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Title: The Washington Consensus. The Report of the Commission on Growth and Development


1
The Washington Consensus. The Report of
theCommission on Growth and Development
POVERTY, INEQUALITY AND INCOME DISTRIBUTION
(30195) Academic year 2011/2012 Second Part Prof.
Renata Targetti Lenti (targetti_at_unipv.it)
  • Lecture 7 15/12/2011

2
  • Marangos J., What happened to the Washington
    Consensus? The evolution of international
    development policy, The Journal of
    Socio-Economics n.38, 2009, pp. 197208,
  • http//www.soc.uoc.gr/marangos/pdf/53-2009-Jo
    urnal20of20Socio-Economics.pdf
  • Kanbur R., The Co-Evolution of the Washington
    Consensus and the Economic Development Discourse,
    http//aem.cornell.edu/research/researchpdf/wp/Cor
    nell_AEM_wp0905.pdf

3
The growth policies in the 50, 60, 70 and 80. The
historical setting
  • The sixty years since the end of the
    second-world-war have seen cycles of consensus
    among the economic policy making elite along the
    to continuum from left (non-neo-liberal) to
    right (neo-liberal), and in what combinations,
    has moved first one way and then another.
  • In particular the quarter century after the
    second-world-war saw the peak of the
    inward-oriented, state-oriented development
    paradigm driven by an acceptance of the
    pervasiveness of market failures (or
    non-existence of many markets) in developing
    countries.
  • Economists and policy makers were convinced that
    governments were able to stimulate growth and to
    expand production capacity through adequate
    policies.
  • The development strategies of developing
    countries focused on accelerating the rate of
    capital accumulation and of technological change.
    From the theoretical point of view the dominating
    growth models were the Keynesian Harrod Domar ad
    the neoclassical Solow model.

3
4
  • In Latin America policies were based on
    protectionism, State ownership of industries and
    regulation of prices, interest rates and exchange
    rate.
  • The newly independent countries in Africa
    followed a similar path, setting up marketing
    boards to protect their farmers from the
    fluctuations of world market prices. A range of
    state controlled industries were established to
    process raw material, and more.
  • Agencies like the World Bank, surprising though
    it may seem today, were in full support of such
    strategies. The World Bank financed many of the
    state enterprises that were producing behind
    import barriers in countries that emerged from
    successive waves of the post-war decolonization.

4
5
  • The justification for an active intervention of
    the State, the so called Developmental State,
    were the following
  • 1) Inflation can help to mobilize resources from
    the wealthy elite who resisted to more efficient
    forms of taxation
  • 2) States owned enterprises can promote
    investments in manufacturing, particularly in
    capital-intensive industries
  • 3) Price controls did not have serious economic
    consequences because the concentration of wealth
    precludes the reallocation of resources in
    response to changes in demand.

5
6
  • Export pessimism was the rationale for
    import-substitution strategies.
  • The perceived success of Keynesian policies in
    restoring full employment in the industrialized
    west after prolonged high unemployment in the
    1930s, and of the Soviet Union in transforming
    itself from an agrarian nation at the time of the
    communist revolution to an industrial power in
    the 1930s, 40s and 50s, was the spur to setting
    up of the Indian Five Year Plans.
  • The objectives of central planning was the
    management of aggregate demand management and
    heavy investment in state-owned enterprises
    behind walls of tariff protection.
  • Controls over the financial sector and a variety
    of price controls were widespread.

6
7
  • The 1970s were a decade of considerable
    rethinking of the economic development paradigm
    that had dominated the previous three decades.
  • The macro level policies of trade protection and
    heavy state intervention in industry was
    criticized from the left for not giving
    distribution sufficient attention, and from the
    right for giving insufficient attention to
    trade and to the private sector.
  • There emerged a story of development success
    which was to have a major impact on the
    development discourse. This was the growth with
    equity experienced by the East Asian economies
    of South Korea, Taiwan and Malaysia.
  • In these economies, income poverty had fallen
    significantly in the wake of historically high
    growth rates.
  • Land reform in South Korea and Taiwan (imposed
    by Americans after the war), early spread of
    basic education, and growth of demand for
    unskilled labor in labor intensive export
    industries were the main factors of the success.

