Illustration by Andrew Neyer
Celebrity Economist Rushes to Save India
The first time I met Raghuram Rajan, the Indian economist couldn’t sit still.
It was over coffee in Bangkok in November 2008, less than two months after Lehman Brothers Holdings Inc. imploded and almost took the global financial system down with it. Rajan had become a big draw by then, having warned as early as 2005 that a crash was coming. On that day in Thailand, he had a more local crisis on his hands: The hotel’s WiFi was out.
“I’ll be back -- I need to make a call and make sure the world economy is still there before I begin my speech,” he deadpanned. “You never know.”
That last sentiment could also apply to an extraordinary bit of recruitment on the part of Indian Prime Minister Manmohan Singh. Rajan, 49, is one of his most pointed critics, never one to shy away from slamming India for trying the same failed policies over and over again. Rather than castigate Rajan, Singh offered him a job: top adviser to the Finance Ministry.
Rajan’s arrival might shake up India at just the right moment and accelerate recent moves to open retailing, aviation and insurance to foreign investment. Palaniappan Chidambaram’s return as finance minister in July might have seemed enough of a jolt. He wasted no time in announcing policies that amounted to shock therapy for an economy that has lost its way. If those were a sign India is again open to business, hiring Rajan suggests it won’t stop there.
There are three things about Rajan that are noteworthy.
One, his focus. He’s looking in exactly the right places from the start -- modernizing the financial sector, making it easier for companies and entrepreneurs to do business, and tackling the labyrinthine distribution system in areas such as agriculture.
Two, Rajan is a University of Chicago guy. It means that, at least to some extent, he’s about increasing economic efficiency as a means of raising living standards. Supply-side solutions can clearly go too far, as we saw when the U.S. went off the financial rails thanks to lax regulations and oversight. Yet if there is anything India needs, it is a burst of deregulation fever.
Among the most common phrases you hear uttered in India is “license raj,” shorthand for the baffling, elaborate and multilevel system of issuing permits to do anything. This snarl of red tape throttles business and breeds corruption. It is the single-biggest barrier standing between India’s 5.5 percent growth and shantytown dwellers in Mumbai or Kolkata. New strategies are desperately needed to remove it.
Three, Rajan is an intellectual re-import. It is often said that India’s best export is its chief executive officers -- Indra Nooyi of PepsiCo Inc., Lakshmi Mittal of ArcelorMittal, Anshu Jain of Deutsche Bank AG, just to name a few. Its academics, too, remind us that the developed nations don’t have a monopoly on economic wisdom.
Rajan is part of a growing pattern of Indian talent returning home. Take Rana Kapoor, who left Wall Street to start Mumbai-based Yes Bank Ltd. Or former Citigroup executive Jaithirth Rao who founded software maker Mphasis in the U.S. before moving the company’s headquarters to India, where he started an affordable-housing finance company. Rajan’s experience as chief economist of the International Monetary Fund from 2003 to 2006 and as a celebrity academic is now to India’s benefit.
There’s still plenty of flow in the opposite direction, including Kaushik Basu. He recently left India’s Finance Ministry to become chief economist of the World Bank, which along with the IMF is holding its annual meeting this week in Tokyo.
Basu is the rare iconoclast in a position to make a difference. He is an adherent of his own brand of Freakonomics. His interest lies not with the politically correct or expedient, but common-sense solutions to the biggest quandaries of our day. One is what to do about official corruption. He argues that it be legalized, thereby adding transparency to the process and having the effect of naming and shaming graft seekers.
Like Basu, Rajan is an example of an Indian in the right job at the right time in ways that could benefit humanity. Jump- starting India’s economy would offer the world another economic engine at the perfect moment. It would also arrest the policy decay that has befallen Asia’s third-biggest economy.
A day after Chidambaram met U.S. Treasury Secretary Timothy Geithner in New Delhi earlier this week, Standard & Poor’s reminded India it may become the first BRIC economy -- Brazil, Russia, India, China -- to lose its investment-grade rating. Junk status would be a terrible blow to a nation S&P predicts will see its budget shortfall widen to about 6 percent of gross domestic product in the 12 months ending in March 2013. Borrowing costs would surge, investors would flee and reducing poverty would instantly become harder.
The good news is that Rajan is on the case to help Singh’s team get back in touch with its reformist roots. You can bet he won’t be sitting still on the job.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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