Journal Issue

Dornbusch on global economy, Argentina, Russia, and much more …

International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Loungani: Alan Greenspan seems to have declared the recession all but over. Do you agree?

Dornbusch: One disagrees with Greenspan at one’s peril. He has a deep understanding of the U.S. economy. Certainly, the evidence of recovery is clear. The inventory restocking that has accompanied the past 10 recoveries is taking place. Consumer spending has remained strong. And with the tax cuts for businesses that the U.S. Congress just passed, it may be that investment will also join the orchestra in time. The United States has had a growth recession, and it is back on track now with solid productivity growth.

Loungani: What’s the economic outlook elsewhere?

Dornbusch: The recovery of the U.S. engine helps the rest of the globe, but other than that, I don’t see that the risk factors have changed. Japan remains a huge risk factor. Balance sheets in Japan, private and government, are basically unviable. Growth doesn’t collapse immediately because the country has captive finance, but in time it will. Europe is rich, complacent, and stable. It will keep dragging its feet on structural reform because, at heart, it does not really want to do it. It is happy the way it is. Certainly, you are not going to see any movement on reform in an election year. In the Middle East the question is whether reforms can be managed in Saudi Arabia without political turmoil. It’s difficult to generalize about the emerging markets, but it seems that hyperinflation has been licked almost everywhere and whatever could be privatized easily has been sold off. Now come the hard reforms, and there is starting to be reform fatigue.

Argentina and spillovers

Loungani: What are your views on Argentina?

Dornbusch: I’m not sure my views can be printed in a family magazine like the IMF Survey. But everybody knows that I think Argentina is, and has been, badly governed. Carlos Menem, after a few good years, started backpedaling on reforms to help himself get re-elected. And Fernando De la Rua accelerated that process of going backward.

For Argentina to get out of this crisis, reconstruction rather than quick-fix financial support has to be the answer. Tax evasion and corruption—and the government’s acceptance of this—must be suppressed in the most radical fashion. The cumbersome tax code must be simplified to a flat tax, hopefully leading to better enforcement. The economy needs a quick productivity boost by massive privatization of ports and customs and deregulation of the wholesale and distribution sectors. Argentina must move quickly to a new temporary convertibility plan—say, two pesos to the dollar, just because it is the next simple number after one-to-one. The world should provide financial support, but only upon its acceptance of radical reform and foreign hands-on control and supervision of fiscal spending, money printing, and tax administration. Further IMF money without this change of the rules of the game would be a dramatic error. The IMF is placed in a difficult position when people are in the streets, but I hope you will not be forced again into supporting an incomplete or implausible program.

Loungani: Is it realistic to turn a country’s economic management over to foreign control?

Dornbusch: It’ll be more like Paul Volcker heading the oversight committee for the restructuring of Arthur Andersen. Argentina needs a debt workout, and the people who carry it out have to be impartial and independent. It’s not respectful of national sovereignty to treat countries like corporations, but how else do you deal with repeated economic mismanagement of a country by its politicians? Turning things over to the military is no longer acceptable, thank God.

Loungani: Some say Argentina’s crisis has discredited neoliberal economics or the “Washington Consensus.”

Dornbusch: Nonsense. Neoliberal economics or the Washington Consensus—a terrible term, by the way—is simply a list of policies that have worked better than the alternatives, such as central planning, import substitution, nationalization, and the like. There is no promise of quick growth or industrial country standards of living in a few years. In fact, you may have to stick to the policies for a while to get any growth dividend at all. Think about all the deregulation and restructuring the United States went through in the 1970s and 1980s to get a few years of a growth bonanza with the New Economy. Argentina has a history of promising too much, too soon—“plata dulce” [sweet money].

In November 2001, the IMF’s Second Annual Research Conference specially honored Rudi Dornbusch. Kenneth Rogoff, Director of the IMF’s Research Department, presented the Mundell-Fleming lecture on Dornbusch’s Overshooting Model After 25 Years.The text is available on the IMF’s website ( and as IMF Working Paper 02/39 (copies, $10.00 each, are available from Publications Services. See page 87 for ordering information).

