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Why Demonetisation Could Have Completely Unintended, Unexpected Consequences

30/11/2016 12:50 PM IST | Updated 01/12/2016 8:37 AM IST
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Amit Dave / Reuters

Prime Minister Narendra Modi has explained demonetisation to his people in simple terms. He has made a strong economic, political and moral argument to justify his decision, and the consequent hardships it has naturally created. The impact of the move on hoarded black money, corruption and fake currency has been accepted as a natural positive outcome by even his strongest detractors.

What Modi, and many others in India, seem (hopefully not wilfully) ignorant of is the great academic advances made in recent times to understand the impact of major socio-economic decisions on large and complex societies like India.

Very often, the initial assumptions that politicians make about how the "good" and the "bad" people affected by their decisions will behave turn out to be completely wrong.

Many politicians before Modi, most notable amongst them President Ronald Reagan of the US, have applied a neat solution to what they described as a completely rational population segregated into the good guys and the bad guys. The electorate was reassured that the good guys would benefit from their policy and the bad guys would suffer. Hence the War on Communism, the War on Drugs, and the War on Terror. Modi has his War on Black Money/Corruption/Organised Crime and Terror.

The reality though is very different from that. The complex systems approach says that actions like demonetisation can have completely unintended, unpredictable and even unimaginable consequences.

The reason given by the complex system theorists is that social systems have interdependencies that are hard to identify, let alone model and predict. Moreover, very often the initial assumptions that politicians make about how the "good" and the "bad" people affected by their decisions will behave turn out to be completely wrong.

Therefore, it is entirely possible that those expected to suffer through demonetisation will adapt and metamorphose, find new ways to hoard wealth and avoid taxation, develop new forms of corruption and produce new fake currency. Clearly some will die out, but many will self-organise in ways that cannot be predicted. Small traders who deal in cash may switch to a dodgy digital economy on the internet or move small amounts of money off-shore to monetary instruments that governments cannot control. Interdependencies may develop between local and external agents that are not a part of the system right now but appear as an unintended consequence of the demonetisation decision. For instance, ordinary corrupt civil servants could start using the services of the international finance mafia to receive and hoard their daily bribes.

In a similar vein the good people expected to benefit from or at the least not suffer from demonetisation could find that it has a profound negative effect on their lives. Large sections of the informal economy could slow down or collapse, reduction in spending on luxury goods and services could create unemployment for those working in these sectors. The initiation of millions of the poor and illiterate into formal banking could create opportunities for new forms of financial fraud and small-time scams even in remote, rural parts of the country.

India is a vast country, a global economic giant. Complex systems theory recognises the inability to model its reality. It teaches humility and not braggadocious conviction...

The point is that none of these circumstances may play out, or all of them may come true, or the country may be left with entirely different sets of problems and opportunities. The possibilities are endless. Complex systems theorists only emphasise that politicians, the bureaucratic machinery and the state paraphernalia in general are not equipped to first identify and then deal with the second and third order effects of their decisions, and the multiple cause and effect chains that they create. In many cases the true effect of a policy will be known decades later, or even after a generation.

Complex systems theory is increasingly entering mainstream discourse in the West. The 9/11 terror attack, the global economic crash, rise of ISIS, Russian intervention in Syria, Brexit and, most recently, the victory of Donald Trump have all come as a surprise to experts, long-time observers and journalists. These events could not be predicted by the most sophisticated models and algorithms run by universities, governments and powerful organisations like NATO. The programmes used millions of data points, combined human and electronic intelligence, trolled through vast amounts of historical data and represented the cutting edge of human thought. Yet they could not account for all the complexities of individual and social behaviour.

Interestingly, after these events had taken place a whole host of "experts" managed to explain their inevitability and make all the neat causal connections that led up to these outcomes. Surely, even a child can see now that the absence of security at airports, the practice of using suicide bombers and aeroplanes that could be act as missiles would lead to 9/11. Similar "explanations" will be given about demonetisation and its fallout after a while.

India is a vast country that is now a global economic giant. Complex systems theory recognises the inability to model its reality. It teaches humility and not braggadocious conviction in intended consequences of political decisions such as demonetisation. Apt perhaps for a civilisation that gave us the philosophy of syadvad or "maybe-ness" over two millennia ago.

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