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|  | OCTOBER 1, 2003
Figuring the "Best Answer" at the IMF Does the global lender of last resort err? "Sure," admits new Chief Economist Raghuram Rajan, "that goes with the territory" In his book, Saving Capitalism from the Capitalists, University of Chicago finance professor Raghuram G. Rajan argues that financial markets have great potential to help the poor. Now, as the International Monetary Fund's chief economist, Rajan, 40, will be able to put those ideas to the test, setting the research agenda for the 1,000 economists the IMF employs. Born in Bhopal, India, Rajan is the first IMF chief economist from a developing nation. His predecessor, Kenneth Rogoff, calls that "a huge plus," giving the IMF newfound credibility with policymakers from developing countries. Rajan's appointment is unique, too, in that he's a corporate-finance and banking scholar -- not a macroeconomist. That could be helpful. "Many crises have twin causes," Rajan says. "They can be caused by macroeconomic imbalance, exchange-rate misalignment, and so on. But they also seem to be accompanied by banking crises." Rajan's academic bona fides are beyond question. In January, he received the American Finance Assn.'s first-ever Fischer Black Prize, given to the most important finance researcher under 40. Says Rogoff: "He's the leader of his generation." He'll need all his smarts to navigate the IMF, which has been sharply criticized by stalwarts such as Nobel laureate Joseph Stiglitz, who condemned the IMF's emerging-markets policies, implying that the fund has become too cozy with corporations. Rajan spoke recently with BusinessWeek reporter Brian Hindo about the IMF's critics, his qualifications, and his research agenda. Here are edited excerpts from their conversation: Q: The IMF has been assailed as too restrictive in its lending policies and having done more harm than good to developing nations. How do you respond? A: First, the IMF is [only] called in when a country has problems. If a country has problems, and the private sector is no longer willing to lend to that country, it means the private sector thinks there's little hope the country will solve those problems. Typically, the problems include the country living beyond its budget. When the IMF comes in, it has to find a way to get the country back on track. That's always the primary objective. People confound this objective with charges that we're working to make creditors whole, or that we're working for some agents in Washington or London, or wherever. But the primary objective is always to get the country back on its feet, which often involves unpleasant medicine. Often politicians don't want to take that unpleasant medicine because it has political costs. So it's far easier for the country to say the IMF forced us to do it than for them to say this is in our best interest. That's often -- but not always -- the reason the IMF is blamed. Q. Sometimes the IMF deserves criticism, though, doesn't it? A: Does the IMF make mistakes? Sure. But that goes with the territory of economic policymaking. We don't understand everything. We don't know everything. What's important is that we learn from it. The IMF has, over time, learned from policy mistakes and has often publicly said that it has learned and that it's changing some of the practices. Finding the right balance is difficult, and we're always struggling with that. On the one hand, you do want to influence a country's policy if you think the policies are misguided. On the other hand, if you interfere too much, you're interfering with the sovereignty of the country. Sometimes, mistakes are made in exactly the opposite direction -- in the direction of being too accommodating to governments. So it's not always the case that the IMF is too tough. Q: Unlike your predecessors, your research background is in banking and corporate finance -- not macroeconomics. Is that a challenge? A: Increasingly over time, macroeconomics is being linked to microeconomics. People have realized -- especially after the Asian crisis -- that many macroeconomics problems have microeconomic roots. So, you really need to know both sides in order to offer good policy advice. The IMF is extremely strong in its views on exchange rates, monetary policy, and fiscal policy, and so on. I suspect [my] appointment reflects the fact that they want more weight being put on the microeconomics side.
BW MALL
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