The SenseMaker

Rajat Nag is a distinguished policy leader and educator. A former Managing Director-General at the Asian Development Bank and Distinguished Fellow of the Emerging Markets Forum, he focuses on governance, public policy innovation, and institutional development in emerging economies.

Amogh Dev Rai:
I formally welcome you to SenseMaker once again. It’s good to have this conversation, sir. Good afternoon and we’re meeting virtually after a long time. So, first and foremost, welcome back to SenseMaker. This is your third time as a speaker here.

Rajat Nag:
Thanks, Amogh. Glad to be here.

Amogh Dev Rai:
In no particular order, just to familiarise our readers and listeners—

You’ve served as the Managing Director General of the Asian Development Bank (ADB) from 2006 to 2013, and you’ve been part of the ADB and other international organisations before that. You got your undergraduate degree in engineering from the Indian Institute of Technology, Delhi then moved to Canada for your first Master’s, and later, another Master’s from the London School of Economics and Political Science. You’ve often mentioned that your interactions with one of your teachers Prof. Amartya Sen) there was pivotal—it made you shift from investment banking to the world of international development.

Since then, you’ve remained deeply engaged with international development. Your alma mater in Canada, University of Sakatchewan, conferred on you an honorary doctorate in 2016 in recognition of your contributions to the development story of Asia. After retiring from the ADB, you’ve served on multiple boards. You’re part of a policy based think tank network in Washington D.C. where you a Distinighished Fellow as well at a similar institute in China. You also serve as the President of the Action for Autism Network in India. And for our audience, of course, you are also a board member at the Advanced Study Institute of Asia and a Distinguished Fellow here at ASIA.

With that introduction, I want to begin the conversation proper. As always on SenseMaker, we’re exploring a thematic issue. This edition of Decypher is centred around “Power.” So my first question is simple:

Are we in the twilight of institutions? Have we reached a point where institutions are at the mercy of individual power, rather than the other way around?

Rajat Nag:
Well, the short answer is no. We are certainly not in the twilight of institutions. If anything, institutions are more needed now than ever before. I do understand where you’re coming from institutions are indeed under threat, and in many places under attack. But that’s exactly why they matter more. Societies cannot survive without institutions. They may evolve, take different forms, but I do not see us moving away from the need for strong, robust institutional frameworks.

Amogh Dev Rai:
That’s interesting. Many of our readers will be aware of your contribution to this debate through your recent book From Here to Denmark, where you analyse institutional evolution across countries. One of the standout aspects of that book is how it combines analytical depth with grounded case studies—something not easy to do.

So as a follow-up can you walk us through some of the institutional stories you’ve studied? You allude to future generations in your answer, but I’m curious about what trajectories you’ve found across countries you’ve examined.

Rajat Nag:
Before diving into specific countries, let me step back briefly. At its core, the institutional story is about two things. First, institutions are the “rules of the game”—rules that societies evolve over time, giving a framework for how social interactions and governance happen. Second, and just as important, is enforcement. Rules without enforcement are mere words. Institutions only hold if both the rules and enforcement mechanisms exist and reinforce each other.

When we studied different societies—whether Denmark and Great Britain in Europe, Japan and Korea in Asia, Botswana in Africa, or Uruguay in Latin America—we saw a common thread. Despite different cultural and historical contexts, all these societies developed institutions by gradually building consensus around rules of engagement and their enforcement. This mutual reinforcement is key. You can’t have one without the other.

Now, depending on the structure of society, institutions evolve differently. Broadly, we see two societal structures: limited access orders and open access orders.

Amogh Dev Rai:
Could you expand on that distinction a bit?

Rajat Nag:
Certainly. In limited access orders, elites control the levers of power. They write the rules to serve their interests and enforce them to maintain their dominance. This leads to extractive, exclusionary institutions designed to preserve the power of a few at the expense of the many.

On the other hand, open access orders are based on merit, competition, and fairness. Entry and rewards are not determined by one’s birth or family connections, but by one’s ability and performance. Rules in such societies are clear and enforced uniformly.

