Lessons in economic reality

Part 2 - Diverse disciplines that bring enlightenment

Part 3 - A cure for the professional identity crisis

Kristin Forbes has spent a good portion of her career shaping US economic policy. She has held high-profile jobs in the US Treasury department and at the World Bank and, at the age of 33, was the youngest person to serve on the White House Council of Economic Advisers.

But, says Professor Forbes, who teaches at the Sloan School of Management at the Massachusetts Institute of Technology, the most rewarding moments of her professional life so far have come from her students. “Business school forces you to think about how your work applies to the real world,” she says. “What’s most gratifying is seeing a student a few years out who tells you how a particular lesson in your class helped him make a real-world business decision.”

After all, Prof Forbes – who was recently honoured as a “young global leader” as part of the World Economic Forum at Davos – has made plenty of real-world business decisions herself. As an academic, she has travelled the world studying international finance and development; as a policy analyst, she has attempted to put these lessons into practice.

Prof Forbes’ primary area of study is financial contagion – the phenomenon in which a country’s economy is jolted because of changes in asset prices elsewhere. She has looked at the triggers that cause financial crises to spread and examined policies that could reduce contagion in the future. “I’ve taken rigorous empirical analysis and applied it to important policy questions,” she says. “Before my work, people thought that if there’s a crisis in one country it will spread, but movement can be contained.”

Growing up in Concord, New Hampshire, and attending Williams College, one of America’s leading liberal arts colleges, Prof Forbes did not become interested in economics until university. “I took my first economics class at Williams and I absolutely loved it,” she recalls. “I had a very gifted professor who taught me to think about the everyday decisions I make – should I eat that second slice of pizza – in economic terms.”

After graduating with high honours, Prof Forbes took a job on Wall Street as a
financial analyst at Morgan Stanley, the investment bank. She soon realised her “heart wasn’t in the business world” and in 1993 left to work at the World Bank.

She was assigned to the East Asian Miracle project,
a high-profile scheme to investigate why some countries in the region struggled economically while others thrived. “We were looking at which policies help get countries out of poverty,” she says. “It was that project that hooked me and made me realise that good economics can lift millions of people out of poverty.”

She decided then to go back to school: she received her PhD in international and development economics in four years at MIT. During her studies, she spent a summer in India based at a think-tank in New Delhi. She also travelled throughout the country, spending time in remote villages. “I always made an effort to spend my summers working in the real world,” she says. “In India, I saw the tremendous impact of the relationship between inequality and growth.”

After her graduation in 1998, Sloan hired her as a professor. But in 2001, she took a leave of absence from the school in order to work in the Office of Quantitative Policy Analysis at the US Treasury. She says that John Taylor – then the department’s undersecretary of international affairs – made a priority of thoughtful, in-depth policy analysis. “After the Asian crisis, he wanted the Treasury department to be better prepared for predicting financial crises so that we could work on preventing them,” she says. “We set up a vulnerability assessment to find out which countries are subject to financial contagion – which is still used to this day.”

While in the Treasury, she also worked on the Millennium Challenge Account – now known as the Millennium Challenge Corporation – which was set up to allocate and disburse US government aid to countries that encouraged economic freedom. Prof Forbes was charged with determining which countries were the most deserving of funds.

“We looked at levels of corruption, the amount of money a country spends on healthcare, the amount of money it spends on education. That way we could work towards more quantitative results – to see the number of children vaccinated and the number of children that went to school, for instance.”

In 2003, she was asked to serve on the Council of Economic Advisers, a three-person team that advises the White House – and the president – on economic issues.

During her two-year tenure on the council, she was entrusted with educating members of the George W. Bush administration about the implications of China’s growing economic power. “There is a tendency to bash China and to blame China, but I think now there’s a better understanding of its benefits,” she says. “Consider the low cost of imports in the US – the cheaper sneakers and the cheaper clothing that we get from China. Our pay cheques go a lot further and we often ignore that as a benefit. Another benefit is that China is a tremendous export market for the US. It’s the fastest growing export market.”

She also tutored political leaders in the economic realities of outsourcing. Since many Americans blame US job losses on foreign workers, outsourcing is a politically sensitive topic for lawmakers.

“I was trying to help people to understand that outsourcing is a two-way street,” says Prof Forbes. “While US outsourcing does result in job losses at home, there are also companies – such as Japanese automakers – that outsource to the US, which creates jobs. It’s tempting to enact policies to create barriers to outsourcing, but that could backfire. The solution is to make America more competitive.”

As a successful woman in a typically male-dominated field, Prof Forbes knows a lot about competition. What is her advice for young female students on how to get on in the world? “It depends on who you’re working with – most people are open-minded, but there’s always a few who will discount you because you’re a woman, or because you’re young.

“Just make sure you know your facts,” she says. “If you do, your sex won’t be an issue.”

This is part one of the ‘women to watch’ series