TIME India

Why the World’s Most Powerful Leaders Really Love India

Xi Jinping, Narendra Modi
Indian Prime Minister Narendra Modi and visiting Chinese President Xi Jinping walk for a meeting in New Delhi, India, Thursday, Sept. 18, 2014. Manish Swarup—AP

Chinese President Xi Jinping’s visit to India highlights the geopolitical contest reshaping Asia

Some of the world’s most important people are wooing India’s new Prime Minister Narendra Modi like teenage boys drooling over the homecoming queen. Less than a month ago, Modi was feted in Japan on his five-day official visit, during which he even received an unexpected hug from usually stiff Japanese Prime Minister Shinzo Abe. This week, Modi is hosting China’s President Xi Jinping, who upon his arrival in the country on Wednesday, proclaimed that Beijing wishes “to forge a closer development partnership and jointly realize our great dreams of building strong and prosperous nations.”

Why has Modi become so popular? The reason can be found in how Asia is changing, politically and economically. Ever since China’s paramount leader Deng Xiaoping launched his country’s remarkable economic miracle in the early 1980s, the old Cold War divisions in the region melted away amid increasing economic integration. According to the Asian Development Bank, trade between Asian countries accounted for 50% of their total trade in 2013, up from 30% in 1985. But with China flexing the political and military muscles it has acquired from growing wealth, Asia is becoming split into two camps once again – one centered on China, the other on the U.S. and its allies, including Japan, South Korea and the Philippines. Each side is looking to bolster its support in the region in order to gain leverage on the other. Tokyo, embroiled in a tense stand-off with Beijing over disputed islands in the East China Sea, is looking to build a network of allies to “contain” a rising China. Meanwhile, Beijing is aiming to create a power bloc of its own in the region to counteract U.S. influence.

India has become a key wild card in this new geopolitical power game. As a rising power in its own right, and a huge potential source of new business in everything from espressos to expressways, whichever side manages to lure New Delhi into its orbit will tilt the scales in its favor.

Both camps are making their best pitch. Japan’s Abe took the unusual step of traveling from Tokyo to the historic city of Kyoto to personally welcome Modi to the country. Xi ventured all the way to Modi’s home state of Gujarat on this visit, even donning an Indian-style vest. Abe sent off Modi with a promise of $33 billion of new investment. Xi is reportedly planning to top that during his India visit, dangling an even bigger package of $100 billion.

On purely economic grounds, you’d think Xi has an advantage in his quest for Modi’s favor. Trade between the two has exploded, to nearly $66 billion in 2013 from a mere $1.2 billion in 1996. Their economic links will likely continue to strengthen as Chinese companies become more and more important global investors and Chinese consumers more and more important customers. The world’s two most-populous nations would appear to have many economic interests in common as well. Their companies, accustomed to operating in an emerging economy and selling to emerging consumers, are attracted to the potential of each other’s markets. China’s Xiaomi, for instance, has successfully lured Indian customers to its cut-rate smartphones as it has in China. Wouldn’t Modi be wise to hitch his country to the world’s rising power, rather than Japan, a declining one? That would bring to life the economic power of what’s been termed “Chindia.”

But China-India relations are more complicated than that. After India’s independence in 1947, Prime Minister Jawaharlal Nehru thought his new nation would find a friend in newly communist China. The spirit of the times was captured in the phrase Hindi Chini bhai-bhai, or “Indians and Chinese are brothers.” That hope was dashed, however. India has incensed China by allowing Tibet’s Dalai Lama, who Beijing considers a dangerous separatist, to reside in exile in India. Modi, in fact, invited Tibet’s prime minister-in-exile to his inauguration in May. Relations are also continually roiled by border disputes. In 1962, the two fought a nasty border war, and the causes of that conflict linger to this day. The two countries contest land along their border in India’s far north in Ladakh, while China claims India’s eastern province of Arunachal Pradesh. China perennially irritates India over these unresolved issues. Just last week, only days before Xi’s much-heralded visit, India charged that Chinese troops are building a road in the contested territory in Ladakh. In talks with Xi on Thursday, Modi urged the Chinese President to finally resolve their border disagreements.

