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Raghuram Rajan on the Necessity of Change

Is the world learning the right lessons from the recent global economic crisis?

December 18, 2010

Is the world learning the right lessons from the recent global economic crisis?

1. Why is a fundamental rethink necessary?

"All countries stand to gain in the long term — not just from a more stable world economy, but also from a more sustainable domestic growth strategy."

2. Don't international economic summits help?

"Nothing really happens at international meetings. Platitudes are rolled out, but everyone knows nothing will be done. That is not surprising — given that actions to reduce sustained trade surpluses or deficits require domestic political momentum."

3. What about the IMF and the World Bank? Can't they help?

"Yes — if they take a cue from the movements promoting action against climate change and supporting aid to poor countries."

4. Can you be specific?

"The World Bank and IMF should expand beyond the conventional, which is to make their case to the top leaders. To create more political momentum within countries, they need to use all the modern methods of contact that technology has put at everybody's command. They should speak directly to the influential and the connected in many countries, explaining to them why change is necessary — and how it can be beneficial despite the pain of adjustment."

5. Give me an example.

“Think of the IMF making its case more directly to the thinking middle class in China."

6. What would they argue?

"That by expanding retail credit — and thus reducing the need for households to save before they can buy — China could become less of a producer-oriented, capital-intensive economy. It would become both more private-sector-oriented — and far less dependent on foreign demand."

7. What else do these organizations need to do?

"The multilateral agencies should help bridge the fault lines between nations — and help each one see what it needs to do."

8. Why?

"This is not a task that the private or non-profit sector will undertake. Cuddly koalas, rain forests and destitute children do inspire hearts, minds and donations. In sharp contrast, causes such as global trade imbalances, exchange rates and even food scarcity are unlikely to have the same public appeal — and will not be taken up by NGOs."

9. What is the difference between the World Bank and the IMF, and the NGOs?

"Unlike the NGOs, they do not have to choose exciting or emotional issues that attract funding. They can focus on the drier issues that are every bit as important to the future of our globe."

10. And finally, will changing the economy be an easy task?

"We should have no illusions: Change is difficult for all countries."

Editor's Note: All the quotes in this feature have been drawn from Raghuram Rajan's book, "Fault Lines: How Hidden Fractures Still Threaten the World Economy," published by Princeton University Press on May 24, 2010.

Each edition of “Read My Lips” presents quotes made by the featured individual at the time specified in the answers. However, it is a “virtual” interview only — insofar as we have added questions in order to provide a better context to the thoughts expressed.