Anne Krueger Reflects on 50 Years of Rent-Seeking, Trade, and Economic Development

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Anne O Krueger. She is a Senior Fellow at the School of Advanced International Studies, Johns Hopkins University, and the Herald L. and Caroline Ritch Emeritus Professor of Sciences and Humanities in the Economics Department at Stanford University. She served World Bank’s Chief Economist from 1982 to 1986, and the first deputy managing director at the IMF from 2001 to 2006. We talked about her famous 1974 paper “The Political Economy of a Rent Seeking Society” on its 50th anniversary, her experience understanding the license permit raj system in India, the 1991 trade liberalization, the Washington consensus, decline of the WTO, the new protectionism in the US, reforming Argentina and much more. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

Anne Krueger, welcome to the “Ideas of India” podcast. It is such a pleasure to have you here.

ANNE KRUEGER: Thank you. It’s a pleasure to be here.

Rent-Seeking in Turkey and India

RAJAGOPALAN: I want to start with the famous AER paper from 1974. This is the 50th anniversary of that paper, but before we discuss the nuts and bolts, that paper has two case studies, one on Turkey and one on India. What made you visit Turkey and India, and how did you get involved with those two countries and their trade and licensing regimes and so on?

KRUEGER: There are two stories. There is not one: one Turkish and one Indian. Beneath all that, of course, is the underlying story that I was always interested in the international and in development, and had followed much of it right along, and so in that sense, it was natural for me to then obviously be doing research that involved the countries and what was going on. I was reasonably convinced, even on the basis of what I’d learned from basically just international trade courses and things like that, that the import substitution thing was at best doubtful, or at least it needed to meet a pretty stern test of making it come good and all that. There wasn’t a lot of evidence of that. I don’t think I knew much about exchange control or anything.

Then one summer I was invited to work for the U.S. Agency for International Development and they had me write a paper on what I was thinking about all this, and I wrote it, and I think I gave it to them late July or around there some time. Then they say, “Okay, now we want you to go and try out your ideas on one country, and you got a choice of two, we could do Colombia or we could do Turkey.”

I chose Turkey. I thought it would be more interesting than Colombia, and I still think I was right on that one. I did go there, and I was obviously worrying about the import regime. I was worried about the controls and stuff, and so I told the Turkish people, who the embassy gave me contacts with, that I just wanted to meet some Turkish businessmen and talked to them about what they did.

I spent some time going around Turkey and talking to them and figuring out what was happening and why. That was the real beginning of it. In the course of that, of course, I learned something about that, but I had always had an interest in India long before Turkey. The minute they were interested in going any further, I chose India. I think one year, maybe the third year, I was doing some work in Turkey. I then left there for India directly, and that was my first visit to India and the rest, as they say, is history. 

RAJAGOPALAN: Different biographical sketches have different years. What I put together was you went to Turkey in 1965.

KRUEGER: I think that’s right.

RAJAGOPALAN: In 1968 was your first visit to India, and then ’69, ’70, you were appointed consultant by USAID and so on.

KRUEGER: Even for the first trip to India, I thought I was—I think the consultancy came earlier, but it sounds about right. I guess I’m a bit surprised at ’68. I thought ’69 or ’70. No, I guess I would’ve said ’69, so ’68 may be right.

RAJAGOPALAN: What interested you in India? I’ve read so many papers at this point. I don’t know where it was exactly, that you were also very interested in India because of some of the graduate students who introduced you to all the problems and the development problems, the labor problems and so on. Was there anything before that? Because the consensus at that time was that India was just doing the right thing. What got you interested in the nuts and bolts of the Indian system?

KRUEGER: I guess the answer has several parts. The first part of which is, I don’t know why I had an interest in India. I vividly remember the headlines in the American newspaper the day that Gandhi was assassinated, and I was a little kid. But that was a very important event, and I was pushing a lot of people out until I got—it was very bothersome. I don’t know why or what, but India had always somehow had an attraction.

I guess we’d had a day or two about India in school and things like that, but I’d always had that attraction, and so the interest was there for that reason. And of course, in graduate school, as you said, I had a couple of friends, including several Indians, and some of the things I read as a result of their recommendation, for example, there was “Toward Freedom” and things like that came out of that. Of course, many of them were very committed to the economic policies and what have you. It was I think fairly natural that I’d be interested.

RAJAGOPALAN: Even before 1965, the general consensus in the ’50s and ’60s was that free trade was really for the developed world, the Western world in the post-war period, and developing countries were doing the right thing by being protectionist, by having infant industry protection, import substitution, import licensing—you know the list better than I do. Did you ever buy into that orthodoxy, or were you always skeptical of it? If you did buy into it, what made you change your mind?

KRUEGER: I don’t know as I bought in. I think I recall someone at graduate school saying, “Yes, there might be an industry where you had high cost of startup, but if you then set it up, you would recoup your money and you would be able to take off the protection and be able to produce for world markets and stuff.” What I understood about India and about Turkey, was that they were not doing any part of that. Not only were the ones that were protected not thriving, they wanted more protection, and they were not at all thinking about the international market. They knew they couldn’t compete.

There was some dissonance that way. I’m not so sure that the consensus, at least as I perceived it, was quite as strongly pro-import substitution and all that, as you are saying. There was one guy whose name was Shenoy in India, who was very prominent and who was obviously opposed.

RAJAGOPALAN: B.R. Shenoy, yes.

KRUEGER: I think there was a very good agricultural economist, K.N. Raj, who was very doubtful. I think some of that was there too.

RAJAGOPALAN: When you first went to India, what were your impressions? Did you just immediately understand the craziness of the License Permit Raj overall and also what was happening in the external and trade sector? Or did it take you a lot of time to get in and figure it out? Who were you speaking with? What were your impressions?

KRUEGER: There are a number of things. I went there to do the same kind of study as I had done for Turkey, so already I was interested in getting into that, and I knew that I would never learn what I needed to learn by going around in government offices. I’d learned that in Turkey. That was the most important lesson. I basically asked them to find me a place that would help me and I thought I wanted to learn about this. And I knew about the auto industry, and so I basically said, “Can we find somebody who could sponsor me to take me around, and I want to compare buyer and seller information.” Which seemed to me to be critical because you could be told anything. Everybody always knows their own product is good and their reasons for it.

Basically, it taught us, we’re willing to do this. They basically arranged, gave me a list of their buyers and their suppliers and what have you, and I went around from place to place. They were very accommodating and very generous with their time and with their access to their people and all that. I got what I needed to know, and of course, in the process, I learned a lot more.

I obviously knew something when I got there, I certainly didn’t know as much as I learned while I was there, and of course, I’ve learned even more since. It wasn’t the end of the learning, but it was certainly a good basis. It is true, I should just tell you, it is also true that several Indians who knew the system pretty well did refer my book as this: “how to learn about the Indian system” at one point in time.

RAJAGOPALAN: This book is extraordinary, actually. I should hold it up for the camera. This is “The Benefits and Costs of Import Substitution in India.” I find this book extraordinary because of the level of detail. You decide to look into the auto industry and, in particular, auto parts, right?

KRUEGER: Yes. That’s because what they were assembling. The automobile was high priced, but how much of that was because the cost of assembly and how much of it was the cost of the parts? Of course, the answer was it was both.

RAJAGOPALAN: What you managed to do is amazing because you go to Hindustan Motors, you get a list of all their parts supplies, I believe 50 or 60 of them, and then you write in the book that I figured out that each of these parts businesses have three sets of books: one for the tax man, one for the public and one for themselves to actually understand what was going on. And that they were generous enough to open up these books to you. Was this similar to what happened in Turkey or was the Indian problem its own unique Indian thing?

KRUEGER: I think India is unique, and maybe because India, of course, was under British rule, and the Brits are very much, what shall I say, meticulous bookkeepers. Whereas I don’t think the Turks are quite as worried about the details in some regards. While the system was much the same, I think the level to which it went in India was a little bit further.

