Exit Interview: Rajan Reviews Experiences at Fund, Discusses Next Moves

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.


The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Raghuram G. Rajan

Raghuram G. Rajan, Economic Counsellor and Director of the Research Department at the IMF since September 2003, will be returning to the University of Chicago’s Graduate School of Business in January as the Eric J. Gleacher Distinguished Service Professor of Finance. As Rajan neared the end of his term, he discussed his experiences at the IMF and his plans for the future with the Editor of the IMF Research Bulletin.

Research in General

Before joining the Fund in September 2003, what was your general perception of the research done in the Research Department? What did you see as its strengths and weaknesses?

Before joining the Fund, I had been at the Research Department a few times to give talks, including at the Annual Research Conference (ARC). I had some sense that there were a group of people doing good work here, but I wasn’t intimately aware of all the research being done. I was, however, familiar with the work of Research Department people who published in my own area of research—banking and corporate finance—such as Enrica Detragiache and Shang-Jin Wei. So, I came to the department in learning mode.

Your main specialization was in corporate finance, while the focus of IMF is on macroeconomics. Which were the challenges and the opportunities of seeing problems from “a different angle”? Did not being a macroeconomist faze you? What were the objectives you set out for yourself and the department?

First, it seemed to me that not only the academic profession but also multilateral institutions were becoming increasingly focused on the political economy of reforms. So trying to understand how reforms were devised and carried out was important, especially given the great interest in notions like country ownership. Under what kind of circumstances did reforms become more feasible, and could we understand the political underpinnings of the problems even better? Closely tied to these issues was the role of institutions in the process of reforms. Achieving institutional change had become central to our mandate. Regarding countries’ policies, we know that not only growth but also well-functioning institutions are important in achieving stability.

Second, we needed to spend more time on low-income countries, including countries such as India and China, which are becoming a much bigger part of the world economy.

Third, we needed to do more on the financial sector in terms of research and operational work in the Fund. So these were the areas that I wanted to put more emphasis on. I also had a very strong sense that, because I had expertise in banking and corporate finance, but not in macroeconomics, I should be very careful not to disrupt the continuity of research in the Fund, which provided the organization with valuable support in carrying out its mission. Instead, I should attempt to enhance it. Among the issues concerning ongoing research here, two were quite central. One was modeling, on which we’ve made considerable progress. Regarding this, I would like to acknowledge the contributions of my predecessor, Ken Rogoff, who did an incredibly farsighted job in setting up this process, and of Douglas Laxton, Gian Maria Milesi-Ferretti, and Tamim Bayoumi, who took it forward. I also think the work we have done on exchange rates is very important. I think we understood, to some extent, the macroeconomic underpinnings of exchange rates, but understanding their financial underpinnings was a greater challenge, and putting more effort into such research is an important way to improve our understanding of exchange rate determination.

I also came here with a very strong view that the Research Department should not try to be an academic department, because by doing so it would get none of the benefits of being in a multilateral institution but all of the costs. We really could not replicate what was going on in academia without being in Cambridge or San Francisco. Instead, we should draw on our rich store of contacts and experience to produce research that would be far more interesting to academia. In other words, we should make the best of being at the center of policy formulation. Our research therefore should become more closely tied to the work of the Fund’s area departments (those covering the various regions of the world). We have sought to support surveillance, stabilization, and reform efforts by focusing more on applied work, without, however, insisting that every piece of work meet this test. I continue to believe it is very important for our economists to be seen not as working in an ivory tower but instead as doing work that is closely connected to issues at the Fund.

