Fault Lines: How Hidden Fractures Still Threaten
the World Economy
Raghuram G. Rajan
Collins Business n R499 n pp 274
Insightful, educative and incredibly gripping, if you want just one book to understand the ongoing global financial crisis and the way forward, Fault Lines it is. Borrowed from geology, the expression takes the physical phenomenon of enormous physical stresses along tectonic plates of the Earth and applies to the global economy in general and the financial sector in particular. Coming from former chief economist at International Monetary Fund (IMF) and current economic advisor to Prime Minister Manmohan Singh, Raghuram G. Rajan, a professor at Chicago’s Booth School of Business, takes his key idea of free markets a step further in this book.
Free markets, he wrote in his brilliant 2003 book, Saving Capitalism From The Capitalists, need to be wrenched out of vested interests for them to function smoothly. Seven years later, his key argument remains the same — allow markets to function but regulate them better. He attacks the incentive structures that allow the system — from investment-protecting bondholders and shareholders to bonus-chasing managers — that took risks at the cost of taxpayers. The key question: how do we get the private sector to price risk properly again, without assuming government intervention?
That’s a political issue, he writes: “Growing income inequality in the US stemming from unequal access to quality education led to political pressure for more housing credit.” No problem in the intent, he says, but “the gap between government intent and outcomes can be very wide indeed, especially when action is mediated through the private sector”.
The reason: objectives of the private sector aren’t the same as the government’s. Politicians made it worse. Rajan suggests reforms — but also notes the difficulty of selling them to the public, hence to the politician, a crucial player in the field of ‘political economy’. “There are no silver bullets,” he writes. The story is still unfolding.
For this Indian edition, Rajan has written a new chapter, ‘What lies ahead for India’. In these 14 tight pages, he presents an optimistic picture of the country’s growth story. But it’s not blind optimism. “Don’t take growth for granted,” he warned me over tea on a hot, humid Delhi evening. “India has people but the jobs aren’t where people are, nor are all the people necessarily capable of undertaking the jobs that are being created.”
But the biggest impediment to India’s growth story is land — its title, its grab, its ugly politics and vested-interest-driven economics. The road here is simple: “Giving them full can clear title to the land will create a much more vigorous and liquid market for land transactions and will smoothen the way for land acquisition.” The problem: “Well-connected industrialists, developers, politician and the home-grown mafia,” who can enforce property rights and even enhance them by altering zoning restrictions. No doubt, we need to give land and its related economics a deeper look.
Rajan’s market-leaning — thankfully not market-worshipping ideas — are part of a larger debate that is looking at the return of big government with apprehension, something that I agree with in theory.
But the question I ask and to which I haven’t received any satisfactory answer yet is: what are the systems we need to put in place before we can leave 800 million illiterate and poor of our country at the mercies of the super-sophisticated, super-efficient free markets? While an optimistic Rajan attempts to build the architecture of that answer in this book, getting the ‘right balance’ is going to be a political struggle and a hard-to-mend fault line.