Download Latin American Development and the post Washington Consensus

Latin American Development and the post
Washington Consensus Consensus
Joseph Stiglitz, Columbia University
IADB Conference on Development Banks
Belo Horizonte March 31
I. CONTRASTING EXPERIENCES
• Rapid growth in Asia
• Disappointment in the economies in transition
and Africa
• And in Latin America
– Only limited growth
• And it was not sustainable
• And it was not sustained
– But even when growth did occur, it was not equitably
shared
• Trickle down economics does not work
• At best indifferent, and at worst hostile, to policies that would
have promoted equality
China’s growth is unprecedented
– Previous economic revolutions—like the
industrial revolution of the nineteenth
century—had seen growth rates peak at
around 2 to 3%
– The golden age of growth in America in the
fifties and sixties saw similar growth rates
– China’s growth has been three times these
numbers
• Even faster than Asia miracle countries
BUT CHINA IS NOT ALONE
• India’s enormous success
• More than two decades of growth of 5 to
6%, now approaching 8%
And it’s more than just GDP
• China has had success not only in
increasing GDP
– The fraction of the Chinese population living
on less than $1 a day has fallen from 63.8%
in 1981 to 16.6% twenty years later
II. THE MEANING OF SUCCESS
• We need to be careful in assessing what we
mean by success
• US: GDP increasing, but
– Increased poverty
– And even those in the middle worse off—as real
median incomes falling
– Real wages stagnating—incomes would have fallen
even more were it not that Americans are working
more and more
• Imposing costs to the family
• Huge social costs
• Perhaps partially reflected in high level of violence and
crime—ten times higher than others
Meaning of success (2)
– Poor performance in other indicators—health
• Spends more, poorer results
• Lower ranking on HDI
– Growing problem: rich countries with poor people?
• U.S. and elsewhere, GDP increasing, but environment worsening
– Will growth be sustainable?
– Not only environmentally, but socially and economically
– Especially with huge deficits
• Important not to be misled by using wrong measures of success
– What we measure affects behavior
– Do not be beguiled by GDP
– Also look at HDI, median real income, Green NNP
• OBJECTIVE SHOULD BE SUSTAINABLE, EQUITABLE,
DEMOCRATIC DEVELOPMENT
III. LATIN AMERICA IS NOT
LIVING UP TO ITS OWN PAST—
and falling behind others
9
8
7
6
5
Brazil
4
East Asia
3
Latin America
2
1
0
1961-1980
1981-1993
1994-2004
DECLINING GROWTH IN PER
CAPITA INCOME IN LATIN
AMERICA
7
6
5
4
Brazil
3
East Asia
2
Latin America
1
0
-1
60s
70s
80s
90s
2001/2004
GROWTH RATES: BRAZIL,
CHINA AND INDIA
16
14
12
10
8
6
Brazil
4
2
China
India
0
-2
-4
-6
90
92
94
96
98
2000
2002
2004
LATIN AMERICA ALSO
EXPERIENCED TREMENDOUS
VOLATILITY OF GROWTH
Growth in Latin America
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1950s
1960s
Source: WDI, World Bank and ECLAC
1970s
1980s
1990s
2000-04
Unemployment in Latin America is
relatively high
10
9
8
7
Brazil
6
5
East Asia & Pacific
4
Latin America &
Caribbean
3
2
1
0
90
92
94
96
98
2000
There has not even been a catch
up from the lost decade
T h r e e D iffe r e n t V ie w s
(A n n u a l A v e ra g e G D P
V ie w in g
1 9 6 1 -8 0
1 9 8 1 -9 0
1 9 9 1 -0 1
V ie w in g
G ro w th
R a te )
T h r e e P e r io d s
5 .5 9 %
1 .1 8 %
3 .0 5 %
L o s t D e c a d e a s th e A fte rm a th
Im p o r t-S u b s titu tio n S tr a te g y
1 9 6 1 -9 0
1 9 9 1 -0 1
V ie w in g
1 9 6 1 -8 0
1 9 8 1 -0 1
S o u r c e : W D I W o r ld B a n k
o f F a ile d
4 .1 0 %
3 .0 5 %
R e fo r m P e r io d a s C a tc h -U p
fro m L o s t D e c a d e
5 .5 9 %
2 .1 5 %
POVERTY RATES IN LATIN
AMERICA HAS NOT DECLINED
60
50
40
Brazil
Latin America
East Asia
30
20
10
0
1981
1984
1987
1990
1993
1996
1999
2001
IV. INTERPRETING THE
FAILURES AND SUCCESSES
India’s success
• In spite of weaknesses in infrastructure
– Including electricity
– Better infrastructure would have led to even more
growth
• In spite of absence of natural resources
– Or perhaps because
• The “natural resource curse”
• Growth occurred before trade liberalization
• And, like China, there is still not full capital
market liberalization
China’s success
• IN SPITE OF IT NOT FOLLOWING MOST OF
DICTATES OF “CONVENTIONAL WISDOM”
(WASHINGTON CONSENSUS)
– Not even clear property rights
• But clearer property rights might have led to even
more impressive growth!