RAJAGOPALAN: When you looked at these three sets of books, did you immediately figure out that this is a matter of rent seeking or did that insight come later after you had put all the data together?

KRUEGER: Oh, it came later, obviously. At first it seemed amazing, but then after you realize, these guys are smuggling parts or these guys are importing in false pricing or whatever it is they’re doing, you figure out, there’s that. But then after a while when there’s so much of it, you realize this is not just simply a matter of me taking money out of your pocket, that you are indeed making your living doing that when you could be doing something productive instead. That was the fundamental thing, is not realizing it was there, which I think everybody knew. 

I remember a day or two on corruption in graduate school. I think what we were taught was that, when there’s corruption, it doesn’t much matter because it’s simply a transfer from one person to another. That would be true if it were one or two little isolated events, I suppose. Once everybody realizes that if they do this, that or the other thing, they’ll get more, then everybody competes for it. By that time they’re spending time and resources on it. By that time it is more costly.

Professional Influences

RAJAGOPALAN: Now coming to the rent seeking aspect of it, how much did you know about rent seeking from the nontrade literature, before you did these studies? For instance, there was Gordon Tullock and his 1967 paper.

KRUEGER: Well, two things about his paper. Where was it, what was it? Western Economic Journal?

RAJAGOPALAN: Yes.

KRUEGER: I didn’t even know of it until about 1973 when he sent it to me and said I’d stolen his work, which was not true. Of course, his work was restricted to what monopolies do. Which is also important, but it’s not the same thing. Of course, mine, I came at it from the international trade side, so no, I did not know of that literature at the time. I’m sorry I didn’t, but I didn’t.

RAJAGOPALAN: No, that’s totally fine. What I was trying to figure out was what were the influences? For instance, there were folks at Chicago, there was Harberger, there was, of course, Stigler who was talking about the demand side and the supply side of regulation and the kinds of problems that causes Pelzman was just starting his work. Did any of the nontrade side regulatory stuff influence you at all, or this was just completely different?

KRUEGER: Two parts to the answer, one of which is Al Harberger was and is still a good friend. In that sense, I’m sure we exchanged ideas. I don’t remember going over this one with him in particular. Certainly, he knew about some of what I was thinking and all the rest of that. In Al’s case, yes. I knew George Stigler fairly well and admired his regulation work, but I thought of that as being different because he went after the capture part of it. That in itself was a different part of the thing, although it probably applied too, but I never thought of that actually at that time as applying to the rent seeking, if you know what I’m saying?

RAJAGOPALAN: Yes.

KRUEGER: I guess the answer is, no, it was trade, and it was the recognition that this is not a small thing, and it is not simply a transfer.

RAJAGOPALAN: Absolutely, and that’s where you also extend Harberger’s work. There he recognizes a certain proportion as a transfer, but the dead weight losses that Harberger shows are relatively small compared to what actually you figured out eventually and then extended that.

KRUEGER: Well, he’s looking at welfare cost only, which is a slightly different too. That was a very important paper that covered a lot of territory. He’s a great man.

RAJAGOPALAN: Now coming back to India, who were some of the people who influenced your work? For instance, you know folks like John Powers, Soligo and Stern, they were working on Pakistan, in the early to mid-’60s, they were talking about how inefficient the foreign exchange and the import licensing system is in Pakistan. There were, of course, Bhagwati and Desai, who I know that you got to know later, but I don’t know if you knew them the first time you went to India. What were people talking about? Did you all know each other and connect with each other, or did you all land on this?

KRUEGER: Well, I guess it’s part of the community, so to some extent, yes. No, to correct, no. In fact, I met Jagdish Bhagwati in Turkey. We were both invited to a conference on the Turkish board and trade regime. Along with a friend of both of ours, Michael Bruno, one night we were just having coffee and he was Israeli. We began discussing what was going on in each of the three countries, me discussing Turkey and Jagdish, India and Michael, Israel, I think. I’m sure Israel. In any event, the three of us were discussing these things. That was the inception of the whole Bhagwati-Krueger project.

RAJAGOPALAN: That was later, the NBER project?

KRUEGER: No, it started right there and then, that was it.

RAJAGOPALAN: Oh, wow.

KRUEGER: That’s where we started it.

RAJAGOPALAN: It started as early as say 1966, ’67. Wow.

KRUEGER: No, you’re right, ’67. It started then, but then I, in fact, because I had been working with USAID, I undertook to try and see if I could talk them out of the funds to finance the project, which I did. That took, I think, more than a year. It was about a year or so after that that we then began to identifying authors. I do not even remember, I could probably look it up, when the first meeting of all the authors was, but it was after that, I’d say probably about ’69 or ’70.

RAJAGOPALAN: How did you choose the 10 countries and the 10 authors? Were they all part of the community, or was it just each of these people had done different studies and you figured out that you’re all looking at the same problem?

KRUEGER: No, in fact, as we talked to each other, we’d already figured out we were looking at the same things, which we hadn’t even recognized at first. For the others, we wrote an analytical framework paper, which we circulated to various people asking, “Would you be willing to do this on your country?” Then we looked for people, through the literature primarily, who had done work that was on the country and looked as if it was close enough to what we were looking for, that they would have the contacts or other things they needed to do the work.

It was a question of, yes, it would be interesting to do this country, but if you can’t find anybody to do it, it doesn’t work, and that person is a good person, but if he’s got a country that’s already free trade, what are we doing? 

RAJAGOPALAN: That I appreciate. 

KRUEGER: It was matching and who could we find? Each of us knew, I would guess, two or three of them. That’s probably about six. We each knew it ourselves, but there were one or two that neither of us knew, but we began looking through literature and found.

South Korean Miracle

RAJAGOPALAN: One of the biggest success stories of that time, when we talked to other trade economists, we learned that the South Korean story really flipped something for everyone. In your series, it was, of course, Larry Westphal who led that with a couple of his co-authors. When did you learn about South Korea? I know you visited in the early ’70s, but when did you actually learn about what was happening there and how they had fixed and turned things around?

KRUEGER: Well, there was a very famous economist, fairly sure much famous than he [Larry Westphal] was, economist. named T.C. Liu, L-I-U, I think, but I’m not sure of that, or I don’t remember. I should have looked it up. In any event, he was at Cornell. Of course, he’d come from mainland China and left when things had gone bad there. He was very much an apostle, a disciple, call it what you will, of the fact that you needed an open trade regime and trade. He’s the one who sold the Taiwanese summit. In fact, I met his daughter later and stuff like that. I never met him, but I don’t think I met him anyway. At any event, he had gotten Taiwan going about 1955.

I think I read something as early as 1957 about the Taiwanese success and how Taiwanese exports was booming when all, everybody knew that developing countries could do nothing, and here was Taiwan. I kept watching it from then on and knew about it. The Korean invitation was something that came out of the blue. Larry Westphal and Charles Frank did a very good Korean study, and that was important, but that was not this.

Basically, came an invitation to go to visit Korea, I think, 1973 or ’74. That was the beginning of what still continues as a relationship in a sense. I learned a lot from them. Although there’s a lot of other learning along the way. I’ll tell you one thing that was very interesting. At some point, and I would guess about 1972, I was invited among other places to Singapore to give a couple of talks.

Of course, I knew Singapore was free trade and all that, but I thought it would be interesting. I went and the USAID had arranged the usual series of conferences for me to meet people ahead of time. One of them was their planning board and I didn’t give it enough thought ahead of time. I asked the same question as I would’ve asked to the Indian Planning Commission: By what criteria do you decide? I don’t remember what the question was, it doesn’t matter, but I do remember the answer: “We look and see what makes sense.”

RAJAGOPALAN: That one sentence explains the difference between Singapore and India.

KRUEGER: Well, I’m not sure it entirely explains it, but on the other hand, it was certainly an eye-opener, as to a different way of looking at things. I think the Koreans are much closer to the Singaporeans than to the Indians. From the first time I came there, I got off a plane and I was in the shaggy old clothes that were one wears. I had been on the plane overnight, so they were in horrible shape anyway.

