BY SAKSHAM KHOSLA


Saksham Khosla is a first-year International Development concentrator at SAIS and an editor at SAIS Perspectives. He previously conducted research on social protection, governance, and financial inclusion in India at the Carnegie Endowment for International Peace and Carnegie India. 


Dr. Raghuram Rajan, Katherine Dusak Miller Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago, visited SAIS to discuss his new book The Third Pillar: How Markets and the State Leave the Community Behind. He is a former governor of the Reserve Bank of India and former chief economist at the International Monetary Fund.

Following his talk, SAIS Perspectives spoke to Dr. Rajan about his arguments for rethinking the relationships between the three pillars of modern society – community, markets, and the state.  


Perspectives: A large literature looking at long-term economic growth, such as work by Melissa Dell, Abhijit Banerjee, and Daron Acemoglu and James Robinson, shows that states and markets have deeply path-dependent outcomes. Since you make a case for empowering and strengthening communities in your book, do you worry they are similarly constrained by the weight of their history?

Dr. Rajan: There is path dependency but what I am concerned about is within the same country there are communities with very different levels of well-being. So, it’s not so much the broader institutions in the country or the market or state institutions, but really that regional disparities and place-based differences have become important. And of course, each community has its own history, there is a certain amount of path dependence, but it’s easier to remedy significant disparities when you know that other communities have actually succeeded. Again, I don’t know that we would succeed with every community, but there’s a greater chance if you know the institutions don’t stand in the way of some good in communities.

 

Perspectives: Moving to markets, there are two views broadly about job creation in developing countries. One view finds that the “animal spirits” within many economies have not yet been fully unleashed, and there is much latent potential. The other contends that the combination of increasing automation, slowing global trade, and premature deindustrialization means the traditional model of manufacturing-led growth is on shaky ground. How do you view the potential for employment growth in the developing world?  

Dr. Rajan: In reality what we’ve seen is that even today you see the same process where as countries become richer, some of the low-level manufacturing moves away and goes into poorer countries. Today China is getting priced out of the lower-level manufacturing, so that’s a natural development, and where these jobs are moving to is countries like Vietnam. So maybe there’s less than there used to be but certainly there are still countries where if they do the right things they can benefit in terms of job creation. I think pay accompanies productivity and many poor countries are still at a level where pay is low enough that even given their levels of productivity they can employ people. Of course, if they can enhance their productivity in some form of catch-up they can certainly employ their workers in many jobs. I wouldn’t give up on that, but also wouldn’t make that the sole focus of my development activities. I think if we create the enabling environment, over time we may see a big market opening up in services as opposed to goods trade.

 

Perspectives: We’ve seen in recent years a marked shift in favor of unconditional cash transfers as an instrument for social welfare policy. This is perhaps nowhere more evident than in India, where political parties are pitching voters large cash transfer programs in the ongoing general elections. Where do you see this trend headed in India and do you see this having an impact on how other developing countries are conceptualizing their own welfare states?

Dr. Rajan: I would see direct cash transfers as a way of poverty alleviation rather than as permanent income support. There are plenty of jobs that can be created in India and plenty of workers that can be absorbed into jobs, provided they have the appropriate skills. I see direct income transfers as a substitute for other programs that empower the person getting those transfers to create their own structure of support so that they eventually get the skills, the nutrition, the capabilities that allow them to get good jobs. So, I don’t see this as substituting for jobs, I see it as a mechanism to get those good jobs. In that sense, it’s different from proposals for universal basic income that are sometimes made – I don’t think the idea is to keep people permanently on the dole.

And a number of countries are already doing it – India’s not the leader here – Bolsa Familia, PROGRESA, various Latin American countries, and even some African countries have gone about it. At the same time, we are recognizing that direct income transfers have a benefit – lower leakage, more empowerment, more possibility that you pick the best service that works rather than be tied to a monopoly provider. I think India will learn from other countries and implement it in our way.  


PHOTO CREDIT: ”Work in Freedom Photos” by ILO in Asia and the Pacific, from Flickr Creative Commons, licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License.

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