– Large role of government
• Including Industrial policy
– No free trade in earlier high growth period
– No free capital market liberalization—even today
• SUCCESS BECAUSE THEY FOLLOWED A
DIFFERENT AGENDA
– Appropriate to their circumstances and history
• MUCH OF CONVENTIONAL WISDOM IS OFF THE
MARK
China’s success (2)
• China’s success is not just because of its
cheap labor
• Labor costs in textiles actually higher than
many other developing countries
• Chengdu becoming software center
• Jilin –example of how to deal with “rust
belt problems”
China’s 11th five year plan
• Two weeks ago, China adopted its 11th 5
year plan
– Comprehensive approach to development
– Emphasis on problems of inequality, and
especially in the rural area
– Emphasis on the environment
– And emphasis on science and technology,
maintaining competitiveness
• Including establishing global class universities
• A basis of independent innovation
THE EMERGING CONSENSUS
• THE WASHINGTON CONSENSUS WAS
NEITHER NECESSARY NOR
SUFFICIENT FOR GROWTH
• HAD A TOO NARROW FOCUS ON WHAT
WAS MEANT BY SUCCESS
– Ignored equity, democratic participation,
environment
EVEN ITS ECONOMICS WAS
FLAWED
• CONFUSED MEANS WITH ENDS
– Liberalization, privatization were means, not ends in themselves
• And even accounting was flawed
– Numbers neither provided pictures of sustainability (balance
sheet) inflationary pressures
– With enormous consequences, as privatizations were forced and
land reform and other social initiatives were thwarted
• FOCUSED ON PRICE STABILITY, NOT REAL STABILITY,
GROWTH, EMPLOYMENT
– Though high levels of inflation can be a problem
EVEN ITS ECONOMICS WAS
FLAWED (cont.)
• FOCUSED ON TOO NARROW A SET OF INSTRUMENTS
– Because the Washington Consensus did not understand the
limitations of markets, it focused on too limited a set of
instruments it ignored:
• Land reform
• Industrial policies
• Strengthening the financial sector
• Improving education
• Competition policy
• Governance issues in both the public and private sector
.
BASIC FRAMEWORK
• Need a balanced role for government
– Market is at the center of the economy
– But in every successful economy the government has
played a large role
• In science and technology (internet)
• In making markets work (sound banking and securities
market regulation
• In protecting the environment
• In maintaining social cohesion (income distribution, safety
nets)
• Countries suffer as often from too little
government as from too much
Basic Framework (2):
The importance of knowledge,
technology
• We now recognize that what separates
developed from less developed countries is not
just a gap in resources, but a gap in knowledge
• There is a limit to the pace at which you can
close a gap in resources
– Though China’s savings rate in excess of 42% helps
speed the process
– But closing the gap in knowledge can occur at a very
rapid rate
– That is why even a natural resource rich country like
Malaysia has, in the last two years, switched from
focusing on investments in infrastructure to
investments in people and research
The emerging consensus: trade
• Exports have played a role in the success
of the East Asian and other high
performing countries
– Import liberalization can destroy jobs
– New jobs aren’t automatically created
– Trade liberalization in general has not been
associated with faster growth
• Though obviously, autarky is not an option
Emerging Consensus: investment
• Creating a favorable investment (business
climate) is essential
– But some countries have done well without
foreign investment
– One should probably not give preferences to
foreign investors
– Short term capital flows do not result in higher
growth, investment
– But do lead to more instability
• At the root of many of problems of last decade
Emerging consensus: privatization
• It makes sense for governments to focus on
those areas where the markets, by themselves,
fail to produce desirable outcomes
– Externalities, like pollution—markets produce too
much
– Externalities and public goods—like research and
social safety nets—markets produce too little
– Income distribution—even if markets were efficient,
there may be excessive poverty, inequality
Privatization (2)
• But privatizations have often failed
– Corrupt privatizations
– Failure to regulate—monopoly pricing (even
better at exploiting consumers)
– Agency problems
• And there have been some highly
successful government enterprises
– In many countries, industries
– Chile, Korea, Malaysia
Emerging Consensus: Macro
policy
• Of critical importance
• Harder to manage macro-policy with fully open
capital markets
• High exchange rates and high interest rates hurt
growth, employment
• Puzzle
– Brazil’s overall performance has not been as strong
as one would have thought from its strong export
performance
– Explanation: excessively tight monetary and fiscal
policies
Emerging consensus
• Importance of credit availability
• Importance of competition policy
• Importance of education
– Both primary
– Higher education
So where’s the controversy?
