Last rites for the Washington Consensus

PUBLISHED : Thursday, 05 June, 2008, 12:00am
UPDATED : Thursday, 05 June, 2008, 12:00am

An official consensus has emerged about the Washington Consensus - it's dead. Western aid and institutional loan agencies have long adopted its mantra for developing countries - liberalise, stabilise and privatise. But its failure has been so glaring after the Asian economic crisis and in Latin America - where it has been most painstakingly applied since the late 1980s - that even the World Bank is calling for a new programme.

It did so two weeks ago with the release of the report of the World Bank Growth Commission, led by Nobel economics laureate Michael Spence. Actually, except for US right-wing economists and the editorial board of the Wall Street Journal, everyone else has been pretty clear about the consensus' failure.

Dani Rodrik, of Harvard University's John F. Kennedy School of Government, and Korean-born Chang Ha-joon, of Cambridge University, have separately examined the growth rates of Latin America with Southeast Asia from the 1960s to the present. They found that the Latin American countries not only lagged behind the star economies in Asia - China, India and Vietnam - after they adopted the Washington Consensus as policy from the late 1980s, but they even fell behind their own growth rates in the 1960s when they engaged in precisely the policies the consensus counselled against. Interestingly, they all ranked high on the economic freedom index of the right-wing US Heritage Foundation - much loved by the Hong Kong government - while the star Asian economies were low on the index.

But what about the other consensus - the Beijing Consensus, long posed as its rival? Its fingerprints are all over the bank's report. After all, Zhou Xiaochuan , governor of the People's Bank of China, was a key commission member. The problem is there really has never been a consensus, per se, about what it is, other than being a kind of extreme pragmatism when it comes to a poor country's economic development. Rather than being a consensus, it points to China's extraordinary poverty reduction that needs to be explained.

Between 1981 and 2001, there were roughly 400 million fewer people in the world living on less than US$1 a day - an oft-used definition of extreme poverty. During this time, about 400 million mainland Chinese were pulled out of extreme poverty under this definition. In other words, some countries have more poor people, others have fewer. But the net result has been that the world has seen very little poverty reduction if we take China out of the equation.

China's answer is, of course, unbridled growth, at any cost. It's not clear whether China's case is universally applicable; even Beijing is working to slow it down now. The World Bank report, however, has made sustainable growth the overriding focus. There is no single formula, it says, but many possible ingredients, some of which can be driven by markets, others by governments. But the active management and commitment of governments are crucial. This is, of course, the opposite of the free-market principles of the Washington Consensus.

The next step in the report sounds remarkably like recommendations from Professor Rodrik. Each poor country, he argues, must first remove its unique set of 'binding constraints' that denies it growth. But to sustain growth, building viable institutions then becomes necessary - the rule of law; governance; protection of people and property; social safety nets. What the Washington Consensus got wrong is that, at least in its modified version, it insisted on setting up these institutions first. Clearly, the poorest countries do not have the resources to do so; otherwise, they would not have been poor.

What the World Bank report has come up with has been criticised as being neither here nor there. But the report is a hybrid of what is valid about the two previous consensuses. It is, at least, non-dogmatic. This must count as an intellectual breakthrough of sorts for the global development bank.

Alex Lo is a senior writer at the Post