Raghuram Rajan: ‘Society has to find a new equilibrium’

This is part of a series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists about recovery from the economic impact of coronavirus

Economist Raghuram Rajan has a word of advice for all those who worry about the state of the world at the moment: “Trust people.”

The former India central banker, now a professor at the University of Chicago Booth School, was one of the very few people who warned beforehand of the 2008 financial crisis.

These days, he says, the world is undergoing not a battle between markets and the state, but rather a return to a tri-polar system in which both share power with local communities.

He sees some supporters of Donald Trump, Indian nationalists, and pro-Brexit Britons as struggling for the same thing — a sense of control in a world in which decisions usually flow from the top down, taken by powerful central governments or too-big-to-fail companies.

By empowering local organisations and giving people the ability to make more choices individually, he believes that we can help mitigate populism, and create more vibrant and sustainable communities outside the usual national centres of power.

His recent book The Third Pillar discusses the need to strengthen the third pillar of community and civic society in order to find a way through the current economic and technological disruption.

“When any of the three pillars weakens or strengthens significantly, typically as a result of technological progress or terrible economic adversity, the balance is upset, and society has to find a new equilibrium,” he writes. Today, that involves finding ways to decentralise control, even as politics and the trend towards a digital superstar economy that makes power more concentrated.

In this interview with the FT’s global business columnist Rana Foroohar, he shares personal stories about how he came to his heterodox ideas, takes on some sacred cows (such as social security), and lays out the tools communities need to empower themselves and find a way to grow — on their own terms — in a chaotic time.

Rana Foroohar: I’ve just finished The Third Pillar. I’m curious to know how you came to the idea of inclusive localism at a personal level?

Raghuram Rajan: It actually stems from my observation of the Indian village. There was a big debate in India around the time of independence about whether India should be centred on the village, and the point of decentralisation of self-governance. Gandhi was very much about the village as the centre of activity.

There were some who thought the village is the den of gossip, hidebound tradition and casteism. Ambedkar, who wrote the Indian constitution, was totally against the village. He thought they would perpetuate the old traditions and hold people like him back.

The person who ultimately won was Nehru. He was Gandhi’s protégé, but they agreed to disagree on this issue. Nehru was about the need to modernise, bring people into cities and centralised government.

Just after independence, because India had been partitioned, there was a lot of support for centralisation. Only recently did we start moving to decentralised power, to the village panchayat [council]. But, [we] decentralised without providing them with any funding.

Look at the state of Indian cities. Compare them with Chinese cities . . . [where] local authorities are responsible and go beyond their powers to subvert national rules to enable local entrepreneurs to do well.

They’re very much evaluated on how much growth they bring locally and they’re empowered to do that. In India the municipalities don’t have many powers. So Mumbai is a very rich city, pays a huge amount of tax but . . . look at local infrastructure — it’s totally breaking down.

RF: This topic is so relevant right now in the US, in terms of how different states are handling Covid-19, managing education, and so on. Describe for me the problems of globalisation of the past 30 or 40 years as you see them.

RR: If you think about the way globalisation has been described in the 20th century, it was really portrayed as a fight between markets and the state. But in fact, if you look at what has happened, in terms of raw data, you see the market has grown along with the state. They feed on each other.

To some extent, that is understandable because as markets integrate, people within those markets want more common governance. They want to operate across the entire market. That gives them scale, efficiency and they want to make sure the rules are pretty similar.

The history of the 20th century, regardless of the system you look at, is the growth of both markets and the state together. And to some extent, the superstate, because we’re beyond national capitals determining everything. But when the power is taken out of the nation-state, the problem is this leaves the person at the bottom without much power.

RF: This is a historical cycle that ebbs and flows . . . 

RR: I would argue that the most recent process of deglobalisation started in the past 10 years . . . probably the global financial crisis was the first marker. Now, each time we go further, and are more integrated, there is a pushback. The pushback stems from the imbalances between the markets, state and the “third pillar”. You have an attempt [on the part of local populations] to take back control, à la Brexit.

A common factor in many such attempts is a strong push for greater equality. In India, it’s the lower castes not being willing to accept the second-class status. And you can see something similar happening with minorities in the US, whether it’s African-Americans or Hispanics, demanding a greater position at the table.

Then you have the reaction from the ruling majority, which says maybe we’re going too fast . . . we’re not ready for this.

RF: You’re arguing for a certain amount of devolution of power to local communities, which is a conservative idea. But you’re also addressing things that liberals care about, too (such as inequality, poverty, and race). There’s an interesting overlap happening.

RR: If you ask . . . why do some countries grow and others don’t? There is no magic recipe. The World Bank has tried for decades to offer one. But it doesn’t work that way. We write off some communities as historically poor or disadvantaged. But there comes a time, there comes a place, there comes a set of people who say, “we need to make a change”. And invariably it is internal. It’s not an external thing.

I have, for example, a conservative view on aid because that’s what the data suggest. If you keep pushing aid into countries it has absolutely no effect on growth. Don’t get me wrong . . . if there’s famine, by all means you should help people by sending money but is it a way for them to develop? Typically not. [Communities] will find their way, and that process of finding their way itself strengthens their democratic spirit, sense of control and empowerment. Will every community find its way up? Absolutely not. But many will and the ones that will may be better off for it.

RF: If you were writing up the economic plan for the next US president, what would you include in your road map for rebuilding?

RR: One . . . silver lining [of Covid-19] is it has told us we can work at a distance. That’s extremely important for minimising the importance of place. The tendency before this was to congregate in the cities. Now workers have the possibility of living 200, 300 miles from the city, and seeding communities there. You can nudge this process a little by maybe helping people who have strong incomes, strong degrees to stay in not-so-strong places with some kind of income tax benefit. Now you’ll have to monitor this carefully so that we don’t all end up paying $750 in taxes. 

