Loading summary
Transcript47 lines
- [00:10]
A
Hello and welcome to the very special India edition. We have been talking about this for months now. We've been promising you the India edition of Slate Money. It is finally here. So I am Felix Salmon of Axios. I am joined by Emily Peck of the Huffington Post. Hello. And by Anna Shymansky.
- [00:33]
B
Hello.
- [00:33]
A
And we have, we came to you, as you know, if you've been listening to Slate Money for the past few months. And we asked you who should we get to talk about India? And we got a lot of names, suggestions of people who we should have on. And then there was one email we got which basically said, well, you should get Raghu Rajan on because he knows everything and he's to run the Indian central bank and he's incredibly smart and he called the global financial crisis and he's the. And we're like, yeah, yeah, yeah. But like, realistically, who are we going to be able to get on? And we went down the list and it turns out the Raghu Rajan is here or he's not here, he's in Chicago. Welcome.
- [01:08]
C
Good morning.
- [01:09]
A
Good morning to you and thank you very much for coming on Slate Money. We're super excited to have you on. You have a new book out. What's it called?
- [01:19]
C
Well, it's called the Third Pillar. It's about how the community and re empowering our communities may be a the way we deal with the challenges of globalization and technological change. So it's a prescription of how to save capitalism and society. So not a small idea.
- [01:39]
A
And then, and this is kind of a follow up to your previous book, which was called Fault Lines, which basically told us all that what we now realize is that, well, I think the world realized in the global financial crisis was that the global economy is kind of broken. Yes. And so, yeah, the two books between them kind of say that the world is broken and maybe conceivably why the world is broken and what we might be able to do to fix it. We're going to talk a bunch about the book, but we're also going to talk a bunch about your home nation of India, which is the most fascinating country in the world. I think all of that coming up on Sleep Money. So let's start with the book, the new book, the Third Pillar, which is about communities and how we have very developed capital markets and we have very developed national governments and we have increasingly nationalist governments, not just in the United States, but even in India. And you're saying that what's being lost here is more kind of local feeling that beyond the Occasional sports team people. These, like local communities really are needed and are not doing what they should do in terms of supporting the economy.
- [03:03]
C
Well, let me start with the fact is globalization has very differentiated effects, right? If you're a trader in London, you're doing fantastically well. If you're a guy in a small town where the single largest employer just closed because of foreign competition, you're not so happy. But it's not just that it affects jobs, but once it hits jobs, it also hits the local social fabric. You see with rising unemployment, you see social ills start moving in, Marriage rates falls, divorce rates increase, single parent households increase, the quality of local schools deteriorates. Everything starts going south. And these are vicious cycles. And you can see it in, for example, the protests of the Gilets Jaunes in France or the opioid epidemic hitting some of the small towns in the United States. And the answer is not more stimulus at the center, lower interest rates or easier fiscal, but it really is about getting the communities themselves that are hit to try and figure out how they bring new economic activity, helping them do it, but essentially supporting local revival.
- [04:14]
B
And I think one of the things you talk a bit about in the book is this idea that a lot of people in countries that are voting for some of these more nationalist or authoritarian figures often feel as though they're, they've kind of lost control, that these things are happening from, from the state or from international bodies and they feel like they have no say in the matter. But, but could you talk a little bit about like how supporting that community, especially in really large countries like the United States or like India, could be really helpful in terms of that idea of feeling like people are regaining control.
- [04:46]
C
Right. I think it has something to do with the expansion of markets. As markets have grown larger and more inte, there is a push for common regulatory standards, common national standards, and now common international standards. The European Union tries to impose uniform regulations across the countries of the union. So integrated markets tend to push governance up from the community to the nation, to the international era, to the international arena. And what really this cry that you call, that you described just a while ago, this cry to take back control, is about is a number of people saying we really have no ability to deal with the forces hitting us. And what we really need is the ability to have powers that allow us to tackle them. So that's really what some of these cries, Brexit, for example, is about. It's saying that too many of our policies are determined, not just locally, not just in London. But in Brussels, to bring this round.
