Tuesday, November 22, 2016

Larry Summers thinks costs of demonetisation outweigh benefits

Larry Summers, the well-known economist and former US Treasury secretary, thinks that India's demonetisation  drive is ill-judged. It penalises honest users of cash without being able to flush out black money in a meaningful way. And the costs imposed on the economy may outweigh the benefits. In the American and European context, he argues that the right way forward is to stop fresh issue of high denomination notes, not declaring existing high denomination notes illegal:
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 other store of value. So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.
Without new measures to combat corruption, we doubt that these currency reforms will have lasting benefits. Corruption will continue, albeit with slightly different arrangements.
Nothing in the Indian experience gives us pause in saying that no more large notes should 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 government fortifies this judgement.

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