RF: These periods when we shift from globalisation and growth to deglobalisation and perhaps wealth distribution . . . sometimes get rocky and we have wars and there’s protectionism. At the same time, you’ve got the demographic divide that’s coming not just in the US but in a number of countries where millennials are soon going to be the biggest working block, the biggest voting bloc.

How will these coming shifts change our way of thinking about markets and how to divide the pie between younger people, with all this student debt, and older boomers holding much of the wealth?

RR: This gets to the divide that both the market and government have created within communities, right? There is some evidence that before social security the elderly were certainly dependent on the rest of the community for support, and were thus predisposed to things such as [funding public] schooling. There was a natural flow of funds within the community.

Once the elderly are protected by social security, have their own separate means, and their own wealth, at that point they’re not dependent on their kids or their grandkids and perhaps are less sympathetic towards the needs of young parents.

We all know communities where this is not true. But I think the breaking of family ties by the creation of market mechanisms, or government mechanisms, is an inexorable process, and has benefits, but we also need to find ways to preserve the spirit of the community.

RF: You’re sitting at the University of Chicago, former home of Milton Friedman, certainly a centre of neoliberal thought. Does inclusive localism require us to turn away from neoliberalism? It seems there is inherent conflict when capital can move more freely than goods or most people.

RR: Chicago is a big tent. We don’t all go and pray every morning at the altar of Milton Friedman. What I think is central to Chicago is competition: economic competition and political competition. Societies without competition tend to stagnate and eventually doom themselves.

But an issue that I think Chicago has not spent as much time on, is, how does the individual grow into a state where they can actually compete? We take as given . . . [that] at age 21 you are suddenly able to compete. Wonderful. But how did you start? What did you learn as you got to age 21? Babies don’t start by competing. You nurture them till they’re able to compete.

And that is missing in the narrative. What is the responsibility of different players here to help you reach a state where you can be a full-fledged participant?

That’s, to some extent, why there needs to be the focus on community because that early childhood, what’s most important, comes from within the community.

RF: Let’s bring geopolitics into this. Who knows what’s going to happen after November, but let’s assume some level of decoupling between the US and China continues. Europe also seems to be developing a somewhat separate value set, different ideas about digital governance and privacy. Does this worry you? Do you see it as an opportunity?

RR: Variety is good. In fact, with computer technology we have the ability to handle variety at relatively low cost. A lot of rules can be programmed into machines to deal with them. If you have different taxes across jurisdictions, well, I don’t need to know every tax. I just need to look it up or it is done almost automatically.

I think we have the opportunity to have variety and experimentation that will lead us in directions that we didn’t think of before and some will turn out to be good.

What we’ve tried with globalisation is to arrest that by saying, “uniformity, homogeneity”. We all need the same rules, etc. That level of harmonisation is not needed and in fact it detracts from people feeling they have control.

I think what we can do is isolate the areas where there is conflict, intellectual property and technology, and isolate the areas where there’s broad agreement. If you want to sell me vacuum cleaners, I want to buy them . . . Or I want to sell you commodities, great. We can allow that to flourish, giving us a basis for discussion and commonality, while separating out the areas where there is a lot of worry, and try and work out over time what might be reasonable answers to those issues.

We need to allow for maximum flexibility for each country to decide, but with some minimum rules of the game. Now, that requires a lot of thinking.

RF: I do struggle to see in the kind of one-world, two-systems paradigm how you can have a country such as China that has chosen to have companies in service to the country, and regions such as the US and Europe where its more the opposite. That seems to lead to situations like, for example, Qualcomm, where you have an American innovator battling an American tech giant (Apple, over patents) in three continents while being penalised for doing business in China (by both countries). How do situations like that work out?

RR: This is where you need a little bit of faith that competition in the long run will work out. Remember when we thought the Japanese system would destroy everybody else? This was in the 1990s.

RF: I remember! My father is a Turkish engineer who ran a Japanese manufacturing firm in the rural Midwest. He made me come and take Japanese lessons with him.

RR: Right. Remember when we were all learning Japanese? Then we all started learning Chinese. Some people call this “peak China time”. China is an ageing society and will need to sell a lot outside its borders as it ages. Domestic demand is not going to be enough, especially as it ages. That’s something we’ve seen from Japan.

Think about services where data are important, and how much trust there is in a one-party system, with the ability to impose on the private sector and its management of the data? How willing are you going to be for your private data to be held in China and possibly exposed to the tender mercies of the Communist party? My sense is that this system will reach its limits.

One of the reasons Alipay is finding it harder to expand across the world is, in some sense, it has to stay on the good side of the government within China.

What is incredible to me is that the US government now sometimes asserts itself in the same way as the Chinese government in an attempt to level the playing field, not realising the greatest strength of US companies may be their ability to tell the government to buzz off.

RF: This goes to your point about markets and the state moving in tandem because you have the biggest companies, claiming to be “national champions”, pushing that tactic in some cases.

RR: Exactly, because they have an advantage in making the rules along with the government. Look at GDPR in Europe [the data privacy regulation], one of the concerns is that some of the compliance requirements are really onerous, which favours the big companies rather than small companies.

Post financial crisis regulations, again, are more likely to favour the large banks who were at the table writing the rules along with the regulators.

A lot of the economic and political changes coming will tend towards more centralisation. We need to find [a way] in which we can also decentralise.

This is the edited transcript of an interview between economist Raghuram Rajan and the FT’s global business columnist Rana Foroohar

Source: Economy - ft.com