A challenger of the received wisdom

Financial talent is hard to come by these days, as any headhunter will confirm. And it can be even more difficult to keep. Case in point: Ricardo Hausmann, until recently the Inter-American Development Bank’s chief economist. Hausmann joins the Harvard faculty this month. But don’t expect him to be saying many good-byes. The international financial community seems bound to hear quite a bit more from this dynamic player. Hausmann shared some of his characteristic all-or-nothing views with Euromoney’s James Smalhout as he was packing his bags for Cambridge

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Hausmann, a Venezuelan, is planning a very different public presence after leaving the IDB. He's deeply worried about events in his country, where he once was the minister of planning, and wants to speak about them publicly in ways that aren't possible at one of the multilateral development banks.







Hausmann: "We need to make sure that we are not part of the problem"

Hausmann's departure is clearly a major loss for the development community in Washington. "He was tremendously effective and basically put the research arm of the IDB on the map," says Sebastian Edwards who served as chief economist of the Latin American and Caribbean Department at the World Bank from 1993 to 1996. "The IDB had been producing research, some of it high quality, all along, but it was not being noticed."
Always provocative, Hausmann was known for looking into new areas and coming up with controversial solutions, but ones that obviously struck a chord in Latin American economics. "Ricardo had a great sense for identifying the issues that were relevant for the region," said Liliana Rojas-Suarez, a former colleague. "He kept his ears open during all the time that he was there and translated the needs that he heard into the research operations of the IDB."
Hausmann created a bit of a stir inside the IDB by taking on macroeconomic issues as well as broader questions relating to development. And he also had an impact on the other multilaterals, like the World Bank and the IMF, with his challenging views. "Because the IDB is seen as a less controversial institution in terms of macroeconomic issues," says Claudio Loser, the IMF's Director of the Western Hemisphere, "he could discuss policies more openly with individual countries and he was able to influence them in that way."

Of course, there were critics. "In trying to defend the views that he adopted on a number of issues," says Edwards, "he chose to emphasize the message in a broad way rather than the subtleties involved with the idea and the texture that it requires given the diversity of Latin America."
What were your most important accomplishments as chief economist of the IDB?
Isaac Newton said, at the age of 85, that lifetime celibacy was his most important achievement. I don't consider that to be in the top ten of his major contributions, but it goes to show that it is very hard to make self-assessments, even for someone like Newton.
In my case, it is hard to know what the judgement could be based on. One criteria might be our impact on the nature and quality of the policy debate. We started from scratch in February 1994 and set up the office of the chief economist. I hired the people. We defined the mission, decided on an approach to research and created an internal culture. We also targeted different audiences and developed products to reach them. We decided that we had three major audiences and that we had to link to each of them. These audiences were: the policymakers of the region, the academic community and the Bank itself. For the policymakers, we formed a network of central banks and Finance ministries that met twice a year. That gave us an eye and ear on what the region wanted and needed to discuss.
We also developed a product we called the encerrona. That is a brainstorming session with the president of a country and his cabinet on a Saturday, typically, an hour outside the capital city where we would make a presentation about the obstacles to development facing the country. And we have our annual economic and social progress report for policymakers.
You have been at the forefront in calling attention to the costs of pro-cyclical macroeconomic policies. Did policymakers get the message?
We started off in 1994 by focusing on the causes of a very high level of macroeconomic volatility in Latin America. We found that part of the problem was that policy outcomes were pro-cyclical, instead of anti-cyclical.
We argued that this was not caused by the intentions of policymakers. They are trapped into a pro-cyclical response to events. My best guess as to why Fiscal policy is pro-cyclical is that it has something to do with concerns over solvency. In bad times, people think that you are less able to repay loans and so your creditworthiness declines and you Find less Financing, although an anti-cyclical policy would have involved more borrowing. So, in bad times you are forced into a contractionary Fiscal policy because you lose access to Finance.
When I joined the Bank, the dominant paradigm assumed that macroeconomic problems were behind us. That was the atmosphere that reigned before the Mexican 1994 crisis. The problems uppermost in people's minds were growth and poverty. Growth was seen as related to increased domestic savings and exports and also maybe education. The social aspect had to do with targeted government programmes.
We wrote a very critical piece on savings saying that it was the wrong policy focus. We argued that savings tend to follow growth and not the other way around. We showed that the main explanatory variable for the difference in savings between east Asia and Latin America was growth, not culture.
Moreover, we don't really know much about how to affect savings. There was a lot of talk that savings could be increased by increasing public savings. People had estimates of the so-called "off-set coefficient" of Fiscal policy.
How much would the private savings decline if public savings increased?

We came up with a story that the off-set was very large except in periods of crisis. So, savings was not a good focus for a growth-oriented strategy and public savings was not the way to get there.
Moreover, we argued that saving was definitely not related to crises. That got most of the attention. Prominent economists at the time were saying that the Mexican crisis was caused by low domestic savings and that became the official position of Washington and the new Mexican government. We made the point that the savings issue was irrelevant, but it took the Asian crisis to show that high domestic savings was no guarantee against crisis.
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Cash management poll 2008:

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

A challenger of the received wisdom

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