Such tensions are clearly weighing on Modi’s mind. He has apparently embarked on a mission to upgrade India’s military capabilities and relationships. Abe and Modi during their recent summit agreed to strengthen military ties, and in August, New Delhi and Washington pledged to do the same during U.S. Defense Secretary Chuck Hagel’s visit to India. One of the first economic reforms Modi announced after becoming Prime Minister was easing restrictions on foreign investment into India’s defense sector, a move aimed at bolstering its technology and production capacities. It is an open secret who is the target of all these military moves. While in Japan, Modi took a swipe at an assertive China when he told business leaders in Tokyo that “everywhere around us, we see an 18th century expansionist mind-set: encroaching on another country, intruding in others’ waters, invading other countries and capturing territory.”

Modi, then, is attempting to have his halwa and eat it, too — playing off both sides to win as many goodies as he can. In his quest to restart India’s economic miracle by building much-needed infrastructure and boosting manufacturing, Modi will need all the money he can get — from China, the U.S., Japan and anyone else who is offering. India has always been wary of trying itself too tightly into any one political camp — during the Cold War Nehru was the leading figure behind what was known as the “nonaligned movement.” The question is how long Modi can play one side off the other. We may find out soon enough. Later this month, Modi will travel to Washington to meet with President Barack Obama. Let’s see what goodies he picks up there.

TIME China

China May Be Heading for a Japanese-Style Economic Crisis

CHINA-ECONOMY-PROPERTY
A man walks past a construction site in Beijing on May 30, 2014. After years of boom that have seen prices rocket, the prospect of a bust is looming over China's vast property sector. WANG ZHAO—AFP/Getty Images

Beijing is pursuing policies similar to those Tokyo did before Japan tumbled into financial meltdown

The economic system East Asian policymakers have put in place over the past 60 years has had both spectacular successes and equally spectacular failures. On the positive side, the “Asian development model,” as it is often called, generated what is probably the greatest surge of wealth in human history, wiped out poverty on an unprecedented scale and built industries at a spellbinding pace. On the downside, however, the model — by effectively subsidizing investment — also produces dizzying levels of debt, burdensome excess capacity and enfeebled financial sectors. That has resulted in severe financial crises, like the one suffered by 1990s Japan (the inventor of the Asian development model), from which it has still not fully recovered.

China, too, has followed this same model. In fact, Beijing has put it on steroids, by adding in a degree of state control that the Japanese would never have dreamed up. So that begs the obvious question: Will China face the same fate as Japan?

Strategists Naoki Kamiyama and David Cui at Bank of America-Merrill Lynch say the answer could be yes. “China’s development unfortunately has largely followed the script written by Japan some 30 years ago,” they wrote in a new report. As a result, “China today is facing many similar problems Japan did in the late 1980s and early 1990s — imbalanced growth, government stimulus, overcapacity, an overwrought housing market, and a severely under-capitalized financial system.”

Beijing today, the report contends, is creating these similar conditions by making similar policy mistakes Tokyo did more than 20 years ago. The Asian development model made both economies highly dependent on investment and exports for growth. In the 1980s, when Japanese exports struggled due to a stronger yen and slower global growth, Tokyo tried to keep the system going by flooding the economy with cheap credit. That led, ultimately, to an asset-price bubble.

Beijing has walked the same path. In response to the downturn following the 2008 financial crisis, China pumped up credit at home to offset the collapse of external demand. That held up growth rates, but also led to a scary spike in debt levels, excess capacity, and a surge in the property market. Kamiyama and Cui also contend that Chinese policymakers are repeating the errors their Japanese counterparts made to solve these problems. In Japan, the central bank hiked interest rates to control asset prices, producing a bust in the property market and blowing a hole in the balance sheets of Japanese banks. Then the government was too slow in acknowledging the extent of the problem. China is doing the same. The central bank has been tightening monetary policy to rein in property prices. The Merrill strategists fear that that decision is bursting China’s property bubble. “It appears that the property market seems to be tipping over,” they wrote.

Going further, Kamiyama and Cui make the case that the situation in China is more dangerous than it had been in Japan. “It appears to us that the problem facing China today may be more serious than Japan’s in the late 1980s and early 1990s,” they write. “China’s growth was more imbalanced, its reliance on external demand was heavier, the government’s monetary policy in response to the external demand shock was looser, debt growth was faster, over-capacity was worse, and asset price appreciation had been just as rapid.”