- [05:49]
A
To India, I can easily see that the nationalism that lay behind Brexit was a reaction to the perception of power in Brussels. Tell me a little bit about how has India or how has globalization affected India, and is that related to the rise of the bjp, the Hindu nationalists?
- [06:12]
C
So I would not relate what's happening in India to globalization, but more to the economic change that's happening. Many people are leaving their villages, they're leaving their traditional communities, going into urban areas where they're often lost. They don't have the social structures that they used to have, and often they pray to new ideologies, new beliefs. And the bjp, as well as its cadres, the RSS is the underlying organization, have been very successful at pushing the idea of a national community Hindu majoritarian. And that is attractive for some people who have lost some of their roots.
- [06:57]
D
Going back to what you were talking about before, how communities are being kind of torn apart by the forces of globalization, how do you see a successful community being reinvigorated? What's a good model? I know you talk about a particular neighborhood in Chicago in your book. Are there other examples of communities that have rebuilt themselves? How do you empower these communities to do that?
- [07:20]
C
Well, there are lots of examples. Let me start first with a country which has an example of how it could work. This is a small country, Switzerland, which pushes down powers on the principle of subsidiarity. It will be at the lowest level at which it can be exercised effectively. So the idea is that the national government will look after, for example, the National Institutes of Technology. The cantons, of which there are 26, will determine what happens in the high schools, while the municipalities, of which there are nearly 3,000, will look after the primary schools and kindergarten. So this is trying to empower the local area with the most powers that they can possibly have. And that, to my mind, is a first step in reviving communities. Too many of the powers, for example, educational powers, have migrated up, and pushing them back down would be a good thing. But I think if you look at successful community revivals, of which there are a number, they typically involve five elements. One, good leadership. Two, community engagement. Three, we've already talked about community empowerment. Fourth is funding to start revival. Many of these are stressed communities without a tax base. Some funding is important, whether it's from private sources or the national government, but it's important it doesn't come with too many strings attached. Otherwise, that excludes local initiative. And lastly, building infrastructure that ties the community to the national and International economies is also important. Many communities in the U.S. for example, don't have access to broadband. In this day and age, not having broadband is being excluded from the entire digital economy. So I would argue a number of these steps taken together can actually promote revival.
- [09:05]
A
So let's pick up on that and if you could, because this is one of the main questions we've been receiving, can you tell us a little bit about the Indian economy in particular? We talk pretty much every single week here on Slate Money about China. We understand how central China is to the global economy, how it's becoming increasingly, increasingly important. It's incredibly globalized and it has upended every country in the world in one way or another. India's I don't know if it's bigger now in terms of population or it will be any minute now. I think people have a much less of a sort of mental idea of what it is, where it stands, how important it is, the role it's going to play in the future. What do you think that Americans in particular like don't understand about India? Because I think honestly they, they don't understand much. What's the important things they need to know?
- [09:58]
C
Let's start with people. Yes, it is closing in on China and will probably exceed China soon in terms of the number of people. Its economy is about one fourth to one fifth the size of China's, which means it's just about bigger than France or England at this point, but below Germany, Japan and of course China and the United States. The important reason to think about India is first, hopefully with so many people it will get richer and it will contribute immensely to world growth. But it's also at very low levels of per capita income. So the path to getting richer should theoretically be easier because it's a lot about catch up building the infrastructure that is needed for a modern economy. Construction, new factories, services, all these things can help India grow into a much bigger economy. The government has set a target of becoming a 5 trillion economy by 2024. I mean, people debate whether that's reasonable, but that's the kind of ambition that there is there. So in the space of a decade, my sense is it should be the third biggest economy in the world after the U.S. china. Now, coupled with the number of people it has, it is going to be an important global power. The benefit so far is that it is a democratic country and therefore there are sort of lines of understanding between a country like the United States and India, which may not exist as much, say with a more autocratic country and.
- [11:37]
B
Could you also talk a little bit about the relationship between the public and private sectors? I know you talk a bit about that in the book, about how that has evolved and changed.
