Meritocracy and social mobility have long been hailed as the foundations of a well-functioning society. But economic pressures have exposed the failures of existing structures, where so-called ‘elites’ remain in charge while an increasingly dissatisfied and often struggling wider population is left to bear the consequences of their decisions, according to Raghuram Rajan, the former central bank governor of India, who is currently a professor of finance at the University of Chicago Booth School of Business. People “don’t see the mobility they used to think existed before”, he says.
Central banks are exposed to the anti-elite wave too. “I think that, unfortunately, central banks are very much, squarely, part of the elite – as am I and I’m sure you are [at The Banker]. We’re all part of this group,” adds Mr Rajan.
Accessibility blocked
Specialised talk on markets and the economy has not helped to bridge the gap between policy-makers and the wider community they serve. “[Central banks are made up of] unelected technocrats, many of them have PhDs, many of them talk a language that is not that easily accessible to the masses – sometimes purposely intended to not be accessible,” says Mr Rajan. “And to some extent, they push against the idea that there [can be] easy solutions to the problems we have.”
This is an issue. For however complex the required solution, articulating it more simply would go a long way in keeping communities on board, according to Mr Rajan. Inaccessible language, on the other hand, risks playing in the hands of populists with intuitive (but not necessarily wise) plans. “All these populist leaders essentially are willing to espouse easy solutions: you want more spending so let’s print more money,” says Mr Rajan.
Traditionally, central bankers have been trusted to define and carry out their duties. “They were left alone, everybody trusted that they do what is right. But as they’ve been called out to do more, with all the quantitative easing, [and] as this wave of populism increases, they’ve been asked to explain [their actions] to the public: ‘Why did you [help] rescue these banks, why did you keep interest rates low for so long, why are you raising interest rates?’”
As financial and economic crises have affected everyone, a broader part of the population is paying greater attention to policy-makers. “People now want to know – they don’t trust central banks, as part of the elite, as much as they used to and they want to know not just that they [have set] the right interest [rate level], but even [if central bankers] have the right knowledge,” says Mr Rajan. “There’s a devaluation of knowledge in the sense that [if the elites] made mistakes before [they may well] make them again – and maybe we, the people, know better than you do stuck in your ivory tower.”
More vocal
Current times call for closer relationship between leadership and community, and a more flowing communication, according to Mr Rajan. This, however, comes with its own challenges as a more vocal central bank risks being perceived as political, rather than independent. “Of course, visibility carries a risk: politicians [may] feel that you’re intruding on their space and you also become the target of anyone who sees you as occupying a stage they believe you should not,” says Mr Rajan.
Central bankers in emerging markets know this well, as building consensus around any necessary reform risks becoming a politically charged exercise. But this is now a risk that developed markets cannot avoid either. More frequent interactions with the public, through the press, is a start. The US Federal Reserve has doubled the number of its press conferences, for example, which Mr Rajan points to as a way to improve the institution’s communication efforts. “Now that [central banks’ established] system has been challenged, you have to go out there and explain more,” he says.
Raghuran Rajan is Katherine Dusak Miller distinguished service professor of finance at the University of Chicago Booth School of Business and author of The Third Pillar, the Revival of Community in a Polarised World. He spoke to The Banker’s economics editor Silvia Pavoni.