That means, they believe, that the consequences for the financial system in China could be more severe as well. “We suspect that China’s (nonperforming loan) ratio could be higher than Japan’s,” they forecast. “Japan’s reached over 8% some 10 years after the property bubble burst. In fact, judging from past experience in China, we could argue that the ultimate NPL ratio could be significantly into double-digit.”

The Merrill strategists also worry that China’s leaders aren’t taking the action to necessary to confront these problems. They believe the banks need to be given a boost of fresh capital to strengthen and prepare them for an onrush of bad loans, but they aren’t optimistic that Beijing will take such a step anytime soon.

On that point, they appear spot on. China’s leaders seem to be quite content with the current pace of reform in the country. Chinese Premier Li Keqiang told business leaders at the World Economic Forum in Tianjin on Wednesday that “the reform measures we have taken are good for now and make a hard landing less possible.” But there is a growing chorus of voices that argue the pace of reform in China is simply too slow. Jörg Wuttke, president of the European Union Chamber of Commerce in China, complained on Tuesday that even though China’s new leaders “have recaptured some of the necessary reform zeal … it’s now time that China’s leadership walks the talk.”

The fact is that China’s new leaders, for all of their bold statements, have done little to change the basic nature of the Chinese economy. It has been nearly two years since President Xi Jinping and his team began to take the country’s helm, and almost a year since an important party plenum unveiled a much-heralded policy document that promised sweeping change. But beyond some intriguing experiments — a few new private banks have got the greenlight, and there have been some preliminary steps to reform state-owned enterprises—there has been almost no progress towards making the Chinese economy more market-driven and more capable of fairly allocating resources and financing.

A much-touted free-trade zone in Shanghai, launched a year ago as an experiment in freer capital flows, has barely gotten off the ground. In some areas, policymakers seem to have moved backwards—most notably in market opening. The business environment appears to have become more nationalistic. Government agencies, for example, are widely perceived as wielding an anti-monopoly law against foreign companies to an unfair degree. The U.S. Chamber of Commerce recently complained that China’s anti-monopoly actions “often appear designed to advance industrial policy and boost national champions.”

There should be, at this stage, real concern about the ability or will of President Xi, Premier Li and their policymakers to undertake the fundamental reconstruction of the Chinese growth model necessary to avoid a Japan-style economic crisis. The Merrill study just provides more evidence that China is repeating the same mistakes and suffers from the same flaws of other economies that experienced financial crises. There will always be businessmen and economists who dismiss or downplay such concerns. These “panda huggers” argue that China is “different” and isn’t vulnerable to the same problems as other economies — that somehow the laws of economics don’t apply. But remember, that’s what experts used to say about Japan too.

TIME India

Why India’s Modi and Japan’s Abe Need Each Other — Badly

India's PM Modi shakes hands with Japan's PM Abe during a signing ceremony at the state guest house in Tokyo
India's Prime Minister Narendra Modi, left, shakes hands with Japan's Prime Minister Shinzo Abe during a signing ceremony in Tokyo on Sept. 1, 2014 Shizuo Kambayashi—Reuters

The two Asian leaders are looking to strengthen ties during their meetings in Japan to counter a rising China

Cuddly is not an adjective that comes to mind when describing the Prime Ministers of either Japan or India. Shinzo Abe, like most Japanese politicians, often appears overly formal, while Narendra Modi has a reputation for being demanding and stern. But apparently the two feel warm and fuzzy about each other. Abe made the unusual gesture of welcoming Modi on his five-day official visit to Japan with an uncharacteristic hug. After that, the duo chatted over an informal dinner and strolled through a temple in the historic cultural center of Kyoto.

The leaders of Asia’s two most prominent democracies have good reasons to cozy up. Greater cooperation between India and Japan could prove critical in helping Abe and Modi achieve their economic goals at home and their strategic aims in the region — which means countering an aggressive China. That’s why the two have gushed about the importance of the India-Japan relationship. Modi said in a statement that his visit would “write a new chapter” in relations, while Abe in a Monday press conference said that their bilateral ties have the “most potential in the world.”

They have a lot of catching up to do. For economies of such size — Japan and India are the second and third largest in Asia, respectively — their exchange is still relatively small. Trade between the two reached only $15.8 billion in 2013 — a mere quarter of India’s trade with China. Japanese direct investment into India totaled $21 billion between 2007 and 2013, making Japan an extremely important investor for the country. But recently, the inflows have tapered off amid India’s economic slowdown. Over the past three years, Japanese firms have invested more in Vietnam and Indonesia than India.