- [11:45]
C
Yeah. India has always had a pretty large presence in the public sector, state owned firms which aren't necessarily favored with a few exceptions such as coal India, but have occupied that space for a long time. The problem is today many of them are relatively inefficient compared to the private sector. Yet there is no strong consensus for privatization in India. Yet. One example where the state owned sector is dominant but perhaps not very efficient is the banking sector where 70% of assets are owned by state owned banks. The problem with the state owned sector is one, they come under bureaucratic rules which typically mean that they can't pay very much to top management, while they tend to overpay at the lower level. That means that where they really need talent, especially in really competitive areas, they find it hard to keep or retain it. And second, they come under various rules of procedure which limit how creative they can be. For example, in making loans. Many are risk averse in some ways because if a loan goes bad, the central investigation authorities start taking a look at it. Because almost always the assumption is these have been made for the wrong reason rather than simply the bank took risk and it didn't turn out well.
- [13:15]
A
Now I mean, I'm fascinated by you saying all of this because of course, from the experience of those of us who lived through the global financial crisis, the idea of efficiency and creativity in the banking sector kind of strikes fear into our very souls. And we're like, no, we would love our banks to be less efficient and less creative. Tell us a little bit about the trade offs there and how India in particular was affected by the global financial crisis.
- [13:42]
C
You're absolutely right. You don't want extreme levels of creativity and you don't want extreme levels of risk taking, but you want some. And what sometimes happens when you don't allow reasonable and careful risk taking is that you still end up taking the risk, but without appropriate diligence. So in India, for example, the banks lent to what was supposed to be really safe infrastructure. But then starting in the 2009, 10, 11, suddenly that sector started slowing down. Sometimes because of government inaction in giving permissions, sometimes because of difficulties in land acquisition. What happened was a whole lot of projects which were reasonable in conception suddenly turned really bad and weighed on the public sector banking system. So I mean, one of the arguments that has been made is perhaps they all tried to do the at the same time. And perhaps they didn't exercise independent diligence because, you know, they were following fairly bureaucratic norms.
- [14:48]
B
And I thought that this was a really interesting thing you brought up in the book about Indian bureaucracy, that people tend to think of India as this very bureaucratic state. But you say part of the problem is actually that there aren't enough people working in the state. So that actually creates a more complicated bureaucracy because people can't handle forms and claims. Could you speak a little bit more about that?
- [15:06]
C
Yeah, absolutely. So India is bureaucratic in the following sense. That the government tries to do too much is in too many areas. But it's not that we have an army of civil servants who can receive those applications, process them quickly and opine on them. Instead, what we have is rules in every place. Therefore, you do have to submit applications, but the number of people who deal with those is relatively limited. So one example of this is the judiciary. Not quite bureaucracy, but it's a situation where we have many, many cases which are pending for long periods of time and we don't have enough judges. Similarly, many government departments, you enter them, you'll see many applications in triplicate, in paper, filed here, filed there, filed everywhere. And you wonder how they get through it in reasonable time. And the ANSW answer is they don't.
- [16:05]
B
And so in terms of, you know, talking a little bit about, like, how, you know, the Indian economy has developed, but also really recently. So, I mean, I think when Modi was elected, there was idea that, you know, he was a businessman, that he was going to be more business friendly and stimulate growth. And now, you know, there have been a number of somewhat controversial things that were done in terms of demonetization, some of the VAT changes, the identification laws. Could you maybe speak a little bit about some of these very recent changes?
