RBI Guv raps industrial nations for expecting emerging markets to be “orthodox” in their monetary and economic policies at a time when they themselves have ‘thrown orthodoxy out of the window’
Basel : Cautioning against expecting too much from central banks, RBI Governor Raghuram Rajan has said it is wrong on their part also to always claim a ‘bazooka’ left up their sleeves, even as he asserted that life is “very difficult” in emerging markets. In a panel discussion here on lessons learnt by the central bankers from the global financial crisis, he also took on the industrial nations for expecting the emerging markets to be “orthodox” in their monetary and economic policies at a time when they themselves have “thrown out the orthodoxy out of the window”.
He was speaking at a panel discussion after the Per Jacobsson Foundation Lecture, delivered by JPMorgan Chase International Chairman Jacob Frenkel, on the occasion of the Bank for International Settlements (BIS) Annual General Meeting here. The lecture took place on June 26, but its content has been made public now only. Those participating in the panel discussion included Bank of Mexico Governor Agustun Carstens and Bank of France Governor Francois Villeroy de Galhau.
The lecture took place within days of Rajan making public his decision that he would not opt for a second term as RBI Governor when his current three-year tenure ends on September 4.
Rajan sought to compare the current scenario in industrial countries as a new situation, where policies do not seem to work as advertised, where one could argue that normal laws of economics do not apply and where elites were pushing these policies before they lost the reputation. “There is a sense that they don’t know so they could not be trusted. There is a zero sum game that if an immigrant comes he takes my pension away and if I give to this set, which is top 1 per cent or so, then I am going to lose out in the longer run.
Talking about emerging markets in this kind of situation, the RBI Governor said spillovers become much more difficult in this kind of environment because the whole focus is on the domestic economy.
“So there used to be, for example IMF was all about fiscal consolidation and the fiscal rectitude, even that last bastion has given way. For us in emerging markets even to talk about fiscal rectitude becomes very hard because immediately they point to IMF that even the IMF doesn’t talk about fiscal rectitude.
“If you are an emerging market, a small boat in a turbulent ocean of policy and environment emerging from elsewhere, what do you do? You want us to be more orthodox, but you want us to be more orthodox in an environment where orthodoxy is being thrown out of the window. “So it does become much more difficult to talk about labour market flexibility, low fiscal deficit, low inflation, all those good things in such an environment,” he said.
He further said the industrial countries had the benefit of being where they were of showing the way to prosperity and growth. On the other hand, all emerging markets had the debate on how they were unique and the laws of economics do not apply to them, but they were also looking to “pick up the same path and bring down inflation, bring down other things and get to the glorious days when they themselves become rich”. “But now we have two strikes against that path. One is there was a big crisis and how much that path was responsible for the crisis. Was inflation targeting the reason, why we had that massive crisis, that debate is going on. “And second, that the industrial countries are themselves debating the orthodoxy, which then means even they don’t believe in that. So therefore what do we do? For somebody who believes entirely in what Jacob has been talking about, life is very difficult in an emerging market,” he said.
