INTERVIEW

RF: How does the IMF’s role differ from the World Bank’s?

Rogoff: The two organizations are quite similar Kenneth in some ways. They are both, broadly speaking, United Nations (U.N.) family institutions. But they have different voting structures than the U.N. Votes in the IMF and the World Bank are loosely weighted by size of economic contribu- tion to the global economy, so that the European Rogoff countries, Japan, and the United States have a disproportionately large vote. The IMF and the World Bank also have interlocking boards of The International Monetary Fund (IMF) was founded directors, so some people sit on both boards. in 1945, along with its sister institution, the World As for how they differ, the IMF is charged Bank, in an effort to stabilize the international eco- with trying to promote global financial stability nomic order. In recent years, the IMF has come under and growth, while the World Bank directs its efforts at alleviating poverty. The IMF provides intense scrutiny from a wide range of sources. It has support to the World Bank in working toward been the target of anti-globalization activists, who have that goal, but that is not our primary mission. taken to the streets to protest the organization’s poli- Importantly, the IMF is only allowed to lend to cies, and of the Nobel Prize winning economist Joseph sovereigns, whereas the World Bank does not face any such restriction. It is also worth noting Stiglitz, who has taken the IMF to task on a panoply of that the World Bank is also much larger in terms issues in his book Globalization and Its Discontents. of staff and budget than the IMF. So what does it mean, in practice, to In August 2001, Kenneth Rogoff took a two-year leave of “promote global financial stability”? Part of what absence from Harvard University to become the chief we do is constantly loan paid-in capital to emerg- ing markets and developing countries. For economist at the IMF. (He will rejoin the Harvard faculty instance, in the 1990s we made some large loans in the fall of 2003.) During his academic career and earlier to South Korea, Thailand, and Indonesia, and stints with the IMF and the Federal Reserve’s Board of more recently we have loaned to Argentina, Governors, Rogoff established himself as an expert on Brazil, and Turkey. But there are also many smaller loans out there. It’s not unusual for us international finance, debt, and monetary issues. His to have so-called “programs” going in 30 or 40 1985 article for the Quarterly Journal of Economics, “The countries at one time. The important issue we Optimal Degree of Commitment to an Intermediate look at in assessing the size and structure of a Monetary Target,” spawned a vast literature on central program is whether an individual country’s prob- lems might pose systemic risks to the global bank design. And his textbook, Foundations of Interna- financial system. tional Macroeconomics, co-authored with Maurice Such lending is the headline activity of the Obstfeld, is widely used in graduate classes. IMF, but there is also another big element to what the IMF does. We provide a forum for Rogoff is also an expert chess player, obtaining the life- countries to meet and provide information—both formally and informally—to one another. This time title of International Grandmaster (the highest allows policymakers to exchange ideas about best rank awarded by the World Chess Federation) in 1978. practices during noncrisis periods. In fact, many He retired from tournament competition at the age of of our staff papers deal not with crisis issues but 25 to focus on his economic research. Aaron Steelman instead with more general macroeconomic issues. Finally, of course, every member country must interviewed Rogoff at the IMF’s headquarters in submit themselves to bilateral review of their eco- Washington, D.C., on April 15, 2003. nomic policies every year or two.

32 Region Focus • Summer 2003 RF: When you came to the IMF, were there certain economic issues that you thought should be the focus So what does it of your department’s research? mean, in practice, Rogoff: I think it’s very important, when coming to a job like this, to have to “promote global an open mind and to realize that some of the best ideas come from the financial stability”? bottom up. You have to really listen to people and to give people room to Part of what we do be creative. But, yes, there are some specific issues that I wanted us to is constantly loan work on, such as exchange rates for developing countries. Before I came paid-in capital to to the IMF, I had done a lot of work on industrialized countries but I had emerging markets never really worked on low-income countries, and it quickly became and developing apparent that they have many inter- esting special problems. For instance, countries. the amounts of international aid going to poor countries are very large as a percentage of their overall budgets— SCOTT SUCHMAN we’re sometimes talking 10 or 20 percent. How do you manage this macroeco- nomically? Also, consider Africa. Many of those countries are subject to huge commodity price empirical, policy bent than you would see at a uni- shocks. How do you conduct monetary policy versity seminar series. when your main export—which produces, say, 80 percent of your country’s income—can vary up or RF: The IMF has been attacked from all sides: down by more than 40 percent? These are very from the left for pushing “neo-liberal” policies interesting questions that just never would have in developing countries, and from the right for occurred to me if I hadn’t come here. creating moral hazard problems as a result of its We are also interested, of course, in the inter- lending. How would you respond to such critics? national financial architecture and all that entails: capital controls, the international bankruptcy Rogoff: The most important thing for us to do, court, and other issues. And I’m very interested and it’s the honest truth, is not to respond to the in new open-economy macroeconomics, an inter- critics but to listen to them. Indeed, broadly est that grows out of my work with Maury Obst- speaking, the IMF and the World Bank are quite feld. When I came here, the Fund had a model receptive to criticism and have made some serious that was, I think, very effective at looking at what changes over time. In 1980, for instance, the occurs if there is an oil or global productivity World Bank was not in favor of free trade. Simi- shock. But the model was 20 or 25 years old, so I larly, the IMF was much more Keynesian 25 years wanted to replace it with a newer model, and we ago than it is today. It’s not easy for these insti- have made a lot of progress in that direction. I tutions to move quickly—you need to achieve con- must say, though, that much of what we have been sensus among a large number of board members, able to accomplish is because other places—such some of which represent a large number of coun- as the European Central Bank and the Federal tries—but the critics have made a difference. Reserve Bank of New York—have been refining The second thing that I want to say is that their own models. Not surprisingly, I would say almost everyone in academia has some criticisms that most of the work we do has more of an of the World Bank and the IMF. I sure did. I

