Tuesday, July 15, 2003

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Meet the IMF's new economist-in-chief

Earlier this month, the International Monetary Fund announced that Raghuram Rajan -- the Joseph L. Gidwitz Professor of Finance at the U of C's business school -- will be replacing Kenneth Rogoff as the IMF's chief economist.

The BBC -- in typical fashion -- is painting this as a blow to the United States:

Raghuram Rajan is best known for a book he helped to write entitled: "Saving Capitalism from the Capitalists".

In this he argued that the world's business elite want to rig so-called free markets in their favour to make the rich richer and the poor poorer.

Such views will be warmly supported by developing countries who are the main recipients of IMF money and advice.

But they are unlikely to go down well with the United States government which is the most powerful voice on the executive board at the IMF.

Leave it to the BBC to eliminate any trace of nuance or background in their coverage. A closer look shows that Rajan probably agrees a lot more with American policymakers than BBC paleolibs when it comes to IMF policy. [What about other policies?--ed. Rajan opposes both the hike in steel tariffs and the removal of the estate tax. This makes him a friend to the BBC because that means opposing the Bush administration on high-profile issues.]

Click here, here, and here for some excellent recent interviews with Rajan. Some highlights that suggest the BBC is off its rocker:

Q: The recent protests the world over against the IMF, World Bank and the WTO have often accused these organisations, amongst many things, of a lack of transparency, and therefore being undemocratic. Do you think that is true?

A: See, here is the issue. The protestors against globalization are sometimes misguided because they are not quite clear on what they are protesting against. Some people, for example, are protesting against the fact that workers in India or China work for 10 to 13 hours a day. They are saying 'What terrible working conditions!' But you know what? Workers in India and China can compete with workers in the West who have far more capital and far more education only by working longer hours at lower pay.

If these workers were to ask for the same working conditions as workers here they would be out of a job very quickly. So until they can produce more or become more productive through a better education and better health care system, which will happen over time, they will have to compete by accepting lower wages.

So the issue of 'Oh, this globalization is forcing those workers to work in terrible conditions.' No, this is not globalization. If you force them to have the same pay, it's a form of protectionism. You are essentially shutting them out of the world market. These workers in India and China, who are able to compete in the world market, are able to thereby achieve a much better standard of living.

This argument is not just made of workers. It is made of software workers, right? 'Oh, these Indian software workers coming and working 60, 70 hours at half the wage that we earn. It is unfair, they should be kept out', etc. This is plain and pure protectionism.

Similarly, there are arguments made about multinationals destroying countries and so on. There's always a grain of truth in these arguments. But if you play them all out -- what they are suggesting is often complete nonsense.

Q: There has also been criticism of the structural adjustment policy that the IMF has traditionally pursued. Where do you stand on that?

A: I don't want to get into that argument because I don't know what exactly was behind it. I do know that the IMF in some documents has admitted that it was probably overly aggressive in asking for expenditure cuts. Soon when they saw this was having a very adverse effect they retreated and had more reasonable targets.

I am not saying -- and I don't want to say -- that these organizations are beyond criticism. There are valid criticisms of their actions in the past. What is important going around is: Are the organizations prepared to adapt and change? Are they trying to do things in the best interests of the people of the member countries or they basically trying to infuse a quasi-imperial diktat from the past? The evidence and my impression is certainly of the former than the latter. (emphasis added).

Go to the links above to read more on Rajan's views, as well as this precis of his latest book (co-authored Luigi Zingales).

Brink Lindsey, by the way, provides this review of : "Wide-ranging, idea-crammed case for free financial markets and analysis of why they seldom exist."

Fierce opposition to protectionism of any kind, combined with the conviction that globally integrated financial markets are the best way to help both poor countries and poor individuals, make Rajan an excellent selection to replace Ken Rogoff. The BBC's coverage of this replacement suggests just how one-dimensional their reporting has become.

posted by Dan on 07.15.03 at 11:37 AM