Chicago Booth Review Podcast Raghuram Rajan: Your Doctor Could Be in India

Raghuram G. Rajan: India has been a democracy right from being a poverty-stricken country to its current middle-income status. And if you can go nearer high income, it's a powerful example for others.

Hal Weitzman: When you find yourself on hold with your bank, an insurance company, a computer manufacturer, or an airline, you may well end up talking to someone in India. For decades, big companies in the US and Europe have set up so-called Global Capability Centers or GCCs in India to handle back-office operations. In 2012, there were about 760 such centers in India. Today there are more than 1,600, and the number is on track to reach 1,900 next year, adding some $60 billion to the Indian economy according to PWC.

Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman, and today I'm talking with Chicago Booth's Raghuram Rajan, who sees the future of India's economy as moving from the back office to the front of house. Rajan believes India can leapfrog the traditional route to economic development by offering not just support services to the world, but also professional services such as management consulting, legal support, and medical and financial advice. This is the second of our two conversations with Rajan about his new book, Breaking the Mold: India's Untraveled Path to Prosperity.

Raghuram Rajan, welcome back to the Chicago Booth Review Podcast.

Raghuram G. Rajan: Thanks for having me again.

Hal Weitzman: I wanted to ask... Last time, we had such a fascinating conversation about your book, Breaking the Mould: Reimagining India's Economic Future, which you've written with Rohit Lamba that I wanted to bring you back because I was thinking about the rest of the world. What is the significance of India world's largest democracy for the rest of the world? So let's start with just a basic question. Why should the rest of the world care about what happens in India? Why should readers in America read your book?

Raghuram G. Rajan: Well, let me start with readers in Africa.

Hal Weitzman: Sure.

Raghuram G. Rajan: So India is very much like a number of poor African countries having missed the manufacturing boat and trying to figure out what the world holds given you have a young population, population that speaks English in places like Nigeria, and that is quite capable. I mean, the smartest student in my class over the last 30 years has been a Nigerian woman who was just extraordinary in terms of her capability. So there's a lot of talent there that is yearning for opportunities. So how do you get that? And so in a sense, what we're trying to say is India offers an alternative path. You don't have to go the manufacturing led growth path, but you can leapfrog.

I mean, remember, 70 to 80% of business activity in an industrial country is really services. Maybe 15 to 20% is manufacturing, 5% mining and 5% sort of agriculture. And what we're saying is, look, maybe you can leapfrog the manufacturing stage and not go through that. Dani Rodrik calls this premature deindustrialization, and I would suggest maybe it's not a bug, but a feature if you can directly start providing services and the world desperately needs services. Think of how many African physicians are in the UK health services providing national health service for UK residents. The UK is growing old and doesn't have a whole lot of doctors, and increasingly we'll look to Africa for doctors. But what if those doctors could stay in Africa and still provide services to the UK and spend their money in Africa and make the local economy richer and more viable? Wouldn't that be win-win? You'd have to have more scope for telemedicine in the UK, but what they gain from that by moonlighting in the afternoons, will actually allow them to live well in Africa, but also they provide their services in the morning to African patients.

Can we not have a new kind of global trade in services which compensates for the fall off in global trade in goods? That's the story for Africa.

Story for Western aging economies is look, you keep thinking that one way to fill the gaps as your workers age and retire is to have more immigration. And that's going to be part of the answer. But part of the answer may be also get more services done at a distance and get it done at a distance from younger economies elsewhere. And that limits the extent to which you have to deal with cultural assimilation and all that, which is creating problems in your country. But for that, maybe you have to start thinking about what you need to do to buy those services in. For example, should the National Health Service in the UK be paying for doctors providing services from India or from Africa? Can there be these insurance payments? And so can we talk about a wiser globalization? A globalization which doesn't entail displacement, but win-win on both sides.

Hal Weitzman: Okay, so your idea is that this is part of a global economy of services and there'd be specialization. So we'd go to Nigeria for our doctors for our medical services and India for our computing services.

Raghuram G. Rajan: Maybe that's specializing. The nice thing about services is it doesn't require so much in terms of scale. You don't have big scale economies. So that consultant that you hire doesn't necessarily become that much better off when they're in a firm of 3,000 than if they're in a firm of 10. That boutique firm probably provides you better services than that gigantic firm where all the sort of-

Hal Weitzman: But where do you see India really shining? What would be the areas in particular that you're excited about?