Summer 2003 • Region Focus 33 wrote some of the first papers on moral hazard Rogoff: I think that it’s a very passionate and and IMF lending in the late 1980s with Jeremy angry book, which is part of its effectiveness. It Bulow. We took a fairly cynical view of the whole is directed at a broad audience and it clearly hits process. I also wrote a paper with Maury Obst- a chord with many people. Certainly if you asked feld called “The Mirage of Fixed Exchange Rates” professional economists if they agreed with some that said it was a disaster to support fixed of the arguments in the book, they would say yes. exchange rates, which was conventional wisdom It covers a laundry list of problems with the IMF, at the time. This view, which has now by and large from the left, from the center, from the right, become the conventional one, is an example of from outer space. And as Jagdish Bhagwati said why one has to resist always trying to come down in his review, if you launch enough missiles, you’re somewhere in the middle on debates, which is a bound to hit some targets. In that regard, I would natural tendency in an institution like this. highlight the issue of premature financial liberal- ization being something that one wants to be very RF: It’s pretty surprising that 25 years ago free wary about. I certainly agree with Joe on that, trade would have been a controversial idea at though I also think that if Asian countries had the World Bank or IMF, since liberal trade poli- genuinely flexible exchange rates in the 1990s, we cies were so widely accepted by the profession might have only seen a mini-Asian crisis instead as a whole. of a full-blown one. And Stiglitz’s book agrees with the general proposition of having an international Rogoff: You have to understand that the institu- bankruptcy court, an idea the IMF has advanced tions are governed by their member states. A lot over the past couple of years. of countries will say that if you look at the history But there are some areas where I think he takes of the industrialized world, many countries have very odd positions. For example, let’s say you have had protectionist policies. Even today, the United a country in a severe debt crisis that has been cut States and the European Union off by its lenders. Should the IMF criticize the remain quite protectionist in some country for not engaging in countercyclical fiscal areas, albeit far less than most policy? Or if a country’s exchange rate is under developing countries. I think that attack, I don’t think it should respond to it by In the 1990s, is very unfortunate. It strengthens printing more money. the hand of protectionists in In general, I have trouble summarizing my take certainly, I think developing countries who say, on the book, because it draws in everything “Look—today’s rich countries got anyone has ever written. But, at the end of the countries looked that way by using protectionist day, when you set aside the personal attacks on policies. Why are you so sure that the competence, intelligence, and moral charac- at the financial we should reduce our trade barri- ter of the IMF staff, there are clearly some well- ers? Shouldn’t we protect our taken points in the book. liberalization infant industries?” So, the free trade position, which economists RF: The IMF gets a lot of attention for its of the United will say is obviously correct, will efforts to help prevent and deal with crises. But not be so obvious to some of the there are some very important issues that can’t States and asked people from our member states. be characterized as crises, but which still prob- This is a good example where the ably lower the standards of living of millions of how they could middle ground was not right. Free people—such as Europe’s rigid labor market trade was, in many ways, the policies. What sort of counsel can you provide follow that type radical position 25 years ago, even to member countries on these types of issues? though it was right. And I think of framework. that some of the people who still Rogoff: We have an analytical piece on that very remain skeptical of liberal trade topic in the April 2003 issue of World Economic policies are coming to the realiza- Outlook. We ask what are the costs to Europe tion that globalization is some- because of its labor market institutions—and what thing that you can’t really stop. would be the gains if those institutions were brought to U.S. levels? We use two different models RF: Your open letter to Joe Stiglitz drew a lot to look at those issues. We come up with estimates of attention from economists, but may not be that Euro-area unemployment would fall about 3 as familiar to others. Could you briefly percent and output would be 10 percent higher if describe what you had to say in response to those institutions were brought to U.S. levels. That the criticisms he has made of the IMF? doesn’t prove that they should make these changes,

