Anne Krueger’s many achievements include Chief Economist of the World Bank from 1982 to 1986 (widely recognized for substantially improving the quality of published research) and First Deputy Managing Director of the IMF from 2001 to 2007. You have an amazing career. She speaks with Shruti Rajagopalan for about an hour on a variety of topics. “Anne Krueger looks back on 50 years of rent-seeking, trade and economic development.” (Mercatus Original Podcast, June 20, 2024).
The full content of the conversation cannot be defined here, but part of it focuses on the opening lines of Krueger’s famous 1974 paper. “The political economy of rent seeking” (american economic review, June 1974). While the paper was being prepared in the late 1960s and early 1970s, Kruger was a professor at the University of Minnesota. But in the summer, often as part of a U.S. aid project, she found opportunities to travel to places like Turkey, South Korea and India. She spoke to real business people along the supply chain. For example, in one study, she spoke to Hindustan Motors and 50 to 60 of its suppliers in India. This process of gathering background information differs significantly from the way most economists conduct research today. For example, she discovered that “each of these component companies had three sets of books: one for the taxman, one for the public, and one to understand what was really going on.”
Perhaps the main conclusion of the 1974 paper is that corruption is not just a series of transfers or bribes from one group to another. Instead, “competitive rent-seeking” meant that companies were investing significant resources into finding ways to overcome government prohibitions, licenses, and rules. As a result, the costs of the rule were more significant than previously thought. Kruger says:
It seems surprising at first, but once you find out that these people are smuggling parts or importing them at false prices or whatever, you realize it’s there. But over time, when it happens too much, you realize that it’s not just a matter of me taking money out of your pocket, but that you’re actually making a living doing it when you could be doing something productive instead. That was fundamental. You just don’t realize it’s there. I think everyone knows.
I remember One or two days related to graduate school corruption. What we learned was that when there is corruption, it doesn’t really matter because it is simply passed from one person to another. That would be true if it were one or two small isolated incidents. When everyone realizes that they can get more by doing this or that, everyone starts competing for it. Until then, they are spending time and resources on it. Until then, it will cost more.
The common justification for rules, regulations and import blocking is that it is the price to be paid to give domestic industry space for growth and development. But Kruger argued that businessmen do not actually believe this justification. They just wanted less competition. The following is an exchange from the interview.
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 era, and that the developing countries were doing the right thing by being protectionist. Industrial protection, import substitution, import licensing, the list goes on and you know it better than I do. Have you ever accepted that orthodoxy, or have you always been skeptical of it? If you purchased, what made you change your mind?
Kruger: I’m not sure since I bought it. In grad school, someone said, “Yes, there may be industries that are expensive to start, but once you set them up, you’ll be able to make your money back, take the protections off, and produce for the global market, etc.” What I understood about India and Türkiye was that they were not doing any part of it. Not only did the companies that received protection not thrive, they wanted more protection and never thought about international markets. They knew they couldn’t compete. There was a bit of dissonance that way. I’m not sure the consensus, at least as I perceive it, is as strongly supportive of import substitution as you say.
Kruger tells a good story about India’s attempts to advocate for open trade and macroeconomic stability at the time and how her arguments were received.
At one point, I was coming back to India, and one of the secretaries and one of the key economic ministries said this: “You’ve been selling this for years and I’ve never heard a rebuttal. Come and speak at our ministry on Saturday morning. “We will bring in other chief secretaries and discuss it,” he said.
I went on Saturday morning and did the discussion and presentation, and by then things were going a little more smoothly than before. And I knew India well enough that I had no problem applying it to India. I was satisfied that it was finished in a neat way. The first question came from my host, and the first question was, “Now madam, you surely know that India is a poor country. You surely know that there are two types of products. There are luxuries and necessities. Now it would certainly be a crime for a poor country to produce luxury goods. But how can we export essential goods?” The discussion hasn’t changed much at that level.
In short, there are examples of tight government control of the economy (“Criminals producing luxuries”) and zero exports (“How can we export necessities?”). India did not start a faster growth pattern until that mindset changed.