Raghuram G. Rajan: I think more broadly... I mean, what do you see today? That's the best we can extrapolate. Every large firm, whether it's... Maybe there's an overstatement, but lots of large firms are creating what they call Global Capability Centers in India. Goldman Sachs has 8,000 people. These are guys who are writing down their models and working them out for them. From New York, we want this kind of model to help us do this kind of thing for our client or trade this kind of risk. And those guys in India are beavering away to provide that. There are 1,600 such GCCs already in India, accounting for about 1.7 million employees, and it's growing very fast. And this is about 40% of the world market, which is interesting. It's a big number, but that's an example of what can happen.

My friend was going back to India for a big four firm, and she said, "I need to set up our India office." "Is it for India?" "No, no for Europe." "So what's your India office going to do for Europe? Is it a back office?" "No, no, it's the semi front office. What it's going to do is provide consulting services directly along with the teams in Europe." "Well, what do the Indian kids know? Do they know European issues?" "No. That's what the consultants from Europe will provide, but these kids are plenty smart, they're well-educated, and they're one-fifth the cost. And so when you combine them with a team in Europe, you get really a fantastic mix and we're going to do more of that. So my job is to create this." That's what you hear more of. And so the opportunities are there. I think those sort of workers paid maybe one-fourth or one-fifth the US wage can create employment for 10 other Indian workers and you can get a lot of employment very quickly just by an expansion in services.

Hal Weitzman: What do you think it means for the United States though to go back to that? Because it strikes me that the whole kind of anti-globalization thing could get a lot worse. It's been manufacturing, now they're coming for our services as well.

Raghuram G. Rajan: It could, but it could also say, look, I can't get an appointment to see a doctor for three months. And if I could see a doctor overnight at one-fifth the cost that I can get now, why not? If I can get legal services because I need to figure out how to write my will, either I go towards some kind of program and I have no idea whether it's appropriate or I go to a service which basically says, "Look, we have lawyers who are trained in Illinois law who can provide this at one fifth, one sixth." Competition is good. The problem to some extent is the worry about the lump of labor. This is the famous economist issue. You basically think there's only so much economic activity and once there's competition, it's going to take away a lot of that. But just to think if wills became cheaper, how many more people would write their will and not die interstate and create problems for themselves?

Similarly, I mean financial advice. Wouldn't you like to have more financial advice if you could get a trusted real person? Well, maybe AI will provide a lot of this. That's what some of our big firms are betting. But maybe I really want to talk to a human who can understand my problems and maybe I'm willing to tolerate a somewhat different accent. But if I get sensible advice, there's a lot of scope for competition to make lives better. So it's not just one way. Those guys in India need sensible will, for example, buy AI services. Where are AI services available except in the United States? They will want high-powered US lawyers to help them in the mergers and acquisitions to help them get financing.

It can be a new wave of globalization. Last point. Who got hurt in the last wave of globalization? The manufacturing workers. Who benefited? The service workers, especially the highly skilled service workers. So to some extent, by creating more service competition, you could basically redress some of that balance. But again, I want to emphasize it doesn't have to be win-lose. It can be win-win. The main thing we have to learn from our previous attempts at globalization is you need to pay attention to who's losing out and act quickly.

Hal Weitzman: There was a previous book of yours, The Third Pillar, you talked about that.

Raghuram G. Rajan: Yes. And I said the problems arose from not acting quickly enough. And there are countries that have acted very quickly. These Scandinavian countries, for example, we show the way to deal with it.

Hal Weitzman: Talk a little bit about India and its importance for democracy globally. We live in a period when if we went back 30 years, we would say everybody's going to be democratic in the coming century. Now that looks very unlikely. And if anything, the tide is turning much more towards autocratic regimes and real politic type international relations. If India is a stronger democracy, how does that help the world?

Raghuram G. Rajan: Well, I think a couple of ways. One, we talked earlier about India being a development example if it works out. Not yet, but if it works out. And being able to develop democratically is actually not that common. Even the US and the UK became truly democratic at a fairly high level of per capita income in today's dollars or pounds. Korea democratized a little later. So did Taiwan. China hasn't democratized yet. India has been a democracy right from being a poverty-stricken country to its current middle income status. And if you can go nearer high income, it's a powerful example for others.

