THE POST WASHINGTON CONSENSUS CONSENSUS

Joseph E. StiglitzColumbia University

New York

Sao PaoloAugust 22, 2005

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

GD

P G

row

th

Year

7.3%

5.6% 5.5%

2.1%

7.8%

2.7%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

1960-1980 1990-2004

Brazil

East Asia

Latin America

7.6%

5.6% 5.5%

2.7%

7.3%

2.5%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

1960-1980 1994-2004

Brazil

East Asia

Latin America

ANOTHER COMPARISON: GDP GROWTH IN TWO PERIODS (1960-1980 and 1994-2004)

GROWTH RATES: BRAZIL, CHINA AND INDIA

-6

-4

-2

0

2

4

6

8

10

12

14

16

1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 2004

BrazilChinaIndia

GD

P G

row

th (

annu

al %

)

Year

LATIN AMERICA ALSO EXPERIENCED TREMENDOUS VOLATILITY OF GROWTH

Growth in Latin America

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1950s 1960s 1970s 1980s 1990s 2000-04

Source: WDI, World Bank and ECLAC

… AND UNEMPLOYMENT HAS BEEN RISING

Latin America Urban Unemployment

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: ECLAC

DECLINING GROWTH IN PER CAPITA INCOME IN LATIN AMERICA

Declining Growth GDP Per Capita- Latin America

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1960s 1970s 1980s 1990s 2000-03

Source: WDI , The World Bank

MORE RECENTLY, ACTUALLY DECLINING IN SOME YEARS AND VOLATILE

'Declining' GDP Growth Per Capita- Latin America

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1997 1998 1999 2000 2001 2002 2003

Source: WDI , The World Bank

1 9 6 1 - 8 0 5 . 5 9 %1 9 8 1 - 9 0 1 . 1 8 %1 9 9 1 - 0 1 3 . 0 5 %

1 9 6 1 - 9 0 4 . 1 0 %1 9 9 1 - 0 1 3 . 0 5 %

1 9 6 1 - 8 0 5 . 5 9 %1 9 8 1 - 0 1 2 . 1 5 %

S o u r c e : W D I W o r l d B a n k

I m p o r t - S u b s t i t u t i o n S t r a t e g y

V i e w i n g R e f o r m P e r i o d a s C a t c h - U p f r o m L o s t D e c a d e

T h r e e D i f f e r e n t V i e w s( A n n u a l A v e r a g e G D P G r o w t h R a t e )

V i e w i n g T h r e e P e r i o d s

V i e w i n g L o s t D e c a d e a s t h e A f t e r m a t h o f F a i l e d

CATCH UP FROM LOST DECADECATCH UP FROM LOST DECADE

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

0

10

20

30

40

50

60

1981 1984 1987 1990 1993 1996 1999 2001

BrazilLatin AmericaEast Asia

Pov

erty

Rat

io (

% o

f po

p) a

t $

1/da

y P

PP

Source: World Development Indicators, the World Bank

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”

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

PROBLEMS WITH THESE JUSTIFICATIONS

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

• 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

BEWARE OF WASHINGTON CONSENSUS PLUS

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