34 Region Focus • Summer 2003 because there are transition costs and allocative invested in real estate and equities. And, as we issues, not to mention some noneconomic con- know from Ben Bernanke’s work on the 1930s, cerns that might affect Europe’s decisions. when the banking system goes awry, it’s very hard We can present our analysis and try to create to get it back into shape. Many cor- a dialogue, but it’s really hard to do much more porations are being supported by than that. We don’t have much traction with banks which are themselves insolvent. Kenneth Rogoff developed countries on these types of issues. It’s Banks are keeping these corporations ➤ also important to note that countries do look at afloat when, in fact, they should be Present Position each other and notice when certain countries are folded. Also, Japan’s weak social safety Economic Counsellor and Director of growing and they ask what it is that they are doing net doesn’t give them the ability to the Research Department, International correctly. That doesn’t mean that they will change absorb changes as well as the United Monetary Fund their policies overnight. But it can have an effect. States can. Eventually, they will need ➤ Previous Positions In the 1990s, certainly, I think countries looked very deep restructuring of their Faculty appointments at Harvard at the financial liberalization of the United States banking system. It’s going to be University and Princeton University; and asked how they could follow that type of painful, but until they do that, they Economist, International Monetary Fund; framework. And they were much more affected will not have growth. Economist, Board of Governors of the by this than by anything that the IMF might have Another big problem is deflation, Federal Reserve System told them about the issue. which is aggravating the problems that ➤ the banks have. I think the Bank of Education RF: What do you think are the prospects for Japan should end deflation, and I think B.A., Yale University (1975); Ph.D., economic liberalization in the Middle East? that it would be very straightforward Massachusetts Institute of Technology to do it—they need to be more aggres- (1980) Rogoff: Growth in the Middle East has been very, sive with their monetary policy. Even ➤ Selected Publications very poor. Per capita GDP over the past 20 years if they ended deflation, I recognize that Co-author, Foundations of International in the Middle East region as a whole has fallen by they would still have many problems. Macroeconomics (Cambridge, Mass.: MIT 1.6 percent a year. It has been the worst perform- But it still would be a big step forward. Press, 1996); author or co-author of ing region in the world—and this includes the oil Japan also has dire fiscal problems, numerous scholarly articles in such pub- countries. There’s another chapter in the World in part because they have run deficits lications as the American Economic Economic Outlook that looks at how much higher in an effort to try to jumpstart the Review, Journal of Political Economy, growth could be in the Middle East if institu- economy. And, moreover, they have an Quarterly Journal of Economics, Journal tions—here we are talking about corruption, polit- even more urgent aging problem than of Monetary Economics, and Journal of ical rights, and other related issues—were brought does the United States; Japan’s labor International Economics into line with the world average, forget about the force is already falling. industrialized average. It concludes that the Middle East could see gigantic income changes. RF: Are there certain skills that you The Middle Eastern countries have very large acquired playing chess that have public sectors with very large budget deficits. They helped you as an economist? have very shallow banking systems. And they have very serious issues with corruption. These are fun- Rogoff: It’s hard to say. When I was damental problems that need to be addressed. an academic I did a number of papers

There is a role for regulation and for govern- that involved game theory. I find that SCOTT SUCHMAN ment intervention in certain areas, but most coun- game theory comes very naturally to tries don’t have the balance right. They have too me, whereas algebra is something I can much state involvement and state control. The do, but I wouldn’t describe myself as Middle East is a region where this is particularly very facile with it. So I definitely think there is problematic. That said, we believe that such gov- some connection between my chess career and ernance issues have to be decided by the people my ability with game theory. Also, it’s certainly of these countries themselves. All we can really true that, in my current position working on do is provide technical analysis and demonstrate policy issues, I find myself drawing on chess analo- that their economies are performing very poorly. gies. That’s because, in chess, there is seldom a “right” answer. You very much need to consider RF: In the 1980s, Japan was the envy of the rest what the other person is thinking. You’re not just of the world. What has happened to its objectively looking at the board—you are trying economy? to understand the other person. And in a policy environment, when you’re discussing a problem Rogoff: Japan has a lot of banks that are not or negotiating a program, you are doing much the fully functional, because they have a great deal same thing. RF

Summer 2003 • Region Focus 35