When economists turned the spotlight on themselves at Davos

The just-concluded meeting of the World Economic Forum at Davos had proved to be a virtual non-event, overshadowed as it was by the crisis in the Islamic world. But economists basked in the limelight as they were a much-sought-after tribe. Their wide-ranging forecasts — the likelihood of the next economic crash, growth outlook for China, the possibility of a debt crisis, et al — were in demand, at a time when their track record has never been more pathetic — a fact that, ironically, came to the fore in the conference itself. Economics, we all know, is not an exact science and, when it comes to forecasts of this profession, taking them with a generous pinch of salt would be in order.  How credible are these forecasts? In his thought-provoking Three Sacred Cows of Economics, Alex Rubner spoke of an economist who had forecast the age of a river as one million and twenty-one years. Asked how he can be so accurate, the economist replied that, twenty one years ago, the age of the river was estimated at one million years. Nearer home, the Reserve Bank of India, when it came to projecting the inflation rate by the end of March 2011, it had simply shifted the sign post. In stead of the earlier 5.5%, it has now revised it to 7%. Why? Because between the second- and third-quarterreviews, the underlying price scenario had changed for the worse. When the forecasts cover a wide field and many uncertainties loom large, the perils of economic prediction are obvious. But, undeterred, at the World Economic Forum 2011, five top contemporary economists ventured to predict the future of economic forecasting.  But economists are not the ones to shy away from problems and this time around in Davos, they understood that they are the problem. At a closed-door dinner session, some of the best minds in the profession decided to turn the focus on themselves. Among the galaxy of attendees were such luminaries as Robert Shiller of Yale University, Joseph Stiglitz, the Nobel laureate, Simon Johnson of MIT Sloan School of Management , Raghuram Rajan, formerly director of research with the International Monetary Fund and now with the Chicago Booth School of Business, and professor Carmen Reinhart of Maryland University. And, for a change, this debate generated more light than heat. The underlying complexities were examined — the uncertainties, the political factors, natural disasters, outbreak of wars — and why forecasts based on such variables tended to go wrong. As one executive of an asset management company put it, an economic forecast is one input among many. It could be the starting point of an analysis or discussion. Raghuram Rajan referred to IMF’s forecast about Africa, which was belied when the economy of one country had collapsed following an outbreak of conflict, impacting the growth estimate of the entire continent.                                                   - DNA