Rudi Dornbusch: Global Economic Truth Teller

Rudi Dornbusch, the German-born MIT professor who trained a generation of international economists and policymakers, died on July 25, 2002. Professor Dornbusch was never one to hide his opinions. We feature excerpts from one of his last interviews where he expressed his views on key global economic issues.

Alan Greenspan seems to have declared the recession all but over. Do you agree?

One disagrees with Greenspan at one's peril. He has a deep understanding of the U.S. economy. So the United States has had a growth recession, not surprising after the good years we had, and it is back on track now with solid productivity growth.

Would you agree that the determined U.S. response to terrorism threatens its own economy?

Look, a time when you cannot drive across a bridge in this country without worrying about it being blown up is a time for maximal hawkishness. But it has to be a very long-term fight. Up to this point in the war, it's likely that the United States has created more terrorists than they've killed off.

So the next step is critical: can the alliance now rescue a few key countries — Saudi Arabia and Pakistan among them — from being over-run by the fundamentalists?

How do you justify the war against terrorism?

I do not favor a war on terrorism based solely on pacifism. An ignorant denial of the growing threat of terrorism, not just on U.S. soil but wherever there are free societies, would not be good for any country's economic, social and political outlook.
We should be thankful that America is trying, with carrots and sticks, to get cooperation in identifying where the terrorists are, how to reach them and how to cut off their money.

What is the economic outlook of Europe?

Europe is rich, complacent and stable. They will keep dragging their feet on structural reform because, at heart, they do not really want to do it — they are happy the way they are. Certainly, you are not going to see any movement on reform in an election year.

How do you view the prospects for the emerging markets?

Difficult to generalize, 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.

What is your take on the current situation in the Middle East?

Whether reforms can be managed in Saudi Arabia without political turmoil is another major risk factor to the global outlook. One remembers that the Shah of Iran's attempt to introduce reforms in that country soon resulted in his resettlement in America. Can Saudi Arabia open up without all those suppressed forces for change taking over?

How about Argentina?

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 the problem of repeated economic mismanagement of a country by its politicians? The old way of turning things over to the military is no longer acceptable, thank God.

How do you view criticism of the so-called Washington Consensus?

That is 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 subsitution, nationalization, and the like. But there is no promise of quick growth or of achieving an industrialized country standard 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.

Why have Russia's fortunes improved after the 1998 crisis?

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 has been checked. Now tax collection from organizations such as Gazprom is considered normal, where a few years back it was inconceivable.

Where oligarchs are still at work in Russia, they have learnt that a fair distance from politics and a focus on normal business is 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.

Could the transition process of the Soviet Union have been handled better?

It's true that the Russian reformers — Gaidar and 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 oligarchy with great wealth and political power.

Yet, in the end it has 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 fruits are starting to show.

After dropping out of the Kyoto Agreement, is the United States a hopeless case for promoting a cleaner environment?

Environmental issues will become part of the U.S. agenda as the political parties lobby to capture the votes of young people who, quite appropriately, care quite fervently about the environment.

I'd like to see some of the rage against multinationals' alleged ravaging of poor countries shifted to U.S. suburbanites' ravaging of the environment.

How troubled are you about child labor?

In the United States until 20 years ago it was perfectly normal for 14-year olds to be working in the fields. Canadian school and university calendars are organized around the harvest so that 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 twenty years ago.