Anyway, I get off the plane disheveled and all the rest of it, just anxious for a shower and what have you. Instead, the press are there. What’s the question from the press? “What are we doing wrong? Tell us what we’re doing wrong.” You guys are growing at 10% per year; what is it you’re doing right? In any event, the Korean attitude is, how can we do better? It was just a very different attitude right from the beginning. It was unbelievable, every six months, it was a new country.

RAJAGOPALAN: The Korean growth rates like clearly seemed to have unlocked something in all the other policymakers who were advising developing country leaders and so on.

Korea vs. India

KRUEGER: But in India, if I mentioned something about Korea, I was told it was different. Then, of course, India was too big for that.

RAJAGOPALAN: Yes. I want to get to India, actually. How was your study received at the time when it came out? Because you’ve gone to India every few years and you’ve stayed in touch.

KRUEGER: Well, that time every year.

RAJAGOPALAN: Every year, right?

KRUEGER: Yes.

RAJAGOPALAN: You must have been meeting people. Did you just want to pull your hair out because they didn’t get it? Or did some people get it, but the system couldn’t be reformed? What was your impression?

KRUEGER: There was clearly a very strong consensus in the other direction. I remember one time I was in Madras, Chennai, and at that time there was some very nice, I think, afternoon tea or something reception put on. And I think some of the state government people brought along the journalists and the others. I ended up talking to a few of the wives of the journalists and their explanations to why import substitution was so good was absolutely as good as that of most of the other Indians.

Everybody, it wasn’t just the economists and it wasn’t just the government officials. It was everywhere. I had a guy who drove a three-wheeler in Delhi. I occasionally used him to go places. He spoke enough English to explain to me that his three-wheeler was bad. He wanted a new one, but he didn’t want an Indian one. And here’s why. Then he explained why they couldn’t get through the customs. It was common knowledge.

RAJAGOPALAN: What about the policy elite? Because now it seems like the policy elite in India and the policy elite in the rest of the world are extremely integrated. They almost always sound the same and say very similar things. I imagine that time it wasn’t the case, especially your experience.

KRUEGER: It wasn’t the experience of anybody working on trade issues in developing countries. It just wasn’t. If I can do this without naming any names.

At some point, I was coming back to India, and one of the secretaries and one of the important economic ministries said, “You’ve been selling this for years, but you’ve never heard the counterarguments. Come give a talk on a Saturday morning at our ministry. I’ll invite in the other chief secretaries and so on, and we’ll have a discussion.”

I went and had the discussion on the Saturday morning and made my pitch, which by that time was a little bit smoother than it was earlier on. And I knew India well enough, so I could apply it to India, no problem there. I was reasonably content with it as it finished up. The first question came from my host, and the first question was, “Now, madam, surely you know that India is a poor country. Surely you know that there are two kinds of goods: There are luxuries and there are necessities. Now, surely it would be criminal for a poor country to produce luxuries, and how could we possibly export necessities?” The discussion did not change very much from that level.

RAJAGOPALAN: What made you go back over and over again and still have some kind of optimism that something would change?

KRUEGER: Partly, as I said, simply that I like India, so that it made it easier. I still love going to a dance or a concert or something like that. I can do all that there, and I have friends there, which is another part of it, so I could go back that way. On top of that, the rest of the world was doing differently, and I was convinced that at some point it would just have to be changing because everybody would finally perceive that they’d just been left behind—

RAJAGOPALAN: That’s true.

KRUEGER: —several centuries ago. I don’t think it was really conviction that it would change so much as you got to keep trying.

RAJAGOPALAN: When we did the 1991 oral history project, we spoke with all the folks who were part of the reforms and the change that was brought in in 1991. Montek Singh Ahluwalia, Shankar Acharya, Ashok Desai, Rakesh Mohan, so many, Vijay Kelkar. We’ve spoken to so many of the folks who were there at that time, and they all talk about some of the big influences.

One of them is, of course, “Planning for Industrialization” by Jagdish Bhagwati and Padma Desai. There was also the Ian Little, Scitovsky and Maurice Scott book; this is “Industry and Trade in Some Developing Countries.” They also changed their mind during the ’60s. Then the next is yours, right? Your work. They always mentioned your study on India and also the NBER series with Jagdish, which was hugely influential. Did you have a sense of how things were slowly changing or did you just figure all that out much, much later?

KRUEGER: I don’t think I had a sense of how much things were changing. There are some people still around who do believe that the changes started in the 1980s, which I do not buy. But certainly the rhetoric at that time did not. At that time, there were a couple of years there where I was reasonably discouraged because I thought the rest of the world was moving on and India was not.

RAJAGOPALAN: Yes. Did the Chinese experience give you a lot of hope and that, look, that’s a huge country because I think that’s another thing that changed for India. When it was Singapore, Taiwan, Hong Kong, the Indian elite were like, “Oh, those are small countries. They can manage this.” India is a large and poor country, but when China liberalizes, suddenly Indian policymakers are talking about, what do we need to do to catch up? Was that a big moment for the trade folks and for you in particular?

KRUEGER: Before that moment, the Japanese foreign aid minister came to India and was taken on a tour, was treated very nicely because, of course, India, the government officials appreciated what he might do and so on. They gave a very nice banquet for him the last night he was there, and they asked him to stand up and give his impressions. He started—I’m paraphrasing, because, at first, I’ve never heard the talk. I heard of the talk, but I heard it both from the Japanese side and the Indian, so I’m pretty sure it’s true.

In any event, he went on, and he said before he came, he knew India was a wonderful country, and he was all excited to see it and so on and so forth. He didn’t understand why. He said then everybody told him India was too big to export, that that was the problem. He had done some homework. What he had done is he had went and looked for the numbers of Singapore, and Singapore had a population of, I think, around four million people or something at that time.

Then he looked around Indian cities, and he decided Chennai was about the same size as Singapore. Then he looked at what Singapore exported, which was more than what India exported. What he thought should happen is Chennai should do all the exporting.

RAJAGOPALAN: That’s such a fantastic way to make the point.

KRUEGER: What I’m saying is that it was not just the ones you cited who are the English-language speakers. There were others who were after him, too. The Japanese were likewise saying things were amiss to some extent, at least, and he was one of them. That’s the first part of the answer. 

The second part of the answer is, in my recall, I do not think that the Chinese very rapid growth was perceived as that much of a success until around 2000. I think the Indian changes came before that. I think there were several reasons why we didn’t perceive China first. One of which was, of course, it was so poor too, another of which it was so closed, we didn’t understand it as well. A third of which is, of course, that with Mao, things had gotten so bad that when he came out from under that, you would expect it to bounce back even if they hadn’t changed the system.

It wasn’t until the middle of 1990s even that it began looking as if there’s something more. I must confess, I was still a skeptic as to whether the Chinese could continue and sustain it even as late as 1997, ’98, that I just did not think that without removing some of their constraints and what have you that they could continue as long as they have.

Import Substitution and Rents

RAJAGOPALAN: Now, looking back at your 1974 paper, one of the things that you talk about when you talk about the Indian case study is that this kind of import substitution, import licensing system has huge rents. Actually, today morning I was talking to my parents who are still in India, and they asked me, who’s Anne Krueger? I said, “She’s the person that India owes at least 7.3% of its 1968 GNP,” because that’s what you estimate in this paper as sort of the loss from the craziness that’s going on.

One of your recommendations is that it’s better to switch to a tariff regime as if you still wish to be protectionist, at least it won’t have these kinds of problems and so on. Now, India did switch to a tariff regime for the auto industry, as you well know, and the tariffs are over 100% in many cases. How do you look back at the auto industry now? Do you look at things as, oh, my God, it used to be so much worse, or they could have done so much better?

