THE POST WASHINGTON CONSENSUS CONSENSUS

1. THE POST WASHINGTON CONSENSUS CONSENSUS Sao Paolo August 22, 2005 Joseph E. Stiglitz Columbia University New York

2. 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

3. 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

4. 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

5. ECONOMIC GROWTH: EAST ASIA, LATIN AMERICA AND BRAZIL GDP Growth Year

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

7. GROWTH RATES: BRAZIL, CHINA AND INDIA GDP Growth (annual %) Year

8. LATIN AMERICA ALSO EXPERIENCED TREMENDOUS VOLATILITY OF GROWTH

9. … AND UNEMPLOYMENT HAS BEEN RISING Source: ECLAC

10. DECLINING GROWTH IN PER CAPITA INCOME IN LATIN AMERICA

11. MORE RECENTLY, ACTUALLY DECLINING IN SOME YEARS AND VOLATILE

12. CATCH UP FROM LOST DECADE

13. 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

14. POVERTY RATES IN LATIN AMERICA HAS NOT DECLINED Poverty Ratio (% of pop) at $1/day PPP Source: World Development Indicators, the World Bank

15. 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)

16. 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

17. 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

18. 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

19. 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”

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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.

30. 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.)

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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