And Russia?

Loungani: Why have Russia’s fortunes improved after the 1998 crisis?

Dornbusch: Russia’s reversal owes much to the change in the political landscape. Under Putin, the power of the oligarchs and their conspiracy to steal the remaining pieces of Russia have been checked. Now tax collection from organizations such as Gazprom is considered normal, when a few years back it was inconceivable. Where oligarchs are still at work in Russia, they have learned that a fair distance from politics and a focus on normal business are in their interest. That shifts the focus to entrepreneurship and making money in Western ways. The high oil prices came just in time to help Putin put in place his financial responsibility policy and his reform strategies.

Loungani: Would the Soviet Union’s transition have been handled better if it had been more gradual, particularly with respect to privatization?

Dornbusch: You cannot slow-motion the phase-out of the KGB. Same thing for privatization. Where gradualism, circumspection, a plan, and rules might have led is open to question. You may well say, “OK, but did you have to give it all to the oligarchs?” Here it’s true that the Russian reformers—Yegor Gaidar and Anatoly Chubais above all—privatized without much care for niceties. They got rid of public sector assets at literally any price and with just about any process. This was controversial, and it created an oli garchy with great wealth and political power.

Yet, in the end, it worked. The massive privatization and restructuring of state enterprises is paying off. The initial phase, because of poor existing productivity, is always traumatic; it’s not surprising that, after 90 years of bad economics, it takes some action to get the joints flexed. But now—with reduced debts, less overstaffing, and a gain in flexibility—the process is starting to bear fruit. Now you can begin to think about attracting foreign capital. Would that have been possible if Russia had been advised by someone who would still be drawing up perfect privatization schemes in his head?

How is a poor country going to lift itself except by taking advantage of world markets in some of its export sectors and accumulating skills in the process?

–Rudi Dornbusch

Choosing an exchange rate regime

Loungani: Given all the recent currency crises, do economists really have any coherent advice to offer countries on how to choose an exchange rate regime?

Dornbusch: Things are a bit chaotic on that front, but there is some advice economists can offer. For Eastern Europe, we’re basically right to advocate that they become part of the euro area. They should do it right away to eliminate some of the noisemakers and the potential for instability because of concerns about the currency. And, for countries with a long history of monetary instability, I still stick with the recommendation of a currency board. But there should be no promises of quick growth and no slacking off on reforms. Can we really say that leaving the dollar has been a great strategy for Argentina? It has put people in the streets and devastated the country’s banks. Would it really have been more painful to stick to the dollar and do the hard reforms—the deregulation and the fiscal reforms—that were needed?

Some large and financially stable countries can manage flexible exchange rates—Canada, Brazil with an Arminio Fraga, for example. Floating can be combined with a bit of careful inflation targeting. But if countries become obsessed with inflation targeting, they run the risk of ending up with an overvalued real exchange rate and killing the economy. This was Chile’s problem, and it led to the 1999 recession. As long as inflation is headed downward, we shouldn’t worry too much about how long it takes to go from 10 percent to some lower rate. We should worry more about avoiding real exchange rate appreciation by having a sort of “Taylor Rule” that limits the impact of inflation targeting on the real exchange rate.

On the globalization debate

Loungani: What do you make of the antiglobalization movement?

Dornbusch: Most of it is a theater of the absurd. How is a country going to lift itself out of poverty except by taking advantage of world markets in some of its export sectors and accumulating skills in the process? You can’t bootstrap a closed economy from the Stone Age to prosperity—North Korea would have been the miracle economy if that were possible.

Loungani: But people seem to be fighting over the evidence on the effects of globalization. There is the David Dollar-Dani Rodrik debate, for instance.

