Sunday, November 23, 2014

In Search of Dynamism

Raghuram Rajan

Is effective global financial regulation possible, and, if so, what form should it take? Will demand in rich countries remain too weak to return the world to prosperity? Does debt forgiveness and relaxation of multilateral financing terms for developing countries help or hurt their growth prospects?

The financial crisis of 2008-2009, it is said, has given rise to a “new normal” for the world economy. Like Japan’s bubble years, the era that preceded the global financial crisis has left a heavy burden of debt on the balance sheets of banks and households in all but a few advanced countries. With credit and investment down and unemployment possibly remaining stuck at high rates, a robust global recovery now seems more a mirage than a viable possibility.

Given the jittery state of the world economy, governments in every country, rich and poor alike, are engaged in a desperate search for growth. They know that the tools that they have been using to fend off stagnation or worse – near-zero interest rates, huge stimulus programs, and bailouts for financial and industrial firms – cannot be implemented indefinitely. So how will long-term growth be revived and sustained?

Raghuram Rajan, the youngest-ever Chief Economist of the IMF, a former Chairman of India’s Committee on Financial Sector Reforms and adviser to the Prime Minister of India, and currently Professor of Finance at the University of Chicago, is one of the few economists who not only saw the crisis coming, but also proposed viable policies to revive growth. In fact, in 2005, at a celebration honoring Alan Greenspan, it was Rajan who revealed that the emperor had no clothes by asking if “financial development made the world riskier?” and foreseeing that “disaster might loom.”

Every month in In Search of Dynamism, written exclusively for Project Syndicate, Raghuram Rajan examines the global economy to find the sources of renewal and the policies needed to support it.

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