Rajan warns against protectionist forces
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Large global imbalances and rising inequalities in many countries-both industrial and emerging market-increase the risk of a protectionist backlash, says Raghuram Rajan, who stepped down at end-2006 as Economic Counsellor and Director of the IMF's Research Department to return to the University of Chicago. In a wide-ranging interview, he reflects on the global economy, the IMF's role in furthering economic and financial stability, and being in the hot-seat job of chief economist.
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At end-2006, Indian-born Raghuram Rajan stepped down as Economic Counsellor and Director of the IMF's Research Department to resume his career as an academic and researcher at the University of Chicago's Graduate School of Business. When Rajan joined the IMF in September 2003, he was the first chief economist to come from a developing country and the first to specialize in international finance rather than macroeconomics. Earlier that year, he won the Fisher Black prize for the person under 40 who had contributed the most to the theory and practice of finance. Laura Wallace of the IMF Survey spoke with him about global economic issues, the IMF's role in furthering economic and financial stability, and being in the hot-seat job of chief economist.
IMF Survey: How do you see the IMF's role evolving, particularly when we have fewer crises?
Rajan: We should be happy that there are fewer crises of the old sort requiring bucket loads of money. Perhaps the next crises will be different in nature-they may be slower in developing but more costly and widespread in consequence. For instance, insufficient investment in energy in the past, and even today, will have consequences for some time.
The large global imbalances create the possibility of a protectionist reaction, or a sharp adjustment in asset prices, in the future. Some of these slow developments are obvious at the multilateral level, but not at the level of an individual country.
As another example, with demographic changes, capital has to be able to flow out of countries where populations are aging to the countries where populations are still young so capital can be matched with labor to boost production. Similarly, manufacturing is increasingly taking place in developing countries. But if their markets are in developed countries, the developing countries need to have entities there to handle design and marketing. This means emerging market investment in upstream assets like research and development and in downstream assets such as distribution in developed countries. It is thus in the interest of all countries to keep barriers to cross-border investment from rising.
The IMF has a very important function in fostering multilateral dialogue to deal with problems that have multilateral solutions and using that process to encourage change in individual countries. One of its new tools to do this is the multilateral consultation, which it began using in 2006 to promote dialogue on the enormous global imbalances.
The virtue of this device is that it brings together the right people to discuss a particular issue. Until now, the various international forums have been either too big or not inclusive enough.
Perhaps the next crises will be different in nature-they may be slower in developing but more costly and widespread in consequence.
-Raghuram Rajan
The IMF also has its traditional bilateral surveillance role, and we need to keep rethinking that role to ensure that it's top-notch and provides value even as member countries increase in sophistication. Right now, a new area of emphasis is improving the integration of financial sector surveillance with the regular country consultations.
The bottom line is that even if there are no fires, the fire department should be thinking about precautions to make sure a fire doesn't break out. But this also means staffing should be sufficiently flexible-crudely speaking, more resources in regional departments (the firefighters) in bad times and more...
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