That may be about to change. The fact is that the economic interests of the two nations dovetail nicely. Modi is looking to restart India’s slumbering economic growth by upgrading its woeful infrastructure, strengthening its manufacturing base and constructing a network of new “smart” cities across the nation — all of which Japanese money, technology and investment can help make a reality. Abe on Monday pledged $33 billion of financing and investment for India from public and private sources over the next five years. “Japanese trade and investment ties with India are set to strengthen significantly over the next decade and beyond,” Rajiv Biswas, Asia-Pacific chief economist for consulting firm IHS, predicted in a recent report.

Meanwhile, Abe is trying to jump-start a Japanese economy that has been stalled for two decades, and badly needs new sources of exports and revenue for ailing Japan Inc. India, with its 1.2 billion increasingly wealthy consumers and bottomless investment opportunities, can provide just what Japan requires. That is especially the case due to Tokyo’s souring relations with that other Asian giant, China. As tensions have risen over disputed islands in the East China Sea, investment and trade between China and Japan has deteriorated.

China is pressing Tokyo and New Delhi closer together for other reasons as well. Abe is trying to forge ties with countries across the region to contain a rising and increasingly assertive China. Meanwhile, Modi, who has his own territorial disputes with Beijing on India’s borders in the far east and north, is aiming to enhance the country’s military capabilities. Much of a joint declaration signed by the Prime Ministers dealt with strategic cooperation. The two pledged to “upgrade and strengthen” their partnership in defense by regularizing joint maritime exercises and collaborating on military technology.

China wasn’t specifically mentioned in the declaration, but which country Abe and Modi have in mind is no secret. Modi, in fact, took a clear swipe at Beijing in a speech to businessmen on Monday. “Everywhere around us, we see an 18th century expansionist mind-set: encroaching on another country, intruding in others’ waters, invading other countries and capturing territory,” Modi said.

None of this has gone unnoticed in the Middle Kingdom. An editorial in the state-run Global Times written in response to Modi’s comments attempted to downplay the friendly Abe-Modi summit. “The increasing intimacy between Tokyo and New Delhi will bring at most psychological comfort to the two countries,” the newspaper contended. “If Japan attempts to form a united front centered on India, it will be a crazy fantasy generated by Tokyo’s anxiety of facing a rising Beijing.”

Whether closer India-Japan ties are a fantasy will become apparent quickly. China’s President Xi Jinping is due to visit Modi in India later in September. Let’s see if he gets a hug.

TIME europe

Europe’s Economic Woes Require a Japanese Solution

Rome As Italy Returns To Recession In Second-Quarter
A pedestrian carries a plastic shopping bag as she passes a closed-down temporary outlet store in Rome, Italy, on Tuesday, Aug. 12, 2014. Italy's economy shrank 0.2 percent in the second quarter after contracting 0.1 percent in the previous three months. Bloomberg—Bloomberg via Getty Images

The region’s economy is starting to resemble Japan’s, and that threatens to condemn Europe to its own lost decades

No policymaker, anywhere in the world, wants his or her national economy to be compared to Japan’s. That’s because the Japanese economy, though still the world’s third-largest, has become a sad case-study in the long-term damage that can be inflicted by a financial crisis. It’s more than two decades since Japan’s financial sector melted down in a gargantuan property and stock market crash, but the economy has never fully recovered. Growth remains sluggish, the corporate sector struggles to compete, and the welfare of the average Japanese household has stagnated.

The stark reality facing Europe right now is that its post-crisis economy is looking more and more like Japan’s. And if I was Mario Draghi, Angela Merkel or Francois Hollande, that would have me very, very nervous that Europe is facing a Japanese future — a painful, multi-decade decline.

The anemic growth figures in post-crisis Europe suggest that the region is in the middle of a long-term slump much like post-crisis Japan. Euro zone GDP has contracted in three of the five years from 2009 and 2013, and the International Monetary Fund is forecasting growth of about 1.5% a year through 2019. Compare that to Japan. Between 1992 and 2002, Japan’s GDP grew more than 2% only twice, and contracted in two years. What Europe has to avoid is what happened next in Japan: There, the “lost decade” of slow growth turned into “lost decades.” A self-reinforcing cycle of low growth and meager demand became entrenched, leaving Japan almost entirely dependent on exports — in other words, on external demand — for even its modest rates of expansion.