So, for any society to achieve good governance, it must make the transition from a limited to an open access order. It doesn’t happen overnight. It can take decades or even centuries. But that’s the trajectory. Despite different paths societies may follow to reach their ‘Denmarks’ , the goal remains the same—open, inclusive institutions that uphold fairness.

Amogh Dev Rai:
I’ve always admired the breadth of countries you cover—you don’t confine yourself to GDP per capita or the usual development yardsticks economists often prefer. But there’s something I’ve been meaning to ask you again—because it puzzled me the first time we spoke about it.

What happens when institutions, having reached their apex, begin to turn inward or decline? We’ve seen this in the United States and other places. There’s been a shift away from accountability, something you stress in your work as essential for institutional legitimacy.

In the US, people rally around “1776” as a kind of nostalgic war cry but they forget how long it actually took to build institutions that worked for everyone. Why do societies that have benefited the most from institutional strength seem to turn away from them?

Rajat Nag:
Let me try and break that down in two parts. First, the idea that institutions, once established, are somehow permanent—that’s an idle thought. Institutions, even the most robust ones, are fragile. They need constant nurturing. They’re not monuments; they’re living organisms.

The context in which institutions emerge is never static. The social norms, cultural values, economic conditions—all of these change. So, institutions must evolve too. What worked in 1776 can’t simply be carried over into 2025 without adaptation. Otherwise, they become irrelevant.

Now, the second part of your question: why do people start turning inward or away from institutions? That’s about power. Remember, institutions are essentially frameworks for distributing and exercising power. But the people enforcing the rules are themselves part of that power structure. When that balance breaks down—when enforcement becomes ad hoc or self-serving—people lose trust. And when that happens, they retreat. First into themselves, then into smaller identities: family, community, tribe.

The global layer complicates this further. People are now impacted not just by domestic changes but by international economic shifts globalisation, supply chains, outsourcing. You could lose your job not because of anything local, but because someone across the world can do it cheaper. When institutions don’t respond to this dislocation, people feel abandoned. That breeds resentment and fuels populist narratives.

Amogh Dev Rai:
And that sets the stage for my next question. In a recent speech at the India International Centre, you made a compelling point: that institutions require constant human engagement. They need flexibility, yes, but also decision-makers who see their human dimension.

So I want to focus on the relationship between institutions and economic shocks. How have economic shifts crises, growth spurts, collapses shaped institutional change in the countries you’ve studied? And what must we watch out for going forward?

Rajat Nag:
That’s an important question. Economic growth, of course, matters. But what really drives institutional stability is a broader sense of fairness. People don’t expect equality of outcome, but they do expect equity, they expect to be trated fairly. They expect fair access to opportunity and a fair share of the gains economic growth creates.

Growth without equity breeds frustration. Globalisation, for instance, has dramatically benfitted the world. Global poverty has come down significantly over the past several decades. People all over the world are richer, live longer and are more educated than they were a generation back. But not everyone has benefitted equally.

Take the Rust Belt in the United States. Workers there lost jobs, not because of personal failings, but because steel manufacturing moved elsewhere, to China mainly. The US car industry and others benefitted significantly from the cheaper steel. China benefitted from exporting the steel . The benefits were widely dispersed, but the costs were concentrated. but the steel workers in the US lost.

When this happens and society fails to recognise or compensate the losers, people lose faith in institutions. That’s when institutions come under pressure, not because they’re inherently flawed, but because they’re perceived as indifferent to suffering.

So, when institutions fail to mitigate or even acknowledge these losses—when they don’t respond to the distress caused by dislocations like job loss, technological change, or globalisation—people begin to feel betrayed. They feel the system is rigged. And that opens the door to populism, resentment, and retreat from institutional trust.