KRUEGER: Both of those are true, of course. It was worse then, and it is better. That’s part of it. Yes, they could have done so much better. There’s also no doubt about that. Both of those parts are true. I think for a while after 1991, the tariffs were taken off. I think Maruti and so on right in there were done without that, and that’s what made the big change.

After that, people wouldn’t quite accept the poor quality they would before, et cetera. I think it’s sad that those tariffs have come back because I think that without those tariffs, some of the auto parts and manufacturers would have developed into successful exporters. That’s the part that, no, you can’t see what isn’t there. That’s what makes it tough, so hard in economics to say, “Yes, you got this, but you could have had that.”

RAJAGOPALAN: Yes. No, absolutely. Also, when I go back to India, I see Indians spending twice the amount, not even purchasing power parity terms or something, literally twice the dollar amount on cars, car models that are like 25 years old, that are still being sold in India by foreign brands and manufacturers when they could have just far better cars, safer cars, more fuel-efficient cars and so on.

KRUEGER: By the way, 100% tariff on auto or auto parts was not all that unusual in the developing countries at that time. I think at one point, unless my memory is mistaken, Chile, before they moved away from all this system, had a tariff over 1000%.

RAJAGOPALAN: Oh, wow.

KRUEGER: Of course, tariff equivalents, even in India, were very much higher than was recognized because people didn’t figure out that, indeed, they’re getting their materials at a lower cost and now they’re getting their big value added blown up.

RAJAGOPALAN: You talk about this in this particular book. In the developing countries lectures, there are a number of lovely tables. There eventually I figured out that Turkey eventually reduced tariffs to almost single digits, I think. Somewhere between 3% and 10% is where the auto tariffs are.

From that study, some people seem to have taken the right lesson, and some people are yet to figure out, or at least maybe they just didn’t read the last page of your study.

KRUEGER: Turkey is now a major exporter of auto parts.

Turning Around the World Bank

RAJAGOPALAN: Exactly. I want to go to the next phase of your life, so to speak. All this work was done. You started your career at University of Minnesota. That was your first job. Initially, you wrote some very theoretical model papers. Then you switched to all this empirical work, detailed case studies. You did the NBER series, of course, which has just changed the game. Now, when everyone looks back, that’s the series that is quoted. After that, you move on to the World Bank. The first question I have is, what made you do that? Then I have a number of questions about the Bank.

KRUEGER: Well, they asked me to go, is the simple answer to why.

RAJAGOPALAN: Did you have a sense of what were their views on trade and development before you went there, or was it all like you were discovering as you went along?

KRUEGER: I don’t think I was ignorant completely, but on the other hand, I did not appreciate the extent to which they had bought into some of the “governments should manage and control.” The answer is I knew some of it, but I learned more once I got there.

RAJAGOPALAN: The only major difference that I find is that developing countries would call it like industrial planning and the World Bank rhetoric was a little bit different. It was like managerial economics where the government is pulling the levers, but it’s the same wine in a different bottle.

KRUEGER: There was very much of that. When I got there, there were a number of things that simply, as far as I was concerned, if I was going to be supposed to be chief economist of the place, they were not going to be.

RAJAGOPALAN: A couple of questions. When we spoke with Rakesh Mohan, who was also at the bank in the ’80s, he said that when you joined, succeeding Hollis Chenery, he said, “Anne turned the whole thing around.” It was not always popular. That a lot of people were shocked.

KRUEGER: That’s certainly right.

RAJAGOPALAN: You literally did a 180-degree flip from what the research departments and the policy departments were saying at that time. A two-part question. One is, how easy or difficult was it to do that, even though you were right at the top? Second, why was that required? Why hadn’t all the work that you had done in the ’60s and ’70s and everyone else had done, why hadn’t that reached Washington, D.C. yet?

KRUEGER: Well, I can’t answer the second part, obviously. I just don’t know. Hollis had been there for a long time. His training was more as an engineer, and he did point out waste. It wasn’t that he missed it all and so on, but he certainly did not have my view as the role of incentives and all that in the private sector, et cetera. He contributed importantly, of course, with his empirical work. I had a lot of respect for him and all that, and in that sense, it’s fine.

Okay, so then was it hard? I don’t know. There was no choice. I was not going to be in charge of something, or I was not going to sign off on something that said some of these things. It was either I’ve come here and I’m going to quit quickly, or I’m going to try and fight it through. We fight until we decide we can’t do it, then we leave.

RAJAGOPALAN: What I mean by hard is not that you had to just make tough decisions or tough choices; it’s clear the path that you chose. Hard more in terms of one of the big things that you have to do in terms of research is bring out the World Bank research reports. Every country desk is working on things. They have to use those insights both toward writing the report, but also communicated back to the governments that they’re working with. Was that process easy? Because there were a lot of young folks who understood what you were trying to tell them, or was it just you were fighting the intellectual orthodoxy every day, every meeting, every report?

KRUEGER: Something of both. First off, the research department itself had half of it was doing things that we needed doing, world debt and country debt and trade statistics and so on, on to many other issues. That half was, I don’t know, it was pretty good. It could be better, and some improvements were made. That’s always true, but it was the other half was with the researchers. Most of them were younger people who had gotten their Ph.D. and gone straight to the World Bank. Basically, they had had almost no experience of developing countries.

The first time they went to a developing country, they were given a World Bank briefcase, of course, and then they got off the plane and they were treated like important people and so they thought they were important. I think that just continued. At that time, in many countries, the qualifications and the background of the people who were there was sufficiently unfortunate, for lack of education and so on, that sometimes even then they could have provided reasonably decent advice. Sometimes it was so obvious what needed doing that even if you thought you needed to manage everything, you could say this needs to be done, even if the implication was that I thought it should be done another way. It’s a mixture.

The things that mattered were things like the World Development Report. That was very important, and some of those worldwide publications and those where getting it done right was the critical issue.

RAJAGOPALAN: Now with the bank, one of the things that you really start hammering on, which is a little bit different from the other trade economists and the trade policy folks, is the importance of macroeconomic stability. What were some of the experiences that led to that? Was it the crises that you saw when you were at the World Bank just before that, the currency crisis in Turkey? What brought that insight about?

KRUEGER: Well, the first off is, remember, Turkey had inflation, and what have you, and badly misbalanced in the late 1960s and stuff. I already knew about that, which was important. Secondly, and probably equally important, I certainly understood that when you have exchange control and you’re not getting any exports, then the price of import competing goods goes way up. Until you can get the exchange rate right, you can’t do much about the other things. The trouble with that is you can’t get the exchange rate right until you got the underlying macro right.

I was an economist, and I’d always learned that you needed a reasonably balanced budget. For me—what should I say?—it was no great insight or anything. It just simply was part of what had to be. We did the series, which you have mentioned, the agricultural studies. In there, I think this astonishment, even the agricultural economists were surprised. You could show that the exchange rate was at least as important as some of these other things. They just hadn’t thought about this as part of it. They thought that was part of the macro.

Part of the answer is that. To me, it wasn’t macro; it was simply how do you do policy to get the incentives right so the people do the kinds of things that are best for the country.

RAJAGOPALAN: When I look at that literature, especially if I try and read it in chronological order, the sense I get is the trade economists are really just talking about trade. Sometimes they’re also talking about foreign exchange and foreign exchange constraints, but they’re not going into monetary policy. They’re not going into, should there be a consensus toward Bretton Woods, or should they all start moving away from that? Your tenure at the World Bank is the first point I see where that starts changing, that there’s this idea that these things need to go hand in hand.

In fact, even at your time in the bank, you’re looking at agriculture, you start looking at manufacturing reforms and trade, you’re looking at FDI, which is very early, relative to all the others, FDI and privatization, population. These are some of the big themes during your four and a half years at the bank. That, to me, is quite unique. I don’t see other trade economists doing that then or even now.

KRUEGER: Well, one of the interesting things to me after I got to the Fund, later on, was that I went to have lunch, a meal, or coffee or whatever with friends from the World Bank and if we got discussing some country that had macro problems, I was astonished at the lack of depth of the knowledge of some of the bank economists because they just aren’t exposed to it to the same extent. I guess part of the answer, I was actually teaching graduate macro at Minnesota for a while, so I guess I had to know something from that, too, and on and on.