• Industrial policy, development banks
– Not question of picking winners, but looking for
externalities, coordinating needed infrastructure
investments, other investments
• The record has been mixed
• Almost every successful country has had such
policies
– Today, America’s is largely embedded in defense
department
– But current American Administration is finally
recognizing importance for America to remain
competitive, increased NSF budget
Brazil’s success
• Brazil has demonstrated technological
leadership
– Embraer airplane global best seller
– Bio-fuels have helped Brazil achieve energy
independence
– All done with important support from government
• Including through development bank (BNDES)
• These have resulted in impressive export
performance
– But why then has Brazil’s growth been so lackluster?
Controversy (ii)
• Institutions
– Independent central banks focusing exclusively on
inflation…
• America focuses on employment and growth
• UK has government set inflation target
• Sweden makes sure that voice of workers is heard
• Importance associated with various items
– Equality/progressivity
• VAT is a regressive tax, and not even an efficient tax, in an
economy with a large informal sector
• Land reform—
– sharecropping introduces a major distortion in the economy
– Most successful countries began with major land reforms
Controversies (iii)
• Credit—key role of making credit available
at affordable interest rates
• Markets by themselves lead to undersupply in
many areas
• In U.S., other successful countries—large role of
government (guarantees, CRA)
• Foreign banks may lead to reduced supply to small
and medium sized enterprises
• Important niche for Development Banks
• High profits suggest lack of competition—what
should be done?
– What matters is both availability and lending
rate (not just T-Bill rate)
• Greenwald and Stiglitz, New Paradigm in monetary
economics
• Importance of reducing T-Bill rates and spreads
• Regulatory policy, competition policy and standard
macro-economic policy instruments all have to be
employed
Which country looks in better shape?
Which country looks like it should be growing faster?
Fiscal and External Accounts in 2004
6
4
2
0
(% of GDP)
-2
-4
-6
-8
Country A
Country B
Budget
balance
Primary
budget
balance
Current
account
balance
What accounts for this growth differential?
Real GDP Growth
10.00
8.00
6.00
GDP growth (%)
(%)
4.00
2.00
0.00
Country A
Country B
It’s not inflation…
Inflation (Consumer Price Index)
10.00
8.00
6.00
Inflation
(%)
4.00
2.00
0.00
Country A
Country B
Can high real interest rates explain differences in
performance?
Inflation and real interest rates (ex post) 2004
50.00
40.00
(%)
30.00
20.00
Brazil
10.00
Turkey
0.00
Inflation
Real money Real lending
market rate (ex post)
interest rate
(ex post)
Excessively tight fiscal and monetary policies in
Brazil?
Brazil and Turkey, macro data 2004
50.00
40.00
30.00
(%) 20.00
10.00
0.00
-10.00
Brazil
Turkey
Exports CA Budget Real GDP
change balancebalance lending grow th
interest
rate
Controversies
• Macro-policy
– Too narrow a view of objective—controlling inflation
• Good policy also looks at growth and employment
• Controlling inflation does not automatically lead to faster
growth
• And indeed it may hamper long run growth
– Lower GDP now is associated with lower GDP long into the
future
– Stabilization and growth policies are
interconnected
• Relying on interest rates in crises limits use of debt
• Weakens financial markets and impairs efficiency of
allocation of capital
BEWARE OF WASHINGTON
CONSENSUS PLUS
• Lip-service to issues of distribution
– better safety nets
– or improved female education
• Emphasis on second generation of reforms
– Items left off in earlier agenda
• In particular about governance issues
• Step in the right direction
• But does not deal with fundamental
inadequacies in the current approach
V. Globalization will be imposing
new challenges
• Heightened competition
– Based on education, technology
• And heightened forces for inequality
– Particularly problematic in countries, like
those of Latin America, where there is already
high levels of inequality
• Will require an active role for government
Changing Global Landscape
• Thomas Friedman has suggested that “the world is flat”—for first
time in human history, poor countries are competing on a level
playing field
• But the world is not flat
– Disparities between the haves and have nots have increased
– Power of entrenched monopolies, like Micro-soft, is probably greater
than ever before
– Importance of research gives enormous advantage to those who have
the resources and skills to undertake it
– The Uruguay Round made the world less flat
• Especially TRIPs
• But the nature of competition is enormously changed
– Successful countries cannot simply rest on laurels
– And those coming from behind will have to work harder
• THESE CHANGES WILL AFFECT EVERYONE
The successful countries are
shaping globalization, and winning
• Nordic countries have been so successful, not
only in growth, but in broader measures of
success
– Readjusted their “welfare state” model to new realities
– But still retained model—including high taxes
– With better safety net, there can be more risk taking,
entrepreneurship
• Success in modern technology based economies requires
risk taking
• There may even be less of an equity-efficiency
trade-off than we once thought
VI. INSIGHTS FROM ECONOMIC
