Dr. Raghuram Rajan Meets with Booth MBA Exchange Students to Discuss Emerging Markets

By Prahlad Agarwal, HKUST Exchange Student

Prahlad Agarwal Headshot.jpg

Dr. Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. He was the 23rd Governor of the Reserve Bank of India between Sept-2013 and Sept-2016. Between 2003 and 2006, Dr. Rajan was the Chief Economist and Director of Research at the International Monetary Fund.

Dr. Rajan was generous to meet bunch of MBA exchange students and full-time Booth students at an intimate conversation on financial and economic risks surrounding the world. He started with a quick background of three imminent risks facing emerging markets today:

  1. Monetary tightening: As the period of easy money ends and Fed gets concerned over wage growth in a historically tight labour market, we are surrounded by inflationary pressure. Higher interest rates may not lead to massive capital outflows from emerging markets, but such possibility cannot be completely ruled out.

  2. Trade tariffs: The general convention that trade embargo is a way of settling past trade imbalances is myopic. China’s splendid economic growth over past few decades has grown its appetite to claim the global supremacy from US. The new military frontier is technology where China has been able to make inroads and beat US in certain areas of AI and digitization. Trade tariffs are nothing but a natural retaliation of the shifting power from US to China as the horse has left the stable.

  3. Commodity prices: It is a double-edged sword – when they are low it hurts emerging markets such as Russia and Middle East and when they are high it hurts emerging markets such as India and Indonesia.

Booth students with Dr. Raghuram Rajan at Harper on November 27, 2018

Booth students with Dr. Raghuram Rajan at Harper on November 27, 2018

Dr. Rajan presented interesting insights as how the world could see a peaceful power transition. The West needs to recognize China’s prominence. For instance, China’s power within IMF till very recent was even less than Belgium (one third in size to China in GDP terms). While China needs to showcase firm assurance of its transparency, rule of law, fair competition and drop the stealthy image it has gained somehow.

The next recession could have a prolonged effect given that Fed has lower room to boost liquidity when nations are already too levered. US for instance has record fiscal deficit at a time when unemployment is record low.

Listeners to Dr. Rajan turned in several intriguing questions affecting the world affairs.

Challenges faced by nations to pursue socio-economic growth

  1. Political: Case in point is Macron and Trump. French President Emmanuel Macron tried to pursue social growth and saw his popularity ratings quickly drop. Trump is a result of people’s demand for quick-fix solutions. At any given day a majority will choose instant solution (like raising trade tariffs to bring immediate gains) over long term painful solutions (building educational infrastructure to produce skilled workforce).

  2. Economic: Post World War II, Italy was in a worse situation than many emerging markets today. Yet, over the past 70 years it has transformed into a first-world. It continues to be plagued by populist pressure. The two prominent political parties – one argues for higher wages and the other for lower taxes, will eventually both lead to a widening fiscal deficit. A Debt to GDP of almost 130% only makes it worse for Italy and similar others to pursue long term socio-economic growth.

Dr. Raghuram Rajan speaking at the World Economic Forum. Dr. Rajan first joined Booth in 1991, and prior to returning in 2016 was the Governor of the Reserve Bank of India

Dr. Raghuram Rajan speaking at the World Economic Forum. Dr. Rajan first joined Booth in 1991, and prior to returning in 2016 was the Governor of the Reserve Bank of India

Interestingly, Dr. Rajan has authored a book titled The Third Pillar on how communities are left behind by State and financial markets. It is due to be released in Feb-2019.

What keeps countries together?

If Europe is considered a good example to check whether there is empathy between British and Polish or Sussex and Essex, the answer could be no. Not just between countries, even coastal cities in US differ significantly from central semi-urban regions. It is democracy which keeps everyone together by responding quickly. The rise of authoritarian world over past few years may not coerce democracies to extinct but will only evolve them from the present system to be more resilient.

Belt and Road Initiative (‘BRI’) and India’s role

BRI will certainly bring large parts of the world together as China has demonstrated its capability to undertake large size infrastructure projects. What remains to be observed is the financial viability – can those projects generate enough revenue such as the failure of Hambantota port in Sri Lanka. A successful BRI will require China to be more transparent and pursue projects strictly over commercial considerations and not geopolitics.

India fears being encircled by Chinese owned ports and hence has rightly distanced itself from BRI. However, to engage in a meaningful dialogue with China, India needs to economically grow in size. To China, India doesn’t matter as much as India thinks it does.