Raghuram Rajan and Rajanomics- Always one step ahead.

Unlike the typical run-of-the-mill bureaucrats, Raghuram Rajan is an interesting personality. I have been closely following his interviews, sound bites and write-ups.

Here is some compilation of some of the Rajan’s background and economic views.

Influence of the Chicago School

Rajan started his career as a professional economist in 1991 at Chicago University’s Booth School of Business. In the world of economics, the Chicago school is usually associated with the legacy of Milton Friedman, who advocated a minimalist state and rejected the Keynesian policies that were dominant across the globe till the 1970s.

As anyone from the Chicago Booth School, Rajan represents the same tradition, with a little tweak in his views, which is best expressed in his book Saving Capitalism from the Capitalists.
This book is an impassioned and erudite defence of the free markets enterprise system. Rajan argued that freer markets—perhaps the most beneficial economic institution known to humankind—but along with that Rajan also focuses on the critical roles of bureaucrats and politicians as the visible hands needed to guide the invisible hand of the market for yielding economic efficiency from a long-term perspective.

At a length, he contends that capitalism’s worst enemies are the capitalists themselves. That is, the industrial and financial incumbents in a national economy, who conspire to choke the sorely needed finance to those innovators and entrepreneurs who seem to threaten the existing economic order. These status-quo backers present the mortal danger to capitalism. If you are a free market enthusiast, you need to read this.

Rajan’s prediction of the 2008 crisis.

The book was a huge success and soon after that, Rajan was appointed as the chief economist of the International Monetary Fund (IMF), he became the youngest person ever to be in that chair. And not just that, as an IMF Chief economist Rajan did depart from the mainstream consensus and the conventional wisdom of the time, and don’t stick to the old orthodoxy of the IMF. It was then he gave the most famous speech of his predicting the impending crisis. To quote,

the financial risks that are being created by the system are indeed greater,

He said,

They may also create a greater  probability of a catastrophic meltdown.”

At that time, his arguments were dismissed by notable economists, but history vindicated him. When the crisis really came to the fore with the failing of several big banks, Rajan was among the few economists whose reputation grew manifolds rather than diminished by the great crash of 2008.

Soon after in 2010, he penned his second famous book, Fault Line: How Hidden Fractures Still Threaten the World Economy – which is one of the masterpieces, and a must-read book. (Follow the link)

In Fault Lines,  he dissected the causes of the 2007-08 financial crisis. He elucidated the need to continually address and balance a number of hidden fractures inherent in an economy’s financial sector through the enforcement of effective countervailing measures by the central bank and other institutions. He explained how the process of working with the US government to push for financial deregulation made the Federal Reserve equally responsible for the crisis. No wonder, he was to go ahead and become the Reserve Bank Governor of India.

Not just this instance, Rajan held several unpopular views which became the subject matter for several controversies.

Rajan on Aid – He saw, what world didn’t yet.

In a 2007 National Bureau of Economic Research paper, co-authored India’s current chief economic adviser Arvind Subramanian, Rajan argued that non-industrial countries which opened themselves to foreign capital outflow did not necessarily grow faster than those which did not. In fact, the reverse was true—i.e., countries which relied less on foreign capital grew faster, they said.
The authors attributed this to inadequately developed financial markets in the non-industrial economies and overvaluation of exchange rates due to capital inflows. Having said this, the paper does not call for putting restrictions on the movement of capital and finance across countries. Instead, it calls for policies which can help developing countries mitigate these effects.
The reason why the paper became so controversial was largely due to the timing of its publication. The research paper was on financial aid and how aid clearly doesn’t work, in terms of economic growth, they argued Aid is useful in a calamity and so on but somehow for all the money that is poured in as aid you really don’t see strong evidence that it helps economic growth.
The paper came out one week before the Gleneagles summit when all the rich countries in the country are getting together and being pushed to ramp up aid.
Such conclusions are a hallmark of most of Rajan’s writings and speeches, in which he exposes faults with the current capitalist system, but rather than calling for restrictions, argues for developing robust institutional structures to facilitate greater liberalization.

Rajan fight on Crony Capitalism in India

In 2008, when the world was excited about India’s prospects in the world economy and how India managed to scrape through the crisis with just minor scratches, Rajan in one of the early speeches in India, warned about the fault lines in the Indian economy and about the crony capitalism in the country. He famously said,

I have a list, it has the number of billionaires per trillion dollars of GDP for the major countries of the world. Guess which country tops the list? It is Russia, with 87 billionaires for the $1.3 trillion of GDP it generates. ‘Of course!’ you will say—these are the oligarchs who stole the country’s mineral resources, who participated in the Loan for Votes scheme, etc. But guess which country comes second? It is India with 55 billionaires for the $1.1 trillion it generates.”

He added,

India’s number of billionaires is extraordinary compared with emerging market peers such as Brazil, or with developed market peers such as Germany. Moreover, the fact that most billionaires gained wealth because of their access to natural resources such as land or government contracts raised disturbing questions about the nature of India’s growth process.

The Indian banking system is mainly in public hands and is used to finance crony capitalism, which has held the country back for too many years. So far, Indian banks have lived in the illusion that all debtors would pay sooner or later, even when borrowers often borrowed from one bank to pay another. But Rajan started attacking this thought, he was aggressively tackling the NPA problem. Reforming the banking governance, asset restructuring, asking repeatedly for the fiscal discipline and decided to force the banks to cut down exposure to their most dubious borrowers, even at the cost of bringing out non-performing loans by being adamant to not cut interest rates despite several calls from the Finance Minister, FICCI, Corporate Lobbies, and the PM himself.

If Rajan had done as most central bankers and closed his eyes to it, the problem would only have emerged at a time of economic crisis.

Subramanian Swamy said here,

R3 (Raghuram Rajan) planted a time bomb in our financial system in 2013. It is timed for December 2016

I believe Rajan didn’t plant a time bomb, was rather trying to diffuse a time bomb planted in our economy, he was sitting on the bomb himself. He has been booted out, probably the demonetization move has pushed the timer a bit, only to let it explode a later point in time.

Rajan has always been one step ahead of his contemporaries.

Here are some of the Rajan’s discussions and interviews which are illuminating for a rookie in economics.

Rajan and Arvind on NDTV Profit

Rajan’s Dosa-nomics

Rajan on how to become a successful investor

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