A Conversation with Anne Krueger: Rent-Seeking and Other Topics

Anne Krueger has a remarkable resume, including Chief Economist at the World Bank from 1982-86 (where she is widely credited with substantially upgrading the quality of published research) and First Deputy Managing Director of IMF from 2001-2007.

She converses with Shruti Rajagopalan for about an hour about a wide array of topics in “Anne Krueger Reflects on 50 Years of Rent-Seeking, Trade, and Economic Development” (Mercatus Original Podcasts, June 20, 2024).

I can’t do justice to the sweep of the conversation here, but it focuses on the lead-up to a prominent 1974 paper by Krueger called “The Political Economy of Rent-seeking” (American Economic Review, June 1974). At the time the paper was gestating, in the late 1960s and early 1970s, Krueger was on the faculty at the University of Minnesota. But in the summers, often as part of US AID projects, she found opportunities to travel in places like Turkey, South Korea, and India. She talked with actual business people along the supply chain. For example, in one study she talked with Hindustan Motors in India and 50-60 of its suppliers. This process of gathering background information is wildly different than how most economists conduct research today. For example, she found that “each of these parts businesses have three sets of books: one for the tax man, one for the public and one for themselves to actually understand what was going on.”

Perhaps the key conclusion in the 1974 paper was that corruption wasn’t just a set of transfers or bribes from one group to another. Instead, “competitive rent-seeking” meant that firms were devoting considerable resources to finding ways to beat the government’s prohibitions and licenses and rules. As a result, the costs of those rules were more substantial than had been previously believed. As Krueger says:

At first it seemed amazing, but then after you realize, these guys are smuggling parts or these guys are importing in false pricing or whatever it is they’re doing, you figure out, there’s that. But then after a while when there’s so much of it, you realize this is not just simply a matter of me taking money out of your pocket, that you are indeed making your living doing that when you could be doing something productive instead. That was the fundamental thing, not realizing it was there, which I think everybody knew. 

I remember a day or two on corruption in graduate school. I think what we were taught was that, when there’s corruption, it doesn’t matter much because it’s simply a transfer from one person to another. That would be true if it were one or two little isolated events, I suppose. Once everybody realizes that if they do this, that or the other thing, they’ll get more, then everybody competes for it. By that time they’re spending time and resources on it. By that time it is more costly.

A common justification for rules and regulations, and blocking imports, was that it was a necessary price to pay to give domestic industries some space to grow and develop. But Krueger argued that those in business didn’t really believe this justification. 

But Krueger argued that those in business didn’t really believed this justification. They just wanted less competition. Here’s an exchange from the interview.

RAJAGOPALAN: Even before 1965, the general consensus in the ’50s and ’60s was that free trade was really for the developed world, the Western world in the post-war period, and developing countries were doing the right thing by being protectionist, by having infant industry protection, import substitution, import licensing—you know the list better than I do. Did you ever buy into that orthodoxy, or were you always skeptical of it? If you did buy into it, what made you change your mind?

KRUEGER: I don’t know how I bought it. I recall someone at graduate school saying, “Yes, there might be an industry where you had a high cost of startup, but if you then set it up, you would recoup your money and you would be able to take off the protection and be able to produce for world markets and stuff.” What I understood about India and about Turkey, was that they were not doing any part of that. Not only were the ones that were protected not thriving, they wanted more protection, and they were not at all thinking about the international market. They knew they couldn’t compete. There was some dissonance that way. I’m not so sure that the consensus, at least as I perceived it, was quite as strongly pro-import substitution and all that, as you are saying.

Krueger tells a nice story about her attempts to argue for open trade and macroeconomic stability in India at this time, and how her arguments were received.

At some point, I was coming back to India, and one of the secretaries and one of the important economic ministries said, “You’ve been selling this for years, but you’ve never heard the counterarguments. Come give a talk on a Saturday morning at our ministry. I’ll invite the other chief secretaries and so on, and we’ll have a discussion.”

I went and had the discussion on the Saturday morning and made my pitch, which by that time was a little bit smoother than it was earlier on. And I knew India well enough, so I could apply to India, no problem there. I was reasonably content with it as it finished up. The first question came from my host, and the first question was, “Now, madam, surely you know that India is a poor country. Surely you know that there are two kinds of goods: There are luxuries and there are necessities. Now, surely it would be criminal for a poor country to produce luxuries, and how could we possibly export necessities?” The discussion did not change very much from that level.

There’s the case for strict government control over the economy (“criminal .. to produce luxuries”) and zero exports (” how could we possibly export necessities?”) in a soundbite. India did not start its patterns of more rapid growth until that kind of thinking changed.