ON VARIOUS TRILEMMAS
A 2-Pager by Ajit Chaudhuri
Most of us are familiar with the concept of a ‘trilemma’. I for one, in college, wanted to do well in studies, cavort with beautiful women and play football. I learned soon enough that, at best, I had to pick two out of three and by doing so I would forego the third (and my second division is a tribute to my choices). The gastronomic trilemma (good food, served quickly, easy on the pocket, choose any two) is another that we all commonly face. The Government of Delhi has faced an engineering trilemma (to specification, on time, within budget, choose any two) vis-à-vis the Commonwealth Games and is well on course to make an international shame of a billion Indians.
Which brings me to the policy trilemma that is so much in the news these days thanks to the coverage of the economic downturn. It goes like this – a nation’s economic policy makers would like to achieve three objectives.
The first is to have an independent monetary policy, which translates to the central bank being able to use tools such as interest rates and money supply to stabilise the nation’s economy (and thereby deal with inflation, bubbles, depressions, overheating, and whatnot).
The second is to maintain stability in the nation’s currency exchange rate, thereby making it easier for households and business to engage with the world economy and plan for the future.
The third is to have an open capital market that allows for international flows of money, thereby enabling citizens to diversify their holdings by investing abroad and encouraging foreign investors to bring in resources and expertise.
And herein lies the trilemma – policy makers can at best choose two of the three objectives – by doing so, they lose control of the third. If they decide on an independent monetary policy and a fixed exchange rate, like China, they have to control the flow of capital in and out of the country. If they decide on a stable exchange rate and an open capital market, they cannot use monetary policy to address economic disruptions – the example of countries within the European Union, and Argentina in 1991, come to mind. And if they decide on an independent monetary policy and free flow of capital, such as the US and the UK, the currency has to float.
This helps to explain certain things. An economic downturn combined with high public debt has different implications for the UK, who can inflate away their debt and also enable a cheaper currency to stir exports, compared with those for the PIGS (i.e. Portugal, Italy, Greece and Spain, for whom neither policy option is available and cutting public expenditure and begging for handouts from Germany are the only ways ahead). China is reluctant to let its currency float (despite considerable pressure from the US) because of its implications on monetary policy and controlled capital flows as well as on the more obvious exports competitiveness of its economy.
There are two criticisms to the policy trilemma . The first relates to the validity of the objectives. There are arguments in favour of including employment creation and inequality reduction as explicit policy objectives for central banks. There are also arguments against the free flow of capital as an objective, and examples (Chile, Malaysia) wherein capital controls are seen to have contributed to greater policy autonomy. The second relates to its ‘all or nothing’ approach, with arguments in favour of adopting intermediate options in the three policy domains, such as capital account management through selective controls and managed currency exchange rates.
Which brings me to the final trilemma of this paper – the donor trilemma. In this era of extra-ordinary donor power and domination within the Indian non-governmental development sector, I find that most of the better donors have three (not always explicit) objectives for their NGO funding policy.
• To work with and support NGOs that are excellent – that lead the way, that develop models for others to replicate, that have a single-minded focus on working with the poorest, that influence policy, etc.
• To work with NGOs that are honest – that put their (the NGOs) intended beneficiaries at the centre of their work, that reflect on efficacy and the change they actually bring about, that develop rigorous and transparent systems and procedures, that are accountable to their stakeholders, etc.
• To get their NGO partners to do what they (the donors) want and/or think is right – on what is done, how, where, who for, and why.
The donor trilemma is that any NGO that meets two of the objectives is thereby unable to meet the third. Excellent and honest NGOs are genetically incapable of being driven primarily by donor priorities, and there is only so much that they will do to meet donor demands. Honest butt-kissers will at best be mediocre in their work. And excellent NGOs that also kowtow around to their donors will have difficulty in being true to themselves.
Development funding agencies would do well to understand the implications of the donor trilemma. One, no NGO partner can meet all three objectives. Two, the choice of which objective you are willing to let go should be critical to your choice of NGO partners. And three, any NGO that adheres to your every command is compromising on either excellence or on honesty.