7
8
  • At the end of the 80s this opinion on the role of
    State was totally reversed. The cost of
    government failures appeared to be considerably
    larger than the cost of market failures.
    Government interventions interfered with
    development.
  • There was a swing away from postwar Keynesianism
    in Europe and North America, which had its own
    political economic logic.
  • The two oil shocks (1973, 1979) led to severe
    balance of payments difficulties for non-oil
    exporting countries in Latin America, Asia and
    Africa.
  • The US Federal Reserve, under Paul Volcker,
    raised interest rates dramatically to squeeze
    inflation out of the system in the US, with a
    resultant rise in the dollar.
  • This led to unsustainable debt repayment burdens
    (mostly dollar denominated) for many countries in
    Latin America and in several others with heavy
    exposure to external debt. The immediate crisis
    was one of lack of foreign exchange to service
    debts and purchase imports.

9
  • In this context, trade liberalization was
    advanced as a solution to generate foreign
    exchange through exports.
  • The crisis arguments meshed with longer term
    arguments on the efficacy of inward looking
    versus outward oriented development strategies.
  • The new wisdom was that integration into the
    global economy was the best strategy for economic
    growth, and growth was the best route to poverty
    reduction.
  • Then came 1989, the fall of the Berlin wall, and
    the triumphalism of the end of history.
  • This was the culmination of the general pressure
    for reducing the role of the state in the economy
    that saw its apogee in the Reagan-Thatcher-Kohl
    era.

10
  • With the collapse of the communist system the
    lessons for developing countries also seemed
    clear.
  • In India with the sixth and seventh Five Year
    plans (1980-85 and 1985-89) began the process of
    economic liberalization. Key price controls were
    abolished.
  • After a period of political instability, in 1991
    major external liberalization measures were
    announced, and the gradual opening of the Indian
    economy was undertaken.
  • In Africa, external liberalization was
    undertaken, the most obvious indicator of which
    was the freeing of the exchange rate from
    controls and rationing in most of Eastern and
    Southern Africa, and gradual removal of
    quantitative trade restrictions and lowering of
    tariffs.
  • In Latin America, similar external sector
    liberalizations were undertaken.

11
  • The 1980s and 1990s also saw the opening up and
    integration of China into the global economy
    (formally, the Chinese process began in 1978).
  • While politically communist, China increasingly
    took on the characteristics of a market economy,
    with peasants being allowed to keep what they
    produced, inward foreign investment, and
    spectacular increases in exports, investment and
    economic growth.
  • Thus during the 1980s and 1990s the economic
    development discourse took a distinct turn away
    from the previous consensus among the economic
    policy making elite.

12
  • For more than four decades, development was seen
    (at least by economists belonging to the
    "mainstream") as mainly a matter of economics.
  • Increasing the capital stock (either through
    transfers from abroad or through higher savings
    rates at home) and improving the allocation of
    resources were considered the way to promote
    higher and sustained growth rates.
  • Less developed countries were portrayed to be
    identical to the more developed countries, except
    perhaps in the extent of the inefficiencies in
    resource allocations (which, in turn, were
    related to the greater incidence or laking or
    malfunctioning of the markets).

13
  • Economists views differed in policy
    prescriptions, that is on what policies could
    improve resource allocation, and what role
    government should play.
  • For economists belonging to mainstream the
    solution was to improve markets functioning, and
    in particular, the elimination of government
    imposed distortions associated with
    protectionism, government subsidies, and
    government ownership.
  • The replacement of the traditional economic
    development strategy with a simple code of rules
    as privatisizing and liberalizing international
    trade and capital flows, has been considered the
    solution for many underdeveloped countries and
    mainly for Latin American countries.
  • Distributional issues were left only to the
    working of the market and any redistributive
    initiative were seen as either likely to
    distort the market or to scare investors.

14
The conventional wisdom in the 90 the Washington
Consensus.
  • Washington Consensus is considered, in a first
    interpretation, as the vision of the Washington
    main Financial Institutions
  • Originally the expression Washington Consensus
    was coined to capture the wisdom of the
    Washington-based Institutions (the International
    Monetary Fund, the World Bank and the US
    Treasury) behind the policies aimed to promote
    development in Latin America.
  • Later on it has been applied to all developing
    and transition countries. This approach can be
    considered the result of the criticisms made by
    mainstream economists of development economics.