The other thing that’s interesting about your comment, which I hadn’t thought about, is when I was a graduate student and when I was first teaching, there was not such a course as “trade” or another course on “development,” there was one, you took one field. It was international economics, and the two were meshed. They were not separate fields. You did do exchange rate stuff. There’s a little book I did on exchange rate determination, which was an outcome and part of that. Those two fields being together, it was natural to see them together.

RAJAGOPALAN: That’s interesting, because what I see most, I would put you more in the micro foundations, microeconomist side of things. And usually I see those economists just focus quite narrowly on one thing. Sometimes they work into the adjacencies of what’s going on. Someone like, say, Arun Shourie who wrote his dissertation on foreign exchange, he’s able to do that. He’s able to trace the entire license permit system. Padma Desai and Jagdish Bhagwati, of course, managed to do that in their work. I don’t see people go much beyond that.

Even in India, actually, the external sector playbook for trade, for foreign exchange reserves, for how we devalue, how we stabilize the currency, that was written by C. Rangarajan. That report work that was done, that was very much considered the realm of monetary policy. Monetary economists do that kind of work. That’s one of the reasons that I find what you did quite unique and interesting.

KRUEGER: Well, the problem, I suppose you could say another way, is that indeed the macro was not that important for what is happening on the trade side, because given the exchange rate and exchange control, you were just leaving the exchange rate fixed when it shouldn’t be. With exchange control, you were bottling up the macro problem so it wasn’t part of trade problem. If you see what I mean.

The Krueger Consensus

RAJAGOPALAN: Yes, I do see what you mean. One of the things that changes in the 1980s is also what they now call the Washington Consensus. You can’t just have trade liberalization. There’s a bunch of things you need to do together, otherwise, you just bump yourself from one crisis to another and go along. I have a cheeky question about that. Why is it called the Washington Consensus and not the Krueger Consensus?

KRUEGER: I think the first part of the answer is, of course, when we were starting to look at these things, some people more readily than others, began thinking that some of these things needed doing. By the time John Williamson wanted to talk about the Washington Consensus, the whole list was there, which it wasn’t for most people, most of the time. Maybe it wasn’t consensus before that, I don’t know. He chose the title, not me.

RAJAGOPALAN: I would call it the Krueger Consensus. You managed to somehow bring that consensus back. Now, when you look back at the World Bank, how do you think of your time there and the enormous impact that it had, especially in changing the consensus from the policy point of view toward government? I think of your work in this late ’60s and ’70s as changing the consensus amongst economists and maybe some policy economists, but mostly amongst trade economists and so on, and then your work in the ’80s as really changing the consensus among the government elite.

KRUEGER: I think, first off, you’re giving me too much credit. I do think that there were a lot of people working on a lot of parts of it. I also think, as you said, that the Taiwanese and Korean experience was very important in all this. Remember, S. Korea had high inflation. They had to bring it down too, and that was necessary to get the exchange rate in line. The Koreans had a lot to say, I think, on all of this and making that important.

The truthful answer is that I’ve never believed that after you leave a post that you need to go back and second-guess your successor. I truthfully have not followed the World Bank that closely since. I’m beginning to follow it a bit more now. First off, I’ve gone long enough, and secondly, the issues are different. Certainly, in terms of the kind of thing you’re asking, I can’t tell you very much.

RAJAGOPALAN: What was unique about the ’80s? Because one thing I can point to, it’s also the time of Reagan and Thatcher. There’s a different global political consensus that’s going on that’s moving more toward free trade, more free democracy and free trade in general. These two seem to be very charismatic leaders to spread the message. You’re there at the bank, the bank and IMF start having enormous influence, so what was it in the ’80s that somehow changed things? Is there something weird about that time?

KRUEGER: I don’t know. One part of the answer is that in some countries, including the U.K., quite clearly, the policies that have been followed were leading the country into the ground. In Mrs. Thatcher’s case, she had the Scargill strike and all those things going and that led so many people to think that there’s something that was going wrong, that she had a pretty wide-open space in which she could then get some of these reforms made, which quite clearly did make a difference, although things happen.

I guess I tend to think that obviously when there are mistakes, what happens is that when things that are going well, people more and more take for granted, and the things that aren’t going so well, they more and more harp upon. The result of which is finally they’ve forgotten what they take for granted, and they begin wondering about the others. The question is, do we have to rediscover the wheel in order to get the other things right?

Africa

RAJAGOPALAN: No, I can see why that might be the way you look at that. When it comes to Africa, it seems that a lot of the work that you and all your colleagues were doing, to me, it seems like it had a lot more impact on Asia and a lot less impact on Africa. Whereas if you look at maybe say two, three decades before that, Asia and Africa are at about the same level of—

KRUEGER: Ghana’s per capita income, according to one of the figures I think I published somewhere or other—was it from U.N. documents?—was 22 times the per capita income of Korea in 1960.

RAJAGOPALAN: Wow. Korea is obviously the miracle. 

KRUEGER: Oh, Taiwan would be the same.

RAJAGOPALAN: Taiwan, yes. 

KRUEGER: Did you know that the South Korea’s per capita income is now above Japan’s?

RAJAGOPALAN: Yes, it’s extraordinary. The Korean miracle to me is the greatest achievement of the last, say, half-century or something like that. To me, what’s even more extraordinary is unlike Ghana, or even to a certain extent, Taiwan, Korea was ravaged by civil war. When we look at Korea numbers in, say, the mid-’50s, it’s where Yemen and Syria are today.

KRUEGER: True.

RAJAGOPALAN: It’s really one of maybe the second- or the third-worst economies in the world. That seems even more remarkable because Ghana already it seemed like it was already a little bit ahead.

KRUEGER: It was a great hope of Africa at the time it gained independence.

RAJAGOPALAN: Yes. Why did Africa not go the same way as Asia? Why did all of you have so much influence on Asia? Africa also has a number of post-colonial countries. Lots of places like India with the same bad import licensing systems, same good bookkeeping, English, they go back and forth, they listen to the elite consensus in the World Bank and in London. Somehow just things work there.

KRUEGER: I don’t have an answer, of course. I think if we went back, the educational attainment of the population was lower in Africa in most countries by quite a bit. I’m not certain of that, but I think so. Even as I say that, I’d have to remember that the all instruction in Korea under the Japanese colonial empire was in Japanese. There was no instruction in Korean.

RAJAGOPALAN: Wow.

KRUEGER: I just don’t know. Certainly, the Asians take pride in their appreciation of educational attainment in a way that I don’t know has happened to the same extent in Africa. Africa had raw materials, which doesn’t help a thing because they could live off those rents. 

The politics in Africa, to my view, became more about it’s my turn to get the royalties from the copper or whatever it is now. You had your turn. Give it to me, with the election. I’ll take it for a while then they’ll get mad at me, and I’ll give it back to you. I think there’s less of that in Asia. I think Park Chung Hee, the Korean president from 1960 to 1970 was obviously dedicated to going down in history as the man who turned his country around. He was austere.

RAJAGOPALAN: That’s a big South Korean trait, just the fiscal austerity and also the willingness to let go of losers and just focus on the economic performance of winners and then double down.

KRUEGER: That’s, of course, the thing that if you let the losers go, you’ll do better. Of course, that’s one of the things that Koreans did by opening up and saying, “You must perform,” which India never had because you had the protection. If you got your import license, you could do it.

India’s 1991 Reforms

RAJAGOPALAN: Now looking at India, 1991 reforms is now already 33 years ago. In the ’90s, there was quite a bit of momentum. Tariffs were consistently slashed. There were a number of disinvestment privatization programs. The FDI was brought in. Then the momentum seems to have been lost, say, in the last decade or so. Also, we’ve done a bit of a U-turn on certain kinds of tariffs have increased in certain areas. The pandemic certainly hasn’t helped. When you look at the reform story of India, how do you think about it? Is it that that was a wonderful thing that happened? Is it that there’s so much more that’s left to be done?

