The Telegraph
Since 1st March, 1999
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- Consensus is a costly luxury when economic growth is in peril

The author is former governor, Reserve Bank of India

The world came to know on a Friday morning a few weeks ago that the American president, George W. Bush, had fired his chief economic advisor, Larry Lindsey, and his secretary of the treasury, Paul O’Neill, and replaced them in a quick and dramatic move. These changes would have mattered little to distant nations, if the United States of America were not the epicentre of the global economy today. What happens in the US economy has repercussions in every nook and corner of the world. It is as if the global financial presidium is itself changed.

O’Neill’s departure from the treasury, in particular, would cause no great discomfiture either in the US or elsewhere. In fact, it was the cause of great relief to many, both in the US and abroad. He had come to distinguish himself by a notorious tendency to speak out his mind — mostly out of turn — and succeed in ruffling the markets. He had come to hold office at the treasury after a successful turnaround of an American aluminium giant, Alcoa, but his corporatist private sector orientation did not equip him for the high office he entered. Especially painful were his ill-considered and often mistimed responses to the economic problems of distressed countries, like Argentina and Brazil, which were at the doors of the International Monetary Fund for help.

First came the laissez faire reaction of O’Neill that he was against the global bail-outs per se. He attacked them as mistakes of his predecessors in the Clinton administration. His preference was for the economies in crisis to resort to market-based solutions. But his attitude of nonchalant laissez faire in global economic management did not survive too long. Political reality dictated otherwise. Bush could not allow strategically important countries — important to the US geopolitically — like Brazil and Argentina, to go under. This was especially so considering that it was mostly New York-based financial institutions — particularly banks, which had huge loans outstanding to these countries. The insolvency of these unfortunate countries would also imply that New York financial institutions would themselves go under.

Geopolitics and potential domestic financial distress thus ultimately prevailed on Bush to overrule his secretary and help facilitate large bail-outs by the IMF. Besides Brazil and Argentina , Turkey, being a part of the anti-terrorism coalition, also got its hefty aid package. O’Neill had to watch all these developments helplessly.

But that did not prevent him from muddying the international financial scene with gaffes. One of his “famous” one-liners was that he did not intend to funnel multilateral aid to Brazil so long as the moneys ultimately ended in Swiss accounts. Whatever the basis of this accusation, the suggestion was of malfeasance on a national scale. Not only did it hurt Brazil’s national pride, it also disturbed the already fragile confidence of both domestic and foreign investors in Brazilian financial institutions. It triggered the exit of larger money hoards from Brazil, worsening the mire of liquidity in which Brazil’s economy was caught.

Competent observers argue that this gaffe of O’Neill alone added an extra 10 billion dollars to the rescue package for Brazil, which had to be orchestrated by the IMF. It was ironic that O’Neill, who had famously said that it was not his objective to use the hard-earned savings of ordinary Americans to help out foreign economies, had cost by his misjudgment and gaffe, a significant additional burden.

Unfortunate as his international posture was, O’Neill’s departure was actually hastened by his increasing dissonance with the president’s domestic policy — particularly the preference for a fiscal stimulus to the US domestic economy. While O’Neill may have been doctrinally right in pleading for fiscal austerity, Bush had decided otherwise on pragmatic grounds. The continuing slowdown of the US economy — particularly the increase in numbers of the unemployed — needed to be set right. The president was not going to commit the same mistake as his father, Bush Sr — viz., ignoring the ominous signs of domestic economic distress. He realizes that his commanding position in US politics would be under threat if the economy collapsed. He seems to have taken heart from the pithy summing up by the former president, Bill Clinton, of his successful campaign against the Republicans. “It is the economy, stupid,” was Clinton’s message and President Bush Jr is not ignoring that resounding rebuke.

The Bush team of economic administration was not, by any standards, a match for its distinguished predecessors, with Larry Summers, Robert Rubin — and it included Alan Greenspan. It is not for nothing that a popular New York newsmagazine had a cover page on the Clinton years citing these three as “the saviours of the world”. By their coordinated actions, they had prevented the world from descending into economic chaos following the Russian crisis, Long-term Capital Management fiasco, and the Asian financial collapse.

Robert Rubin, the market-savvy secretary, was trusted by the markets and he in turn guided the markets right. Larry Summers had the reputation of being a potential Nobel Prize winner and further had learnt his ropes at Harvard followed by a successful tenure at the World Bank and then the treasury. Clinton had definitely chosen a skilful and splendid team for his economic management.

Only Alan Greenspan survived Clinton’s departure. As for the rest, Bush’s choice was clearly no match for the brilliant duo of Rubin and Summers. Bush followed his party’s tradition of choosing candidates for the treasury from within the corporate hierarchy and generally excluding occupants of Academe.

Some critics of the latest Bush changes in his team have argued that the move may very well amount only to something like changing the deckchairs on the Titanic just before the ship hit the iceberg. It is economic policy perspectives that matter more, rather than the changes among the occupants of various positions in the administration. The “actors” in the administration can do no better than their policy frame permits. This is, however, a partial view. Economic leadership, particularly at the level that O’Neill and Lindsey occupied, does make a material difference to the way policies are implemented.

The departure of Larry Lindsey has been remarked on as particularly surprising because he was an economic adviser on whom Bush had relied throughout the presidential campaign and beyond. What seems to have broken him was a tendency to quarrel with his colleagues, in particular O’Neill. He was also adjudged as reacting without adequate sensitivity to the corporate governance issues that surfaced following the collapse of Enron and Worldcom. What is important to a student of politics is that Bush has not hestitated to draw blood when it concerns issues of discipline and competence in his cabinet team. He would not tolerate wide and publicized disputation among his aides — a lesson for other national leaderships, caught in similar situations where the disputes go on endlessly and in full glare of the public media.

Bush has already found replacements for those whom he has dismissed. O’Neill’s successor is John Snow, a railroad tycoon — unfortunately, again in the same corporatist mould. What he knows of high finance is derived from his experience in running a railroad. Whether he has the same tendency towards one-liners that embarrass is, however, to be seen. It is part of the US tradition to draw candidates for manning the treasury from corporate chiefs. Clinton had made a departure by drafting the merchant banker par excellence, Robert Rubin and the economist wizard, Larry Summers, in quick succession.

Bush has shown by his Friday morning massacre — as his latest changes have been called — that he can be decisive and ruthless when it comes to being boss of his show. One lesson that Bush has for the political leaders around the world is clear. Dissent may be democratic, but it can be a costly luxury. Perhaps, other national leaders need to take a leaf from Bush’s book. Endless pursuit of consensus can turn out to be a costly option when economic growth itself is in peril. A swift and sharp change in top management teams can sometimes work miracles. Bush has shown the way. Whether or not other leaders will follow the new Bush paradigm, Bush has shown the world that he is decisive and swift.

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