Amogh Dev Rai:
Which brings us to a very paradoxical situation. As you said, globalisation has enlarged the pie. Today, we’re not just talking about millionaires and billionaires—we’re inching toward trillionaires. Yet, the backlash against the very institutions that facilitated this growth is strongest in the places that gained the most.
You mentioned fairness earlier. But how do we explain the fact that leaders like Viktor Orbán in Hungary or Donald Trump in the US—who belong to the very structures that benefited from institutions—are now attacking them? What’s really driving this anti-institutional fervour from the top?

Rajat Nag:
It’s a crucial question. Again, it ties back to inequality. Globalisation has done a lot of good economic, social, even cultural. But the perception of being left behind is a powerful one, and often it’s not totally misplaced.

Steel workers who lose their jobs in the US rust belt see their lives stagnating. Their social standing erodes. A job is not just a paycheque it’s also a marker of dignity, relevance, and purpose. When that’s taken away, it breeds anger. And that anger can be harnessed by political forces.

Along comes a populist leader who says, “It’s not your fault. The elites, the global “It’s not your fault. The elites, the global institutions, the immigrants, the foreign trade pacts—they’re to blame. But I’ll fix it.” This narrative has enormous emotional appeal. It’s simple. It offers a target. And it claims to restore dignity.

The tragedy is that the institutions being blamed—multilateral bodies, trade systems, even democratic processes—are in many cases what held things together for decades. But they’re not perfect. And when they don’t adapt fast enough, they become easy scapegoats.

Amogh Dev Rai:
And you know this better than most, having spent decades at the helm of a multilateral institution like the ADB. Let’s talk about that a bit more directly. These institutions carry enormous power, but they’re also constantly under pressure sometimes fairly, often unfairly.

You were managing director general during the 2008 financial crisis arguably the most serious economic shock in recent memory. So, I’d like to ask in two parts.
First, how do these institutions actually make decisions? From the outside, they often seem like black boxes—insular, opaque, elitist. It’s easy for critics to say they’re run by a few for the few. Is that true?

Rajat Nag:
That’s a fair question. So, let’s clarify how these institutions are structured. Take the Asian Development Bank, or the World Bank. Unlike the United Nations where each country has one vote, voting power in these multilateral development institutions is weighted by their shareholding.

This obviously means that developed countries have more say in decision-making. That’s just a structural reality. But I must add that most decisions are taken by consensus.

Now, the critique that these institutions are black boxes it’s not baseless. There’s complexity, yes. But they do engage extensively with civil society and other stakeholers. It’s part of the operational process. However, let’s be clear: the loans or assistance ultimately go to sovereign governments. NGOs or citizens may offer inputs, but final decisions lie with the state.

So yes, civil society voices are heard. But no, they do not carry the same weight as that of member states, especially the more powerful ones.

Amogh Dev Rai:
That brings me to the second part of the question. Many of us, especially those trained in economics after 2008, have felt that the discipline had lost its moral compass. There’s been a drift towards mathematical abstraction, sometimes called “physics envy,” where models trump common sense. This has affected institutional policy-making too.

Take the United Kingdom. In your book, you mention its institutional transformation as an example of resilience. But economically, it’s been trapped in austerity for more than a decade. Despite promises of reform, there seems to be no exit from this self-imposed straitjacket.

Why don’t bad policies have expiry dates? Why can’t institutions say, “This isn’t working anymore. Let’s stop.” Why do we return to outdated metrics like GDP growth, as if they’re sacrosanct?

Rajat Nag:
Good point. Yes, GDP is important, but woefully insufficient. The fixation with GDP as the sole metric of progress fails to recognise important issues such as inequality, social deprivations, health, education, climate change etc.

Now, austerity as an economic policy emerged from Keynesian thought—spend during crises, save during booms. But what happened in many countries was that governments didn’t save during good times. When things got bad, there were no buffers left. So they were pushed into cutting spending at the worst possible moment.

Now, in theory, yes, multilateral institutions could push back. But they are constrained. They advise fiscal discipline, yes, but they don’t control political choices which are made and must be made by sovereign states.

