In doing so, they still must be wary about the agenda of the varied populists they want to bring on board. The edifice of free market capitalism and globalisation is after all about much more than just global high finance — think free trade, foreign direct investment, movement of people across borders, to name a few. And the problem is that the populists would instinctively turn the entire system on its head, which would send the global economy into an even sharper tailspin.

So, what’s the compromise politicians must strike? First, there will have to be some redistribution given the severity of the downturn and the toll it’s taking on the poorest. This should, however, be done in the least distortionary way. Textbooks would suggest lump-sum cash transfers (as opposed to protectionism or nationalisation) which is precisely the policy road the US and UK governments are already taking. It is politically difficult to argue about the costs of redistributing to the poor when billions and trillion are being pumped into banks and financial institutions.

In this there is a lesson for India. For too long we have resorted to distortionary and ineffective ways to allegedly protect jobs and create livelihoods — protectionism, licence raj, big public sector, etc, which achieved little. Now’s the time for policymakers to push more effective direct transfer programmes to the poorest while stepping up reform in other areas (including disinvestment) to help finance this transfer spending without busting the deficit — a combination of good reformist economics on the crutches of some minor but effective populism.

... contd.