Washingtonconsensusreadings

What Should the World= Bank Think about the Washington Consensus?

This package of polic= ies that go with the structural adjustment period has been termed the “Washing= ton Consensus”. Williamson = (1990, 2000, 2005).

He came up with the t= erm at a conference of the Institute for International Economics. He was asked w= hat were the “sensible” policies for Latin American countries to follow<= /span>.

He was describing the policies that were generally agreed upon by the WB, IMF, and US trea= sury concerning policy in Latin American countries in the late 1980’s.

“…the low= est common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.” (p. 251)

The situation then: High budget deficits, lots of borr= owing (debt crisis), high inflation.

Based on our theories= that markets work, and that market based solutions and policies would help solve these problems that were experienced.

However, Williamson i= s trying to distinguish between what is in the consensus he identified and critiques= of it based on a broader interpretation.

What is in the origin= al formulation:

· Fiscal discipline, balanced budgets, control inflation. Trying to avoid recourse to the ‘inflation tax’.

· Redirect pu= blic expenditure from politically sensitive areas that receive more resources th= an their economic return can justify toward neglected fields with high economic return and potential to improve income distribution such as primary educati= on and health, and infrastructure.

· Tax reform = (lower and broaden)

o&nb= sp; These first= three he argues had the most agreement, but also notes that point two probably received the least attention in actual policy.

· Financial (= later)/ Interest rate (in the original) liberalization to arrive at market determin= ed interest rates.

o&nb= sp; He notes th= at this was more controversial than he thought when he put it in the consensus. =

· Competitive= and unified exchange rates

o&nb= sp; He notes th= at in retrospect, there was not really a consensus about this. Some called for fixed, some floati= ng. Williamson prefers a mix of the tw= o.

· Trade liberalization – quantitative restrictions give way to tariffs, tarif= fs then lowered to 10%-20% range.

· Liberalize = FDI inflows

o&nb= sp; These next = two he maintains were largely part of a consensus, but notes that some of the East Asian miracle practices were not consistent with these suggestions.

· Privatizati= on of state owned assets.

o&nb= sp; The practic= e of it turned out to lead to controversy by how it was managed.

· Deregulate = to abolish barriers to entry and exit and regulations that inhibit competition= .

o&nb= sp; Also not cl= ear that it had much to do with the East Asian growth experience.

· Secure prop= erty rights, especially to the informal sector.

Move from the previous orthodoxy (ISI, inflation tolerance, state having a leading role) to the OE= CD orthodoxy.

These are things the countries could do for themselves – the list was not about internatio= nal aspects that could be reformed.

Note that these are p= olicies, not about institutions. The f= act that some places that implemented parts of this consensus did not do well, while others that did well did not follow this consensus led to a new focus= on institutions.

O= ften used as shorthand for the policies of the WB / IMF/ US government in the late 1980’s early 90s. This fit at that point, but there = has been growing divergence (IMF called for liberalizing capital accounts, WB a= nd IMF currency regimes differ from a ‘competitive one’ called for here as they pushed either fixed or floating, WB focus on poverty, governan= ce, and corruption,…

I= MF strongly critical of US Treasury at this point.

Williamson is also re= sponding to what this term had come to mean.

See quotes on page 25= 5.

Use as shorthand for ‘neoliberalism’ or ‘market fundamentalism’.

‘NeoliberalR= 17; is hard to get at a clear definition, but to the extent that it includes monetarism and minimal government that is not part of the Washington Consen= sus outlined above.

“let’s bash the state, the markets will resolve everything”.

He also notes that ca= pital account liberalization was not on the list – pushing this contributed= to the East Asian crisis. <= /o:p>

[= capital accounts – FDI, private loans and portfolio investments, government a= nd multilateral flows, resident capital outflow]

He does describe fina= ncial and interest rate liberalization as of questionable “pro poor” impact. He suggests this is b= ecause he did not also add in financial supervision.

Most of the points of= the Washington Consensus he maintains are ‘pro poor’, although in s= ome cases sensitive to the way in which the reform is implemented. In and of themselves they are not = going to lead to poverty reduction directly, but he is arguing they are not inconsistent with poverty reduction. This is an issue as we will see due to the fact that the WB is at th= is point in time turning to an explicit focus on poverty reduction.

He gives us an overvi= ew of development thinking.

F= irst generation (40s to 60s) – accumulation of physical capital.

S= econd generation (60s-70s) – accumulation of human capital.

Third generation (70s= -90s) – getting the policy environment right.

Fourth generation (90= s on)- getting institutions right.

And in that spirit &#= 8220;I don’t think anyone believes there is some universal model that can or should be imposed on the world- Washington consensus, post Washington consensus, or not”. (p. 261).

Gore (2000).

The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries.