KRUEGER: Both.

RAJAGOPALAN: Both. This  Economic Policy Reforms and the Indian Economy] is an excellent volume, where you talk about the kinds of economic policy, reforms that are required. It’s got amazing—T.N. Srinivasan, Bhagwati, even the commentators, Montek Singh, your student, Sajid Chinoy and you had the opening essay. It’s really a remarkable book, but it’s already dated. Even in this book, I can feel that sense of urgency that there’s so much more to be done, and this is the next reform agenda. How do you feel about that looking back?

KRUEGER: Quite clearly the ’90s were important and they got some of the macro issues, especially the exchange rate, more under control. Although, I’m not so sure it’s still there. I think there’s a big monetary problem at the moment, I’m afraid. But be that as it may, what happened there was that success. The other thing that happened that nobody in India come and so on, and I haven’t had a chance to take a close look myself, is that the WTO, World Trade Organization, in 2001 or ’02, I’m not sure which—

RAJAGOPALAN: Yes, 2001.

KRUEGER: —2001 decided that the Indian banning of consumer goods import was WTO illegal. The results of which was India removed that. I still think that that had a great deal to do—

RAJAGOPALAN: Absolutely.

KRUEGER: —with India doing as well as it did for the next seven or eight years. Then you got also some changes in monetary policy through the central bank, and those reforms were increasingly very important in the 2010-2015 or something period like that. You had a series of these, each of which was going in the right direction. The trouble is that there’s still those guys in the office and still with their stamps ready to go. It still takes 10 years to get your husband’s estate through probate and stuff like that. Many of the barnacles of the old system are still there.

RAJAGOPALAN: Yes. This is right from your very early work on trade and in that first volume, first two volumes. You talk about how it’s not just about import substitution versus tariffs. You need to bring down transportation costs. You need to reform in a way like land and labor, such that infrastructure can be pulled together. You talk about the cost of urbanizing. It’s a whole slate of reforms.

KRUEGER: Of course. They all go together too. When you leave one or two behind, then you’re tying everything else somewhat back. When you remove one of the constraints, you let some things go forward and so you get better growth than you got, but not what you could if you did the whole thing.

RAJAGOPALAN: Yes. There’s a thicket of regulation in India, which is mostly bad. I always think of it as you get you clear one. That used to be the binding constraint. The import substitution used to be the binding constraint. Now it’s no longer the binding constraint. Now the binding constraint is transportation costs or labor or land or something else. Always you very quickly hit the ceiling and then they can’t go beyond that.

What do you make of just the asymmetry of the overall scale of India versus the scale of enterprises? This is one of the great mysteries to me, about why India can’t figure out that its enterprises need to scale. Wherever you go, everything tends to remain tiny. Even successful firms don’t grow much beyond a point. They don’t turn into franchises and so on, until very recently. When you were in India, like every visit, what did you make of that?

KRUEGER: I actually did a paper when I visited with ICRIER, I think in 2005 or something, on the subject of what was going on there. In fact, I think I’ve gone public also saying that what’s basically gone wrong, among other things, is that labor is bottled up in agriculture.

RAJAGOPALAN: Absolutely.

KRUEGER: When it’s bottled up in agriculture, obviously, you can’t get productivity rising much there because you can’t get the labor-saving devices and stuff that advanced countries earlier got. On top of that, in industry, nobody wants to take the people because, obviously, the labor laws are such that you can corral the guy in his office or whatever else you want to do to him.

The industrialists are terrified for good reason. I think that there are big problems in that. The answer comes, well, of course, we’ve already liberalized in one or two states, which probably does make something of a difference. How much, I have no idea. I think there are a lot of things in the labor market itself that are a big source of the problem. Of course, the real trouble is if you want to give some of the people very nice, cushy jobs, the kind they have in the West, and you don’t have the resources for it, you give it to a few people. The rest of the people will be even worse off.

RAJAGOPALAN: Yes, absolutely. No, and that’s exactly what we see in India. I have some questions which are not precisely about India, just more related to this book. Actually, I recommend everyone reads your book on international trade. The recent one, it’s very, very readable. Students of any level will be able to fully comprehend what’s going on.

KRUEGER: It’s supposed to be more accessible to the public.

World Trade Organization

RAJAGOPALAN: Yes, and it incorporates so much of the research that you’ve done over the years. I want to start with the WTO. The GATT was just clearly a very, very, very successful treaty formation. It worked well. It was enforced well. There was a lot of agreement. The WTO was supposed to do that and much more. Be binding, not just on the executive, also on the legislature and for a lot more countries. What went wrong with the WTO?

KRUEGER: Nothing at first. The dispute settlement mechanism under the WTO was better and was one of the big achievements of the transformation of the GATT into the WTO. Lots of other things went well. China, of course, came into the WTO. All of those things went well. 

What went wrong? Well, I mean, okay, back off of track. When politicians can’t agree on something, and they got to pass a law, what happens is they choose ambiguous wording. When there is ambiguous wording in the WTO agreement, it’s because they couldn’t agree. What’s the definition of a subsidy or what have you? You leave it on the dispute settlement mechanism. Then you get somebody who says, well, it’s not fair because that’s a political decision, which the politicians decided not to make. 

RAJAGOPALAN: Then the politicians also killed the dispute resolution mechanism. At least that is more recent.

KRUEGER: That’s what happened. The final result is the United States, I regret to say, did that. Much, I think, to its own loss. I do not think it was the smart thing to do. It happened because they said, oh, we’re losing all this because we’re losing these cases. I have not looked at them all. As far as I know, the cases that went to the WTO were cases that the decision was won. I’ve not seen anybody that really said this was a bad decision they shouldn’t have made.

RAJAGOPALAN: One sense that I get when I look at the WTO is, was it trying to do too much too soon? Too much agreement across too many issues for too many countries, is that the problem?

KRUEGER: I’m not sure that’s the problem. It’s certainly part of it. Another way of perhaps saying the same thing is everything is supposed to be done by unanimity. That means that even two or three countries would be one too many in a sense for some bargaining activities. 

I think the IMF with all its differences and so on and so forth, of all the problems with it, the system of having an executive director board of 24 where smaller countries have to share an executive director and reach agreement among themselves probably is a better model than the WTO model, just simply in terms of getting things done because the IMF has 24 sitting around the table.

RAJAGOPALAN: Yes.

KRUEGER: Having 167 around the table is not a good idea. I think there’s something to that, but that’s not the only problem. The problem is the world has moved on. With the world moving on, there are new problems, and some of them are just intractably difficult. Probably the most serious one is defining a subsidy, which you’d think was very easy.

United States and Free Trade

RAJAGOPALAN: Another question I have is there’s a very clear sense that the United States has lost its position as the leadership role in global free trade. I have a more domestic question based around that. There was to me, it seems about 100-, 150-year-long bipartisan consensus within the United States that free trade is the correct policy. When did that consensus break down and why did it break down? It seems to be around the time of the Cold War. I don’t know if that had something to do with it. What’s your sense of it?

KRUEGER: The first part of the answer is that nobody’s got a theory that everybody else really accepts because it’s more of a puzzle than that. You said something about the United States had done something and lost its leadership position. It didn’t lose it; it gave it up. There is a difference. I think many people in the rest of the world did not appreciate exactly how the U.S. had been doing reasonably well, despite its flaws, in leadership in the world and how hard it is, particularly in the WTO with 167 members, without the U.S. to get anything done.

That’s the first thing. The second thing, of course, is the rise of China. For reasons that I do not understand, I certainly don’t understand them all, why is it that all of a sudden the United States is so threatened? Why is it that the United States is doing these things? I don’t really have a good answer. A little bit of me wants to say that we had an accident of politics that has had huge consequences. Somehow or other, I’m pretty convinced it has to be more than that. The United States is a big country. That’s certainly part of it. Being a big country, it looks inward more than it should and outward less than it should. Certainly, that’s true.

