Anne O. Krueger

As a result of her careful observations of the political economy of Turkey and India, she developed the concept of rent-seeking. She has been an outspoken advocate of multilateral trade negotiations and opponent of protectionism. She also defends the idea that increased globalization has been good for virtually everyone who has experienced it.

Import Substitution

Even though economists who study international trade have strong reasons to believe that it works for any two countries that engage in it, many economists in international development in the 1950s and 1960s believed that import substitution—using high tariffs on imports of manufactured goods to create their own manufacturing industries—was a good idea for poor countries whose governments and people wanted economic growth. They essentially rejected the idea, developed by David Ricardo in the early 1800s, that people should specialize in producing the items for which they have a comparative advantage.1

Some economists who advocated import substitution made the infant industry argument: to grow into a mature industry, a fledging industry needed protection from imports. Once it was mature, so the argument went, the government could remove the trade restrictions, and the industry could survive in the face of competition from imports. Even pro-free-trade economists such as Gottfried Haberler, one of the leading trade economists in the 1950s, advocated import substitution.

Asked by an interviewer whether she had bought into the idea that import substitution was a good idea, Krueger answered that “It didn’t quite ring true.” She also noted that seeing how badly it worked in practice made her skeptical. She had gone to countries whose governments were practicing import substitution and had closely observed some of the bad effects.

One of the problems with the infant industry argument is that the infant never grows up. In a 2024 interview conducted by Shruti Rajagopalan,2 which touched on import substitution, Krueger stated:

• I don’t know as I bought in. I think I recall someone at graduate school saying, “Yes, there might be an industry where you had 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.

Rent Seeking

Possibly Krueger’s most important contribution to economics is her June 1974 article in the American Economic Review, “The Political Economy of the Rent-Seeking Society.” While in some ways, Gordon Tullock had beat her to the punch with his 1967 article in the Western Economic Journal, “The Welfare Effects of Tariffs, Monopoly, and Theft,” Krueger did a more careful analysis. She also introduced the term that stuck, namely “rent seeking,” and presented some estimates that showed the potentially large cost of rent seeking to the economies of Turkey and India. That she chose those two countries was a natural result of her having spent significant time in both countries, carefully studying their economic systems. In particular, she had closely examined quotas on imports that both countries’ governments used extensively. When a government has discretion in allocating quotas, potential importers will compete for those quotas. The competition might even take the form of bribing government officials.

Here’s how Krueger explained her basic insight in the 2024 interview:

• 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 much matter 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.

Her insight, in short, was that when people compete for quotas, many of the rents that they compete for are dissipated in the competition for those rents. In her 1974 article, she estimated that for India in 1964, rents due to government regulation were 7.3 percent of national income. The amount of rent attributable to import restrictions alone was, she estimated, 5.1 percent of national income. For Turkey, she estimated that in 1968, rents due to import licenses alone were 15 percent of Turkey’s Gross National Product.

Krueger pointed out that if potential importers compete for the restricted licenses to import, then, under some reasonable assumptions, all or most of the rents could be competed away. She noted that if import licenses are allocated in proportion to firms’ capacities, firms have an incentive to increase the sizes of their physical plants. She also considered other ways to compete, writing:

• [C]ompetition can also occur through allocating resources to influencing the probability, or expected size, of license allocations. Some means of influencing the expected allocation—trips to the capital city, locating the firm in the capital, and so on are straightforward. Others, including bribery, hiring relatives of officials or employing the officials themselves upon retirement, are less so. In the former case, competition occurs through choice of location, expenditure of resources upon travel, and so on. In the latter case, government officials themselves receive part of the rents. Krueger, 1974, p. 292.

One particularly dramatic instance of rent seeking and rent dissipation that Krueger noted in studying Turkey’s economy was the exporting of stones, which were then dumped overboard. The exporters could then collect export subsidies.3

Krueger’s focus on competition for import licenses implicitly points to a major difference between her thinking and that of Tullock. In Krueger’s model, each potential importer is willing to spend a lot to get a license. Therefore, much of the rent is competed away, causing a large efficiency loss. Tullock, though, did not consider competition for import licenses; he dealt with companies’ investments in obtaining tariffs. But because tariffs benefit all producers of an import-competing product, those firms that invest in tariffs are, essentially, investing in a public good that benefits other domestic firms in the industry. All firms, recognizing this, will underinvest in getting tariffs. Although economists generally treat underinvestment in public goods as a bad thing, in this case, it’s good because the public good to the firms is not the same as the public good to society; indeed, the public good to the firms consists of their gains from charging consumers more for their outputs.