15
  • Williamson has captured the growing Washington
    Consensus on what the developing countries should
    do.
  • The assumption of the Washington Consensus was
    that it was impossible for markets to function,
    or at least to function well, and for industries
    to become competitive in the global markets
    because of macroeconomic imbalances.
  • From the beginning of 1990s, the focus of World
    Bank interventions and prescriptions shifted to
    macroeconomic issues in order to
  • 1)"adjust" imbalances (external deficit, State
    budget deficit)
  • 2) and change monetary policies (too
    expansionary, overvalued exchange rate).

16
  • The term Washington Consensus was coined in
    1989. The first written usage was in a background
    paper for a conference held at the Institute for
    International Economics by John Williamson in
    order to examine the extent to which the old
    ideas of development economics that had governed
    Latin American economic policy since the 1950s
    were being swept aside by the set of ideas that
    had long been accepted as appropriate within the
    OECD countries.
  • This author made a list of ten policies, that can
    be grouped as a) Structural Reforms b)
    Macroeconomic Policies.
  • Stabilize, privatize, and liberalize became the
    mantra of a generation of technocrats and of the
    political leaders they counseled.
  • The ten policies prescriptions proposed by
    Williamson are based on the assumption that
    competitive equilibrium theorem can be applied
    for raising efficiency of the markets.

17
Structural Reforms
  • 1. Tax reform
  • It is directed to lower marginal tax rates and to
    broaden the tax base. This reform was needed also
    for replacing the revenue lost by trade reforms.
  • A good tax reform with the introduction of taxes
    based on income was desirable. In many developing
    countries tax systems are generally based only on
    the introduction or extension of VAT (Value-Added
    Tax)
  • 2. Deregulation
  • This focused specifically on easing barriers to
    entry and exit, not on abolishing regulations
    designed for safety or environmental reasons, or
    to govern prices in a non-competitive industry.

18
  • 3.Financial sector and Interest Rates
    liberalization.
  • The goal was to build an efficient banking system
    able to intermediate internal capital flows
    efficiently. The necessary condition was a
    normative system (banking and contracts rules).
    This reform could yield a real social benefit in
    term of an improved allocation of investment.
  • The agenda for financial liberalisation went
    broader than interest rates, to include most
    importantly the liberalisation of credit flows.
    As Joe Stiglitz has often pointed out it should
    have needed to be supplemented by prudential
    supervision if it were not to lead almost
    inexorably to financial crisis.
  • 4.Trade liberalization
  • This reform is intended to get rid of
    quantitative restrictions and to reduce tariffs
    progressively.
  • The old import substitution policy based on
    internal firms protection brought to
    inefficiency. Once introduced the protection
    cannot be easily eliminated.

19
  • 5.Privatization of State owned enterprises
  • The goal was to rise efficiency and profitability
    of the privatised enterprises and to increase
    coverage and access to privatised utilities.
  • Of course it matters a lot how privatisation is
    done it can be a highly corrupt process that
    transfers assets to a privileged elite for a
    fraction of their true value, but the evidence is
    that it brings benefits (especially in terms of
    improved service coverage) when done properly,
    and the privatised enterprise either sells into a
    competitive market or is properly regulated.
  • 6. Secure property rights
  • This was primarily about providing the informal
    sector with the ability to gain property rights
    at acceptable cost. This protection will allow to
    obtain credit from the formal sector.
  • The goal is to mobilize assets and to reduce the
    cost of defending property

20
Macroeconomic Policies
  • 7.Fiscal discipline
  • The goal is to reduce budget deficits through a
    selective reduction of expenditures (not social
    expenditures).
  • This was in the context of a region where almost
    all countries had run large deficits that led to
    balance of payments crises and high inflation
    that hit mainly the poor because the rich could
    park their money abroad.
  • 8.Reordering public expenditure priorities
  • Priority should be given to expenditures with
    high economic returns and aimed to improving
    income distribution in a pro-poor direction such
    as primary health care, primary education and
    pro-growth expenditures (infrastructures).
  • This was not intended to cut the total amount of
    expenditures, but only to direct them toward the
    social ones.

21
  • 9. Competitive exchange rate
  • A devaluation of the exchange rate is considered
    an instrument to fostering exports growth.
  • 10.Liberalization of FDIs inflows
  • According to the 2 gaps model 1) in a first
    period trade deficit is binding (imports are
    higher than exports), in a second period saving
    gap is binding (saving is higher than
    investment).
  • In the first period a foreign inflow of capital
    is needed to accelerating growth.

