THE POST WASHINGTON CONSENSUS CONSENSUS Joseph E. Stiglitz Columbia University New York Sao Paolo...
-
Upload
mervyn-hoover -
Category
Documents
-
view
217 -
download
0
Transcript of THE POST WASHINGTON CONSENSUS CONSENSUS Joseph E. Stiglitz Columbia University New York Sao Paolo...
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