A Conversation With: Chief Economic Adviser Raghuram G. Rajan

Rajan, whom I profiled in a recent story for The New York Times, took over as the chief economic adviser in India’s Finance Ministry last month. He has long been an adviser to Prime Minister Singh, and he is known in global economic policy circles for a paper he wrote on the growing risks in the financial system years before the collapse of Lehman Brothers, and for his work at the International Monetary Fund, where he was chief economist. Mr. Rajan is son of a former Indian diplomat and spent his early childhood abroad. He is a graduate of the Indian Institute of Technology, New Delhi; Indian Institute of Management, Ahmedabad; and Massachusetts Institute of Technology. We spoke about state of Indian economy; why he chose to return to the country now, after spending much of his professional career in the United States; and his fluency in Tamil, the language of his family, and Hindi. You have recently returned to India at a time when the government seems to have suddenly woken up to a sharply slowing economy. Where do things stand and where are things going? One of the things that foreign investors, and even domestic investors, tend to be mistaken about India is they get overly euphoric for a while and then they get overly pessimistic. You have to remember this a country of 1.2 billion and it has its own dynamic, it moves according to whatever evolves. But the underlying fundamentals over the medium term for a country like this are obvious to see. In terms of where will growth come from, it doesn’t need to come from a very fancy stuff like extraordinary innovation of one kind or another. Just getting people from agriculture into services and industry itself is growth. Second, the economic establishment in this country fully understands what needs to be done. Prime minister is one of few Ph.D. economists running a country. He has been clear on what needs to be done. And of course the new finance minister has been the old finance minister, and the older, older finance minister, and so he has a good sense [of what needs to be done]. It wasn’t for want of knowledge on what needed to be done that India slowed down. It was obviously because of lack of political, sort of, will. And I think that to some extent, when things were going swimmingly well, which they were till a year ago, you are growing at 8 to 9%, sometimes at 10, why would you think that you need to do more? You can focus on the other things that are more palatable to the population. Why did you want to come back to India now? A part of it was when the call comes, it’s very hard to say no. You feel that you have some duty towards the country. I feel I owe something to the country. Also, I think the chance of even having some small influence that helps, that is multiplied by 1.2 billion lives, it’s such immense opportunity and, of course, could be extremely rewarding if you can do even a small bit. You don’t have to have a grand vision of turning things around, I think that is sort of the recipe for frustration. In a speech you gave at the Indian School of Business in April, you said that Indian policy makers can often be hostile to new ideas and advice from outside experts. Do you feel that has changed or do you still feel that resistance? I think it varies by people. Some people are quite confident, I think willingness to listen is really a matter of confidence. You can’t be so superconfident in your abilities that you ignore what others say, and you can’t be so diffident in your abilities that you think that if they say something, you will be so taken in that you will do the wrong thing. When you are confident about your abilities and also fully aware of what you don’t know you are willing to listen to outside experts with the full sense that if you don’t find it worthwhile you will ignore it (…..)

http://india.blogs.nytimes.com/2012/10/06/a-conversation-with-chief-economic-adviser-raghuram-g-rajan/

A Turning Point for China

(…..) However, China appears to be facing a multiple crises, each exacerbating the other. China could have its turn at instigating global recession. The rest of the globe should expect turbulence and uncertainty. There is a political crisis arising from the fact that the leadership transition is clearly not going as smoothly as planned: The party appears riddled with acute factionalism, heads are falling, but opacity remains. Dramatic fall of powerful princeling Bo Xilai and his wife and their sordid scandal eroded party’s legitimacy. Unexplained disappearance of the presumed incumbent to the presidency before his sudden reappearance two weeks later raised serious questions about the secretive party’s mode of operation. The most profound crisis, one that lies at the heart of all the other crises, is the social crisis. In discussions with Chinese intellectuals in recent weeks, word that keeps emerging is “anger.” People are angry at inequality, injustice, corruption, pollution, flagrant abuse of privilege, exorbitant prices of real estate driven by speculation. Social unrest is expressed through increasing number of demonstrations over quality-of-life issues, for example recently in Dalian, over toxic chemical plant, and by a hyperactive blogosphere. China’s environmental crisis, with the world’s highest levels of pollution and permanent urban smog, fuels the social crisis. The economic crisis arises not so much because of a 2%, or more, fall in the growth rate, but in a surprisingly widespread pessimism in respect to the future. The state is too bullying, the financial system is byzantine, the education system fails to provide needed quality, and goals of innovation and higher value-added set out in the 12th Five Year Plan appear unattainable because of party’s refusal or incapacity to carry out reforms. The social and economic crises are rendered more acute by China’s looming demographic crisis as the population rapidly ages and the proportion remaining active in the labor market diminishes. In some respects perhaps most dangerous of all crises is the geopolitical. Needless to say, it’s exacerbated by the simultaneous economic, social and political crises. China is currently in a state of territorial conflict with at least three neighbors (Japan, Vietnam, Philippines) while relations with a number of major powers, notably India, Russia and US, are tense. These are further fueled by a increasingly strident rising nationalism, now being ramped up with anti-Japanese demonstrations and the display of military might. Though war still seems reasonably remote possibility, by no means can it be ruled out totally. World should take notice. A more optimistic scenario is that social, political and geopolitical turbulence will not degenerate into chaos, that somehow transitions are managed, even if anxious uncertainty lingers for the next few years. The China economic boom will cease; the developing countries should anticipate a possibly steep decline in demand for commodities. China will likely become more protectionist, reflecting paralytic state of the global trade agenda and retaliation for likely protectionist measures from others, notably the US. But trade war may be averted. Overall, the locomotive will probably still be there, slower and prone to unscheduled swerves and stops. Once this difficult transition period is completed, China may resume its “peaceful global rise”. There are far more pessimistic scenarios, including violent social unrest, economic collapse, extreme environmental degradation, political chaos, military confrontations. The outcome depends on the answers to 2 fundamental questions: Is the leadership capable of implementing needed radical reforms? How will China’s relations with its neighbors and with rest of the world affect its internal development and global economic and geopolitical environment? Answers to these questions should influence the fate of the world.

Link: http://yaleglobal.yale.edu/content/turning-point-china