In his new book, Saving Capitalism from the Capitalists, Raghuram G. Rajan, Economic Counselor and Director, Research Department, International Monetary Fund, argues that capitalism is still the best hope for eliminating poverty and spreading opportunity if markets, and especially financial markets, are allowed to work as they should. The book, co-authored by Luigi Zingales, University of Chicago, addresses the importance of institutions to development and assesses several obstacles identified as barriers to greater economic participation and poverty reduction in an increasingly globalized world. A major argument in their research is that established elites work to stifle competition by preventing new entry by lobbying politicians to formulate rules serving their limited, private interest.
During this event, Rajan described how elites have come to dominate some economies and governments and he provided examples from several regions and economic sectors within India. He described how historical power structures developed in various regions of the country and how hierarchical structures, controlled by elites, tended to have a negative effect on institutions and, over the long term, exacerbated poor economic conditions. Rajan said that in the absence of infrastructures supporting markets, the market is not well defined.
He noted that the reason many people are against capitalism is that they are used to seeing “monopoly capitalism” in which only a few people have access to the benefits of capitalism. He then stated that the reason people are not able to benefit from capitalism is because other, more powerful interests are able to decide how markets are created and run and then they prevent changes to the system.
According to Rajan, both the far right and the far left hoped to correct this imbalance. The right advocated the abolition of government, while the left wanted to eliminate business, such as through the communist system. He noted that neither solution is practical. The answer is to create a system in which neither government nor business controls the other. Regulation, which balances the promotion of new entry with the protection of consumers offers such solution and is preferable to the liaise faire system, Rajan said. If institutions are allowed to function properly, government will be able to provide the infrastructure to create a competitive environment with widespread access. Then, business and markets can function efficiently with little intervention by governments. For this to happen, he said elites must be convinced that free markets are in their best interests. Rajan noted that globalization is causing many of these special interests to take notice.
Globalization, or the opening up of borders to capital and trade flows, creates a competitive environment in which the elites find out that they no longer have the ability to control the domestic situation and must compete in the larger, global environment. As this becomes evident, they realize the need for adequate infrastructure, corporate governance, and laws in order to be competitive.
Rajan described the case of the Indian automobile industry which as late as the 1990s was producing 1940-era cars for a closed domestic market. Once the market was opened and foreign models become available, domestic car sales dropped. As a result, Indian automobile manufactures began to examine the methods of other producers in order to improve quality. After several years, Indian began producing cars of export quality. In only a few years, production grew from 50 thousand to 600 thousand automobiles per year. He noted that the initial short-term pain of opening up the market was quickly replaced by long-term economic gains. Another result was that local demand for quality increased and this demand for quality stretched from consumer goods, to infrastructure, to improved financial services for business and consumers.
He concluded by emphasizing the need to address the growing backlash against globalization in developed countries as more goods production and services move offshore.
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