Raghuram G. Rajan: Economic Growth Just One Piece of the Puzzle

In 2005, the International Monetary Fund’s chief economist delivered a speech in which he predicted the world was on the brink of a financial meltdown. It was not a popular view. Three years later, however, he was proved correct.

That economist was Raghuram G. Rajan, Katherine Dusak Miller Distinguished Service Professor of Finance, a man who, in the words of Stephen Barter, co-chair of Chicago Booth’s EMEA Global Advisory Board, has gone on to become one of the best central bankers of our time.

Rajan recently spoke at Booth’s London campus as part of Chicago Booth Insights, an annual series of global events where thought leaders from the Booth community address the most complex issues facing businesses today.

During a fascinating fireside chat with Martin Wolf, Financial Times' chief economics commentator and associate editor, Rajan discussed the headwinds to growth for today’s global economy. And 10 years after the financial crisis he predicted, there was no shortage of talking points: from the resurgence of populist leaders and protectionism, to the rise of passive investments and the threats posed by a leverage market suited to easy conditions. Plus, of course, a subject close to his heart: the Indian economy.

Still, while the conversation centred on the challenges and risks beneath the surface of a steadily growing global economy, it was far from all doom and gloom. “Let’s be thankful,” Rajan told a packed audience of more than 300 students, alumni, and business leaders. “For the first time since the financial crisis, we’ve had a year of strong global growth with all engines firing and are shaping up for another one in 2018.”

But what of those other, more malign factors circling around the positive economic outlook, such as the threat of a bilateral trade war between the United States and China, criticism of central banks for not tightening enough, and a growing schism between the man on the street and so-called economic and political elites?

“These issues are worrying,” Rajan admitted. “And they’ve been building up for a long time. There’s a public perception that the elites took us into the financial crisis, but it was the masses who suffered—and are still suffering—as a result. That’s leading to a lack of trust in central bankers and economic institutions.”

It was a sobering message, and one picked up on by Wolf as he highlighted the need for policymakers and economists to balance financial growth with a backdrop of political disorder.

Yet if good news was to be found, surely India, which recently overtook China as the world’s fastest-growing economy and a country Rajan served with distinction as the governor of the Reserve Bank between 2013 and 2016, was the place to do it.

“Yes, India has done well,” he agreed. “But we must be careful about beating our chest on growth because we’re still one of the poorest major economies in the world. We now need to spend 10 years focusing on building the infrastructure and human capital required to get to the next stage of growth.”

A major part of that “next stage” will be ensuring the benefits of growth are felt by people across the country’s vast population, not just a select few. Which brought the discussion back to perhaps the financial sector’s greatest challenge: bridging the gap between itself and the public—not just in India but all over the world.

As one audience member asked: How do central bankers and policymakers engage a soundbite-obsessed society around the complex language of economics?

“The interesting thing about economics is the direct impact is often not the most important effect,” explained Rajan. “It’s the indirect effects that tend to be important and persist. We have to get people to look beyond the first sentence [of Martin Wolf’s pieces] and read the whole column.”

In other words, we must resist the temptation to focus only on the here and now and consider what might be coming further down the line. Just like in 2005, one might say.