Download Washington Consensus - Columbia University

THE POST WASHINGTON CONSENSUS
CONSENSUS
Sao Paolo
August 22, 2005
Joseph E. Stiglitz
Columbia University
New York
GLOBAL CONSENSUS ABOUT THE
WASHINGTON CONSENSUS
 The Washington Consensus has proved
neither necessary nor sufficient for successful
development
– Even if each of its policies made sense for
particular countries at particular times
 Any future consensus cannot be made just in
Washington
 Any new framework must provide better and
greater adaptation to the circumstances of
the countries involved
DEVELOPMENT IN THE LAST 50
YEARS: SUCCESSES AND FAILURES
 East Asia- stupendous growth
 Africa- a decline
 Latin America- disappointments
- First, the lost decade of the 1980s
- Then, seven years of growth
- Then, seven years of malaise 1997-2004
LATIN AMERICA: THE FAILURE OF
THE WASHINGTON CONSENSUS
 Growth since 1990 at half of what it was
in earlier periods
– 6.80% 1950-1980: Asian Tiger level
– 5.72% 1930-1980: Respectable level
– 2.3% 1994-2004: Poor performance
under Washington Consensus
ECONOMIC GROWTH: EAST ASIA,
LATIN AMERICA AND BRAZIL
8.00%
7.8%
7.3%
7.00%
6.00%
5.6% 5.5%
GDP Growth
5.00%
4.00%
2.7%
3.00%
2.1%
2.00%
1.00%
0.00%
1960-1980
Year
1990-2004
Brazil
East Asia
Latin America
ANOTHER COMPARISON: GDP GROWTH IN TWO
PERIODS (1960-1980 and 1994-2004)
8.00%
7.6%
7.3%
7.00%
6.00%
5.6% 5.5%
5.00%
4.00%
2.7%
3.00%
2.5%
2.00%
1.00%
0.00%
1960-1980
1994-2004
Brazil
East Asia
Latin America
GROWTH RATES: BRAZIL, CHINA
AND INDIA
GDP Growth (annual %)
16
14
12
10
8
Brazil
China
India
6
4
2
0
-2
-4
-6
1990
91
92
93
94
95
96
97
Year
98
99
2000
01
02
03
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
… AND UNEMPLOYMENT HAS
BEEN RISING
Latin America Urban Unemployment
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1990
Source: ECLAC
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
DECLINING GROWTH IN PER CAPITA
INCOME IN LATIN AMERICA
Declining Growth GDP Per Capita- Latin America
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
1960s
1970s
Source: WDI, The World Bank
1980s
1990s
2000-03
MORE RECENTLY, ACTUALLY DECLINING
IN SOME YEARS AND VOLATILE
'Declining' GDP Growth Per Capita- Latin America
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
1997
1998
1999
Source: WDI, The World Bank
2000
2001
2002
2003
CATCH UP FROM 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
G ro w th R a te )
V ie w in g T h r e e P e r io d s
1 9 6 1 -8 0
1 9 8 1 -9 0
1 9 9 1 -0 1
5 .5 9 %
1 .1 8 %
3 .0 5 %
V ie w in g L o s t D e c a d e a s th e A fte r m a th o f F a ile d
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
4 .1 0 %
3 .0 5 %
V ie w in g 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
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
5 .5 9 %
2 .1 5 %
LATIN AMERIA: INEQUITABLE SHARING
UNDER THE WASHINGTON CONSENSUS
 Washington Consensus policies produced only
limited growth
 But even when growth did occur, it was not
equitably shared
 Washington Consensus was at best
indifferent, and at worst hostile, to policies
that would have promoted equality
 Failures are not surprising:
- Trickle down economics do not work
- Equality issue not even considered
POVERTY RATES IN LATIN
AMERICA HAS NOT DECLINED
Poverty Ratio (% of pop) at $1/day PPP
60
50
40
Brazil
Latin America
East Asia
30
20
10
0
1981
1984
1987
1990
1993
1996
1999
Source: World Development Indicators, the World Bank
2001
THE CONTRAST BETWEEN EAST ASIA AND
LATIN AMERICA AND THE FRAYING OF THE
WASHINGTON CONSENSUS
 Unlike Latin America, East Asia did not follow
Washington Consensus policies in some important
respects. They
- Were slow to liberalize capital markets
- Were slow to liberalize trade
- Adopted strong government industrial policies, including
creating some successful government enterprises
 Policy differences account for much of the performance
differences between East Asia and Latin America:
- More growth and faster growth
- Benefits of growth more widely shared
- And more stability (the only exception being the 1997
crisis, from which all but Indonesia recovered quickly)
WASHINGTON CONSENSUS: A
BRIEF SUMMARY


How it is commonly used?
Development strategies based on market
fundamentalism
– Emphasizing privatization, liberalization
and macroeconomic (usually meaning
price) stability
– Downscaling and minimizing the role of
government