It is easy to see Europe falling into the same trap. Low growth gives European consumers little incentive to spend, banks to lend, or companies to invest at home. Europe, in fact, has it worse than Japan in certain respects. High unemployment, never much of an issue in Japan, could suppress the spending power of the European middle class for years to come. Europe also can’t afford to rely on fiscal spending to pump up growth, as Japan has done. Pressure from bond markets and the euro zone’s leaders have forced European governments to scale back fiscal spending even as growth has stumbled. It is hard to see where Europe’s growth will come from – except for increasing exports, which, in a still-wobbly global economy, is far from a sure thing.

This slow-growth trap is showing up in Europe today as low inflation – something else that has plagued Japan for years on end. Deflation in Japan acted as a further brake on growth by constraining both consumption and investment. Now there are widespread worries that the euro zone is heading in a similar pattern. Inflation in the euro zone sunk to a mere 0.4% in July, the lowest since the depths of the Great Recession in October 2009.

Sadly, Europe and Japan also have something else in common. Their leaders have been far too complacent in tackling these problems. What really killed Japan was a diehard resistance to implementing the reforms that might spur new sources of growth. The economy has remained too tied up in the red tape and protection that stifles innovation and entrepreneurship. And aside from a burst of liberalization under Prime Minister Junichiro Koizumi in the early 2000s, Japan’s policymakers and politicians generally avoided the politically sensitive reforms that might have fixed the economy.

Europe, arguably, has been only slightly more active. Though some individual governments have made honorable efforts – such as Spain’s with its labor-law liberalization – for the most part reform has come slowly (as in Italy), or has barely begun (France). Nor have European leaders continued to pursue the euro zone-wide integration, such as removing remaining barriers to a common market, that could also help spur growth.

What all this adds up to is simple: If Europe wants to avoid becoming Japan, Europe’s leaders will have to avoid the mistakes Japan has made over the past 20 years. That requires a dramatic shift in the current direction of European economy policy.

First of all, the European Central Bank (ECB) has to take a page out of the Bank of Japan’s (BOJ) recent playbook and become much more aggressive in combating deflation. We can debate whether the BOJ’s massive and unorthodox stimulus policies are good or bad, but what is beyond argument at this point is that ECB president Draghi is not taking the threat of deflation seriously enough. Inflation is nowhere near the ECB’s preferred 2% and Draghi has run monetary policy much too tight. He should consider bringing down interest rates further, if necessary employing the “quantitative easing” used by the U.S. Federal Reserve.

But Japan’s case also shows that monetary policy alone can’t raise growth. The BOJ is currently injecting a torrent of cash into the Japanese economy, but still the economic recovery is weak. Prime Minister Shinzo Abe finally seems to have digested that fact and in recent months has announced some measures aimed at overhauling the structure of the Japanese economy, by, for instance, loosening labor markets, slicing through excessive regulation, and encouraging more women to join the workforce. Abe’s efforts may prove too little, too late, but European leaders must still follow in his footsteps by taking on unions, opening protected sectors and dropping barriers to trade and investment in order to enhance competitiveness and create jobs.

If Europe fails to act, it is not hard to foresee the region slipping hopelessly into a Japan-like downward spiral. This would prove disastrous for Europe’s young people — already suffering from incomprehensible levels of youth unemployment — and it would deny the world economy yet another pillar of growth.

TIME Economy

A Global Financial Guru Who Predicted the Crisis of 2008 Says More Turmoil May Be Coming

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision And Images Of Market Reactions
Raghuram Rajan, governor of the Reserve Bank of India, speaks during a news conference at the central bank's headquarters in Mumbai on August 5, 2014 Bloomberg/Getty Images

Raghuram Rajan, the governor of India's central bank, fears supereasy money from the world’s central banks is inflating assets and encouraging bad investments

Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected. The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.

Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.

Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” Rajan tells TIME in his Mumbai office. “A number of years over which we, as central bankers, have convinced markets that we continuously come to their rescue and that we will keep rates really low for long — that we do all kinds of ways of infusing liquidity into the markets — has created markets that tend to push asset prices probably significantly beyond fundamentals, in some cases, and make markets much more vulnerable to adverse news. My worry is that, with inflation not being strong, this can continue for some time until things are so stretched that any signs of inflation, and a rise in interest rates, could precipitate a fairly strong market reaction. Certainly that volatility hurts across the world.”