Multilateral Trade Agreements and the World Trade Organization

Krueger has long been an advocate of multilateral trade agreements rather than of trade agreements between two countries. In International Trade: What Everyone Needs to Know, she pointed to the tremendous success that multilateral trade negotiations had led to after World War II. She wrote, “In the first (Geneva) round of MTNs [multilateral trade negotiations], the pre-agreement tariff rates before 1947 averaged 48 percent across the advanced countries. The rates as of the end of 1947 pre-Geneva had fallen to 32.2 percent, and the January 1, 1948, rates post-Geneva averaged 25.4 percent.” She also noted that after the Kennedy Round (1964-67), the Tokyo Round (1973-79), and the Uruguay Round (1986-94) of trade negotiations, each of which had brought tariffs down, the average tariff rate imposed by the United States was 3.1 percent, by the European Community was 2.9 percent, by Japan was 1.4 percent, and by Canada was 2.6 percent. These rates were on dutiable manufactured items. Because not all manufactured items were subject to tariffs, the average tariff rates for all manufactured items were even lower.

Krueger noted one relatively unsung benefit of MTNs: a standardized customs entry form that companies could use for their exports to all countries that were signatories to the agreement.

Krueger has been a strong supporter of the World Trade Organization (WTO), the successor to the General Agreement on Trade and Tariffs (GATT.) The WTO has mechanisms for resolving disputes between the member countries. Contrary to what many casual observers believe, Krueger has noted that the U.S. government had won approximately 90 percent of the cases that it had brought to the WTO. Moreover, she noted, it had “lost a smaller share of the cases brought against it.” (International Trade, 2020, p. 157.) Also, compliance rates were fairly high.

Nevertheless, the U.S. government, under Republican and Democratic presidents, has had a philosophical problem with how the WTO operates. The U.S. government sees the WTO as a contract among sovereign states, whereas other countries’ governments see it as a legal system that evolves. During President Trump’s first term, his administration blocked new appointments to the Board. President Biden did nothing to change this. Although the WTO can still issue rulings in trade disputes, since December 2019, the WTO’s Appellate Body, which used to be the final court of appeal, has no members and, therefore, can no longer hear appeals. As a result, the governments of countries that lose in dispute cases can avoid complying.

In a 2025 interview conducted by Dylan Matthews,4 Krueger decried this situation:

• Remember, already we have dismantled the dispute settlement mechanism, which was arguably the most successful thing that the WTO had done. Twenty-seven countries, of which one is the European Union, are taking the WTO mechanism and they’re using among themselves legally and settling disputes with it.

One of the widespread claims about China, which may well be true, is that various companies in China steal secrets from companies in other countries and/or from companies that do business in China. In the 2025 interview, though, Krueger stated:

• I was once a director of a company, and we went to the electronics show, as one should, to show our new equipment and stuff. We had made sure we had at least one, almost always two employees around the clock watching it so that people couldn’t come and steal our secrets. I think every other company in this country does the same thing. I think if anybody can steal anybody else’s, they will. I guess I would worry if I thought that there was nobody from the CIA going and seeing what they could get from China. That’s part of the way the world is.

Globalization

Krueger defends the idea that globalization, whatever its problems, has created large net benefits for the people affected by it. In Struggling with Success: Challenges Facing the International Economy (2012), a collection of her speeches and essays, she wrote that, starting in about 1800, globalization led to huge gains for industrial countries and then, after World War II, led to huge gains for almost all countries. The evidence for this, she noted, is that life expectancies increased dramatically around the world, debilitating disease has fallen, and real incomes have risen by a large percentage. How did globalization contribute? By increasing trade across borders. Globalization increased over the last two centuries and especially since World War II for two main reasons: falling transportation costs and reductions in tariffs and in other trade barriers.

