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Economic Reform For Whom? Jomo K. S. (United Nations [Assistant Secretary General for Economic
Development], Malaysia) ©
Copyright: Jomo K. S. 2005 The Washington Consensus
emerged in the 1980s after the end of the Golden Age decades of post-war
capitalism (Williamson 2004). From the mid-1970s, the North Atlantic
economies seemed to be afflicted by a phenomenon not anticipated by Keynesian
economics, by what was called ‘stagflation’ – economic slowdown on the one
hand and high inflation on the other. This crisis of Keynesianism resulted
not only in the rejection of what Joan Robinson called ‘bastard Keynesianism’
on the western side of the Atlantic, but also the jettisoning of development
economics. This was worsened by the debt crises that affected Latin America
and Africa in particular, as well as changes in the political landscape and
the resurgence of free market conservative ideologies, quite unlike the
paternalistic conservatism of the Golden Age associated with the ‘social
market’ economy or the welfare state.
The 1980s’ turn to economic
liberalization generally undermined state capacities by reducing public
sector economic activities and reducing fiscal capacities. In the realm of ideas, this had been
preceded by what John Toye (1987) called the
‘counter revolution’ against development economics. The early 1980s’
sovereign debt crises led to stabilization programmes under the auspices of
the IMF and structural adjustment programmes (SAPs) managed by the World Bank. Together, they quickly obliterated and reversed the McNamara-Chenery heritage at the World Bank. This
was also reflected in academia, principally in the economics curricula of US
graduate schools. One can see this, for example, in the shift from
development economics to open macroeconomics, the renewed emphasis on
international trade theory, the shift to rational expectations in economics
and to rational choice in the other social sciences, as well as the emphasis
on supply side economics versus the previous Keynesian emphasis on demand
management. The result, inaugurated with more than a little help from
supportive political authorities, was what has come to be called the Washington Consensus, the supposed
‘policy consensus’ of the US leadership and the Bretton
Woods institutions, both based in the US capital, Washington, DC. To a great
extent, it was based on an ostensibly ‘free market’ critique of Keynesian and
development economics. There
has since been growing recognition of serious problems with the original
ideas associated with the Washington Consensus with some revisions as well as
the arguably premature declaration in 1998 of a ‘post-Washington Consensus’
by the World Bank’s then Senior Vice President and Chief Economist, the Nobel
laureate Joseph Stiglitz (2004). However, critical
scrutiny of recent fads in development economics suggest little more than a
‘false dawn’, especially when compared to the discourse preceding the
relatively recent rise of the Washington Consensus, despite all its problems
and limitations (Jomo & Fine 2006). But the
laws of inertia in ideas are often determined by political conditions. And as
far as its ideas and policy influence are concerned, the Washington Consensus
has received a new boost with subsequent political developments, including
the election of President George W. Bush in 2000.
The
most important challenge to the Consensus is its failure to deliver on its
promise of higher economic growth over the last quarter century. Instead, we
have seen significantly lower growth in the world as a whole, not only
affecting the developing world, but also the advanced economies. We have seen
much lower growth, almost two per cent lower in the last three decades,
compared to the 1950s and 1960s (Weisbrot, Naiman and Kim 2000). Meanwhile, high growth has occurred
precisely where the policy prescriptions of the Washington Consensus have
been resisted. The highest growth region, until the 1997-98 crisis, was East
Asia, where most economies hardly qualifies as star pupils of the Washington
Consensus. A
growing number of challenges have posed major problems for mainstream economics.
There is no time here to go into all this, but the challenges posed by
strategic trade theory, for instance, has important implications for
development economics. The importance of market imperfections and market
failure – due to information asymmetries, for example – is increasingly
recognized, especially since the 2001 Nobel Laureates for information
economics. Also very important for mainstream economics has been the
challenge from post-Keynesian economics and other sources. The Austrian
school challenge from the right, with the renewed interest in evolutionary
economics, has also raised very important issues. Another
important recent interest has been in ‘institutional economics’, which has
encouraged some economists to embrace more multi-disciplinary and
inter-disciplinary work. Although development economics has always been more
open than mainstream economics, the renewed interest in institutions is
probably welcome despite its often opportunistic and convenient eclecticism
as well as vacuous black-box socio-cultural explanations that have become the
vogue in recent years. The renewed interest in political economy (especially
rent seeking), law, property rights, contracts and social capital have all
been similarly promising, but largely disappointing, if not misleading. The
joke about the new development economics is that when something is difficult
to explain, one can always try ‘governance’ or ‘social capital’. Often, they
have become a sort of factor x to
conveniently ‘explain’ what cannot be explained by other methods. Distributional Consequences Another
important global development has been growing inequality, despite what some
commentators claim, attributed by most observers to the policy and
institutional changes associated with the kind of economic liberalization
favoured by the Washington Consensus. Branko Milanovic has decomposed global household income
distribution to show that although intra-country inequalities can be very
high, most world inequality is explained by international, rather than
intra-national inequality, although the latter has been growing and is often
high. Instead of ‘convergence big time’, we have ‘divergence big time’,
dating back to the early 19th century (see Maddison;
Bourguignon and Morrison), even though this was temporarily reversed during
the post-war Golden Age. There is a large body of literature that suggests
that economic liberalization and some key aspects of the multi-faceted
phenomenon of globalization have significantly increased income inequality at
both national and international levels (e.g. see Jomo
2006). There is also much evidence – e.g. from diverse sources ranging from Forbes magazine to the UNDP Human
Development Report – that wealth inequality is growing even faster than
income inequality. If
the greatest sources of global inequality have been international, rather
than national, we have to look at the consequences of international economic
liberalization -- or globalization -- much more carefully and critically. In
this regard, it is relevant to look at five issues: intellectual trade,
investment, finance, intellectual property rights and the new international
economic governance. International Trade
The case for trade liberalization
has been undermined by growing evidence of widespread ‘jobless growth’, the
ambiguous evidence of the employment effects of trade liberalization and the
misleading claims of earlier advocates of trade liberalization (Rodriguez and
Rodrik). Even Paul Samuelson, the doyen of
mainstream international trade theory, has acknowledged what most critics,
especially from the South, have long argued, i.e. that trade liberalization
does not necessarily ensure welfare gains for all, even in the medium term,
but that outcomes instead depend very much on ‘initial conditions’ (resource
endowments), the short and long term dynamic consequences of the new
international economic specialization as well as economic capacities to take advantage of
the new opportunities thus offered. Many
trade issues first raised in the 1950s and 1960s are still very much with us,
like the persistent decline of primary commodity prices compared to
manufactured goods first identified by Raul Prebisch
and Hans Singer over half a century ago. Consider how coffee prices in East
Africa and Latin America have dropped dramatically with the advent of
Vietnamese coffee production. The list of examples is long. Secondly, W.
Arthur Lewis also pointed out many decades ago that the terms of trade for
tropical primary commodities have also declined against temperate primary
commodities, e.g. cotton versus wool. Thirdly, and increasingly
important in recent decades, generic manufactured products have been
experiencing worsening terms of trade, as in East Asia. This appears linked
to the declining terms of trade for ‘generic manufactures’ against products
with strong intellectual property rights, i.e. officially protected
monopolies in an age of ostensible liberalization. For example, the
successful entry of low-cost East Asian manufacturers into various electronic
component industries not protected by strong intellectual property rights
often led to intense cut-throat competition. This has driven prices down as
productivity gains have translated into vicious ‘beggar thy neighbour’
cycles. High unemployment and underemployment in China have also served to
keep industrial wages down, enabling higher labour productivity – thanks to
high investment rates – to lower output costs and even consumer prices. The
conclusion of the Uruguay Round of trade negotiations saw the World Trade
Organization (WTO) replace the General Agreement on
Tariffs and Trade (GATT) with considerably enhanced powers and a
significantly broadened scope of ostensibly trade related matters. Perhaps
most importantly, membership of the WTO involves a
‘single undertaking’ requiring compliance with all WTO
agreements unlike the previous option under GATT of signing up on an
agreement by agreement basis. The WTO has also
created and strengthened processes and mechanisms for dispute settlement,
that have tended to favour corporate interests and rich country governments
who can better afford the legal and lobbying resources to pursue and advance
their interests. The WTO trade agenda has broadened from GATT’s focus on
manufactures to include services while giving renewed attention to
agriculture. Undoubtedly, many developing countries with strong agricultural
productive capacities will benefit from less protected markets in the North
for their exports. Historically, however, there has been a great deal of
hypocrisy – and self-interest – in the rhetoric and practice of trade
liberalization. For example, many critics note that the European declared
trade liberalization objective of ‘everything but arms’ has, in practice,
involved ‘everything but farms’. In any case, the gains from agricultural
trade liberalization will mainly benefit a few successful agriculture
exporting countries, including those in North America and Australasia, rather
than, say, Africa where many gain from subsidized European food prices. Meanwhile, liberalization of
services has mainly involved financial services, rather than construction or
maritime services where developing countries are better able to compete.
Although the proposed Trade Related Investment Measures (TRIMs)
were not fully adopted, the OECD’s MAI (Multilateral Agreement on Investment)
was aborted and investment liberalization is no longer on the Doha Round
agenda, preparations for an MIA (Multilateral Investment Agreement) with
similar objectives are said by some to be continuing, although they are not
imminent. Meanwhile, the Agreement on Trade Related Intellectual Property
Rights (TRIPS) has given transnational corporations
greater monopoly powers -- not provided by WIPO,
the World Intellectual Property Organization. On the other hand, regional free
trade arrangements as well as bilateral free trade agreements – both, often
misleadingly referred to collectively as FTAs --
may inadvertently serve to slow down multilateral trade liberalization
although they are often rationalized as building blocks for the latter, or as
intended to put pressure to accelerate progress in that direction. Foreign Direct Investment
UNCTAD’s
World Investment Report of 1999
showed that more than 80 per cent of foreign direct investment (FDI) in the world in the 1990s consisted of mergers and
acquisitions (M&As). And as far as the South is
concerned, most of these have been acquisitions, rather than mergers. Hence,
most FDI is not ‘green-field’ investment that
creates new productive capacity. And while ‘green-field’ FDI
may increase economic capacity, it may also pre-empt the development of
indigenous capacities and capabilities, besides draining away much of the
economic surplus needed to sustain growth in the medium and long term. Recent
pressures for investment deregulation, ostensibly to attract more FDI, have in fact resulted in fewer gains for host
economies from incoming FDI owing to the more
generous terms and conditions offered. Meanwhile, there has been a decline of
global FDI, especially to the South, since the
mid-1990s. International
Financial Liberalization
Greater capital flows, due to
financial liberalization, have not resulted in net inflows of funds from the
capital-rich to the capital-poor. The opposite has, in fact, been the case.
The cost of capital has not fallen, while the volatility of the international
financial system has grown, due to -- rather than despite -- financial
deepening. Meanwhile, the frequency and severity of currency and financial
crises have increased. Although some new derivatives have reduced some old
sources of volatility (due to exchange or interest rate fluctuations, for
example), new sources of volatility have been created by these very same
instruments, exacerbated by greater ‘financialization’
reflected, for example, by the growth of hedge funds. International financial
liberalization has made finance capital much more influential and dominant,
exerting severe deflationary pressures on macroeconomic policy throughout the
world, which has slowed growth. Financial liberalization has also undermined
financial policies, institutions and instruments to pro-actively promote
growth of desired firms and industries. Intellectual Property Rights
Strengthened intellectual property
rights have reduced technology transfer, and raised the costs of
technological acquisition, and consequently, productivity, growth and
competitiveness improvements. Revenue from IPRs is
now believed to be the greatest single source of foreign exchange earnings
for the USA. Recent studies suggest that this is not just inequitable, but
also inefficient. Publicly funded pharmaceutical research in the US, for
example, would be less costly, as well as more equitable and efficient than
existing arrangements (Baker & Weisbrot, 2003).
Of course, stronger assertion of intellectual property rights is a recent
phenomenon, dating from the mid-1980s, and analytically contradicts economic
liberalism. IPRs confer exclusive monopoly rights
and associated incomes to their owners, thus strengthening the monopoly
powers of powerful transnational corporations. International Economic Governance
International economic
governance issues have become more important with globalization and
international economic integraton. As noted above,
the Uruguay Round transformed the WTO into a major
agency to promote the liberalization of trade as well as other economic
transactions while strengthening regulation to strengthen and enhance transnational corporate interests. Meanwhile,
reform of the international financial
system has been difficult, but nonetheless remains urgent. There are no
longer any serious efforts to address the international financial
architecture after the concerns of the late 1990s following the Asian and
Russian financial crises. It took 15 years and a world war before there was
reform in 1944 after the Crash of 1929. The IMF
and the World Bank were thus created at Bretton
Woods to address fundamental problems after that systemic crisis. In
1971, the Bretton Woods system was unilaterally
destroyed by President Nixon, but there has been no systemic reform since
despite the growing frequency of currency and financial crises in recent
years. With the end of the Bretton Woods system,
the IMF has created new roles – and rules – for itself,
which need to be critically examined. Unlike the UN Security Council, where
five countries have veto powers, only the US has veto power in the IMF. In the Bretton Woods
institutions, voting rights favour rich country governments in an archaic
system inherited from the end of the Second World War. The
IMF is widely perceived to advocate different
policies for large developed economies in contrast to emerging markets and
developing countries. The Wall Street
Journal periodically condemns the Fund for urging the US and Europe to
adopt counter-cyclical policies to stimulate their economies, but the Fund
rarely urges developing countries to adopt similar counter-cyclical policies.
Instead, its macroeconomic and other policy conditionalities
and recommendations tend to have pro-cyclical and hence contractionary
consequences. Many observers (e.g. Stiglitz 2002) have also noted that the IMF has made serious policy errors in recent years that
have undoubtedly reduced cumulative economic growth and welfare for hundreds
of millions of people. In Russia and Brazil in 1998, overvalued exchange
rates -- that ultimately collapsed -- caused serious economic damage. Shock
treatment and ill-considered transition policies in the economies of the
former Soviet Union have, over the last decade and a half, contributed to one
of the worst economic disasters in the history of the world, with Russia
losing more than half its national income. The Fund has failed to help devise
more effective crisis avoidance safeguards, and IMF
involvement has often exacerbated, rather than ameliorated crises when they
have occurred. Besides its poor record of crisis aversion and crisis
management, it has not significantly enhanced international liquidity to
facilitate coordinated reflationary measures to
reverse the generally deflationary macroeconomic policies it has encouraged
since the 1980s, let alone relieve economic stagnation, poverty and
unemployment. Even the IMF Managing Director has been forced to acknowledge East
Asian alienation and the need to re-invent the Fund to stay relevant. William Easterly (2000), then
a senior World Bank researcher, has noted that ‘The poor in developing
countries are often better off when their governments ignore the policy
advice of the International Monetary Fund and World Bank’. IMF and World Bank policymakers claim that their reforms
often require necessary short-term pain for the sake of long-term gain.
According to him, during times of economic growth, the poor did not gain as
much in countries in which the IMF lent money as
they did in places with no programs, although they were not hurt as badly in
recessions. Meanwhile, China, India and other countries in East Asia that
have not followed IMF economic programs and
prescriptions have seen more of their people lifted out of poverty in times
of economic growth than have nations that take the advice of the
Washington-based lenders. Hence, the Washington
Consensus cannot point to any region in the world as having succeeded by
adopting the policies that they promote or require in borrowing countries.
Understandably, they are reluctant to claim credit for China, which maintains
a non-convertible currency, state control over its banking system, and
otherwise contradict standard Washington Consensus prescriptions. If
globalization and other policies promoted by the Washington Consensus have
not led to increased growth, it becomes extremely difficult to defend these
policies. The costs of these changes—the destruction of industries,
unemployment and lower incomes, besides the harsh ‘austerity’ medicine often
demanded by these institutions and by international financial markets—become
burdens to society and setbacks to economic development without any
compensating benefits. Meanwhile, domestic financial
institutions and policies -- so crucial to earlier developmental efforts (Gerschenkeron 1962) -- have been reduced, if not
undermined by financial liberalization. Yet, recent IMF
research now concedes that international financial liberalization has not
contributed to growth while increasing monetary and financial instability.
Yet, IMF operations in most countries do not seem
to have recognized the policy implications of its own research. Lower tax revenues and
increasing insistence on balanced budgets or fiscal surpluses have also
generally constrained government spending, especially what is deemed social
expenditure, with some deflationary consequences. Privatization in many
countries temporarily increased government revenues, enabling governments to
temporarily balance budgets or have surpluses on the basis of one-off sales
incomes. Such budgetary balances are clearly unsustainable, but have
succeeded in, at least temporarily, obscuring the imminent fiscal crises such
policies may lead to. In the meantime, structural
adjustment programs (SAPs) and now poverty
reduction strategies (PRSs) have been used to
promote economic liberalization, with adverse consequences for the developing
world. Meanwhile, developing countries are much more divided today because
much of the burden of the HIPC initiative is
actually borne by middle-income borrowing countries, rather than only by the
rich creditor countries – as is widely believed. Of course, the ostensible current
focus on poverty reduction is better than the earlier emphasis on
stabilization, adjustment and liberalization, but much of the recent
discussion of poverty reduction is palliative, rather than developmental in
nature, focussing on welfare and distribution without creating conditions for
sustainable economic progress. On the other hand, there is widespread
suspicion that including poverty on the economic development reform agenda
has basically served as sugar-coating on the Bretton
Woods institutions’ economic liberalization agenda despite their by now well known
in-equitable and contractionary consequences. The
failure of the Washington Consensus to rise to the challenge of human
development, especially in the South, requires us to go well beyond its
research, analytical and policy agenda. Instead of just adding poverty, or
institutions, or governance, or social capital, or culture, or whatever the
new policy ‘flavour of the month’ may be, commitment to rigorous economic
analysis as well as egalitarian, balanced and sustainable development
requires not only critical analysis of Washington Consensus analyses and
policies as well as their consequences, but also of the alternatives
currently on offer in order to develop feasible and viable development
alternatives appropriate and equal to the challenges at hand. References Easterly,
William (2000). ‘The Lost Decades: Developing Countries Stagnation in Spite
of Policy Reform, 1980-1998'’. Processed, Development Research Group. World
Bank, December. Jomo K. S. and
Ben Fine [eds] (2006). The New Development Economics. Zed Books, London. Mi1anovic, Branko (1999). ‘True World Income Distribution, 1988 and
1993: First Calculation Based on Household Surveys Alone’. Policy Research
Working Paper 2244. World Bank, Poverty and Human Resources, Development
Economics Research Group, Washington, DC. Stiglitz, J. E.
(2005). ‘The “Post-Washington Consensus” Consensus’. Processed, Initiative
for Policy Dialogue, Columbia University, New York. Weisbrot, Mark,
Robert Naiman, and Joyce Kim (2000). ‘The Emperor
Has No Growth: Declining Economic Growth Rates in the Era of Globalization’.
Processed, Center for Economic and Policy Research,
Washington DC. Weisbrot, Mark,
Dean Baker and David Rosnick (2005). ‘The Scorecard
on Development: 25 Years of Diminished Progress’. Processed, September, Center for Economic and Policy Research, Washington DC. Williamson,
John (2004). ‘A Short History of the Washington Consensus’. Paper presented
at Foundation DIDOB conference on ‘From the
Washington Consensus towards a new
global governance’, Barcelona, September. ___________________________ SUGGESTED
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