THEORY
• The successful countries have actually
followed models which are more in accord
with economic theory than the Washington
consensus
• They have recognized the importance of
MARKET FAILURES
MARKET FAILURES IN
DEVELOPING COUNTRIES
• Problems are particularly significant in developing
countries
• Markets also by themselves do not produce efficient
outcomes when technology is changing or when there is
learning about markets
– Such dynamic processes are at the heart of development
– There are important externalities in such dynamic processes
– Giving rise to an important role for government
• Successful East Asian countries recognized this role
– The Washington Consensus policies did not
WASHINGTON CONSENSUS
AND EQUALITY
• Justifications for ignoring equity
– It was argued that one could separate equity and
efficiency considerations, and economics should just
focus on efficiency
– Trickle-down economics meant that the poor gain if
growth is pursued and attained
– There were really no “trade-offs”- the single best
policy would benefit everyone
• Could essentially leave economic policymaking
to technocrats to find that “best policy”
PROBLEMS WITH THESE
JUSTIFICATIONS
• These arguments are neither theoretically or empirically correct
• Modern theories emphasize that equality and efficiency cannot be
separated
– Agency theory
– The arguments for land reform
• Sharecropping attenuates incentives just as taxes do
• Washington Consensus policies did serve the interests of
technocrats
– And established special interests
• Too much faith in markets
– Even under the best of circumstances, there is no reason to believe
markets are consistent with social justice
– But even if one did not care about equity, distribution of income, there is
an important role for government because of market failures
Equity is an “end” in itself
• But equity promotes growth and even
efficiency
– Better use of human resources
– Social and political sustainability
VII. A Social Democratic Agenda
• Premised on the belief that those in Latin America know
better what they want—and how to get it—than those in
Wall Street or Washington or elsewhere
– Though they should seek advice, experience of others
– And they need to take into account reactions of others
• And what they care about puts weight on democracy, the
environment, health, poverty, values besides increases
in GDP
– Puts people first
– Both as the means of success—and the objective of success
A Competitiveness/Growth Strategy
which puts people and values first
1.Enhancing Competition
–
–
Requiring strong anti-trust laws
Strong regulations of natural monopolies
2. Strengthening the public sector (reinventing
government)
–
Strengthening progressive taxation
–
–
–
Increasing transparency
•
–
Less reliance on V.A.T.
More taxation of oligopolies
One of great achievements of current Administration
Benchmarking efficiency
A Competitiveness/Growth Strategy
(ii)
3. Putting people first
– Investments in education, health
– Land reform
– Strengthened safety nets
4. Pro-growth policies
– Expanding credit
– Maintaining a pro-growth macro-policy
– Industrial/export promotion policies at national and
state level
• Including investments in advanced education and research
Latin America faces a choice
• The policies just described have worked
– In Asia, in the Nordic countries
– They can work in Latin America as well
• Latin America has a choice between two
strategies
– One has not been working well in Latin
America or elsewhere
– Failed in promoting well-being of ordinary
citizens
Latin America faces a choice (2)
• The alternative strategy—pursued in much of Asia-- has worked
well, beyond the wildest expectations
– Though any strategy has to be adapted to local conditions; one size fits
all policies do not work
• Fifteen years ago there was considerable uncertainty about the
relative merits of alternative strategies
– Enormous successes and failures has now brought clarity
– Though in many circles ideology/interests still prevail
– Success of alternative model consistent with modern economic theory,
with its recognition of the strengths and limits of markets
• Hopefully, the countries of Latin America will choose the strategy
which is not only likely to enhance economic growth
– But also will have a greater chance of ensuring that the benefits of that
growth are shared widely among the people of the region
CONCLUDING REMARKS (i)
Elements of the Post Washington Consensus
Consensus
• Importance of equity
• Importance of employment
• Balanced role of government and market
–
–
–
–
Promoting and regulating markets
Providing institutional and physical infrastructure
Promoting education, innovation and technology
Providing social safety net, redistribution
MORE THAN THEORY
• The ideas are not just of academic importance,
but are of relevance to every major aspect of
public policy
• Development is possible, but clearly not easy
• Equitable, sustainable and democratic
development may even be more difficult
• Policies do matter
• The intellectual framework for thinking about
policies provided by the Washington Consensus
was badly flawed
Concluding Comments (ii)
• There are other frameworks
– More rooted in economic theory
– And historical experience
– Which, at least in other countries, have
worked better
• Faster, more sustainable growth
• More equitably shared
• These provide the basis of the Post
Washington Consensus Consensus