Krueger and Public Choice

Although Krueger has never referred to herself as a public choice scholar, her early study of extensive government regulation of Turkey and India informed her view of government. In the 2025 Matthews interview, she stated:

• Some of these arguments about the market assume that if there are market failures, then whatever the government will do will be better. Maybe the market failures are huge, but that does not persuade me that government failures will not automatically be as huge. That’s the part that’s wrong. I still think that when you’re talking about lots of economic activities, you want to just look at incentives. If there’s something wrong with the market, get the incentives right. Giving bureaucrats the incentive to regulate is not the incentive that will work best in most cases.

Krueger on India

Early in her career, as noted above, Krueger traveled to and studied India’s economy. Even in her nineties, she has kept her attention on the destructive consequences of Indian protectionism. In the 2024 interview with Shruti Rajagopalan, she stated:

• Also, when I go back to India, I see Indians spending twice the amount, not even purchasing power parity terms or something, literally twice the dollar amount on cars, car models that are like 25 years old, that are still being sold in India by foreign brands and manufacturers when they could have just far better cars, safer cars, more fuel-efficient cars and so on.

Asked by Rajagopalan in the 2024 interview whether there would be one piece of advice that she would give Indian policymakers, she answered, with her typical bluntness, “Quit.”

Background

Anne O. Krueger was born on February 12, 1934, in Endicott, New York. In 1953, she earned her undergraduate degree with a major in economics from Oberlin College. She earned her Master’s and Ph.D. in economics from the University of Wisconsin, Madison in 1956 and 1958 respectively. From 1959 to 1982, she was an economics professor at the University of Minnesota. She was an economics professor at Duke University from 1987 to 1993, and an economics professor at Stanford University from 1993 to 2001.

Krueger is a Senior Fellow with the School of Advanced International Studies at Johns Hopkins University. She is also Herald L. and Caroline Ritch Emeritus Professor of Sciences and Humanities at Stanford University. From 1982 to 1986, she was the Vice President for economics and research with the World Bank in Washington. While at the World Bank, she had an immediate impact. In a 2025 interview, she noted that when she arrived, someone had already been chosen to write a chapter on how to administer price controls for the World Development Report. She stated, “I was there as an economist, and I wasn’t going to lose all my credentials in one fell swoop. So we got rid of the price controls and all that.” Between 2001 and 2006, she was First Deputy Managing Director of the International Monetary Fund. In 1996, she was the president of the American Economic Association. The AEA named her as a Distinguished Fellow of the AEA in 1997.

Selected Works by Anne O. Krueger

1966. “Some Economic Costs of Exchange Control: The Turkish Case.” Journal of Political Economy 74 (5): 466-80.

1969. “Balance-of-Payments Theory.” Journal of Economic Literature 7 (1): 1-26.

1972. “Evaluating Restrictionist Trade Regimes: Theory and Measurement.” Journal of Political Economy 80 (1): 48-62.

1974. “The Political Economy of the Rent-Seeking Society.” American Economic Review 64 (3): 291-303.

1975: The Benefits and Costs of Import Substitution in India: A Microeconomic Study. University of Minnesota Press.

1978: Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences. National Bureau of Economic Research.

1990. “Government Failures in Development.” Journal of Economic Perspectives 4 (3): 9-23.

2002: Political Economy of Policy Reform in Developing Countries. MIT Press.

2012. Struggling with Success: Challenges Facing the International Economy, World Scientific Publishing Co.

2020. International Trade: What Everyone Needs to Know. Oxford University Press.

Footnotes

[1] For an examination of how the idea of import substitution dominated in the 1950s and lost support in the 1960s due to the bad experiences with the policies, see Douglas A. Irwin, “The Rise and Fall of Import Substitution, World Development, 139 (2021).

[2] Shruti Rajagopalan. “Anne Krueger Reflects on 50 Years of Rent-Seeking, Trade, and Economic Development,” Mercatus Podcasts, Ideas of India, June 20, 2024.

[3] Krueger, “Learning about the Evolving International Economy,” in Szenberg, Michael and Lall B. Ramrattan, eds., Eminent Economists II: Their Life and Work Philosophies, Cambridge University Press, 2014.

[4] Dylan Matthews. “Interview with Anne O. Krueger.” Journal of Economic Perspectives. Vol. 39 (1). Summer 2025, pp. 107-126.