He rejected the magic of the marketplace

Manmohan Singh

I was greatly saddened to hear of Ajit Singh's passing away a few months ago. I feel honoured to be invited to participate in this function in his memory, organised by  Queen's College. I regret that I am not able to attend, and I thank Lord Eatwell for agreeing to read out my message. 

I first got to know Ajit Singh in 1958, when he was my student in Panjab University Chandigarh. It was clear to me then that he was an exceptionally talented person, and he went on to prove that many times over in his distinguished and highly productive academic career. 

I followed Ajit's career from a distance, first when he was at Berkeley and later at Cambridge, and we also retained personal contact. He visited India almost every year and he would unfailingly look me up during these visits. We became good friends and I always looked forward to hearing from him about developments in the world of academia, and in particular the latest thinking about development policy. I also looked for suggestions about economic policy where we could learn from experience elsewhere.

Ajit was both a committed liberal and also a man of the Left. As a Punjabi, he  inherited a great tradition of rugged individualism, challenging authority whenever it was unjust, and an instinctive approval of revolutionary steps against injustice. Some loosely called him a “Marxist,” though I am not aware that he ever actually described himself as such. However, it is also not an appellation he would have rejected. Like all liberals he believed in constant intellectual introspection and questioning received wisdom, and in  that process I think he saw much more in Marxist thinking, at least for developing countries,  than many of his neo classically oriented economist colleagues would ever concede. He also consciously rejected the unthinking belief in the “magic of the market place” which had become common currency in the 1980s.  

 Ajit's academic writings on the functioning of the financial system in industrialised countries in some areas broke important new ground.  He successfully challenged the view, usually associated with Robin Marris, that financial markets by creating threats of takeover for poor performing corporations  would actually promote efficiency. Ajit pointed out that takeovers were not driven by a desire to take over poor performing firms in order to improve their profitability, but simply by the desire of managers to expand their market size. This was an early example highlighting the role of principal-agent conflicts, in which the interests of managers were not aligned with those of shareholders. We now know that these were precisely the sort of drivers  which led to the much of the wrongdoing which produced the financial crisis of 2008. 

Surprisingly, the functioning of financial markets was not much discussed in the early debates on development policy. There was much focus on real macro phenomena such as the rate of savings but relatively little on the financial system that would best allocate these savings to net borrowers. This changed sometime in the 1980s, and especially the 1990s, when the World bank and the IMF made financial sector reform a key part of their analysis and recommendations. Ajit was an early critic of the kind of thinking which lay behind the Washington Consensus and he has been proved right in the end.   

He was not by any means opposed to markets or insensitive to their potential to produce greater efficiency. He was certainly no believer in the superior wisdom of bureaucrats taking decisions that should be left to entrepreneurs. However, he was among the early critics who pointed out that financial markets were different from markets in the real economy. He was also among the early economists who pointed out that the success stories of development were not stories of countries that assiduously followed the ideas enshrined in the Washington consensus. I recall several discussions with Ajit when I tried to get a reaction from him on what he thought about the reforms we were pushing in India. He readily saw the logic of giving  more freedom to entrepreneurs, and subjecting them to competition in the market, and also removing the dead hand of bureaucracy from micro-economic decisions which should be taken by businessmen and indeed needed to be taken by businessmen to make them responsible for the end result. But I could see that he had doubts  about our efforts to give a larger role to the stock market as a mechanism for efficient resource allocation. He was also deeply concerned that we should not make the mistake of opening up the capital account too quickly.    I constantly reassured him that we were indeed moving gradually and were particularly cautious on the opening up to international capital flows.  

Ajit's academic output was so prodigious that I could not possibly have followed it  carefully, but in 1998 he contributed an essay on “Liberalisation, the Stock Market, and the Market for Corporate Control - A Bridge too far for the Indian economy?” to a festschrift in my honour edited by my former teacher Ian Little and Isher Ahluwalia. I found Ajit's essay particularly valuable because it summarised a great deal of his earlier work in a form that was easy for a practitioner to read and he used it to draw policy conclusions for India. He pointed out that unlike the case in other countries, where corporations relied mainly on internally generated resources, in India they did seem to have used the stock market to access substantial resources, including from abroad. However, he asserted that while this may have helped the corporations, it was not clear that the economy benefited from the growth of stock market activity, at least in the 1980s which was the period for which data was available. 

He said there was no evidence of any increase in the savings rate in the economy and he doubted whether there was any improvement in efficiency. He went on to  specifically reject the notion that stock markets, by creating a market for corporate control, would increase efficiency. In fact, he argued that it was much more important for India to strengthen competition in the product markets and also to make exit easier. The last was a recommendation which few of his many friends in the Left would be willing to endorse.  

It worried me at the time that Ajit remained less than enthusiastic about our approach to financial sector reform. The festschrift, which was first published in 1998 was reprinted by OUP  14 years later as an Oxford India Perennial, and the editors invited each author to add a short postscript. Ajit's postscript was a terrific example of a scholar retaining an open mind and being willing to modify earlier positions. Reviewing the Indian experience over a longer period, than when he wrote the original piece, I was delighted to find that Ajit endorsed what he described as our decision to integrate strategically with the world economy rather than simply choosing close integration. 

He acknowledged that India had become, and I quote, “one of the fastest growing economies in the world during the last two decades. Its savings rate has increased from 25 per cent to 35 per cent during these twenty years. Its current growth rate of 7 per cent to 8 per cent per annum is by international standards exceptionally good in the wake of widespread and relatively deep slowdown of growth in rich countries”. He went on to add that in his original article he had worried about the ascendancy of finance over industrial capital if the market for corporate control was allowed to develop: in the postscript he acknowledged this had not happened. I was very pleased to receive a better than passing grade from my former student and long-time friend. 

No words about Ajit can be complete without reference to his extraordinary personal strength in the face of adversity. We were all distressed when we heard in 1982  that he was diagnosed with Parkinson's disease. But we were also inspired by the way he  met that challenge, intensifying his work and also his interactions with friends and academic colleagues. He travelled around the world, participating actively in professional conferences fighting against the ill-effects of the disease which imposed an ever-increasing burden. His conduct in these difficult circumstances was truly an inspiration to all.  I offer my sincere condolences to his wife Anne Zammit, his sisters, nephews and nieces, and pray that God gives them the strength to bear their loss.  

The writer, a former Prime Minister of India, taught Ajit Singh at Panjab University, Chandigarh