Clearly, I also came here with a sense of my own inadequacies. I had taken courses in macroeconomics in graduate school but had not done any research in macro. Obviously, if you haven’t done research and haven’t touched this stuff for 12 or 13 years, you will have forgotten a lot. One confession I have to make is that during the couple of months before I joined the Fund, I diligently read Ken Rogoff and Maurice Obstfeld’s massive international macroeconomic textbook and a bunch of other macro textbooks. I also have to say that economics has an underlying commonality: optimization with constraints is basically what we do in all branches of the discipline, and the single biggest common concept in economics is that of general equilibrium, which is how we distinguish our answers to problems from those of laymen. The other thing I thought was very important was to play to my strengths—the set of tools, techniques, and knowledge I came with—but not try to speak knowledgeably about things that I didn’t fully understand yet. I think that one of things you learn early in life is that since you cannot know everything, it is very important to admit it when you don’t know and be willing to learn.

What would you consider your main achievements during your tenure? What work you are proudest of?

Frankly, I think that the main achievements during my tenure will be judged by others in the future. I can tell you, however, that there are a number of things I feel we have done on aspects of political economy. We certainly have started some work on improving our understanding of the political economy of reforms in developed countries. Some of this work done for the WEO (World Economic Outlook) was, I think, quite influential. The OECD (Organization for Economic Cooperation and Development) replicated that work, confirming many of the results. That was a good start, and I think we are now in the process of extending this work to developing countries and finding out how reforms take place and under what circumstances. It think this research is very promising—it takes advantage of the capabilities of the Fund and can be very beneficial to its work.

We have done a fair amount of work on institutional change, both as part of the WEO and separately. Over time, my view of institutions has evolved, and I now think that they are very endogenous. Trying to understand how institutions have developed and changed, and what triggers you can pull to encourage changes, is therefore very important, and I am very happy about the work the Research Department has done on these issues. We have also, I think, done extraordinarily good work on China, to which Shang-Jin Wei, Eswar Prasad, and Marcos Chamon made important contributions. Also, through writing and publishing a bunch of op-ed pieces, in coordination with APD (the Asian and Pacific Department), we have helped to change the tenor of the message the news media are sending their readers, including policymakers, about China’s policies. The Fund’s message has obviously had an impact, and I think the intellectual contributions that have made this possible should not be underestimated. I also think that we have done a fair amount of research on India, to which Arvind Subramanian has made a significant contribution, and, here again, both policymakers and the broader public have been influenced by it. And certainly, the work on low-income countries that is emerging from the Macroeconomic Studies Division has been quite valuable, including the work on the effectiveness of aid. Over time, policymakers and their advisors are likely to take these findings into account in their work practices and decision making.

“Many important issues are vigorously debated in battles fought inside the Fund, but outsiders are unaware of this.”

The third issue on which we made notable progress was finance. Take, for example, the recent WEO chapter on how financial systems affect economic cycles. I think that was a significant contribution because it linked issues in microfinance to macro issues and thereby attempted to improve our understanding of the microfoundations of economic cycles. This chapter could have important effects. We have also worked, for example, on understanding financial sectors in low-income countries, including the role of foreign banks, on which some good contributions have been made by Enrica Detragiache and Thierry Tressel. And in the work on country insurance done by the Strategic Issues Division, and on financial globalization done by the Financial Studies Division, we are doing cutting-edge research.

I am also quite happy that we have not only continued our research but also expanded it, and its findings are being more extensively shared with, and applied in, the rest of the Fund. Take our modeling work. Increasingly, the models we’ve developed are being discussed with and used by IMF country teams in Article IV (regular consultation) missions. I think this has been an important improvement, because earlier, without these models in their toolkits, some country teams had a sense that they were dealing with counterparts in member countries who were more informed about some of the latest developments and techniques than they were. I’m therefore happy that we’re back on the frontier on these issues.