Dornbusch: David Dollar is a very serious researcher. It is, in part, thanks to his prodding that the World Bank has had to confess that “globalization is good for the poor, growth is good for the poor, foreign direct investment is good for the poor.” It just missed one extra credo, which is also true: “The IMF is good for the poor.” But I think Dollar would agree that one cannot rely solely on regression evidence from a tired old data set. You have to use your common sense as well. You have to ask, for instance, why China—which doesn’t decide anything based on orders from the West or on regression evidence—has concluded that markets do miracles and that the World Trade Organization and foreign corporations are, on net, good for China.

Loungani: Some of the antiglobalization protests have targeted large corporations.

Dornbusch: But these multinational corporations are generally far more responsible employers than domestic corporations in developing countries. The multinationals often offer good jobs in export sectors, pay more, and provide skills. There are cases of blatant exploitation, but this is not the rule. Multi-nationals have too much to lose in terms of reputation. And how else are poor developing country producers, who cannot even afford the airfare to New York, going to develop a brand name that is present in every shopping mall in the United States? Hooking up with the distribution channels and brand name of a multinational is a wonderful opportunity.

Loungani: But Nike, for example, has admitted that in one factory village children hand-stitched footballs.

Dornbusch: In the United States until 20 years ago it was perfectly normal for 14-year-olds to work in the fields. Canadian school and university calendars are organized around the harvest so the kids can come back and work. So who is to say that developing countries should be guaranteed today the standard of living that we did not have 20 years ago? That’s just nutty! I think environmental issues are more important. I’d like to see some of the rage against multi-nationals’ alleged ravaging of poor countries shifted to U.S. suburbanites’ ravaging of the environment.

And at the IMF …

Loungani: You know Anne Krueger, the IMF’s new First Deputy Managing Director, well.

Dornbusch: I know, love, and cherish her. She has strong views about how economies should be run. She is an expert on trade policies and, more broadly, on resource use. This is essential for dealing with emerging markets and developing countries: the poorer you are, the more efficient your use of resources has to be. This is obvious to the poor but not always to the people who advise them.

Anne’s combat experience as the World Bank’s chief economist in the 1980s will stand her in good stead. Back then she forced a somewhat reluctant organization to say that economies need to be opened to trade, governments need to be downsized, and inefficient public enterprises need to be privatized. That was shocking advice at that time, and she would have failed had Reagan and Thatcher not been advocating similar policies for the advanced economies.

And Anne is not a pushover. That is important at an institution like the IMF where the Executive Board basically always comes to the table with some kind of compromise in mind for every situation. You need someone to occasionally say “No!” to a bad compromise. And “No!” comes very easily to Anne.

Loungani: What do you think of her proposal for a sovereign debt restructuring mechanism?

Dornbusch: I would have thought she would share my worry that we could end up taking the job away from capital markets and giving it to some really bad institutions. Market solutions are messy, but do we really want to have some court system, say, in New York, deciding whether a country is bankrupt and how to restructure its debt? It is dangerous to apply Chapter 11 to countries. Legal rules are fine for deciding, say, that a plumber’s lifetime earnings are not enough to pay off his debt and hence he is bankrupt. But do we want to end up in a situation where we say that Argentina—where no one pays any taxes—is bankrupt and the bill should be paid by you and me and the rest of the international community? I say, “No, thank you; that’s an offer I can refuse.”

Loungani: Anything we haven’t touched on?

Dornbusch: No, you’ve squeezed it all out of me.

Laura Wallace


Sheila Meehan

Senior Editor

Elisa Diehl

Assistant Editor

Natalie Hairfield

Assistant Editor

Jacqueline Irving

Assistant Editor

Lijun Li

Editorial Assistant

Maureen Burke

Editorial Assistant

Philip Torsani

Art Editor/Graphic Artist

Jack Federici

Graphic Artist

Prakash Loungani

Contributing Editor

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Photo credits: Denio Zara, Padraic Hughes, Pedro Marquez, and Michael Spilotro for the IMF, pages 81, 84-88,93, and 95-96; Susumu Takahashi for Reuters, pages 89-90; and Peter Andrews for Reuters, pages 91-92.

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