Introduction:
John Lipsky, Dean of Johns Hopkins University School of Advanced International Studies, welcomes Dr. Raghuram Rajan, former governor of the Reserve Bank of India and former chief economist at the IMF, to a conversation about his book, “The Third Pillar.”

Professional Background:
Dr. Rajan is a renowned expert in his field and currently holds the position of Catherine Roszak Miller Distinguished Service Professor of Finance at the University of Chicago. He has dedicated his career to studying and practicing the role of financial institutions in promoting economic development.

Recognition for Warnings Before the 2008 Financial Crisis:
Dr. Rajan gained recognition for his prescient warnings about risks to the global financial system three years before the 2008 crisis.

Stabilization of the Indian Economy:
As governor of the Reserve Bank of India in 2013, Dr. Rajan played a crucial role in stabilizing and driving momentum into the Indian economy during a period of double-digit inflation, a weakening rupee, and a plunging stock market.

Prolific Writing:
Dr. Rajan is a prolific writer, and his latest book, “The Third Pillar,” explores the impact of the state and markets on communities.

Book Signing:
Attendees will have the opportunity to purchase and have Dr. Rajan sign copies of his book after the program.

Conversation Moderator:
Dr. John Lipsky, a Peter G. Peterson Distinguished Scholar at the Henry A. Kissinger Center for Global Affairs and a Senior Fellow at the Foreign Policy Institute, will moderate the conversation with Dr. Rajan.

Main Theme of the Book:
Dr. Rajan introduces the main theme of his book, “The Third Pillar,” which emphasizes the significance of the community as a third factor, in addition to markets and the government, in shaping capitalism and addressing the challenges it faces today.

The Concept of Pre- and Post-Market Support:
Pre-market support involves nurturing and supporting individuals before they enter markets, enabling them to participate effectively. Post-market support provides a safety net for individuals who face challenges or fall off the markets, helping them recover and re-engage.

The Role of the Community:
The community acts as a support system for individuals, providing pre-market support, such as education and healthcare, and post-market support, such as unemployment insurance and social assistance. The community also serves as a source of identity, values, and relationships, fostering social cohesion and resilience. The proximate community, such as neighborhoods and municipalities, is a crucial unit of political organization and plays a vital role in governance.

The State’s Role in Supporting Markets:
The state provides security of property, life, and limb, as well as justice, creating a stable environment for markets to operate. The state also provides pre-market support, such as education and healthcare, and post-market support, such as unemployment insurance and social security. The state’s involvement has expanded in recent decades to include social welfare programs and support for vulnerable populations.

The Function of Markets:
Markets, including goods markets, labor markets, and capital markets, allocate resources efficiently, enhance productivity, and provide consumers with a variety of choices. Competitive markets drive innovation and technological advancement, leading to economic growth and prosperity. However, markets also create volatility and uncertainty, which can lead to economic downturns and inequalities.

The Importance of the Community in a Liberal Market Democracy:
The community provides a sense of identity, values, and belonging, which are crucial for social cohesion and stability. The community offers support and assistance to individuals in times of need, acting as a safety net and preventing social unrest. The community serves as the foundation for political organization and participation, enabling individuals to have a say in how they are governed.

The Importance of Independent Markets:
Markets can exercise countervailing power over the state, preventing predatory behavior and ensuring respect for property rights. A free press and an independent private sector are crucial for holding the state accountable and preventing authoritarianism.

Tendencies of Capitalism and the Role of Democracy:
Capitalism tends to coalesce around a few market players and the government, leading to crony capitalism. Democracy, driven by the community, demands a level playing field and challenges cartelization and monopolies. Historical examples include the populist movement in the United States and the Sherman Antitrust Act.

Technological Change and Its Impact:
The ICT revolution has made it possible to produce goods anywhere, leading to outsourcing and a hollowing out of the middle class. Automation is as significant as outsourcing, with four out of five job losses attributed to automation. The result is a polarization of the job market, with high-paying jobs at the top and low-paying jobs at the bottom.

The Superstar Economy:
The ICT revolution has created a global economy where the best performers, such as celebrities and professionals, can reach a vast audience and earn enormous sums of money. This leads to a superstar economy, where the top earners receive a disproportionate share of income, even within the highest income bracket.

Markets and Government:
Markets and governments are not substitutes but rather grow together. As markets expand, governments also expand, creating social security nets and buffering economic volatility. Governance structures must also expand to keep pace with the globalization of markets.

The Disempowerment of Communities:
As governance moves upward to accommodate the expansion of markets, communities lose power and control over their local economies. Communities have no say in the regulations of national banks operating within their borders.

Income Inequality:
The ICT revolution has contributed to increased income inequality, with the wealthy benefiting disproportionately.

The Effects of Technological Change on Education:
Technological advancements have increased the demand for highly skilled labor, leading to a greater emphasis on education and schooling. Upwardly mobile parents strive to provide their children with the best educational opportunities, often moving to affluent districts with reputable schools. The professional backgrounds, education levels, and parenting practices of successful parents contribute to their children’s early childhood development and academic success.

