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Rajan’s craftsmanship

Through this article, Deepanshu Mohan expresses his concerns about the unsatisfactory approaches adopted by most educational institutions towards learning Economics, and lists out the factors that set Raghuram Rajan apart, as a brilliant craftsman of discipline of economics. 

In the book Saving Capitalism from the Capitalists*, written in 2004, Raghuram Rajan and Luigi Zingales argued how the force of free markets- perhaps the most beneficial economic institution known to humankind- rest often on fragile political foundations that ultimately lead to the exacerbation of most socio-economic problems in developing countries (most noticeably in areas of employment generation, food inflation, tackling food security, poverty alleviation etc).

Rajan and Zingales underlined the potential of market generated economic incentives, and focused on the critical roles of bureaucrats and politicians as the necessary visible hands needed in guiding the invisible hand of the market for yielding economic efficiency from a longer term perspective.

Rajan’s decision to return in his academic role at University of Chicago post the completion his term as RBI Governor in September, makes it pertinent to mention that unlike many econocrats (economists working as bureaucrats in government), as the RBI Governor, Professor Rajan positioned himself as a brilliant craftsman of the discipline of economics.


For someone who deeply understands the complexity of financial systems today and the vulnerability of emerging economies like India in the global economic system, Rajan’s cautious approach on inflation, avoiding short-term interest rate cuts, bank debts, open market operations etc. were driven by calculated precision keeping a longer term vision for the economy. His decisions as the RBI chief boldly avoided the speculative international investor tendencies and government induced pressures to callously allow cheap credit to plague the money supply in a booming economic phase.

In Fault Lines, written by Rajan in 2010, he dissected the causes of the 2007-08 financial crisis while elucidating on the need to continually address and balance a number of fault-lines/imbalances or hidden fractures inherent to an economy’s financial sector through the enforcement of effective countervailing measures by the central bank and other institutions, facilitated with the actions of government. He explained how the process of working hand-in-glove with the then US government to push for financial deregulation made the Federal Reserve equally responsible for the crisis. In a democracy, a process of maintaining periodic deliberation, including points of policy disagreement, between a rising economy’s central bank governor and the government in power is healthy in for the economy’s long- term pursuit to economic prosperity than being considered as counterproductive.

Quite often economists and commentators ignore how important it is for the central bank to resist any loose monetary policy changes (through interest rate cuts or reducing reserve requirements) as quick fix actions during a period of economic boom or expansion. This is what helped Rajan in building the image of a credible central banker who based his economic policy decisions not on short-term circumstantial evidence, but in a longer term perspective of what is desirable for India’s sustainable economic expansion.

Crafting scientific evidence in economics:

The craftsmanship needed in applying economics today goes beyond relying on growth numbers and production metrics alone. With the injection of mathematical modelling and econometric techniques (discussed recently by Paul Romer as ‘machines’**), there has been a growing tendency amongst econocrats to somewhat ignore the ancillary building blocks to efficient economic systems; for example, the institutional reforms needed in enforcement of contracts, rule of law and development of social, political institutions.

Most often these aspects are assumed to be static in the models formulated based on which economic decisions can have adverse consequences. Rajan’s academic thinking always acknowledged this and in his own time as an influencing authority, he practiced the same while giving due importance to both institutional and political reforms and going beyond growth metrics in an economy’s journey to prosperity and sustainable development.

The way economics is still taught in most graduate schools fails to acknowledge the above point. We have most mainstream economists teaching economics while being ideologues of the market economy or tending to view markets as inherently desirable and government intervention as inherently unwelcomed. Because of this, most of us typically study more about how markets fail because of government action than studying the unorthodox conclusions of mainstream economic policies.

There is need to include a study of more cross-country narratives with an increased exposure to the economic history of nations in advancing our economic thinking on complicated socio-economic issues like income inequality, rural-urban disparities in employment generation etc. Rajan’s own academic work often brought out useful cross-country narratives (say, his empirical explanation on ‘relationship capitalism’ that worked in Japan and continental Europe post the Second World War in Saving Capitalism from the Capitalists).

There is nothing reductionist about the practice of economic modeling ‘til we confuse a given model with the model in identifying a developing economy’s path to greater economic prosperity. Economic analysis, if skillfully crafted, can be very useful in identifying areas of potential gains and thereby helping to create new constituencies for change in resolving most developmental challenges for economies. And that’s what Rajan, like most exceptional economists, independently practiced throughout his term as RBI Governor.

In a certain away, perhaps it would be good to have Rajan return full time into academia to allow him more academic freedom to write about his time as RBI Governor, the political challenges faced and on the hidden fault lines in India’s financial system, which hopefully his successor can seek to address. What will be missed though is his bold, independent, tactful craftsmanship at the central bank.

It would also be interesting to observe to what extent the next RBI Governor acts in line or away from his predecessor’s skillful craftsmanship. For econocrats today, it is critical to apply scientific evidence in economics, balancing the social, political and institutional aspects attached with India’s path to deepen its economic integration with the rest of the world.

With a transcending macroeconomic policy shift towards a more Liberalization, Privatization and Globalization (LPG) strategy (coined during the Washington Consensus days of late 1980s), it is of paramount importance for central bankers, especially in a developing large economy like India to add an ‘S’ for Stabilization in this transcending shift through effective countervailing measures and a long-term centered monetary response to sustain India’s inflated growth story.

Deepanshu Mohan Is Assistant Professor and Assistant Director for Centre of International Economic Studies at the Jindal School of International Affairs, OP Jindal Global University



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