Raghuram Rajan: An economist with a difference

Raghuram G Rajan, Professor of Finance at the Graduate School of Business, University of Chicago, is the first person of Indian origin chosen by the International Monetary Fund as its chief economist.

He is not only the youngest individual to hold this position, but also the first from a developing nation.

Co-author of the book Saving Capitalism from the Capitalists (Crown Business, New York, 2003), Rajan has apparently sought to steer clear of the ideological position espoused by the extreme-right Chicago school of economists.

Though he is a firm believer in the virtues of a free market system, he has nevertheless been extremely critical of capitalists who, to use his words, "in their continuous quest for government protection against competition often turn out to be capitalism's worst enemies."

Now at a relatively young age of forty, Rajan's rise in the world of academia has been truly spectacular.

A graduate in electrical engineering from the Indian Institute of Technology, Delhi, in May 1985, he went on to earn an MBA from the Indian Institute of Management, Ahmedabad.

After a brief stint with the Tata Administrative Services, barely four years after leaving India, in May 1991, Rajan earned a PhD from the prestigious Massachusetts Institute of Technology. His thesis was simply titled: 'Essays in Banking.'

Between July 1991 and June 1995, he taught at Chicago University as assistant professor, thereafter became a full-fledged professor.

In 1996-97, he became a visiting professor at the Stockholm School of Economics as well as the Kellogg School at Northwestern University.

Rajan currently teaches the highly rated case course in corporate financial management at Chicago University.

Considered an expert on comparative financial systems, the IMF managing director Horst Koehler described him as being "at the forefront of work on banking and financial sector issues."

His official designation at the Fund would be Economic Counsellor and Director of the IMF's Research Department -- he would be replacing Ken Rogoff when he joins his new assignment in September after the annual meeting of the World Bank and the IMF.

Only time will tell whether an individual like Rajan would be able to influence the manner in which the Fund -- often accused of toeing the ideological line of the United States and of upholding the interests of big business -- looks at the rest of the world, especially developing countries.

In recent years, the IMF has attempted to become more transparent and less doctrinaire in its approaches towards restructuring the economies of developing nations.

For instance, the Fund is less insistent on extolling the virtues of full capital account convertibility and widespread privatisation than it was in the past.

Whereas the chief economist of the IMF has traditionally maintained a relatively low profile compared to his counterpart in the World Bank, the very fact that a person like Rajan is being appointed is significant.

A charitable explanation could be that the Fund would attempt to be a bit more nuanced, appreciative and sensitive to Third World problems and aspirations instead of shoving their favourite economic prescriptions down the throats of unwilling governments of developed countries.

Rajan's co-author of Saving Capitalism is another 40-year-old professor of finance at Chicago who had, like him, obtained his Ph.D from MIT.

He is Italy-born Luigi Zingales with whom Rajan has collaborated on a number of articles with esoteric-sounding names such as "The Firm as a Dedicated Heirarchy: A Theory of the Origins and Growth of Firms", "The Costs of Diversity: The Diversity Discount and Inefficient Investment" and "The Tyranny of Inequality: An Enquiry into the Adverse Consequences of Power Struggles".

Rajan believes that while the absence of rules can make the playing field uneven, too many rules of the wrong kind can have exactly the same effect.

"... a truly free and competitive market occupies a very delicate middle ground between the absence of rules and the presence of suffocating rules," he and his co-author have written.

They add: "It is because this middle ground is so narrow that capitalism in its best form is very unstable. It easily degenerates into a system of the incumbents, for the incumbents, by the incumbents".

Perhaps the ideal narrow middle ground that would characterise capitalism at its best is somewhat Utopian. Nevertheless, Rajan and Zingales are convinced that "free markets are perhaps the most important tools for lifting the huddled masses out of poverty".

Almost in the same breath, they also acknowledge that while free markets, particularly free financial markets, "fatten people's wallets, they have made surprisingly few inroads into their hearts and minds".

Thus, they point out that financial markets "are among the most highly criticised and least understood parts of the capitalist system".

In their book subtitled Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, the authors compare a poor cane bamboo stool maker from a village in Bangladesh with a Stanford graduate from Silicon Valley who wants to start his own business to point out what is common to both -- lack of access to adequate finance.

Rajan and Zingales are of the view that finance should be made more accessible to talented individuals who are not well off rather than be cornered by small, entrenched and affluent groups.

In that sense, while they are evidently aware of class issues, the authors reject the Marxist view that capitalism is intrinsically unstable and will collapse under the weight of its contradictions.

"In the middle are all those searching for a 'third way', a kinder and gentler form of capitalism or a more market-driven form of socialism," is what the authors have written.

Their book contains very few references to India but these are all perceptive.

In the section on how property rights historically developed, the authors point out that "the growing disparity between the booming west and south of India and the relatively stagnant central and northeast areas is probably, in some measure, a legacy of history" and a consequence of the manner in which land was distributed and property rights granted during colonial rule.

In a different context, the authors point out that property destroyed during a communal riot could be deliberately targeted against irksome business rivals.

In an exclusive interview to Shakti Bhatt of rediff.com, Rajan has spoken out against all forms of protectionism including the clamour being raised by certain politicians in America about jobs being outsourced to India in areas like information technology enabled services, call centre operations and computer software.

Even if one does not always agree with the views expressed by Rajan, one cannot but help admire his easy writing style, his communication ability and his endeavour to demystify the complexities of financial markets and systems.

At one level, Rajan unequivocally states his admiration for capitalism as the "most effective way to organise production and distribution".

At another level, the very title of Rajan and Zingales' book is an oxymoron. After all, where would capitalism be without the big, bad capitalists?

Rajan and his co-author argue that the biggest danger to capitalism comes not from "fire-spewing trade union leaders" but from well-heeled executives in pin-striped suits who publicly praise the virtues of free enterprise capitalism but try their level best to suppress competitive markets.

His India connection would hopefully remain strong even after his new appointment. He is currently a director at the International School of Business, Hyderabad and an adviser to the regulator of the country's capital markets, the Securities and Exchange Board of India.

Whether his suggestions on how India's messy financial systems are to be cleaned up would be accepted, however, remains to be seen.

The author is Director, School of Convergence at International Management Institute, New Delhi and a journalist with over 25 years of experience in various media -- print, Internet, radio and television.