15 February 2011

Everything you probably never wanted to know about the Washington Consensus

So apparently Jonathan Glennie

asked a leading World Bank economist how he could explain why South Korea and other countries (including today's developed countries) that had protected their fledgling industries had done so well.

Yawn. Good point Jonathan. Now can you explain how Nigeria and many other countries (including many of today’s still developing countries) protected their fledgling industries and did so badly.

You can’t just cherry-pick the winners and ignore all those who tried the same strategy but failed. The reason most of those economists you spoke to are so skeptical of the infant industry is that they are social scientists who like to pay attention to systematically collected data rather than anecdote. Systematically collected data does not suggest that infant industry protection is a successful strategy (there are some cross-country regressions out there somewhere…).

And here’s the thing; the Washington Consensus basically was not an evil neoliberal conspiracy, it was a reaction against reckless governments pursuing ill-advised statist policies the like of which would look pretty unrecognizable today. These are humdrum bread and butter suggestions for sound macroeconomic management, with perhaps an emphasis on limiting the ability of poorly skilled and often corrupt governments with weak accountability to do damage and mischief.

Here are those Washington Consensus ten broad recommendations in full, from Wikipedia. They all still sound like pretty sensible advice for the poorest countries with the weakest governments to me.

  1. Fiscal policy discipline;
  2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform – broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
  10. Legal security for property rights.

I used to be much more enthusiastic about the proactive role of government in the economy before I actually worked for one. That goes for the British government as well as the Southern Sudanese government. Let them get the basics right first. The basics are difficult enough; providing security, core infrastructure, social safety nets. Leave the crystal-ball gazing and high-strategizing to someone else.


Ranil Dissanayake said...

Lee, making the argument that intervention failed in some places is also pretty weak. What we need to understand is why it worked in some places and why it failed in others. It may not be a generalisable policy, or it could be that it works when tailored correctly, or under certain circumstances or, or, or....

The point is that you can't cherry pick winners, and you equally can't say 'well it failed in some places, so it's time to forget it'. Every single approach to development will have to be abandoned if that is the case.

And I agree that the WC is an easy punching bag that didn't always deserve it. But the big criticisms were on the blanket way in which it was applied - not all policies work everywhere, and the results (worked in Ghana, catastrophic in Zambia for example) show this.

The ideas are useful, but need consideration for each place. Some of these things were incredibly helpful in Malawi, for example, and others were not.

Matt said...

Mostly in agreement here, with Ranil's caveats, but I think you really need to tone down the hubris and take the italics off of `scientists'. Social science is to science what minigolf is to the PGA Championship.

Matt said...

(also, just in case it doesn't translate, what Ranil is saying is that our regressions need more interaction terms).

Lee said...

I don't think it is about interactions, I think it is about the omitted variable "having a government which is both capable of and actually interested in acting in the national interest." But that isn't exactly a policy recommendation. And once you do have a government like that, it could probably also give out free cheese without doing its chances any harm.

I agree that any policy recommendation (which is all it is by the way, not a Washington diktat, many countries simply ignored the advice, or used the Bank as a handy scapegoat when the inevitable fiscal crunch came) should be carefully considered. But I think "fiscal policy discipline" and most of the rest of the list take drastically less consideration than "strategically figure out what the growth industries of the future are," or even to be more subtle and Rodrikian about it "cleverly offer subsidies for innovation without letting these subsidies get out of control and captured by special interest groups like they usually are in most countries including developed ones like the US where subsidies that might once have been rational are now an immovable burden."

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