Saving the world from misguided populism: Raghuram Rajan offers some prescriptions

As Rajan sees it, our society, economy and polity are an interplay of state, markets and the community and many of the current problems of anger and alienation have come about partly because skewed markets and technology have made meritocracy hereditary and partly because extreme centralisation of powers in the political sovereign has disenfranchised the community.

Importantly the book doesn’t just diagnose, it also prescribes.

The most impressive part of the book is its masterly interpretation of the past thousand years of the western political economy when markets and state carved out niches for themselves from the earlier feudal era when the community, markets and the political state were co-terminus. (Rajan actually advises readers to skip this Part 1 and go over to Part 2 where he discusses the growing imbalance between the state and markets on one hand and community on the other, and then to part 3 where he proposes solutions; but skipping part 1 will mean losing out on a brilliant big picture analysis of the history of political economy of  the modern world).

Cutting to the post-war period, Rajan argues that a rich, and growing US put in a world order that promoted global trade and encouraged institutions like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO) that brought down tariff barriers. But now that the benefits of industrialisation have been fully extracted, growth is challenged and hence there is grabbing and snatching – both between nations and within nations.

Rajan’s recommendation is greater decentralisation. He advises that more powers and monies be restored to local governments and communities. He argues that solutions such as state-sponsored health insurance or universal basic income (assuming it is affordable) should be designed and administered not by an elitist bureaucratic centre but by and through local communities.

Likewise, the European Union, he says, was forged by Europe’s elites without seeking the explicit permission of the citizens of the various communities. Its preservation will require engaging the people.

The scope of this book is vast. It interprets several political economies such as the US, the UK, Europe, China and India and also suggests some remedies at various levels -- intra-nation and international.

While many may agree with Rajan’s masterly analysis of history, the book doesn’t raise or confront some bigger questions:

In the first place will liberals in many countries get a chance to put in place the kind of reforms he is suggesting. The post-war prosperity and thereafter the rise of financial and capital markets gave the liberals a long rope to address the problems of inequity. But as Rajan says, middle-class professionals and intellectuals, from being voices against vested interests, are seen to have become part of the power elites. So will history give these liberals a second chance?

The book doesn’t debate or answer how long the era of right-wing nationalist populism may survive. What happens when displaced and unemployed majorities are disappointed by the populist leaders? In what shape will liberals return, if at all?

It doesn’t discuss the damage that may happen to civil society and structures like the judiciary and the media that limit governments today. Nor does it go into the damage that may happen to world trade as the WTO in particular and multilateralism, in general, is ignored and bilateral agreements become the order of the day.

The book discusses at the length the need to recognise the might of growing economies such as China and India in organisations like the International Monetary Fund (IMF) and the World Bank. As Rajan rightly observes, considering that China may displace the US as the largest economy, the headquarters of the IMF may have to shift to Shanghai from Washington. But he doesn’t dwell much on of how this may be achieved and what if this rebalancing isn’t done.

Rajan discusses empowering local communities largely in a US context. While he refers to the magic wrought to the city of Indore by its brilliant mayor Malini Gaud, he doesn’t discuss the dire financial state of city municipalities or village bodies in India. Indeed after Goods and Services Tax (GST), urban bodies are even more at the mercy of state governments, having lost octroi, which was one of their lucrative sources of income.

A little more about this last point. Rajan does mention that in India an all-powerful central government is checked not by a powerful private sector or by the media but by state governments and by bodies like the judiciary. He is prescient when he argues the private sector in India, being dependent on myriad governmental permissions never dares to criticise governments unlike in the west, where large corporates dare governments and limit them.

Rajan could have dwelt a little more on how state governments in India may be empowered by the centre to deal with issues like farmer distress, deteriorating schools and healthcare, a point which is well discussed by Rajan’s predecessor in the RBI, YV Reddy in his recent book Fiscal Federalism.

In a way, both Rajan and Reddy are arguing against over-centralisation. Reddy points out in his book that Indian central governments have been spending more on state subjects than central subjects; they use state officers to implement their grandiose one-size-fits-all plans thus indulging in what he calls coercive federalism.

A joint book by Rajan and Reddy on how power in India may be decentralised to benefit the local communities may be interesting.

Simply put, Rajan’s book may be seen as an effort to save liberalism from the populists and globalisation from the nationalists. “I hope it stirs your blood,” writes Rajan. Even if one doesn’t agree with his medicines, the book, with its grand big picture analysis, is sure to stir a global debate on the future of markets and civil liberties in an age of misguided populism.