- [16:33]
C
I don't want to sound negative on India. India moves forward, but at a slower pace than one would want. So we're constantly trying to hack at these bureaucratic rules, even while every once in a while we bring in a new set, which are problematic. So we take two steps forward, we move one step backwards. But when Mr. Modi came in, many people believed that he would be a serious liberalizer. And I think, in the words of Larry Summers, he's more of a reformer than a liberalizer in the sense that he wants to do the old stuff more efficiently, but he doesn't want to get rid, in a big way of the plethora of rules and change the system. He doesn't want to Privatize in a dramatic way. He doesn't want to change the process of appointing officials of the state owned banks and make it much more talent friendly. I mean, he is someone who's grown up in the system and he ran a very efficient operation in the state of Gujarat. Some could even argue that what he's done is try to bring procedures that worked in the state to the central government. The problem to some extent is India's too big to be governed from the center. And trying to do exactly similar stuff from the center means that you tend to paralyze the system because you simply don't have the bandwidth to deal with with the many, many different states, the many, many different territories and the many different problems that each one has. So what many have been advocating for India is a new set of reforms which tends to hack away at these old rules and regulations, bring more market in and allow more freedom to business people. And we've taken some steps in that direction. I mean, the government works on making, you know, reducing the amount of business regulation, but we need to do far more, far faster.
- [18:32]
A
So let me ask you about that because that really fascinates me. What you're saying is, I guess what I've been hearing about India, and not just India, but a huge swathe of the developing world for decades, it's kind of neoliberal orthodoxy. For all that Modi is a businessman, he's also a populist. In the face of the rise of populism across the world and within India in general, is there some attempt to reconsider or recalibrate these standard neoliberal solutions and to say, well, there's got to be something a little bit more local or unique or different about the way we're attacking it now rather than the way we would have wanted to attack it maybe 10 years ago.
- [19:19]
C
I think there is something to be said for decentralizing far more in India that that's what I was getting too. You can't run India as you used to. It's become a much bigger and more varied economy. And so decentralizing more power to the states and from the states to the local villages and municipalities makes sense. We've had periodic finance commissions which allocate revenues between the center and the state which have moved in this direction. But we need to do far more now in India because it's a democracy and a democracy which is reasonably poor. There's always a constant tussle between the need to redistribute the wealth that is created and the need to create wealth. And we have periods when we sort of seem to grow faster, but quite quickly. The demand for redistributing some of that growth comes and we constantly try and find a balance between the two. I would say that surprisingly much of the focus of the Modi administration has been more on redistribution. Not necessarily in the old ways, but some of them in the old ways. More funds being transferred to farmers, for example, recently, but also trying to give people access to cooking gas, access to new toilets. All these are attempting to change the lives of people, but haven't been as focused on enhancing growth. And one of the key concerns in India today is growth is slowing considerably. And without new actions, what you call neoliberal actions, growth is going to get strangled. Business simply doesn't want to invest at this point for a variety of reasons. The financial sector is not as free with credit as it used to be, even with retail credit. And so something needs to be done in terms of maybe a new set of actions that instill animal spirits. Once again, that's something the Modi government has to quickly think about because thus far it hasn't sort of done it right.
- [21:30]
B
Because isn't one of the big issues just the kind of inability to create jobs, especially jobs for graduates? So there's like high youth unemployment?
- [21:37]
C
Well, it's across the board. There have been reports even from government agencies of high levels of unemployment, historically high levels of unemployment, even when across the industrial world it's historically low levels of unemployment. One of the big concerns is that even groups, caste groups that used to be reasonably well to do in the past, are now out on the streets agitating for more government jobs because they simply cannot get private sector jobs.
- [22:07]
D
You have a chapter in your book where you compare India and China, which is pretty fascinating. And, and I believe you say in the chapter that India is actually better positioned for economic growth long term than China is. Could you explain a bit more about why that is?
- [22:23]
C
To some extent, there is a problem that faces many countries on the development path, which is the middle income trap. Once you have caught up doing the basic stuff, then you have to start innovating. You have to move forward on the frontier. And that requires a whole set of different institutions from the ones that you had while you were catching up. When you catch up, you can have a reasonably authoritarian regime. In fact, it helps because a lot of the resource allocation can be done by fiat. We're going to put more money into steel, we're going to put more money in here and there. We're going to acquire this land, regardless of what the owner might say, because it's needed for a highway and all that stuff is very easy when you have an authoritarian regime. But once you've finished all that and you want people to innovate, you want people to think, you want people to debate and you want people to make mistakes, then it's far easier to have a democratic structure where people have the freedom to debate and think. And so that was my point, that India finds it hard to build out roads, finds it hard to build airports, because it finds land acquisition extremely difficult. But if it reaches middle income, which it is approaching, the next phase, from there to innovation to grand universities and so on, will be much easier. To my mind, China, which has made that transition to middle income extraordinarily quickly and extraordinarily adeptly, will increasingly find it more difficult if it wants to maintain party control over the economy, to go from here to the frontiers and stay at the frontiers, yes, there will be some areas where it can do that. But my sense is the constant temptation of the party to intervene with the market mechanism, with the financial markets will keep it from reaching where it wants to reach.