The Creation of a Hereditary Meritocracy:
The focus on skills and meritocracy has resulted in a system where only the children of successful individuals can thrive. Successful families tend to cluster in affluent districts, leading to a segregation of wealth and opportunity. Zoning laws and other barriers prevent social mobility and the integration of diverse communities.

The Disintegration of Mixed Communities:
Mixed-income communities have diminished, contributing to a widening gap between the wealthy and the less fortunate. The departure of successful individuals from diverse communities exacerbates the problems faced by those left behind.

The Anger and Frustration of Disenfranchised Communities:
Communities affected by globalization, automation, and the disintegration of mixed communities experience high levels of anger and frustration. They feel left behind by a system that no longer seems to work for them, leading to resentment and a search for solutions.

The Misguided Appeal of Protectionist Solutions:
Some individuals advocate for protectionist policies, such as trade barriers and immigration restrictions, as a way to address the economic and social problems faced by disenfranchised communities. Protectionism, however, is not an effective solution as it fails to address the underlying issues caused by technological change.

The Need for Open Markets and Immigration:
Open markets and controlled immigration are essential for economic growth and prosperity. Protectionist policies would harm the economy by reducing trade and innovation, leading to job losses and higher prices. Immigration helps refresh the workforce, supports aging populations, and provides demand for goods and services.

The Importance of Addressing Global Issues:
Pressing global problems, such as climate change, require international cooperation and collaboration. Erecting trade barriers and breaking up the world order would hinder efforts to address these pressing issues.

The Need for Decentralized Power and Local Solutions:
Power should be pushed back to local communities to address the concerns and challenges they face. Decentralization can help address the grievances of disenfranchised communities and promote inclusive growth.

Three Pillars of Sustainable Societies:
Raghuram Rajan presents a compelling argument for balancing three pillars in modern societies: markets, governance, and community. He emphasizes the need to restore power back to local communities and regions.

Inclusive Communities:
Rajan envisions communities with low walls, allowing for a sense of belonging while promoting inclusivity. He believes in empowering communities with decision-making authority while maintaining free flow of goods, services, and people.

Responsible Sovereignty:
Rajan calls for responsible sovereignty, where nations work together for the common good rather than seeking greatness at the expense of others. Civic nationalism, rooted in shared values, should guide national identity.

Local Decision-Making:
Rajan advocates for pushing power down to the community level, allowing for more local control over production, regulation, and cultural expression. He draws inspiration from the principle of subsidiarity in the European Union, which emphasizes decision-making at the lowest effective level.

Harmonization vs. Local Control:
Rajan challenges the need for global harmonization of regulations, such as capital requirements for banks and intellectual property rights for drug companies. He argues for greater local control over these matters, allowing communities to tailor regulations to their specific needs and values.

Early Childhood Formation:
Rajan stresses the importance of early childhood formation, including schooling, as a critical factor in shaping individuals’ future success. He acknowledges the challenges of funding and disparities in local education systems.

Addressing Regional Disparities:
Rajan recognizes the tendency for individuals with similar preferences in public goods to agglomerate in certain areas, leading to regional disparities. He suggests addressing this issue through mechanisms like progressive taxation and redistribution to promote greater equality.

Global Engagement:
Rajan emphasizes the importance of global engagement and collaboration to address transnational challenges such as climate change, pandemics, and terrorism. He calls for strengthening international organizations and promoting dialogue and cooperation.

Education and Inequality:
Raghuram Rajan highlights the growing importance of education as a ladder to opportunity, leading to increased demand for equal access. The desire for equal access to quality education has become more prominent as education has become more critical for success.

Equal Access to Education:
Rajan emphasizes the significance of equal access to education, particularly in the early stages, to ensure that students from all backgrounds have equal opportunities. He cites historical examples of how equal access to education, such as free high school education, has benefited the middle class and working class in America.

Challenges to Equal Access:
Rajan identifies the current challenge of unequal access to education, with students from disadvantaged backgrounds facing obstacles due to poor early schooling. He acknowledges that providing scholarships and financial aid is not sufficient to address the underlying inequality in educational opportunities.

Proposed Solutions:
Rajan suggests various solutions to address unequal access to education: Magnet schools with reserved places for top students from different schools to promote diversity and equal access. Policies like Texas’s program, where the top few students from every school gain admission to the state university, regardless of their overall school performance. Emphasizing the importance of equalizing students’ capabilities and having good students in every school, rather than solely focusing on financial resources.

Importance of Cultural Norms:
Rajan acknowledges the influence of cultural norms and values on market behavior and interactions, leading to differences in how people treat each other in markets. He mentions the challenges of making changes to cultural norms, as they are organically adapted and changed over time.

Conclusion:
Rajan emphasizes the need for addressing unequal access to education and fostering equal opportunities for all students. He suggests practical solutions, such as magnet schools and targeted policies, while acknowledging the challenges of changing cultural norms and values.