The CGER (Consultative Group on Exchange Rate Issues, an interdepartmental group of IMF economists) has made significant strides, especially in a timely extension of our exchange rate analysis to emerging markets, thanks to Gian Maria Milesi-Ferretti, Jaewoo Lee, and Luca Ricci. Our macro-modeling work and various WEO essays have helped us shed substantial light on the global payments imbalances. The most widely accepted diagnosis of the problem has largely been crafted at the Fund, while the most widely accepted steps toward resolution were also proposed by the Fund—the so-called Fund or G-7 mantra. Indeed, that proposal recognizes that there are deep fundamental forces at work in creating these imbalances, and it is not just a matter of an exchange rate movement here or a saving rate change there, but rather a whole bunch of things that need to be done by many countries to bring about the expenditure switching and expenditure reduction needed to attenuate the global imbalances. Of course, since then, we’ve also played a large role in starting the multilateral consultation which is attempting to make progress on policy actions to reduce possible risks associated with the imbalances. So, I would say, we have been centrally involved in formulation of the Fund’s policy on this issue. Also in the financial sector, we have been very much involved in trying to reform the Fund’s approach to Article IV consultations in order to incorporate more analysis of member countries’ financial sectors. Finally, our researchers have joined country teams in preparing the analysis for their discussions with national authorities—the mark of our researchers’ success is the immense demand we have experienced for them.

Are there areas of research you wished the Research Department had investigated? Was there a topic which was “too political” to investigate?

No, I can’t think of any areas that I wish the Research Department had investigated, nor of any area that was too politically sensitive to investigate. I think people in the department investigated what they wanted, and I did what I wanted. Of course, some areas are too peripheral to be of much relevance. It’s OK to do a paper on these once in a while, because it is interesting, but it cannot be an economist’s main contribution—I think that is well understood.

Research Department

Do you think there is enough freedom for Research Department staff to express their views?

I think the answer has to be a qualified yes. And I say qualified because we must understand our part in an organization which is seen as having views on issues. Any member of the organization who spouts something to the outside world is seen as expressing the organization’s views. No matter how many times we include the standard disclaimer in our Working Papers stating that the views expressed are just those of the individual authors and not those of the Fund, journalists invariably attribute them to Fund. Given this, we cannot say just anything that comes to mind, and I have to say that none of us do.

But we also have to work on easing this constraint, so that we can test ideas. What the Managing Director says is what the Fund thinks, but what a research economist here says and thinks is not necessarily what the Fund thinks. He or she is expressing an idea to peers. The idea needs to get out there to be discussed, tested, and—where relevant—improved. So, how can controversial ideas which are useful and relevant to the Fund be circulated and tested in the public arena without being seen as Fund policy? In this context, it is very important for the Research Department to be seen as a department carrying out actual research, which does not necessarily follow the official Fund line.

Now, at the same time, one has to realize that what our department does cannot be seen as completely unrelated to what the Fund does. Likewise, when, for example, the Economic Counsellor says something on an issue, this cannot be treated as completely irrelevant to the Fund’s view. So we need to keep trying to find a better balance here. Many important issues are vigorously debated in battles fought inside the Fund, but outsiders are unaware of this. They see only what emerges and thus assume that no intellectual ferment is taking place here. It is very important for outsiders to understand what the issues are in some of these battles and to find ways for them to provide comments and criticism, but they’ll need to be aware that the issues under discussion do not constitute Fund policy.

What is the secret of balancing the need for IMF research to be relevant against researchers’ need to explore topics of particular interest to them?

The Fund’s research effort is a two-way street. On the one hand, the Fund has some needs. On the other hand, if you force people to do research in areas that don’t stimulate them, you are not going to get very good research and it will be difficult to attract good people. In order to attract them and keep them, you need to ensure that they have leeway to do things they are interested in. So, it is a delicate balance. I am happy to say that, for the most part, we’ve taxed people relatively lightly, in that we’ve required them to do very few things that were far from what they wanted to do. One of the benefits you have as a department is that you can bring people together to work on a common issue and then get them to transmit the findings of this work to colleagues, thereby getting more of an impact. I’ve therefore suggested, every once in a while, that economists come together within divisions or across divisions to do work which can have high impact. Otherwise, a fair amount of time is open for people to do their own work.