Gore describes the key elements of the Washington Consensus as follows:

(a)&= nbsp; pursue macroeconomic stability by controlling inflation and reducing fiscal defici= ts

(b)&= nbsp; open their economies to the rest of the world through trade and capital account liberalization

(c)&= nbsp; liberalize domestic product and factor markets though privatization and deregulation.

Gore argues this was a paradigm shift. It led to = 220;a shift in the way development problems were framed and the types of explanat= ion though which development policies were justified.” (p. 790)

He describes the shif= t as “…the partial globalization of development policy analysis; and= a shift from historicism to ahistorical performance assessment” (p. 790)<= /p>

A= shift from a national to a global frame of reference for explanations and normati= ve evaluations.

He argues that before= this paradigm shift, explanations and evaluations of the development process were based on conditions in the countries themselves – national factors.

A different historica= l theme is found in the structuralist and dependency school. The normative focus was national, = but the explanatory framework was global.

The Washington consensus is located diagon= ally across from this – the normative framework is global, but the explana= tory framework is national. = The norm is of a “liberal international economic order…a commitment= to free markets, private property and individual incentives, and a circumscrib= ed role for government” (p 792)

The argument to suppo= rt this norm has two components:

1)&n= bsp; This kind of liberalism is ethically superior

2)&n= bsp; It works be= tter than alternatives.

Also increasingly saw= the argument that globalization was happening (as a force larger than the nation). So as a nation, you = need to get on board or be left behind.

T= he shift from historicism to ahistorical performance assessment.

“Stages of growth”, Sen’s four themes (Industrialization, rapid capital ac= cumulation, mobilization of underemployed labor, planning). Kuznet’s= work looking for historical patterns.

Gore identifies the s= hift to an ahistorical perspective with the move to “performance”. Countries are judged as good or bad performers. The focus on long= term social and economic change has been replaced by current period performance standards that were applicable across all countries.

“The goal of st= ructural transformation has been replaced with the goal of spatial integration” (p. 795).

Two challenges: The HDR approach (to which we could probably now add the MDG approach), and the “southern consensus”. =

The HDR approach is b= roadly consistent in world view with the Washington consensus view- it just broadens the set of performance standards.

The Southern Consensu= s (which does not exist as a political reality) draws on the Latin American tradition and the findings of the East Asian growth period that don’t really ma= tch the Washington Consensus.

“It rejects the= idea that growth with late industrialization can be animated using a general blueprint” (p796)

Policy is designed, a= nd adapts, both on internal and external conditions.

Key elements

1)&n= bsp; Strategic integration with the international economy. Not ‘delinking’, but a= lso not across the board opening. Gradualism, management, and sequencing are practiced.

2)&n= bsp; Growth and structural change is fostered by a growth oriented macroeconomic policy. These are long term in perspective= , look at comparative advantage, and identify policies for long term development of capital and technology and marketing….It can be a mix of sector neutr= al and selective policies.

3)&n= bsp; Government – business cooperation. Enhancement of state capacities, not a reduction. Private enterprise drives much of = this, but the state coordinates and addresses market failures as well. Also links private enterprise with= (1) and (2) above.

4)&n= bsp; Distributio= nal issues are addressed to support the overall legitimacy of the project (primarily production oriented rather than redistributive).

5)&n= bsp; Regional in= tegration and cooperation.

The key point here is= that these actively recognize that late industrializing countries face a distinct set of challenges due to the historical context. This is why Gore calls it global i= n the explanatory framework. But th= e focus is on the nation’s long term development project, which is why he ter= ms it national in normative terms.

Gore finds the combin= ation of global liberalism (normative) with methodological nationalism (explanatory)= is inherently unsustainable. The= national policies open you up to international forces – so then if something happens, the explanation has to lie at the international level.<= /span>

He suggests we are at= the edge of a new paradigm that will be global in norms and global in explanation.

R= ethinking the Emerging Post Washington<= /st1:State> Consensus (2005).=

Onis and Senses<= /o:p>

They describe the “neoliberal counter-revolution” as being focused on “the primacy of individualism, market liberalism, outward-orientation, and state contraction…The organizing principle of the neoliberal political econ= omy was the notion of a minimal state, whose primary functions were to secure l= aw and order, ensure macroeconomic stability and provide the necessary physical infrastructure.” (p. 26= 3)

“The central tenet…was ‘getting the prices right’. The state itself was conceived as = the problem rather than the solution”.&n= bsp; (p. 264).

They find the first m= ajor challenge to the WC was the empirical evidence began to question the legiti= macy of the policies as it was not clear that they worked. First, those that did not follow it grew. Second, where it was tr= ied, it did not always work. Furth= er, growth in developing countries was slower and inequality across countries w= as increasing. Further, while it appears that overall poverty did decrease, this has a lot to do with China, which was not following the policy.

They identify ‘premature financial and capital account liberalization” as the main problem (p. 268).

