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Geopolitical risks are no surprise: Ex-RBI chief Rajan

Populism poses a threat, but isn't 'black swan,' says former India central banker

Raghuram Rajan, former governor of the Reserve Bank of India (Photo by Kenji Kawase)

HONG KONG For Raghuram Rajan, India's former rock star central banker, geopolitical risk is the primary worry in today's world. He ranks it ahead of a possible trade war and rising interest rates as reasons to lose sleep.

"I don't think it's a black-swan event," Rajan said of the political danger. Speaking to the Nikkei Asian Review and a few other media organizations on Jan. 17, before addressing the Asian Financial Forum in Hong Kong, the University of Chicago professor explained that the risk is anything but unpredictable, since "we have a plethora of leaders who want to look strong."

Rajan did not name names in the interview, but he mentioned U.S. President Donald Trump, Russian President Vladimir Putin and Japanese Prime Minister Shinzo Abe as examples during his speech. He warned the audience that "we have to expect the unexpected with these populist insurrections."

Rajan stressed the geopolitical risk is "very real." "Everyone wants to take and nobody wants to give," he said, despite the obvious need for give-and-take in resolving disputes between countries.

"The big question is can you [find] a solution," he said. "Probably the answer is no. I do worry, even without a confrontation."

Rajan harbors concerns about the potential effects of a trade war and rising interest rates, too, though he said these risks might offset each other. "If we have a trade war and trade collapses, interest rates may not rise, but it's not the kind of environment that we are looking for."

TECHNOLOGICAL TSUNAMI So what brought so many muscle-flexing leaders to the fore? Rajan believes the central issue is not inequality, per se, but rather technology that is putting jobs at risk.

He cited self-driving cars as one example. In the U.S., about two-thirds of the 3.5 million truck drivers could be affected, not to mention taxi drivers. This innovation could affect other sectors as well, such as insurance.

"I don't think we are prepared" for all the changes that are coming, Rajan said. Blaming globalization, he emphasized, is not the answer.

Jobs are disappearing "not via external competition, but via technology," he said. The only hope is to adapt, and the way to do that "is to keep the global system open."

As a former central banker for one of the world's largest emerging economies, Rajan is well aware of the price such economies would pay if globalization recedes. "To a certain extent, we in the emerging markets have the right to feel betrayed," he said, since industrialized countries are now talking about changing the rules of the game.

Rajan noted how, decades ago, "many emerging markets were closed and had to be persuaded by constant rhetoric by economists, multilateral institutions, and, yes, by the United States to open up. And clearly there were costs to it."

In his view, developed countries have benefited from the open global system. Now that they are feeling the heat from emerging nations that have adapted to the system well, mature economies should "just figure out how to deal with these costs, just as we figured it out when we had these costs."

Free and fair elections may have produced a slew of populist leaders, but Rajan is adamant that the democratic processes that brought them to power are not to blame. Rather, he said, democracy is "highlighting problems that have been ignored and that need to be fixed." In his view, a democratic system "has a tendency of muddling through [to] the solution, [and it] may not be its first cut that works."

The populist victories are important because they serve as "early warning signals that something is going deeply wrong," Rajan said. He believes "all the thinking and anxiety among people prompted these populist insurrections," and if there were no way to reflect these worries in the system, "we would go on blindly and suddenly, one day, we have a revolution. ... The system lets off steam."

"Turning to China, Rajan sounded positive on how the country is coping with its challenges, including capital outflows and rapid depletion of foreign reserves. Though he reiterated a few times that he would not opine on Beijing's policies, he seemed to be backing up the People's Bank of China, the central bank, when he said that the "whole point of building reserves, to a certain extent, is to use them."

While Rajan was willing to sound off on a host of global issues, he was circumspect when it came to the policies of his home country. Asked about the impact of the Indian government's demonetization bombshell -- unleashed after he left the Reserve Bank of India -- he answered: "I cannot speak about what's happening in India. Nice try."

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