Monday, November 30, 2015
RG: What was the group set up to do?
Loungani: On jobs, the immediate task was to remind people that sometimes unemployment is high because demand is low. The Fund, like many others, often veers towards thinking of unemployment as largely a supply-side problem—people are lazy or we give them very generous unemployment benefits so they don’t search for jobs or there are structural problems that keep unemployment high. At the onset of the Great Recession, Olivier (Blanchard) and Min (Zhu)—who had oversight over the group—were worried that we would underplay the most obvious explanation for why unemployment had spiked up, namely that aggregate demand had fallen. Our mission was to keep the words “aggregate demand” alive within the building and outside.
RG: Did you succeed?
Loungani: Perhaps more outside the building than within it, at least initially. Under Olivier’s supervision—he gave me a two-page outline and said “follow this”—Mai Dao and I wrote a 2010 paper which Paul Krugman praised: “A recovery in aggregate demand is the single best cure for unemployment. What a relief to hear the IMF say that!” This sentiment was echoed by many others over the ensuing years, including many in the trade union movement. We had a tougher time at other institutions: after one of my presentations in Europe a person came up to me and said: “I heard the same thing from Olivier 30 years ago and I didn’t believe it then.”
RG: And within the Fund building?
Loungani: It has been a tough sell. Larry Ball (of Johns Hopkins), Davide Furceri, Daniel Leigh and I kept up a drumbeat that the short-run relationship between output and unemployment—known as Okun’s Law—had remained stable through the Great Recession. Antonio Spilimbergo started calling us the “Okun police”. I think it eventually started to rub off; one piece of evidence is EUR’s paper on the rise in youth unemployment, which provides an even-handed treatment of the respective roles of aggregate demand and supply factors.
RG: What was the task on growth?
Loungani: Olivier put it as “moving beyond mantras”. Both he and I had the view that the Fund goes to countries and says: “Here are 25 (structural) areas on which you are behind international standards. Improve on all them by next year and you will surely grow”. So I started to look through the Fund’s advice on growth.
RG: What did you find?
Loungani: That the characterization is unfair. Though you can still find examples of the kind I mentioned, the bulk of the Fund’s advice on growth is actually quite ‘granular’; that is, it digs down to see the specific problems the country is facing. Think, for example, of the great work that Patrizia Tumbarello and many other Fund staff have done in providing advice to small states on sustainable growth.
RG: So what did the group do?
Loungani: In the “Jobs & Growth” Board paper, we summarized the current ‘do’s and don’ts’ on growth and then showed that staff had been broadly following that advice. We also issued a very nice guidance note for Fund staff on how to tackle growth issues—I am not praising myself here as this was largely the work of several SPR colleagues. In this case too, as with jobs, we got some external recognition—in this case some back-handed praise from Dani Rodrik, who in the past has been critical of our advice on growth.
RG: And, finally, on inequality?
Loungani: Here the guidance came largely from Min (Zhu), at least initially. Around 2010-11, when the group’s work started, Min was more concerned about inequality than was Olivier. Min said we should see how policies, including Fund policies, affect inequality, so we could take these effects into account in our surveillance and program work.
RG: So does Fund policy advice affect inequality?
Loungani: One of the first things we did was to see how fiscal consolidations—referred to as ‘austerity’ outside our building—affected inequality. In a 2011 piece we found that austerity raises inequality. This initially proved controversial within the building—and, not surprisingly, popular in some circles outside—but management supported us and the paper was published. In 2014, FAD did a very nice Board paper on fiscal policy and inequality and has just issued a new book on the topic. Recently we have shown that openness—capital account liberalization—raises inequality; I hope MCM picks up on this, the way FAD did with fiscal policy. Min also wanted us to see how monetary and exchange rate policies affect inequality; I never got around to it but hope springs eternal—here again MCM could help.
RG: What’s next for you?
Loungani: I have a few residual tasks to complete in the Jobs & Growth agenda. One is to finish extensions of the work on Okun’s Law to emerging markets and low-income countries. The other is to think about the advice the Fund gives to these countries on the design of labor market institutions. This was a topic close to Olivier’s and my hearts; but while Olivier and I did a paper on it for advanced economies (with Florence Jaumotte), I never got around to doing the follow-up paper for other countries. But my main job is to head the division within RES that deals with low-income countries.
RG: And what’s next for the group? Is it disbanded and how would you summarize its impact?
Loungani: Well, my co-chair Ranil Salgado and I have both moved on. But the agenda continues under new management—and the seminar series we launched continues as well. In RES, Romain Duval has taken over and had added structural reforms to the agenda—this is good as the focus we had placed on aggregate demand was appropriate for the time but we should be even-handed. And of course, inequality has become a big deal at the Fund now—with the astounding success of the work by Jonathan Ostry and Andy Berg, the blossoming work on gender inequality, the pilot cases on operationalizating inequality.
On the impact: I suspect Gerry Rice would not call it “huge”. But, in the words of the poet, we managed “to swell a progress, start a scene or two.”
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