- [24:23]
D
How does India's being a democracy and so that sort of puts it at an advantage for growth. Does the populism coming from Modi threaten that in any way?
- [24:35]
C
Well, I think the authoritarian nationalist streak that sometimes exhibits itself in India and as I talk in the book, without a strong countervailing private sector, without a strong countervailing press, it tends to dominate quite quickly. That is a threat. I think India's strength is its debate, its dialogue, its democracy. Lee Kuan Yew of Singapore said it seems a little bit of an obstacle to growth initially. I think in the longer run it will prove very useful. But we would be really silly as a country to give this up right now when we are approaching middle income, when in fact this is what we need going forward. So the authoritarian streak that demonstrates itself needs to be combated in India. And we do have reasonable institutions, but. But they have to move up to the fight.
- [25:27]
B
And isn't this also an issue when they're not, when not enough jobs are being created? Because when you have certain groups that are did better in the past and then now, if not enough jobs are being created, they're going to see any jobs given to minority or traditionally discriminated against casts as kind of something that's being taken away from them. And so they might be more apt to vote for a populist figure.
- [25:51]
C
I think that's a Very good point. And that is something that may be at the back of people's minds, these entities being favored. The one caveat there is the Muslim population in India is relatively economically backward compared to other populations. So it's hard to argue that they've benefited tremendously from sops given by the government. My sense is that argument may fly in other places in India or vis a vis other communities, but not vis a vis the Muslims, who typically haven't done as well.
- [26:29]
A
Let me ask you, if I may, about the one area which I see India doing some very interesting and innovative infrastructure stuff, which is payments. And there's this system called Aadha which gives everyone a bank account. There's, like PAYTM and various other mobile payment systems are growing incredibly fast. Modi did his big demonetization attempt to basically stop people using cash nearly as much as they were. Is there a sense in which India might be the sort of gleaming country of the future in terms of what a sort of next gen electronic payments economy would look like, or is that not going to happen?
- [27:11]
C
Well, no, I think it's one of those very interesting experiments in India. Aadhaar, of course, was the first step. But then we created what was called the Universal Payment Interface, which allowed anybody with a bank account to transfer to anybody else with a bank account, wherever it was, and across a common public bridge. So this meant that that bridge was not owned by a private company, but could be used by anybody. And that allowed the possibility for Facebook, for Google, for anybody to come and join. And now we're seeing payments have eased tremendously. And of course, we allowed PAYTM to set up a bank in order to manage payments, even though it's a fairly aggressive fintech company. And all your concerns about financial risk, we had to take that into account. Today, India is experimenting with transferring money directly to a lot of people. Many government pensions, scholarships, subsidies are being transferred directly. That empowers people. Pooling them all and making one lump sum transfer would do even better because then they can choose what they want to spend on. And I think that the ability now to access financial services has increased significantly. We still have to manage risk in the system better. For example, now we're making a lot of loans to small and medium enterprises. There are some concerns about whether there are risks building in those loans and whether there's a chance they could go bad. So we have to experiment carefully. But I think your point that this is a real positive is right. In fact, I read the other day that PAYTM is implementing its technology. Japan as Japan rolls out direct payments.
- [28:51]
A
Well, would you consider India to have basically the most advanced payment system in the world? Is there anyone else who's got as far as you guys have done?
- [29:00]
C
No, I would not go so far. I would say we're good on a number of areas. For example, the existence of this public.
- [29:08]
A
Bridge and that's instantaneous, right? Like if I send you money using that public bridge, the money transfers within seconds.