On the other hand, if you then look from where all of the objections, much of the extreme right is coming from places where trade is not that important. That makes it all the more remarkable. You could say, well, unions have lost out, which they have. On the other hand, union membership is now down to something like 9% of the labor force, so how come the unions are so important? And on and on. It’s very hard to say. One thing, I think the fact that so many more goods are more complicated and do take more scientific input means that the role of intellectual property and the role of protection of scientific secrets, both commercially and militarily, has become much more important.

Nobody has yet found an answer that even a few people will accept as to how you solve those problems. I can think of ways that maybe you could get the military one done, if you could ring fence around the stuff you needed, I think there’s a way of doing that. How you do that, until you do something on the subsidy issue and get a definition there, I don’t know. Many people seem to be willing to believe that since somebody says that the Chinese have cheated, they’ve cheated. On the other hand, they forget that perhaps the same things go on in other countries.

I was once a director of a company, and we went to the electronics show, as one should, to show our new equipment and stuff. We had made sure we had at least one, almost always two employees around the clock watching it so that people couldn’t come and steal our secrets. I think every other company in this country does the same thing. I think if anybody can steal anybody else’s, they will. I guess I would worry if I thought that there was nobody from the CIA going and seeing what they could get from China. That’s part of the way the world is.

Somehow or other, there’s an American paranoia about it as if we never did it, which, of course, certainly cannot be completely true. Somehow or other this threat, funny thing about it in a way is that the rhetoric about China now is not that different from what it was about Japan in the 1990s.

RAJAGOPALAN: Absolutely.

KRUEGER: Which is, again, this paranoia.

RAJAGOPALAN: This seems to be bipartisan paranoia. I was under the expectation that Biden will undo some of the protectionist damage that Trump did.

KRUEGER: You weren’t alone in that.

RAJAGOPALAN: It’s the opposite. This week he just announced that the most recent tariffs on China: 25% on steel and aluminum, 50% on semiconductors, 100% on EVs, 50% on solar panels. Biden and the Democratic Party, that politics cares about climate change, cares about moving toward cleaner sources of fuel. To me, the whole thing just seems baffling. Are you baffled by this, or do you see this as a continuation?

KRUEGER: Well, one thing that certainly has made things worse is that in 1968, you may know from history, that there were riots around especially the Democratic convention. One of the consequences of that, and I never understood quite why that followed, but it did, was that the Democrats decided that they should have primaries instead of having smoke-filled rooms to decide who candidates should be. The trouble with that was that it gave to each party more strength to the extremes and less to the middle.

Whereas the out before for the politicians had been to choose the guy most likely to beat the opponent in the general election, now the left wing and the right wing seemed to have sufficient power to drive some of the centrists out of office. Some of them have not even run in the primaries to retain their seat. They quit because they know they can’t win a primary because the extremists are there and they’re so well-funded.

RAJAGOPALAN: Trying to connect this to some of your rent-seeking work, is there maybe too little money in politics now? Like not enough U.S. businessmen lobbying properly as their job should be to get all this crap removed off of the table? What’s going on?

KRUEGER: Well, if anybody heard you say that the problem was too little money in politics, they would send you to have your head examined, I think. Well, the problem is in part that, yes, again, I think part of it’s simply, we live in a very complicated world. With a very complicated world, the side swiping of things from measures, from regulations and what have you can be much greater and sometimes totally unintended.

The result of that is that, whereas it used to be that probably there were a few—I’m guessing, I don’t know the numbers—a few lobbyists around, now there are hundreds because they’re watching out for when there’s that last paragraph that we’ll say such and such. I was reading one yesterday, I’ve forgotten what it was, where there was some overlooked side effect or something, but ignored the legislation was going through and now they had to lobby to reverse it. It was very technical, which is probably why I forgot it, but nonetheless was happening all the time on everything because things are not that simple. There’s no such thing as oil.

What is it, 29 different grades? You cannot take a refinery that’s used to producing the one at the high end to do one at the low end. You can’t even have the same pipelines. Well, once you get to that degree of technical specificity—what is it, 57 different types of steel according to the evidence?

RAJAGOPALAN: I read it. I think it’s a similar number. It’s there.

KRUEGER: Well, it may be more than that by now for all we know. Be that as it may, once you have that level of technical, who’s going to follow up and who’s going to be outraged when they read in the paper tomorrow morning that the ITC decided that it was okay for three-inch pipes to have a quarter more latitude than whatever. There’s I think a lot of just that technical stuff.

Then you get the environmentalists and they’re pushing on the other side. You’re getting more lobbyists partly because they’re defending their industry from too much loss because of the environmental issues. Then you got the Biden administration, goodness knows why, the solar panel is almost the most ridiculous from what I can tell.

RAJAGOPALAN: Even the electric vehicles, it doesn’t quite make sense to me. On the one hand, the United States is keen on a lot of people adopting electric vehicles. It’s actually explicitly giving a subsidy, both on solar panels and electric vehicles. They’re trying to get the infrastructure of the charging stations to quickly improve, which will only happen if enough people adopt electric vehicles. This just feels like a complete own goal, and honestly, I didn’t expect it from Biden.

KRUEGER: Well, the solar panels was coming. I think it’s a surprise how high it was. I think he’d promise to wait two years. There was something there, but not that much. The interesting part about solar panels is different. There are two stages. First you build the solar panel and then you install it. Installation is much more costly than the solar panel. 

The Solar Panels Union that has the installation guys, as opposed to the solar panel tower, because they’re losing jobs because of being higher priced. 

License Permit Raj in the US

RAJAGOPALAN: How did your experience in India help you evaluate what can only be dubbed the license permit raj of U.S. Steel and U.S. Sugar?

KRUEGER: I have said to several people, including some people in the government, that all of that I learned in India, I can now apply.

RAJAGOPALAN: First, were you surprised by how U.S. Steel is as convoluted and as much of a government-imposed permit system as it was in the developing world in the 1960s and 1970s? Second, how did America get here? How does it get out of it? What is to be done?

KRUEGER: Well, obviously, many people are perplexed, not just me. It really is a mess, and it really is terrible. I guess, I hope and think that at least some countries outside the U.S. will be sensible enough not to do it. Once that happens, they will thrive and we will not. Not that I don’t want us to thrive, but I think we will not. That seeing what’s going on when it isn’t that bad may help. I’m hopeful that we can get a solution before that.

I’m hopeful that some of us can think up something that will restore the WTO more effectively and sooner and all the rest of it, but I think ultimately it will happen because things will get so bad. I did visit Australia several times about the early 1970s, and at the end of World War II, Australia and New Zealand, the U.S., Canada were the four rich countries in the world. Canada and New Zealand have slipped and slipped and slipped, Europe had come up and up and up.

Finally, by the early 1970s, it was clearly obvious. Australians went to Europe for their vacation or their whatever. They saw shining new airports. They came back home and they saw dirty dusty airports. They saw the European cars looking all this, and they saw the big rusty old things that had been built in Australia in assembly plants, et cetera. It was the labor government that came in in 1973 and took everything out because they’d seen how bad it got.

Again, it was a national consensus. I think now it’s still true. Australia hasn’t even had a recession since 1990. I think that’s partly because of the reforms earlier on that they got rid of a lot of that stuff that was so very counterproductive. Maybe it’ll have to happen again that some other part of the world gets to do the things that we were doing and ought to do again. I hope we can do it faster than that, but I don’t know.

RAJAGOPALAN: Are you hopeful?

KRUEGER: Oh, I’m hopeful. Of course.

International Monetary Fund

RAJAGOPALAN: Now I want to get to the IMF part of your career which is the early 2000s. This is right after the 9/11. Again, somehow you end up in these positions when there are several countries in crises. You saw firsthand what happened to countries which have untenable debt levels. What do you make of the U.S. debt levels today?