Now, I don’t think that “directed research” is bad; in fact, it sometimes tells people “here is an important problem that the Fund is interested in.” One example of this was when we had a question about how we could address the issue of country insurance, which may be provided by reserves, lending facilities, diversification of activities, and so on. The relevant division went away and thought about it and produced a whole bunch of papers. Some of these came together in a board paper (prepared for the IMF’s Executive Board), but they were also instrumental in generating some of the ideas expressed in ongoing discussions and debates about various possible forms of Fund facilities. Of course, we’ve gone much further on some of these issues, but since they are, to some extent, in the realm of PDR (the Policy Development and Review Department), we have been collaborating with them on specific items.

I have given you some highlights of directed research, but I don’t want to minimize the amount of individual, self-motivated work that is going on in Research. At the same time, some people draw, I think, a little too much of a distinction between work that is Fund oriented and work that is self oriented. I think most of the people who come here eventually develop interests that are Fund oriented, and, for the most part, people have had the time and resources to do what they want.

You also introduced fundamental changes in the organization of the department, decentralizing expenditure by making some resource allocations to economists and providing research grants. Do you think this was a positive experience? Why or why not?

I think credit is due to Alessandro Prati of our front office for making it possible to decentralize budgets throughout the department, so that people could actually spend money the way they wanted. It is hard to measure what effect this has had, but when someone can decide for themself whether to bring in a visiting scholar, spend more money on RAs (research assistants), or go to a conference, you give them more freedom to carry out their research. Many people wanted to get more RAs, and their ability to do so has allowed them to do research that they could not have done otherwise. Regarding decentralizing budgets and creating a common pool for funding projects, I think these organizational changes will be useful in allowing individual-oriented research to flourish, and ten years from now, say, we will see whether it has been as successful as we had hoped. At least, we expanded the possibilities, and I’m really happy that people have taken advantage of the opportunities created. The flip side of providing this increased support for individual research was that I cut out the practice of inviting big, important people to come to the Fund for three months, do their own research work here, and then go away. I thought that expenditures for this were unnecessary and a big waste of Fund money. After doing this, I got a tremendous amount of pressure from outside people who wanted to spend the usual paid vacation at the Fund, but I thought there were far better uses for our money.

What do you see as the optimal relationships among the Research Department, Management, and the Executive Board? How about the optimal relationships between the Research Department and other Fund departments?

In terms of relationships with Management and the Executive Board, I think the Research Department has responsibilities to maintain state-of-the-art knowledge of issues relevant to the Fund and to update the Board and Managing Director on these issues. But we also, I think, have a role in providing an independent view. We have the luxury of focusing on economics while area departments are somewhat tied down by the political issues. Now, Research has to be careful about this, since if, on the one hand, we focus only on economics and not at all on the political issues, we will become irrelevant. If, on the other hand, we focus too much on the political issues, we will become more like an area department. How do we pick a point in between where we challenge the area departments in situations where they are moving too far away from economics owing to political constraints but also recognize that there are limits to what can be done, given those constraints? That is really the challenge that we face. And the need to meet it is a reason why it is very important for the Economic Counsellor to be from outside the Fund, because he or she should be the person who is trying to bring an independent view to policy discussions in the Fund and focus more on what is good for the member country in the medium term. You cannot always be uncompromising, because then you will become irrelevant. In contrast, you can’t just take on board what all of the other departments are saying without demur, because, again, you will become irrelevant. It is hard to pick a spot in between, but it is important to do so. Indeed, one of the best compliments the department has received was from the Managing Director, who jokingly cautioned, the other day, against giving us a task because we tended to be politically incorrect.

“We have the luxury [in the Research Department] of focusing on economics while area departments are somewhat tied down by the political issues.”