Rajan, 51, would not pinpoint specifically where the most dangerous spots in global finance may be, but he did say that he believed assets of all sorts have become inflated. “I don’t know what the right level of the market is,” he says. “But I do know that, when I look at my portfolio and try to figure out where to invest, I can’t think of what I think is fairly valued.”

On top of his worries about market volatility, Rajan is also concerned that supereasy money is causing the misallocation of capital in the global economy, with potentially huge consequences down the road. “My greater worry is that by altering the price of capital for a substantial period of time, are we also, in a sense, distorting investment decisions and the nature of the economy we will have,” Rajan says. “Have we artificially kept the real rate of interest somehow below what should be the appropriate natural rate of interest today and created bad investment that is not the most appropriate for the economy?”

Still, Rajan agrees with Federal Reserve chairwoman Janet Yellen in her policy of slowly withdrawing stimulus measures and reintroducing higher interest rates. “We’re in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I’m with Fed officials in saying that as we get out of this, let’s get out of this in a predictable and careful way, rather than in one go,” Rajan says.

Rajan has had to confront fallout from Fed policy personally. When he took the helm at India’s central bank in 2013, India was suffering as one of the “fragile five” — the emerging markets deemed most vulnerable to the winding down of Fed stimulus. India’s currency, the rupee, tumbled in value as investors fled, fearful that the curtailing of dollars in the world economy would strain the country’s ability to finance its large current-account deficit. In a series of deft and quick steps, Rajan stabilized the currency and wooed back investors, earning him breathless praise in the Indian media. Newspapers dubbed him a rock-star banker and even compared him to James Bond.

Now India, he says, is “absolutely” out of the “fragile five” stage. With narrowing fiscal and current account deficits, falling inflation and rising currency reserves, India’s fundamentals, he argues, are much improved and the country is less vulnerable. However, he sees the turmoil India experienced as part of a larger problem: a lack of coordination between the Federal Reserve and other central banks around the world. The actions the Fed takes are based mainly on U.S. domestic economic factors, but because of the unique position of the U.S. in the world economy, those decisions ripple through dollar-dominated financial markets in ways the Fed leadership does not take into account.

The results, Rajan argues, can ultimately be detrimental to the world economy. He points to a rise in increase in reserves in India and other emerging markets – built up as a cushion against potential fallout from the Fed’s tapering of stimulus – as one of those negatives. By topping up reserves, these emerging markets are in effect decreasing their demand for goods from the U.S. and elsewhere, and that is in the end bad for global growth.

“The U.S. should recognize that the actions we have to take to protect ourselves long run come back to effect the U.S.,” he says. “Therefore there is room for greater dialogue on how these policies should be conducted, not just to be nice, but because in the medium run it is in [America’s] own self-interest. If you are not careful about the volatility you are creating, the others have to respond and everybody is worse off.”

Ironically, Rajan has faced some criticism at home for doing just the opposite of the Fed — keeping interest rates high. Unlike most of the world, where bankers worry about low inflation or even deflation, India has been an outpost where inflation has been running too high, and Rajan took steps to bring the rate down — with some success. Some critics, however, complained that Rajan’s high-rate policy was acting as a drag on growth, and there was much press speculation when newly elected Prime Minister Narendra Modi took office in May that Rajan would come under pressure to cut rates to aid the administration’s promise to get the Indian economy back on track.

Rajan, though, says the central bank and the Modi Administration “are completely on the same page” when it comes to fighting inflation. “I have said repeatedly that the way to sustainable growth is to bring down inflation to much more reasonable levels,” Rajan explains. “That message is something the government is completely on board with. Once we do bring it down then we will have the opportunity to cut interest rates.”

Rajan also seems to be on the same page as Modi on economic reform. He expressed confidence that the new government is taking the initial steps necessary to set the sluggish Indian economy on its way to recovery. Growth rates can be restored to 6% to 7%, from current levels under 5%, Rajan believes, by making the government more efficient in implementing policies — unlocking badly needed but stalled investments in the process.

“Those are the things that are really needed to get the economy back to reasonable growth,” Rajan says. “This government has set about the implementation in a steady way and I am hopeful that we will see the fruits of that in the months to come.” Maybe Rajan will prove prescient this time around too.