Ethics and Values:
The difficulty of teaching ethics and molding someone’s value system. Value systems in a society change based on signal events. Examples of changing values in India: Businessmen portrayed as villains in the 60s-70s vs. heroes today. Women’s empowerment and positive perception of business. Hollywood’s depiction of large corporations as sinister entities.

Black Money and Corruption in India:
Challenges in estimating the amount of black money due to varying definitions. Black money tends to flow in and out of the country based on India’s economic prospects. India’s liberalization and participation in OECD efforts can help reduce tax evasion and black money issues.

Panchayati Raj: A Work in Progress:
Panchayati Raj, a law enacted in 1993, aimed to devolve governance to local communities in India. While some powers have been transferred, funding has not been adequately decentralized.

Measuring Success:
The success of Panchayati Raj should not be solely judged by tangible outcomes. Increased local participation and the emergence of a pool of politicians with proven abilities are positive developments. Panchayati Raj has also empowered women, leading to greater attention to women’s rights in certain areas.

Challenges of a Smaller Talent Pool:
Critics argue that smaller communities have a shallower talent pool for governance. Rajan counters this view, emphasizing that local leaders have a deeper understanding of local problems and can develop tailored solutions. Historically, strong communities have mechanisms for electing and monitoring good leaders.

Technology as a Governance Tool:
Rajan highlights the role of technology in enhancing community governance. Transparent disclosure of funds and spending can help curb corruption and ensure accountability.

Macro and Community-Level Dynamics:
The relationship between the central government and local communities is complex and dynamic. Economic conditions can influence the willingness and ability of both levels to prioritize community development. Trade-offs and dynamics exist, and it’s unclear whether these are structural or cyclical issues.

Shifting Community Dynamics:
In times of economic distress, communities may lack resources to address their challenges, exacerbating existing disparities. Raghuram Rajan highlights the prolonged decline of certain communities and the need to address this issue, rather than relying on cyclical explanations. Rajan emphasizes the significance of community involvement in driving change and seeking support for local initiatives.

Government Programs and Community Development:
Opportunity zones, aimed at reducing capital costs for investors in distressed communities, are only a partial solution. Rajan draws parallels to international aid, emphasizing that communities need to be actively involved in their own revitalization efforts.

Addressing Inequality and Educational Opportunities:
Rajan discusses the issue of elite access to better facilities and resources, perpetuating inequality. He mentions Singapore’s approach of mixed housing and schools to promote integration and reduce income-based disparities. Rajan suggests eliminating zoning laws that restrict affordable housing options, leading to segregation and exclusion. The need for more mixed living arrangements is recognized, as pricing out essential workers from their communities can have detrimental effects.

Technological Progress and Identity:
Rajan acknowledges the economic anxiety and identity challenges faced by workers displaced by technological advancements. He emphasizes the importance of finding new sources of identity and value in an age where technological change can lead to permanent unemployment.

Identity and Leadership in a Global Context:
Rajan highlights the role of powerful leaders in shaping national identity and values. He is asked to describe President Modi’s leadership style and its impact on India’s transformation over the past few years.

Conclusion:
The discussion delves into complex issues of community resilience, inequality, and identity in a rapidly changing world, exploring various perspectives and potential solutions.

Changing Social Dynamics:
Online relationships do not entirely replace physical connections. Professional and school relationships have strengthened through digital means but rely on pre-existing bonds. Local communities remain vital for understanding local institutions and fostering a sense of belonging.

Challenges and Solutions:
Maintaining community connections has become more difficult in the digital age. Loneliness is a growing issue, particularly among the elderly and those without social support. Society will adapt and find new ways to reconnect despite the pressures on traditional methods.

Changing Social Institutions:
Institutions like churches are evolving as people seek new avenues for social connection. Yoga clubs and other social groups are examples of new ways to foster community.

The Plight of Permanently Unemployed Workers:
Permanently unemployed workers face significant challenges, including a lack of purpose and social isolation. They may become susceptible to extremist ideologies and movements.

Nationalism and Economic Disaffection:
Raghuram Rajan observes that economically disaffected individuals, including those who feel marginalized or believe others are taking advantage of them, may turn towards nationalist ideologies and larger community concepts.

Prime Minister Modi’s Nationalism:
Rajan acknowledges Prime Minister Modi’s portrayal of robust nationalism, which is comparable to other world leaders adopting similar rhetoric. He highlights Modi’s mixed economic record in India while emphasizing his current focus on promoting his nationalist credentials.

Concluding Remarks:
Rajan emphasizes the importance of remembering that economists like him understand both the price of things and their value, refuting the stereotype that economists lack appreciation for non-material aspects. Vali Nasser, a former colleague of Rajan, expresses his regret at Rajan’s departure from the International Monetary Fund (IMF) due to his return to academia at the University of Chicago. Nasser acknowledges Rajan’s exceptional leadership skills during his time as First Deputy Managing Director at the IMF.