir Shah
      Nov 22, 2016 at 6:02 am
      Absolutely ... its the best thing to happen to India. Please do your homework.
      Reply
      1. P
        Procopius
        Nov 23, 2016 at 1:58 am
        I don't think very many people understand what the problem here is. Try to imagine if the U.S. government was to declare all existing $10 and $20 bills illegal. All cash transactions would have to be done only with $100 and the existing stock of $5 and $1 bills. At the same time they replace all $100 bills with a new issue that is a different size that will not fit in existing ATM machines, so if you want $100 bills you have to go into the bank and stand in line. How many people can take a couple hours off from work to go to the bank? What happens when all the customers at the 7-11 have $100 bills and buy some stuff that adds up the $7.50? The Indian government decided to print the R2000 notes first, because they could print a larger value in a shorter time. Meanwhile, they don't have enough smaller denomination bills to make change. This is going to take years to work out, and the hardships are going to get worse for months. I was astonished to see that Paul Romer thinks drug cartels keep huge amounts of wealth in the form of $100 bills. Well, he's studied the question and I haven't, but why should they when RBS and HSBC and UBS will gladly launder their money for them?
        Reply
        1. R
          Ramendra ghosh
          Nov 22, 2016 at 3:35 am
          RUBBISH ! The only word that comes to mind having read that article..dian
          Reply

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