Now, Indian democracy has its ups and downs. Currently, I think one would argue it's not the strongest it has been. I think we need to therefore take it upon ourselves to strengthen it once again, because I think the second reason for India being a democracy is it can be a important stakeholder in the democracies around the world and promote better global dialogue. The democracies have one kind of global dialogue, and the autocracies have a different kind. India, if it's joined with the democracies, can help energize a more value-based dialogue, which maybe also be different from what some of the democracies today practice. But we are pushing this book for a more idealistic India, which I think is really important for changing the nature of the dialogue. And 1.4 billion people on that side would be a good thing.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago podcast network show that you should check out. It's called Entitled, and it's about human rights. Co-hosted by lawyers and law professors, Claudia Flores and Tom Ginsburg, Entitled explores the stories around why rights matter and what's the matter with rights.

You talk about the Indian nature of Indian democracy is different. Democracy we think of as very much of being a European type idea that's then exported around the world. This is a different way of thinking about it. How do you think that Indian democracy might be different, might shape the world in a way that American or British type democracy?

Raghuram G. Rajan: Well, I'm not sure that... I mean, there are some things which are truly energizing about Indian democracy, which is that very poor people vote, and a lot of them go to the polls and they feel their dignity, their status, their identities associated with them having the vote. And that's important. That's energizing. That's saying that democracy is actually doing something positive. And they may not have a lot of money, but they know that somebody cares about their vote.

I mean, there are other places we need to do a far better job. How do we inform the voter in a much better way, in a more unregulated, unconstrained way? How do we have more debates without somebody saying "you hurt my sentiments" and constrain open debate? There's a lot of dialogue and discussion that needs to take place in freedom of speech. Freedom of the press requires a lot of work. We need to make sure the government has much less power over the press by its ability to pull government money that's going towards the press in advertisements and so on. That's a powerful influence, and we need to find ways to limit that. But I think there are... I mean, I still think it's a miracle how a poor country has maintained its democracy and how people still are so eager to go to vote. I think if we can strengthen that with what we learn from other countries, I mean we'll have a good package.

Hal Weitzman: That would be huge. It makes me think of the debates we had after the last financial crisis about China and how easy it was for China to spend stimulus money and how hard it was for America to stimulate its own economy which was stuck with... Remember Barack Obama talking about shovel-ready projects.

Raghuram G. Rajan: Right.

Hal Weitzman: There weren't any shovel-ready products. With China you could just get it done because you just send the order out and stuff would happen.

Raghuram G. Rajan: But history has a way of looking at those things. Many people would argue the amounts the Chinese spent then was a mistake, which has resulted in a whole lot of bad debts today. And of course, we became much more willing to spend, recognizing the limitations of the Obama fiscal stimulus. And that caused us maybe to overspend this time with 5 trillion plus in spending.

Hal Weitzman: With the pandemic, yeah. Right.

I wanted to ask you, what do you think India can learn from the rest of the world about development? We know what we don't want them to learn, which is about the manufacturing path and how... We talked last time about how we don't want India to be another China, try and copy the manufacturing or the low cost Vietnam-type path. Who's doing it right? What are you looking to as a good example for India?

Raghuram G. Rajan: Well, I think India would benefit tremendously from learning how important other countries deem their human capital to be. India has not done as good a job on education and healthcare as it should. And even relative to other countries with India's sort of per capita GDP, it falls behind on things like education. And if you look at what Vietnam did, what China did, they spent more maybe so that the people would learn the communist scriptures, whatever the reason. Education was far higher at the time they liberalized than in India. And in India, we still haven't got it right there. So that's an example of what we can learn.

I think the nature of governance is something else. We perhaps because our founding fathers were afraid of the country breaking up, have a much more centralized system. And now that breaking up is hard to do, I think we should be thinking far more of decentralization. Of course, as a famous Indian economist said, "Everybody wants decentralization, but only up to their level." And that's the problem India has now that nobody wants to decentralize further their powers, but we need that. A country with 1.4 billion people needs a lot of local governments, not the number we have.

Hal Weitzman: And what do you think other economies can learn from the Indian experience so far?

Raghuram G. Rajan: I think the fact that we have navigated all this while respecting human rights to some extent. Obviously we can do a better job there, but we've done it to a reasonable extent that we continue to have elections that are free. I mean, those are all... You don't need to be an autocracy to move out of poverty. And what we have to establish is you do need to be a democracy to grow out of middle income into wealth. If we can send that message broadly, I think it'll be a good thing for the world.

Hal Weitzman: Excellent. Okay, Raghu, we're going to follow that together. Maybe we'll talk about it again in a year or two, see how things are tracking. But in the meantime, thank you so much for coming on the Chicago Booth Review Podcast to talk about Breaking the Mold. We've enjoyed both the conversations with you.

Raghuram G. Rajan: Thank you very much.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis, and insights, visit our website, chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe, and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.