Waterfall vs. Agile: A Shift in Economic Policy Perspectives

Each year, India’s Ministry of Finance publishes an overview of the economy.

Any serious student of India’s economy will want to spend time with this report, but it also helps dabblers like me keep up to speed. The Economic Survey 2021-22 is now available. Here, I’ll limit myself to a broad theme that runs the report about how to think about economic policy.

An event like a pandemic is a particular challenge for countries, like India, where the government has long relied on drawing up a series of five-year plans. Perhaps fortunately, India completed its final five-year plan in 2017 and has been moving to another view of policy-making, which is described in the preface of this Economic Survey:

The default mode of policy-making in India and most of the world has traditionally been to rely on a predetermined “Waterfall” approach – an upfront analysis of the issue, detailed planning and finally meticulous implementation. This is the framework that underpins five-year plans and rigid urban master-plans. The problem is that the real world is a complex and unpredictable place buffeted by all kinds of random shocks and unintended consequences. The response of traditional economics was to create ever more detailed plans/regulations, and elaborate forecasting models despite more than adequate evidence that this did not improve outcomes. In his Nobel Prize acceptance speech, economist Friedrich Hayek dubbed this “The Pretence of Knowledge”.

This Economic Survey sets out to explain the alternative “Agile” approach that informed India’s economic response to the Covid-19 shock. This framework is based on feed-back loops, real-time monitoring of actual outcomes, flexible responses, safety-net buffers and so on. Planning matters in this framework but mostly for scenario analysis, identifying vulnerable sections, and understanding policy options rather than as a deterministic prediction of the flow of events. …

Some form of feedback loop based policy-making was arguably always possible, but the Agile framework is particularly relevant today because of the explosion of real-time data that allows for constant monitoring. Such information includes GST [goods and services tax] collections, digital payments, satellite photographs, electricity production, cargo movements, internal/external trade, infrastructure roll-out, delivery of various schemes, mobility indicators, to name just a few. Some of them are available from public platforms but many innovative forms of data are now being generated by the private sector

I’m not sure that the “Waterfall” vs. the “Agile” approach is the most appealing or intuitive nomenclature for this distinction! Alternative suggestions are welcome. But I do think that the move to a greater emphasis on real-time data is an important shift in economics. For a readable example of what is becoming possible in a US context, I recommend “Tracking the Pandemic in Real Time: Administrative Micro Data in Business Cycles Enters the Spotlight,” by Joseph Vavra, in the Summer 2021 Journal of Economic Perspectives.