Problems lie with both what was on the
agenda and what was not
SOURCES OF FAILURES
 View of the economy
- Including the relationship between
economic success and political and social
stability/structures
 Objectives:
- Not just increases in GDP
- But, achieve sustainable, equitable
democratic development
SOURCES OF FAILURES
Confusions between ends and means
• The pursuit of rapid privatization in the former Soviet Union
– Contributed to the enormous increase in inequality
– Compromised the legitimacy of private rights
– And did not lead to faster economic growth
• Capital market liberalization-- “supposed” to lead to more stability,
growth
–
–
–
–
did not lead to faster economic growth
but did lead to more instability
Even the IMF has begun to recognize the problems
Might have had predicted effects in models with perfect
information and infinitely lived individuals
• But would not in models with credit rationing and finitely
lived individuals
• Evidence supports latter view
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
IMPORTANCE OF EQUITY
 Equity is an “end” in itself
- GDP a bad measure of success
• GDP can increase even as the country gets poorer
- Latin American debt
- Resource depletion, environmental degradation
- Better to focus on NNP
- Even better to take account of liabilities
 There can be rich countries with poor people
- Better to focus on median income
- Median household income in the US is declining, even as
GDP increases
 Equity promotes growth and even efficiency
– Better use of human resources
– Social and political sustainability
MARKET FAILURES
 One of the most important findings of modern economic
theory is that with imperfect information and imperfect
risk markets (that is ‘always’ the case) markets are not
efficient (e.g. Greenwald-Stiglitz)
– Adam Smith was ‘wrong’
– The reason the invisible hand often seems invisible is
that it is not there
– Exemplified by problems of conflicts of interest,
herding behavior, bubbles that were evident in the 90s
• With massive misallocation of resources during the
boom
• And massive losses from under performance of the
economy after bursting of bubble
– Estimated in excess of $1 Trillion
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
Summary: THE ROLE OF
GOVERNMENT IN THE ECONOMY
 There is an important role of
government in developing countries,
not only to
- address market failures
• Such as controlling conflicts of interest
• And ensuring the safety and soundness of
the financial system
- promote growth and development
• Through education and technology
But also to:
- promote equity, provide safety nets
SOURCES OF FAILURE OF THE
WASHINGTON CONSENSUS
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
PROBLEMS WITH MACRO POLICY
 Problems reflected in macro policy (an area in
which it was concerned)
- 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
PROBLEMS WITH MACRO POLICY
 Key role of finance in growth is ignored
– Making credit available at affordable terms
– 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
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
CASE IN POINT: TRANSPARENCY AND
THE EAST ASIAN CRISIS
• The IMF and the U.S. Treasury, while pushing the
transparency agency, remained among the least
transparent of public institutions
• The US Treasury had even resisted reforms in the
United States that would have improved
transparency of accounting frameworks in the U.S.,
e.g. related to stock options
• The last set of countries to be afflicted by financial crises
(Scandinavia) were among the most transparent
• When the debate about transparency turned to Western
institutions, hedge funds and secret bank accounts, the US
Treasury opposed
– Worried about “ excessive transparency”
– Vetoed (before 9/11) the OECD initiative on bank
secrecy.
CASE IN POINT: THE
TRANSPARENCY AGENDA
• While continuing to inveigh against
corruption, the developed countries
have refused to take easy steps that
would make such corruption more
difficult
– like allowing tax deductions only for payments
to governments that are ‘published’ (and
adopting other measures such as the
extractive industries transparency initiative.)
TWO CENTRAL QUESTIONS
• What can each country, on its own, do to enhance
sustainable, stable, equitable, and democratic
development?
- taking the world as it is,
- with the inequities in the global trading system
- and the instabilities in the global financial system
How should we reform the global economic architecture, to
promote:
- Stability
- Efficiency
- Equity among countries
- Ability of developing countries to pursue their objectives
NEED OF REFORMS
• Reforming the Global Financial system
– To make it more stable
– To reduce the risks facing the developing
countries
• By reforming the global reserve system
• And developing better mechanisms for shifting risk
• In the global trading system
– The sham of the ‘development round’
• Perhaps most importantly: in global
governance
A POST WASHINGTON CONSENSUS
CONSENSUS
• We need a new framework to guide us in answering both of
these questions
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
MORE THAN THEORY
 The ideas are not just of academic importance, but are of
relevance to every major aspect of public policy—even
affecting technical issues like how we measure success (GDP,
green GDP, median income) and measure budget deficits
 What we measure affects what we eventually do
Accounting Distortions:
 IMF accounting practices continue to put a roadblock in the
way of market based land redistribution
 Accounting practices can “force” privatizations
CONCLUDING REMARKS
• 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
• 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
CONCLUDING REMARKS
The challenge for Latin America in
general, and Brazil in particular, is to
translate this framework into concrete
policies, adapted to their particular
economic, political and social structures
– I hope in this talk I have not only
convinced you that this is possible
– But provided you some suggestions, some
examples, of how this might be done