I think the Research Department has to engage with other Fund departments, and I hope we’ve tried to build good relationships with them. A good relationship doesn’t always mean a relationship without frictions. We have had to defend the independence of the Research Department in quite a few instances, but these disagreements have been settled between departments. I think everybody involved understood where we were coming from; they have respected us, and we have respected where they were coming from; and we have reached reasonable compromises. I have no doubt that if I were an area department director, I would do pretty much what they do.

In a changing world with fewer financial crises, is there a new role for the Research Department?

Of course, in a world with fewer financial crises, fewer short-term issues need to be addressed but there is more opportunity to prepare for the medium term. The Research Department has played an important role in crafting the Fund’s medium-term strategy (MTS), and participating in strengthening Fund surveillance and refining the MTS in the light of experience are very important priorities at this time of relative calm in international financial markets. I am not sure that we are completely rid of crises, however; and we therefore need to make changes now to improve the Fund’s ability to react quickly and effectively to crises if and when they occur.

You put a lot of emphasis on new databases (e.g., on corporate governance, structural reforms, and the structure of public debt). Do you think it this was the right strategy? Why or why not?

We work with data, and our access to data is one of the advantages of working at the Fund. Working with countries to encourage them to supply important data, and creating databases and trying to learn more by using them in our work are important parts of our strategy for maintaining a strong Research Department.

Broader IMF Issues

During your tenure, the Fund launched the initiative on multilateral surveillance. What are the challenges of multilateral surveillance from the research point of view?

The main challenge in multilateral surveillance now is how to influence large countries which have systemic effects on the world economy. What leverage do you have over them when you believe their policies are going in the wrong direction and will have adverse effects on other countries? During the period that I have been here, and certainly for the last couple of decades, the large developed countries have, for the most part, charted independent courses without being much affected by what the Fund has advised them to do. Now that some large emerging market countries are building up large foreign exchange reserves, they have also become more independent and less subject to Fund leverage. I think the big challenge of multilateral surveillance is getting these large players to see that there is a need for them to engage in dialogue to discuss not necessarily their short-term policies but primarily the spillover effects their policies are having on each other and the consequent need for reforms. What I’m talking about is not policy coordination, but instead the need for countries to accept, in their enlightened self-interest, certain limitations on their policies. I don’t think we are there yet. I think that the Research Department can help by making the economic case for this, and certainly we have done so regarding the issue of how to narrow global imbalances. Our job is to try to persuade countries that what is in the interest of the global economy is also in the interest of their domestic economies. Establishing the connections between what is good for the domestic economy and what is good for the global economy and, based on these, figuring out how we can get better cooperation among large countries is going to be one of the central challenges facing the Fund.

Your position involved considerable managerial and administrative responsibilities. Looking back on your time here, what observations do you have about this side of the job? Do you have any suggestions for how your successor might most effectively cope with these responsibilities?

I have one very simple answer to handling the position’s managerial and administrative duties, and it is to find good people. If you find good people to help you, basically they take care of pretty much everything. But in addition to finding good people, you have to give them room. You cannot micromanage what they do. And so, every once in a while, you have to accept that certain decisions they make may not be exactly what you want but rather what they think is best. That certainly doesn’t mean losing control, but it means having an overall sort of framework within which people have leeway. If you find good people who understand what you are trying to do and work within the framework you’ve prescribed, they pretty much do what is best to further the overall objective. I find it an exciting challenge to persuade people, so that what I think is useful also becomes what they think is useful. And if they have different views, you should be willing to engage in dialogue by which you may change each other’s views. I have to say that the people I have been working with in Research have been incredible. Certainly the front office have been superb and the divisions chiefs have all been very good, so it has been a pleasure.