Rajat Nag:
To me, the deeper issue isn’t just about austerity or GDP—it’s about the responsiveness of economic policy. Policies often continue not because they are still appropriate , but because changing them is politically difficult. And institutions, even multilateral ones, often lack the agility or the courage to declare when a policy has outlived its usefulness.

The 2008 crisis, for example, was largely a failure of due diligence in financial markets. Lending had become untethered from accountability. Banks were pushing loans not based on repayment capacity, but on short-term margins. Once the bubble burst, the entire system collapsed like dominoes.

So, yes, institutional reform is about structure but it’s also about moral clarity. You need both economics and ethics. That’s what gets lost when policy becomes overly politcised in the wrong hands.

Amogh Dev Rai:
Let’s now move to the final segment of our conversation—your three-pillar framework. You’ve written that the state, the market, and the community must work in tandem for institutions to thrive. Could you walk us through that model?

Rajat Nag:
Absolutely. Think of society as a tripod. One leg is the state—responsible for governance and justice. The second is the market—driving innovation, efficiency, and production. The third is the community or civil society—where norms, values, and accountability are rooted.

These three need to co-exist, but more importantly, they need to balance each other. You don’t want a Leviathan state that crushes liberty. You don’t want unfettered markets dominated by monopolies or “robber barons.” And you don’t want a fragmented civil society, which descends into chaos or vigilante justice. Each pillar can go astray if left unchecked.

So the key is balance. When one pillar overreaches, the others must push back, and counterbalance. That’s how you keep institutions supple, responsive, and grounded.

Amogh Dev Rai:
But here’s a harder question—how do you make that work in the Global South, where democracy was overlaid after colonialism, rather than emerging organically? Western experts often fly in with checklists. Yet, even Sudan had elections. The forms of democracy don’t always produce democratic outcomes.
At the same time, countries like China argue they have functioning institutions—even if they don’t fit Western models. So where’s the sweet spot? How should developing nations evolve?

Rajat Nag:
Very important question. The answer, in my view, lies in participation not labels. Call it democracy, call it something else but ask: do people have a voice in decisions that affect them? Is there transparency? Is there accountability?

Mechanisms must reflect local contexts. The principle of subsidiarity is key—take decisions at the lowest possible level of accountability. India’s Panchayati system is a good example, despite its flaws. Copy-pasting institutions from elsewhere doesn’t work. They must grow from within.

Amogh Dev Rai:
That connects to the trust deficit—another theme running through this conversation.

Do you think the erosion of trust in these three pillars is what’s ultimately crippling democracies?

Rajat Nag:
Without a doubt. When the three travellers—state, market, society—stop trusting one another, cooperation collapses. Transparency fades. Cynicism takes root.

Sometimes, this mistrust is deeply historical. There are studies showing that in areas affected by the transatlantic slave trade, mistrust remains high even today—passed down generations. When people feel betrayed by institutions or leaders, they default to suspicion. And once trust erodes, rebuilding it is an uphill battle.

Amogh Dev Rai:
Which brings me to my penultimate question—how can nations today simultaneously plan for prosperity and security? Especially given the chaos around us, the breakdown of regional trust, and the erosion of multilateralism?

Rajat Nag:
We need to define security more broadly. It’s not just freedom from external threat—it’s freedom from fear. Fear of the police. Fear of the state. Fear of the feudal landlords. Fear of speaking up.

That kind of security—freedom from fear and injustice—is the foundation for prosperity. If people feel secure in the broadest sense, investment will follow. Growth will follow.

And that feeling of security comes from robust and inclusive institutions. From good governance. From predictable laws. From justice that is seen to be done.

Amogh Dev Rai:
Final question. Are you hopeful?

Rajat Nag:
I am. History teaches us that humans are resilient. We’ve survived wars, famines, financial collapses.

Institutions will evolve. Societies will adapt. The human species has always found a way to walk back from the brink. I believe we will again.

Amogh Dev Rai:
I sincerely hope you’re right. Thank you so much for your time, and for this wide-ranging conversation.

Rajat Nag:
Thank you.