JANUARY 22, 2019
Gita Gopinath has a knack for asking the kind of questions that, not so long ago, might have raised eyebrows inside the International Monetary Fund, where she just took over as chief economist.
What if more emerging markets actively managed their currencies, like China does? What if an influx of capital risks sapping a nation’s productivity, not boosting it?
Interrogating the data for answers, and using them to poke holes in the conventional playbooks for economic policy, was a hallmark of 47 year old Gopinath’s work at Harvard. Now she’ll be expected to recommend practical fixes –- at a turbulent moment when the free-market principles promoted by the Fund for decades are under attack.
Especially in borrower countries like Greece and Argentina, the IMF still gets portrayed as an enforcer of one-size-fits-all policies based on austerity and the unimpeded flow of goods and money. But that’s been out of date for a while now. Fund economists advocated debt relief in Greece. They’ve said capital controls can be useful, and cautiously backed redistributive taxes. When Argentina had to find budget savings, they insisted that the poor shouldn’t bear too much of the burden.
Don’t Be Dogmatic
The shift is likely to continue under Gopinath, who became the first woman to hold one of the most influential jobs in economics when she took over from Maurice Obstfeld this month. She’ll oversee the Fund’s research, including its closely watched growth forecasts at a time when uncertainty is mounting.
The IMF on Monday downgraded its global outlook for the second time in three months to show the weakest expansion this year since 2016. More than a decade since the IMF and other economists failed to predict the financial crisis, Gopinath used her debut press conference to highlight mounting risks, including the trade war and tightening credit.
In her new role, Gopinath plans to use the “broadest lens possible” in search of solutions. Part of her job will be to review the fund’s loan programs, giving her a voice in practical policy making.
“A rethink of globalization is pressing,’’ and it should address the distribution of benefits as well as the impact of new technologies, she said in an emailed response to questions.
In her academic career, Gopinath has been willing to follow the empirical evidence wherever it leads.
“What Gita’s thinking has pointed out is, let’s not be dogmatic,’’ said Mohamed El-Erian, chief economic adviser at Allianz SE and a former IMF economist. “With all the uncertainties that the global system is having to navigate, it’s reassuring that at the IMF, you have someone like Gita.’’
She’s an authority on one key part of that system: currency regimes. The Fund has tended to back floating exchange rates for reasons laid out by Milton Friedman. Allow the currency to fall, the theory goes, and exports become cheaper relative to imports, so the country can sell more goods abroad and boost growth.
Gopinath’s research suggests that reality is more complicated –- and dollar dominance is one reason why. For example, Japan-U.S. trade is overwhelmingly priced in greenbacks –- so a weaker yen doesn’t trigger a corresponding jump in Japanese exports.
That undercuts the argument of those, like President Donald Trump, who accuse competitors of gaming their currencies to gain an edge. It also complicates matters for the IMF, whose charter requires members to avoid “discriminatory’’ currency practices.
The Fund has struggled to develop a consistent policy, said James Boughton, a senior fellow at the Centre for International Governance Innovation. In between fixed and floating currencies lies a bewildering range of options — from Botswana’s “crawling peg’’ to China’s “stabilized arrangement.’’
“Gopinath’s research interests and expertise could really help,’’ said Boughton, who was the IMF’s official historian for two decades. “She’s been well grounded in the practical consequences of exchange-rate policies, without getting bogged down in ideology.’’
It’s far from an academic matter. Rising U.S. interest rates hammered emerging-market currencies last year. Argentina, whose peso collapsed, turned to the IMF for a record $56 billion bailout. The deal permits the central bank to intervene, but only outside a specified peso range — an example of the hybrid approach backed by Gopinath’s work, according to El-Erian, who writes columns for Bloomberg Opinion.
“Exchange rates can overshoot, and overshoot for a long time,’’ he said. “We have to consider different ways of approaching that issue.’’
Another Gopinath research topic is the impact of capital flows. She looked at southern Europe and found a “significant decline’’ in productivity because the money that poured in after the euro’s launch wasn’t allocated efficiently. The IMF, which once considered capital controls taboo, now sees them as potentially useful stabilizers when markets seesaw.
To Gopinath, these are technical questions, not articles of faith. She sees herself as not beholden to any political ideology. She was surprised when a kerfuffle broke out over her appointment in 2016 as a government adviser in the Indian state of Kerala — run by a communist party. Some members voiced fears that Gopinath would impose “neoliberal’’ policies.
At the IMF, too, it won’t be easy to stay out of the political fray.
The Fund is a pillar of the global order enshrined after World War II and now showing signs of strain. Its headquarters are in Washington, three blocks from the White House — where Trump issues periodic threats to pull America out of the multilateral institutions it created. Relations are tense: The IMF has slammed Trump’s trade war as a threat to world growth, while the U.S. Treasury has rejected a boost in IMF funding.
In that climate, Gopinath’s new job requires much more than insightful economic thinking, according to Raghuram Rajan, who held the post last decade. She’ll “find her way,’’ said Rajan, who’s also a former chief of India’s central bank. But she’ll have to be, if not a politician, then at least a diplomat.
“It’s not an easy situation for anyone, because of the political tensions,’’ he said. “It’s a very visible position. And she will have to tread carefully.’’