A Post-Washington Consensus

For years, leftists have criticised the Washington Consensus, seen as the joint manifesto of the World Bank, IMF and USA.

The Consensus, according to the left, says “Liberalise everything, create a minimal state, be tough in fiscal and monetary matters.” Many in Washington will protest at this caricature of rather complex ideas. And in practice the Bank and IMF did not adhere to this line. They lent repeatedly to interventionist governments, to those who repeatedly promised reform and failed to deliver. Yet some of the literature of the World Bank, especially in the 1980s, did indeed trumpet simplistic nostrums of the Consensus.

Now the Consensus has been attacked by none other than Joseph Stiglitz, chief economist of the World Bank. This may surprise outsiders, but not Bank insiders. There has never been a consensus in Washington on anything, leave alone economic policy. The World Bank has changed colour more frequently than a chameleon in the last five decades, oscillating from full-blooded support to Marxist economic experiments in the McNamara era to simplistic free-marketism under his successor.

It has long moved away from ultra-liberal rhetoric of the late 1980s, a good example being the World Development Report 1998 which emphasised the need for a strong, revitalised state to perform properly the tasks that it alone could do.

So the recent WIDER lecture by Stiglitz entitled More Instruments and Broader Goals: Moving towards the Post-Washington Consensus will surprise those who see the Bank as a free-market monster.

It is worth quoting from the lecture. “The policies advanced by the Consensus are not complete, and are sometimes misguided. Making markets work requires more than just low inflation, it requires sound financial regulation, competition policy, and policies to facilitate the transfer of technology and encourage transparency… The success of the Consensus as a doctrine rests on its simplicity. Its recommendations could be administered by economists using little more than simple accounting frameworks. A few economic indicators — inflation, money supply growth, interest rates and budget and trade deficits — could serve… for creating… policy recommendations.…

“Probably the most important policy prescription of the stabilisation packages promoted by the Consensus was controlling inflation. The evidence however, has shown only that high inflation is costly. Recent research suggests that low levels of inflation may even improve economic performance relative to what it would have been with zero inflation.

“A second component of macro-economic stability has been reducing the budget deficit and current account deficit. There is, however, no simple formula for determining the optimum level of the budget deficit or current account deficit. For instance, the case for maintaining budget surpluses in the East Asian countries in the face of an economic downturn, where the rate of private savings is high and public debt-GDP ratios are relatively low, is less compelling.

“Macroeconomic stability, as conceived by the Washington Consensus, downplays the stabilisation of output or unemployment. Minimising or avoiding major economic contractions should be one of the most important goals of policy… The social and economic costs of these downturns can be devastating.” Stiglitz has long attacked total deregulation of financial markets, the most imperfect of markets, and supported their intelligent regulation. He has castigated the IMF’s approach towards the Asian countries hit by the currency crisis. “The agenda for creating sound financial markets should not confuse means with ends: redesigning the regulatory system, not financial liberalisation, should be the issue.” He has also attacked simplistic reforms in ex-communist countries. “The fundamental theorems of welfare economics… assume that both private property and competitive markets exist. Many countries — especially developing and transition economies — lack both.

Until recently, however, emphasis was placed almost exclusively on creating private property and liberalising trade — trade liberalisation being confused with creating competitive markets. Trade liberalisation and privatisation are important, but are unlikely to realise their full benefit without anti-trust laws and other policies to increase competition.

The World Bank is no simple-minded free market monster-witness its evolution of ideas, says Swaminathan S A Aiyar

“Chinese policymakers not only eschewed a strategy of outright privatisation they also failed to incorporate numerous other elements of the Washington Consensus. Yet China’s recent experience is one of the greatest economic success; stories in history… It has proved difficult to prevent corruption and other problem; in privatising monopolies. The huge rent created by privatisation will encouraging entrepreneurs to try to secure privatised enterprises rather than invest in creating their own firms. By contrast, competition policy often undermines rents…

The Washington Consensus policies were based on a rejection of the state’s activist role and promotion of a minimalist non-interventionist state. The unspoken premise is that governments are worse than markets… It is true that states are often involved in too many things in an unfocused manner. Trying to get government better focused on the fundamentals —economic policies, basic education, health, roads, law and order, environmental protection — is a vital step. But states can also improve their capability by re-invigorating their institutions…

“The Washington Consensus advocated the use of a small set of instruments… The post-Washington Consensus recognises that a broader set of instruments is necessary, and our goals are also broader. We seek increases in living standards! — including improved health and education — and not just increases in measured GDP. We seek sustainable development, equitable development, which; ensures that all groups in society, not just s those at the top, enjoy the fruits of development. And we seek democratic development.”

Some leftists will be stunned by such language. Stiglitz has stolen the very; phrases they have been trumpeting for years. Yet this is far from being a sudden U-turn — several Bank documents and projects have reflected this view for years. The Bank has long claimed China as one of its successes, although that country is still a long way from completely free markets. Do not expect the Indian Left to highlight Stiglitz’s lecture or claim credit for the Bank’s conversion. The Left prefers to quote only those bits of Bank literature that sound right-wing, and ignore all else (especially the Bank’s massive financing of socialist governments in many places, including India).

My own view has long been that periodic policy swings of the Bank have relatively little impact. Experience proves that the World Bank and IMF cannot foist reform on unwilling countries through loan conditionalities. They can give a gentle push in a particular direction to countries, but the countries have to complete the journey themselves. Whether they succeed or fail, the responsibility is theirs and not that of outside financiers. So it is silly to credit the Washington Consensus with either failures in Africa or successes in Asia.

The Bank gave similar advice to all its clients, yet some performed brilliantly and others disastrously. What matters is not the consensus (or lack of it) in Washington. What matters is the ability of developing countries to listen to outside advice, and tailor that to solve their own problems. Stiglitz agrees, and says the Bank should be more humble about what it can achieve. Quite so.

What do you think?