To my successor, I would say that as long as he or she keeps the members of the current team or replaces them with people who are equally strong, I don’t think there will be a serious problem. I think is very important to respect their opinions, because these are very strong individuals with very sensible opinions. As I discussed earlier, I arrived here without a macro reputation and was, I think, one of the youngest directors, so I needed to prove to my new colleagues that I was not a fake on either the intellectual front or the managerial front (because I had come from academia). I think it is therefore very important to convince people within your department that you are not inflexible—that you can listen; that you can respect them; and that if they start backing you, you will have no problem. So I would advise my successor to get your department behind you, because once you have their support, you are unstoppable; but if you are fighting daily battles within the department, then you cannot perform outside the department, let alone outside the Fund.

Your position involved a lot of public speaking and meeting with member country officials and many other Fund “constituents” as you represented the Fund in many forums. Did you enjoy this aspect of the job, and what did you learn from it?

The position of Economic Counsellor gives you a tremendous platform, but you need to be very careful about using that platform. It is important to solve internal issues internally, and when you talk on the outside, you should talk about issues that matter to outsiders. Occasionally, you can affect internal debates by making statements outside, but you have to be very judicious about doing that so that you are not perceived as a “loose cannon,” generating more opposition by what you say than movement.

Going Back to Academia

At the Fund, you probably came across many interesting ideas but had little time to write research papers. In view of this, what will be the topics of the first papers you plan to write once you are back in academia?

One thing I am really interested in exploring is the process of institutional change, so I will do some work on that. An interesting aspect of this is the power of vested interests and how it affects a country’s ability to grow and develop. I am also very interested in understanding more about the global liquidity glut and the important role that openness plays in countries’ and global economic development. I worry about some of the forces that are discouraging openness and how little we are doing to address some of the relevant issues.

“I worry about some of the forces that are discouraging openness and how little we are doing to address … the relevant issues.”

Which of the ideas expressed in your book, Saving Capitalism from the Capitalists, were most useful in guiding your work at the Fund? If you were to update your book in light of your experience at the Fund, which chapters would you change, add, or delete? Do you have any plans to write another book exploring some of the issues you explored while working at the Fund?

I don’t remember it chapter by chapter. The book is, to a certain extent, about the role of finance in this process of creating more competition. But clearly so many other factors play a role in creating competition; and during my time at the Fund, we explored a whole range of them. I want to give myself some time to reflect. I must say that the Fund is a fascinating place, but I have no intention of writing a tell-all book about the Fund or anything of that sort. I think that when you work inside an organization for some time, you tacitly agree that unless you learn of corruption or malpractice, you will keep silent, after you depart, about what is going on inside it—it would be a breach of trust to do otherwise. But there are so many other interesting issues I have come across. One of the areas that I am very interested in is understanding more about the growth of the Indian economy and writing something about it. So, if I do write a book, it would be about those issues and perhaps about development more broadly speaking, which I think is very interesting.

Did you find many coauthors here with whom you will continue to work from Chicago?

Yes, I have made a number of friends here, and certainly some of them have been coauthors. One’s role as chief economist severely limits one’s ability to work on research, so I hope that, in the future, I will be able to explore issues with some people at the Fund who I haven’t yet had a chance to do research with.

Would it be fair to say that it is maybe even better to be an ex-chief economist of the Fund than being the chief economist?

I don’t know if it is better to be an ex-chief economist or the current one. I think this has been a tremendous experience not only in terms of my own personal development, through gaining both knowledge and managerial sense, but also in terms of meeting people and just getting to see the broad range of their capabilities. I think the Fund staff is made up of very intelligent and dedicated professionals. I’ve seen them at work and seen the way they think, and the experience has been quite an eye-opener. So, until I return to the outside world and see how it feels, I can’t say that it’s better. What I can say is that if anything beats this job, then it is pretty damn good.

For additional biographical information on Raghuram Rajan, please visit http://www.imf.org/external/np/bio/eng/rr.htm and http://faculty.chicagogsb.edu/raghuram.rajan.

IMF Research Bulletin, December 2006
Author: Mr. Clinton R. Shiells, Mr. Antonio Spilimbergo, Mr. Vladimir Klyuev, and Raghuram Rajan