They also argue that = the reforms undermined state legitimacy and effectiveness, leading to state fai= lure / rise in corruption.

Post Washington consensus.

What did the East Asi= an countries do right?

How can we explicitly= focus on poverty?

They note the Asian c= risis as a tipping point – WB criticizes IMF.

“Perhaps the ke= y element of the PWC is the recognition that states have an important role to play in= the development process” (p. 275)<= /p>

State and economy com= plement each other, not substitutes for each other.

Regulation is critica= l.

Education and infrast= ructure are important state roles.

D= evelopment and transmission of technology.

Promote equality and alleviate poverty.

Market structures can= help reform the state – internal incentive structures and reward, competit= ion.

Also adding in a recognition that the global context matters – = trade policy, aid policy, investment flows….

“A key element = that distinguishes the PWC from the early neoliberal agenda is its recognition of the importance of a change in institutions…” (p. 276).

F= inally, growing recognition of the role of democracy, accountability and transparen= cy. <= o:p>

From 277 on is option= al.

Goodbye Washington Consensus, Hello Washington Confusion

Rodrik (2006)

“Get your macro balances in order, take the state out of business, give markets free reign…Stabilize, privatize, and liberalize” (p1)

Rodrik notes the enth= usiasm for reform want beyond what Williamson listed – in particular with re= gard to financial liberalization and opening up to capital flows.

Things did not work o= ut as intended. Growth below expectations in LA, the transiti= on crisis deeper and longer than anticipated, SSA successes few and far betwee= n.

“The question n= ow is not whether the Washington Consensus is dead or alive; it is what will repl= ace it” (p2)

What happened in the 90s? (sum= marizing the WB Economic Growth in the 90s)

1)&n= bsp; deep and prolonged crisis in transition economies

2)&n= bsp; SSA failed = to take off

3)&n= bsp; Frequent and painful crises LA, East Asia, Turkey, Russia

4)&n= bsp; LA recovery= in the first half of the 90s was short-lived.=

However, it also has = to be noted that the 90s were not a disaster for economic development. Ch= ina and India (and a few o= thers like Vietnam) took off. <= /p>

In addition, empirical analysis of the impact of policy on growth (cross country regressions) led = to the conclusion that the predicted impacts were not well supported by the evidence. <= /p>

One finding – f= ocusing on reducing inefficiency (DWL arguments) is short sighted. Long run issues are more important= . “Seeking efficiency gains do= es not amount to a growth strategy” (P 5).

Market failures that = impact accumulation and productivity change are the ones to identify and address.<= span style=3D'mso-spacerun:yes'> Static ones don’t have much = impact for the process of growth.

Another finding is th= at the objectives of market oriented incentives, macroeconomic stability, and outw= ard orientation are not achieved by a single set of policies. This means there may be no single “best practice” to be extended.

Third, different cont= exts call for different polices. C= ontext matters. ‘cut and paste’ policy will not work (see best practices above).

Fourth, rules in gove= rnment decision making do not make as much a difference as better decision making, which relies on discretion.

Finally, what are the constraints in a given context? The WC implicitly assumes a set of constraints, but Rodrik is proposing a diagnostic approach to figure out what is the key (or are the key) constraint(s) and targeting it / them.

IMF in contrast agree= s that growth has been disappointing, but the interpretation there is not that the approach was wrong, but that it was not done well.

“What has become clearer to practitioners of the WC over time is that the standard policy reforms did not produce lasting effects if the background institutional conditions were poor.” (p 9 )

Second generation reform (= p. 25)

T= he academic work on the role of institutions (to which we will turn next week)= .

Rodrik argues “= the Augmented Washington Consensus’ focus on institutional change proves = to be largely a dead-end upon closer look” (p. 11)

Why?

1)&n= bsp; “Inst= itutional function does not uniquely determine institutional form.” The same objective can be achieved= by multiple forms that are context specific.&= nbsp; What works in one place may not in another.

2)&n= bsp; Institution= s are a long run story. As we will = see, they are used to understand difference in levels, not changes. Growth and institutions are not ve= ry clearly related. <= /span>

“Telling poor c= ountries in Africa of Latin America that they have to set their sights on best-pract= ice institutions of the U.S. or Sweden is like telling them that the only way to develop is to become developed – hardly useful policy advice” (= p. 13)

He critiques the Sach= s / UN Millennium project. We can ge= t into that later – keep it in mind.

He suggests as a way = forward:

1)&n= bsp; Growth diagnostics. Find out where p= olicy reform will yield the greatest return.&nbs= p; Different problems send out different signals. Figure out which one is present.

2)&n= bsp; Policy design. Target the policy res= ponse as closely as possible on the source of the distortion.

3)&n= bsp; Institution= alize reform. Maintain productive <= span class=3DGramE>dynamics, strengthen domestic conflict resolution mech= anisms that allow coping with external shocks.