KRUEGER: Well, there’s a difference between international debt and domestic debt. On domestic debt, you can always print money. Now, if you’ve printed enough money in their fiscal deficits long enough, you will get unacceptable inflation like several thousand percent. It’s not a long-term cure, but it will do for quite a while. At the moment, there is no substitute for the U.S. dollar or no satisfactory substitute for the U.S. dollar. Japan has a debt now, I think it’s still about 270% of GDP. They have interest rates lower than ours and so that’s partly a factor. Even so, Japan has been carrying that debt for a long time, but it’s almost all domestic.

RAJAGOPALAN: They recently had a hit finally, I think the Japanese, the yen has breached 165 and that caused quite a lot of chaos in the international markets, also in Japan.

KRUEGER: Yes, of course, but that’s, I think, quite independent of the debt level itself. I don’t think that’s the immediate explanation of it. In the United States, of course, we’re still about 100%. That’s a lot. A lot of people are distressed that it’s not an issue so far in this presidential campaign, and maybe it should be. Clearly fiscal policy looked to most of us to be too easy over the past couple of years when we didn’t need it and all that. That doesn’t say that that fixes it. At the moment it looks as if much as there is debt and much as one of these days it’ll go, and when it goes, it might go fast if nothing else happens first. That’s the way it is. As I said at the moment, if you were a citizen of, I don’t know, Sri Lanka, and you didn’t have much faith in your own country’s currency and look forward to put it, you’d put it in dollars.

RAJAGOPALAN: When you were at the IMF, one of the first crises that you had to deal with was what was going on in Argentina. Of course, Argentina does this every few years.

KRUEGER: Well, Argentina was already in crisis by the time I got there. Correction. 

Hope for Milei and Argentina?

RAJAGOPALAN: Oh, it was already in crisis. One, what did you make of what was going on in Argentina at that time? Second, what do you make of what’s happening under President Milei right now [recoded in mid-May] and the kinds of reforms he’s trying to push through, some of which are even more stringent than what was suggested by the IMF all those decades ago. How do you see everything play out in Argentina?

KRUEGER: Well, going back to 2001, quite clearly the problem was simply that obvious spending was higher and so on and so forth. They had tried to get the exchange rate pegged and they couldn’t. Finally, they had to do something because it was a crisis. They could no longer borrow in international markets. Argentina’s citizens had been, of course, getting whatever they could by way of their own money out of the country as quickly as they could. It was a classic there are no imports, we’re in a crisis situation, no doubt about that. There’s no shorthand to give you a really easy account, but the basic problem is that they were not willing, the politicians were not willing to fix it.

The result of which was, of course, that they had to go through a debt restructuring and all that. They were a little bit lucky in commodity prices, which gave them a few good years after that. Then things started, the same thing happening over again. This time, as you know, the inflation got up, I guess it was 250% by the end of December or something like that, and all the rest of it. Now what do I make of Milei? I’m going fast because what he’s promised, most of the good economists, Argentine economists I know, or most of those who observe Argentina carefully, that I know, think that if Milei gets to do most of what he wants to do, that, yes, he could succeed, but they also think the body politic will never accept it. And at first, by the way, everybody said he hadn’t a chance. Now they say, yes, he has a chance. 

So far, he’s at least come somewhere within the ballpark where it isn’t hopeless. On the other hand, it isn’t done either. Some of the things he promised could not be done. You cannot dollarize without dollars, so that makes it straightforward. I don’t think anybody thought he’d do that. He would have to accumulate real dollars first. Otherwise, how are you going to get them? Now, money starts reflowing back that’s out of the country. It could someday be done. Not that that makes it a good idea, but it could be done, but right now, no. There’s that. On the other hand, apparently, he’s cut the number of civil servants quite substantially, quite quickly.

The inflation numbers were reported, I think, by the Wall Street Journal with great joy saying the inflation rate was down, monthly rate was down from 12% to 8% monthly, not yearly, monthly. Well, that’s still well over 100% a year. On the other hand, it is going in the right direction. I’m not sure. I was trying to figure out if I were a citizen of a country, where we had to have 12% inflation in February and 8% in March, would I have been able as a consumer to tell the difference? I’m not sure.

RAJAGOPALAN: I think the consumers are able to tell the difference, actually.

KRUEGER: Remember this is not per year. This is per month.

RAJAGOPALAN: Yes.

KRUEGER: This is 12% in January and 8% in February. It’s different prices, different times. It’s not everything going in lockstep. It’s cars last month and it’s wheat this month. I’m not so sure that they can tell. Anyway, whether they can or not, they certainly, enough of them, I do believe they were in a hopeless situation that they’re willing to give him a little bit of breathing room. He only has eight delegates out of 79 or some such number. He can’t get much through the legislature [recorded mid-May before the current reforms were passed in June 2024]. Some Argentines think that he may be able to force it through. Others think he will wait until the elections, which are a year off. I’m not sure he has a year.

RAJAGOPALAN: I feel like he’s managed to get some early wins to show that he means business. There hasn’t been huge public revolt. Yes, the unions are making some noise. The government servants are making some noise and there are certain constituencies which were always going to be up in arms about some of this. We don’t have what many people expected in terms of big riots, the middle class being up in arms, people draining all their resources out of Argentina. I think some of that had already happened before that.

It seems like things are better. Also, he seems very fiscally prudent, which I think is something just the median Argentine understands very, very well because earlier it was all fiscal prudence for the poor and the government can be as profligate as it wants. He seems to have made some very serious cuts to government, in fact, the first president in a long time to get the deficit numbers under some kind of control. Though, of course, everything in Argentina is a different scale, different level that we’re talking about. I’m somehow quite hopeful. I love the country. I’m very hopeful.

KRUEGER: Well, I’m hopeful too because I’m not at all certain that if he fails that there’ll be another chance. It does seem to me that Argentina could become another one of those countries that’s just the backwater for a long, long time. I don’t want to see that for the Argentines or for the world.

Looking Back on Success

RAJAGOPALAN: We started the conversation with the 50th anniversary of your famous AER paper, and I want to end with that. Did you expect it to be such a big hit? It’s one of the 10 most influential papers, like so many things like that?

KRUEGER: No, I did not.

RAJAGOPALAN: How do you look back on that paper now, now that it’s been 50 years since you wrote it?

KRUEGER: Well, obviously, I still believe in it. There’s no doubt about that. I’m not ready to reject it or anything. How do I feel about it? I’m glad it has made a difference and that’s a good thing.

RAJAGOPALAN: What do you think made it such a big success? What is it about that paper, that idea, those countries, those case studies, that just somehow really hit the mark?

KRUEGER: Well, the first thing, basically, even for economists, if you say something’s just a transfer, you’re less worried about it than, of course, if it costs in real resources, which is one of the things I was saying. I think the second thing too is people have become more aware as some of the developing countries have had their corruption problems and so on and so forth, it’s become more of an issue that’s making headlines. There’s more awareness that these things are going on in the world.

RAJAGOPALAN: If there’s one piece of advice you would give Indian policymakers today, what would it be? Just one.

KRUEGER: Quit. 

RAJAGOPALAN: And to the new ones who come in?

KRUEGER: It’s hard because you can’t say don’t have any regulation because that means don’t even have traffic lights and you don’t want that. On the other hand, as you said, there’s too much other stuff going on. I guess cleaning up the legal system and getting things going faster, maybe. Where I would guess if I really had to be responsible person, I wouldn’t say anything until I do a little more homework.

RAJAGOPALAN: No, contract enforcement is definitely the big one.

KRUEGER: No, I’m talking about in the courts. I know the bankruptcy law was changed and all that, but I gather some things are working better, but I don’t know how much, and I don’t know whether it’s going to be fully effective or not.

RAJAGOPALAN: I completely agree. Anne Krueger, thank you so much for doing this. This was such a pleasure.

KRUEGER: Oh, pleasure to be here. Thank you.