- [29:16]
C
Yeah, close to instantaneous. But other countries, China for example, are doing a lot in a lot of different spaces. I think in all these areas the key issue is do you have, while you're permitting innovation, do you have control over the risks? Also you have to be careful that for example, some of this peer to peer lending that's emerging, whether you have full control over it or whether you suddenly find that they turn into one variety of Ponzi scheme or the other.
- [29:47]
A
Because historically the lenders have been the banks and the banks have been closely regulated and you can see what they're doing. But if the lending becomes just out there between individuals, there's no way that can be regulated so easily.
- [30:01]
C
One, that it can't be regulated. Two, it sounds new, sounds interesting. A lot of people put their money into it, but you really know whether they have control over risk. Once you go through a downside and sometimes in the up cycle it looks like they're doing fantastically well and there are no losses and it's the down cycle which shows them up for what they really are. So all this stuff about I'm going to use your social media network to figure out whether you're a good credit risk, I mean that's great. And if that can actually derive a lot of useful information, that's wonderful. But we won't know until you've been through in an unemployment cycle which is pretty severe.
- [30:45]
A
So where are we at in terms of the business cycle right now in India?
- [30:50]
C
I think we're at a pretty low level. Part of the problem is there's a lot of debate about government statistics. In India today we have an overall growth rate which the headline is 7%. But I think the former chief economist came out with a view that it was, it was more like four and a half rather than seven, which would be really low from India's perspective. So I think we need better statistics. But I would say we're really at the trough right now. A lot of economic pain going on, which is interesting. It's happening at a time when the world economy not doing great, but not doing spectacularly badly either. And India typically is buoyed by the world economy. So I would say the Modi government has a lot of work to do and should do it sooner rather than later. It needs to not continue business as usual. It needs to use its mandate to really think boldly and reform, some of it neoclassical or neoliberal. But it has to do more of that. And it can't rely on the old system. The old system is really reaching the end of its limits.
- [32:01]
A
Let's circle back to the book, I think, just to sort of finish up here, but to stay on the same topic. In this world where there are so many forces which are just beyond the control of any local community, whether it's globalization, whether it's markets, whether it's national governments, or whether it's global climate change, is it really realistic to hope or expect for local communities to be able to be nimble and strong enough to be able to build their own responses to these things?
- [32:32]
C
No, I don't think the communities will develop these global responses. What I am arguing for is more democracy in the sense that you are part of the dialogue. What happens when you decide in Paris that, okay, we need to deal with climate change, so we're going to raise taxes on gasoline, and I don't care who gets hurt, is that you get the gilets on in protest because they've not been consulted and they commute long distances, unlike the people in Paris. So we can't get global solutions if you don't have engagement, if you don't have people saying, yes, we need to do this and we're part of the solution. So I would say rather than negotiate everything in closed rooms in Paris or somewhere else and give it a grand name and then try and impose it elsewhere, we need to go back and forth from these global discussions back to the people. Are you okay with this? Would you prefer that? How do we make it reasonable so that everybody participates and we actually have work on every dimension, consumption, production, mitigation, adaptation, in order to deal with this really serious problem that faces us. When I say community, I'm not thinking about sort of this isolated entity which is divorced from all reality and is back to the shire of if you will, but really something which has much more debate internally, has much more say over local policies, but also has more say over national and international policies, or at least feels it has a voice. Maybe overruled by the majority, but at least it has a voice. Let me end with India, because that was your focus. I mean, India's contribution to the world. If it can do. It will be how even poor countries can grow into middle income and beyond, while being democratic, while protecting the rights of its minorities, while being open and while having really vibrant debates. And it will also, as I argue in the book, position India for the next step once it grows beyond middle income. But as I said, the real task for India now is to get first to middle income.
- [34:51]
A
Raghurajan, thank you so much. This has been super illuminating. It's been an honor to have you on this show. And yes, everyone go out and buy the book. It's called the Third How Markets in the State Leave the Community Behind. Many thanks to Raghu. Many thanks to Jessamine Molly for producing. And we will be back next week with more sleep money. Sam.