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Rajan: Emerging economies look inward

November 15, 2012 06:00AM

When China saw the West’s appetite decline for its manufactured exports following the financial crisis, the Chinese government recognized that the country would have to look inward to fill the gap. It hasn’t been easy.

“As emerging economies have to provide their own demand, they are finding it difficult to disengage from the demand the West provided,” said Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance at Chicago Booth.

Speaking at Economic Outlook 2013, Rajan, who also is chief economic adviser in the Indian government, said strengthening the middle class comes slowly.

“Chinese consumption is low because wages are low,” he said. Further clouding the situation were bad loans by lenders “that have come home to roost.”

Rajan said the government-controlled enterprises must allow wages to rise, which is inevitable as the country produces higher value-added goods.

China started out by manufacturing footwear and textiles, he said. Now the nation manufactures computers and other office machines, which include domestically-produced computer chips. “The ‘China price’ will become something of the past,” he said.

The result, he predicted, will be more sustainable growth. “Emerging markets are changing in the right way.”

Speaking to hopes for a robust worldwide economic recovery, Rajan said it will take time for countries to “rebalance.” The biggest challenge for industrial nations, he said, is how to deal with social contracts and restore growth at the same time.

“In the medium term, industrialized countries will have to default on their promises such as social security and healthcare,” he said. “How they choose which promises to keep and how they sell it to people will exacerbate or reduce social tensions.”

Asked whether a US debt-to-GDP ratio of 350 percent is a “new normal,” Rajan said dollar-denominated debt looks strong compared to other currencies.

“Wherever I go, the United States (economy) looks better than any other industrial economy,” he said.

Judith Crown