TIME indonesia

The Big Challenge for Indonesia’s New President: Proving Democracy Works

Indonesian presidential candidate Jokowi sits on a bench while waiting for the announcement of the results from the Elections Commission at Waduk Pluit in Jakarta
Indonesian presidential candidate Joko "Jokowi" Widodo, now president elect, sits on a bench while waiting for the announcement of election results by the Elections Commission at Waduk Pluit in Jakarta July 22, 2014. Beawiharta Beawiharta—Reuters

Joko Widodo’s election victory was a big win for Muslim-majority Indonesia, the world's third largest democracy and fourth most populous nation. Now the incoming President has to deliver much-needed reform

When Indonesia’s election commission announced late Tuesday that Jakarta Governor Joko Widodo had won July’s presidential election, the transition of the world’s fourth-most populous nation to democracy was finally made complete.

Sixteen years ago, when autocrat Suharto fell from power amid street riots and a financial crisis, it seemed the sprawling archipelago nation could break apart as politics in Jakarta descended into chaos. However, the victory of Joko Widodo, affectionately called “Jokowi,” shows how mature and stable the country’s new democracy has become. Jokowi is the first leader in Indonesia who is not affiliated with the old ruling class, but a self-made man, who built a political career with his honesty, smart policies and good results.

Now he faces an entirely new challenge: Proving that new democracies in the emerging world can govern effectively. Indonesia has become a rising star in the global economy, propelled by its increasingly wealthy 250 million people and government policies that are friendlier to investment. However, Indonesia, like many other emerging economies, is slipping. The IMF expects Indonesia’s GDP to grow by 5.4% in 2014 — not bad, but the rate has been declining steadily from 2011, when it was 6.5%. The problem is the same that is dragging down developing nations everywhere, from India to Brazil: Politicians, mired in factional fighting and lacking the necessary will, have failed to implement the reforms critical to keep growth going.

Awaiting Jokowi is a long list of difficult reforms that economists believe are needed to restore Indonesia’s growth. Restrictive labor laws must be loosened up to attract more job-creating manufacturing and the nation’s inadequate infrastructure needs a serious upgrade. The education system could use one, too. Expensive fuel subsidies that are straining the budget have to be reduced. Jokowi will have to manage these changes in an unfavorable global financial environment. With the Federal Reserve moving to end its stimulus programs, the flow of dollars sloshing around the world will be curtailed, and Indonesia, with a large current-account deficit, might find financing itself more costly. The country’s currency and stock market were among the hardest hit when the Fed first announced it would “taper” its program in 2013.

The reforms waiting for Jokowi are almost identical to the ones the new Prime Minister of India, Narendra Modi, needs to implement. The similarities between the two don’t end there. Both were successful on a local scale but now have to implement policy on a more challenging national level. Both will have to navigate reforms through fractious democracies and sell hard change to protest-prone publics.

But Jokowi has it worse. While Modi’s Bharatiya Janata Party won a mandate in a landslide, Jokowi’s political party, the Partai Demokrasi Indonesia Perjuangan (which translates as Indonesian Democratic Party of Struggle), garnered only a minority in the nation’s parliament in April elections, which means he’ll have to govern in a potentially messy coalition. Jokowi’s own victory was more muted as well. He won 53% of the vote to best his chief rival, former general Prabowo Subianto, who may contest the results and drag out the election’s conclusion. “A narrow victory for Jokowi may not be sufficient to empower the newly elected president to carry out all the desired reforms,” worries Societe Generale economist Kunal Kumar Kundu.

There are also doubts about Jokowi himself. In comments on policy, he promised to raise Indonesia’s growth by tackling the nation’s toughest issues – from corruption to red tape – and make the country’s more open to investors. “We need to get our economy growing,” he recently said in one interview. “To do that, we must have more investment and also deliver in terms of infrastructure.” At the same time, Jokowi is new to national politics and policymaking and therefore unproven. “It is clearly too early to tell whether Jokowi will be the man to get Indonesia’s economy back on track,” says Gareth Leather, Asia economist at research firm Capital Economics. “There is no magic bullet to reviving growth.”

If Jokowi succeeds, however, he’ll offer yet another counterpoint to Asia’s other rising power, China. In Beijing, President Xi Jinping and his team seem to believe that tighter and tighter political control is necessary to guide the country forward. A Jokowi government could prove just the opposite – that open democracies can produce real reform and better lives for their citizens. The world will be watching.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser