Development Policy in the Twenty-First Century

Beyond the Post-Washington Consensus

Ben Fine, Costas Lapavitsas, Jonathan Pincus, Ben Fine, Costas Lapavitsas, Jonathan Pincus

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781134402328
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The Post-Washington Consensus has succeeded in becoming the new theoretical underpinning for the World Bank's Structural Adjustment policies in developing countries. This broad-ranging critique explains that without a much broader political economy the Post-Washington Consensus is unlikely to provide a coherent framework for successful development policies.
Development Policy in the 21st Century is unique in its depth and assesses the postures of the new consensus topic by topic, whilst posing strong alternatives. It will improve and stimulate the reader's understanding of this important area, and is highly recommended to advanced students and professionals

1 Neither the Washington nor the post-Washington consensus: An introduction¹

Ben Fine

In 1994 the World Bank and the IMF marked the fiftieth anniversary of their founding meeting at Bretton Woods. The occasion was hardly one of celebration for the two Washington institutions with which official post-war international financial arrangements are most closely identified. This was because, paradoxically, in the lengthy wake of the Uruguay round of the GATT, the World Trade Organization was looming on the horizon, signifying the long delayed but culminating success in creating the trade counterpart to the financial institutions. In contrast, the prospects and standing of the IMF and the World Bank were at their lowest ever ebb. The institutions’ own activity around their anniversary was muted, introspective and defensive.² To some extent, this was a consequence of what has been termed an ‘identity crisis’.³ It was made up of a number of elements. The neo-liberal Washington consensus, in favour of the market and antagonistic to the state, was at its height. However, the institutions were clearly failing to deliver in terms of economic development and stabilisation. As de Vries (1996, p. 65) reported:

After more than fifty years of operations, the Bank still faces a world where over 1 billion people live in deep poverty, with per capita income of less than a dollar per day. Many countries suffer poverty rates between 25 and 50 per cent of their population. These conditions persist despite important improvements in critical social indicators such as life expectancy, infant mortality, access to safe water, primary school enrollment and immunization.

Criticisms were mounting around the environment and women, quite apart from poverty, and the more general efficacy and impact of the adjustment policies being advocated, even imposed, by the Bank and the IMF.

From the right, the ideology of laissez-faire was inevitably being pushed to its logical conclusion – the negative impact and futility of the interventions of the Washington institutions themselves. Far more telling, however, was the growing weight of criticism emanating from development academics and practitioners, evidenced by the titles of their work – such as Beyond Bretton Woods: Alternatives to the Global Economic Order, Fifty Years is Enough: The Case against the World Bank and the International Monetary Fund, A Case for Reform: Fifty Years of the IMF and World Bank and The Globalisation of Poverty: Impacts of IMF and World Bank Reforms.⁴

The fiftieth anniversary coincided with the convergence of an increasingly dogmatic neo-liberal posture, the stubborn failure of adjustment policies and mounting criticism to which response was at best limited in scope. The situation was in one sense suitably symbolised by the World Bank's report, The East Asian Miracle (1993). In the report, the success of the Asian tigers was reduced to the Bank's extensive interventions being equivalent, where successful, to what the market would have done if working properly; it drew the conclusion of non-replicability in other countries. The ‘developmental state’, associated so closely with East Asian success outside the World Bank and IMF, was not so much dead as undead – from the neo-liberal perspective only ever having been alive as a parasite on the market.

However, the unadulterated market had passed its sell-by date. Even looking back today, after the passage of only a few years, both the status and the stance of the Washington institutions look completely different, albeit with the World Bank leaping ahead of the IMF, which continues to drag its feet. The World Bank's renewed commitment to poverty alleviation, its more favourable attitude towards the state and its less dogmatic rhetoric have endeared it to the donor community. The report on the East Asian miracle can now be read in retrospect not so much as simply reaffirming the market but more as a renewal of a belief in the role of the state. In this light, if a single event can be pinpointed as having prompted the motivation for this sea change, it is that provided by the remarkable speech made by Joseph Stiglitz (1998) in early 1998. Here, even more than is suggested by the title of his talk, ‘More instruments and broader goals: Moving toward the post-Washington consensus’, Stiglitz was seeking to establish a new agenda for economic development. He deliberately perceived himself not only as broadening the scope of policy making in terms of goals and instruments but also as placing such policy making on a sounder understanding of how the economy, and especially markets, work or, equally importantly, do not work. Broadly, then, Stiglitz explicitly rejected the Washington consensus and offered a post-Washington consensus in its place. This proposed intellectual and policy watershed did not emanate from some disillusioned academic or NGO activist. Stiglitz was serving as Senior Vice President and Chief Economist to the World Bank as well as having previously chaired the US Council of Economic Advisors. In short, the Washington consensus was under assault from within. For Stiglitz (1998, p. 1):⁵

[The Washington consensus] held that good economic performance required liberalized trade, macroeconomic stability, and getting prices right. Once the government handled these issues – essentially once the government ‘got out of the way’ – private markets would produce efficient allocations and growth …. But the policies advanced by the Washington consensus are hardly complete and 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, to name some fundamental issues neglected by the Washington consensus.

The Washington consensus had emerged in the early 1980s as the neo-liberal counterpart for developing economies to the Reaganism and Thatcherism that had been prescribed for developed economies – an ideology of reliance upon market forces, and of the reduction of state intervention and expenditure to a minimum. It has had the effect of posing economic issues in terms of the state versus the market, leaning heavily, or falling over, in favour of the market. Opposition to the consensus (and it has been extensive) has, however, often been induced to accepting the terms of debate dictated by the consensus – to counterposing the state and the market, and to favouring state intervention whether in getting prices wrong, picking winners or guiding the private sector through public expenditure. In contrast, for Stiglitz (1998, p. 25):⁶

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 focusing on the fundamentals is not a recipe for a minimalist government. The state has an important role to play in appropriate regulation, industrial policy, social protection and welfare. But the choice is not whether the state should or should not be involved. Instead, it is often a matter of how it gets involved. More importantly, we should not see the state and markets as substitutes … the government should see itself as a complement to markets, undertaking those actions that make markets fulfil their functions better.

In this light, Stiglitz's proposal for a post-Washington consensus builds upon, accelerates and leaps ahead of the earlier, painfully slow, intellectual and ideological shifts that could already be detected as present within the World Bank over the last few years. The changing approach was barely discernible in the process leading to the production of the World Bank's The East Asian Miracle (1993)⁷, and has subsequently gathered pace through successive versions of the World Bank's annual posture, as presented in its World Development Report.⁸ From anti-market, through market-conforming, to market-friendly, the state has been seen more positively, if cautiously so. Stiglitz has emerged as the economist at the forefront of the charge, putatively sweeping aside the old consensus and underpinning the new with sound intellectual, policy and ideological credentials.

In short, even before the old consensus has been decently assessed and buried, the pretender to its throne is already grabbing at the crown in a palace revolution. However welcome the demise of the old consensus might be to those who have opposed it for almost two decades, the question of succession needs to be contested. It is not simply a matter of posing alternatives to the new consensus but whether the latter should be allowed to dominate the development agenda – as did its predecessor by posing state versus market. One of the key features of the old consensus has been its almost total neglect both of alternative approaches to the economy and to criticism of its theoretical, empirical and policy stances.⁹ As will be seen, the proposed post-Washington consensus is based upon the need to acknowledge and address market imperfections. As such, it broadens the analytical and policy scope that it encompasses relative to the earlier consensus. However, by the same token, it does so by completely by-passing all criticism of its predecessor that is not based on an approach tied to its own understanding of market imperfections, and it precludes such approaches as alternatives for future perspectives. As will be seen, the new consensus deploys more variables on a wider scope and less dogmatically than the old. Nevertheless, its intellectual narrowness and reductionism remain striking, for it replaces an understanding of the economy as relying harmoniously on the market by an understanding of society as a whole based on (informational) market imperfections.

Intellectual foundations

The intellectual basis for the new consensus is readily identified, not least through the work of Stiglitz himself over the past two decades. Essentially, the motivating idea is very old – that market imperfections can justify state intervention to rectify them, although, in the wake of the Washington consensus, the state is no longer seen as the source of an all powerful and benevolent corrective. State failure must be no worse than the market failure it is designed to remedy. Traditionally, market imperfections have been seen in terms of the conditions under which a perfectly functioning market fails to prevail – as for the presence of externalities, increasing returns to scale or monopoly pricing. The new twist, however, is to broaden the scope of what goes into the making of market imperfections. These now include informational imperfections and asymmetries of various sorts, including the presence of transactions costs, so that market outcomes depend upon who has what information before, during and after the economy's passages in and out of exchange.

Stiglitz (1994) provides a typical example, drawn from the labour market. Employers might know the average productivity of all workers but not that of individual workers. If a less productive worker decides to join the labour market or to work for longer hours for whatever reason, the average productivity of all workers is reduced, thereby lowering the incentive of employers as a whole to take on workers. It is as if there is an externality, for employers behave as if the quality of all workers has been lowered even if this is not the case:

The unproductive worker, in deciding to work more hours, lowered the mean quality of those offering themselves in the labour market and thus exerted a negative externality on others.

Such an insight is far from novel, not least in the context of an industry, for example, that seeks self- or government regulation to sustain a reputation of quality for itself, thereby excluding ‘cowboys’ in the building trade or ‘lemons’ in the second-hand market for cars. The new microeconomics of information is remarkable for seizing upon such ideas, finding as many examples as possible and potentially generalising them across all markets. Market imperfections are pervasive and, when information is imperfect, markets may not operate at efficient levels, they may not clear and they may even fail to exist altogether. Indeed, Stiglitz and various collaborators draw upon formally proven theorems of the type which show that there should always be a mix between the private and public sector, and that the market always works imperfectly in the presence of market imperfections.

In this vein, Stiglitz (1994, p. 5) feels able to make two significant claims. First, he perceives that a new approach to economics has been established which enhances the understanding of how markets work, and which is applicable across a wide range of subject matter:

During the past fifteen years, a new paradigm, sometimes referred to as the information-theoretic approach to economics … has developed …. This paradigm has already provided us with insights into development economics and macroeconomics. It has provided us with a new welfare economics, a new theory of the firm, and a new understanding of the role and functioning of financial markets.

Second, Stiglitz counterposes the new paradigm to the old, or that of mainstream neo-classical economics, which is organised around perfectly working markets. This creates the impression of rejecting the old and breaking radically new ground.¹⁰

Further, the theory suggests imperfect markets in three different ways. As in the case above, the market may clear (supply equals demand) but in an inefficient way – with higher-productivity workers not prepared to work at the lowered average wage of all workers. In addition, the market might not clear (if, for example, employers offer higher wages to attract higher-productivity workers but do not employ all prepared to work at that or even lower wage). Finally, a market may not be formed at all (if employers do not consider that there is a wage at which average quality of, say, young workers coming forward is high enough).

While the example given is from the labour market, the new approach is general and can apply to any market, each of which is liable to have its own type of informational and other market imperfections. These are also presumed to be pervasive in developing countries, giving rise to inefficient, non-clearing or absent markets. While a whole range of new economic applications has been built up on these informational, and other, principles, it is the narrowness of their analytical scope that is breathtakingly presumptuous from the perspective of other approaches, both within economics and other social sciences. For example, many of the references above are drawn from Stiglitz's (1994) consideration of the viability of socialism. While modestly accepting that he is unable to claim to be an expert on the basis of a few visits to socialist economies, the question is reduced to how informational imperfections are handled. The only other work considered on the topic is that which, appropriately or not, can be forced into this analytical framework.¹¹

By the same token, the break with mainstream neo-classical economics can only be exaggerated. In any case, the notion of a perfectly working market economy has long been seen by the orthodoxy as the standard against which the real world should be judged rather than ...