22
  • The Washington Consensus as Williamson
    conceived it in 1989 was a set of reforms
    suggested for starting economic development in
    Latin America.
  • Williamson conceived it as the lowest common
    denominator of the reforms that he judged
    Washington could agree were required in Latin
    America.
  • After the failure of these policies in the
    second half of 90 Washington Consensus has been
    identified as a neoliberal manifesto and calls
    were made for the implementation of a different
    set of policies called post- Washington
    Consensus by Stiglitz.
  • Rodrik observed that by the end of the 1990s the
    consensus had been altered in the form of what he
    named the Augmented Washington Consensus.

23
  • The term has evolved to denote a different set
    of policies than were initially proclaimed.
  • Williamson in subsequent writings changed the
    set of policies by elaborating and expanding them
    and attempting to incorporate the criticisms
    associated with the definition and interpretation
    of the term.
  • He reacted to criticisms related to the negative
    results of the Washington Consensus as a policy
    prescription and to the Bretton Woods
    institutions failures in managing the 1990s East
    Asian financial crises and returning the affected
    countries to normal conditions.
  • Williamson and Kuczynski offered a new set of
    policies the After the Washington Consensus.

24
The results of a decade of reforms
  • Many countries (80) accepted the deregulations
    policies suggested by the World Bank. Prices
    become indicators of scarcity. Protectionism was
    reduced, overvaluation of exchange rate was
    eliminated.
  • The one thing that is generally agreed on about
    the consequences of these reforms is that things
    have not quite worked out the way they were
    intended.
  • Certain recommendations of the Washington
    Consensus were relevant for addressing the
    economic crises of Latin America in the 1980s.
  • They produced some improvements in economic
    policy management, like lower inflation, low
    budget deficits, reduced external debt and some
    economic growth
  • However they were insufficient for achieving
    long term growth or even macroeconomic stability
    under different conditions

25
  • The consequences of these policies from the
    social point of view has been very negative 1)
    rise in inflationary pressure 2) rise in
    unemployment ratio and of poverty 3) reduction
    of social expenditure (health care, education).
  • Latin America and Sub-Saharan Africa have
    stagnated in terms of growth per capita. There
    were frequent and painful financial crises in
    Latin America, East Asia, Russia, and Turkey.

26
  • No doubts that good performance of some
    countries as East Asia, India, China has been
    associated with domestic and external
    liberalization.
  • They are all more open than in previous decades
    and have moved toward greater reliance on market
    forces.
  • But many aspects of these countries policies
    are still far from compliant with conventional
    wisdom and the prescriptions of the Washington
    Consensus.
  • The East Asian experience revealed that the
    success of these economies depended not only on
    macroeconomic stability, but rather on a robust
    financial system in which the government played
    an increasing role in creating and maintaining a
    competitive economy, and on public investment in
    human capital and technology transfer.

27
  • Contrary to expectations, financial
    liberalization did not add much to growth, and it
    appears to have augmented the number of crises.
  • The explanation for these disappointing outcomes
    lies largely in weak institutions, concentrated
    economic and political power, and macroeconomic
    shocks.
  • The lack of improved credit access reflected weak
    informational and legal frameworks. Lack of
    information on borrowers hindered lenders and
    gave borrowers no incentive to maintain a good
    credit record and reduced the incentives to
    service debts

28
  • A stream of literature (Stiglitz, Rodrik, World
    Bank, Kuczynski P.P., Williamson ), in contrast
    with the Washington Consensus, stresses the role
    of differences in the institutions underlying
    policy design and policy implementation in
    explaining different rates of growth.
  • Defined as the rules and norms constraining human
    behavior, institutions include the informal rules
    and norms that govern personal and social
    behavior and the formal rules and norms governing
    economic, social, and political life.
  • While there are some functions that institutions
    need to perform in any society, the form through
    which institutions can perform these functions
    can vary considerably.

29
  • According to Stiglitz the Washington Consensus
    failed because it viewed development too narrowly
    (lack of historical context). New growth theories
    should tackle the issue of poverty and equity in
    the growth process.
  • Development is a transformation of society, from
    traditional relations and traditional ways of
    thinking to more "modern" ways. Although the
    particular priorities will differ from country to
    country, there are some common elements
  • Successful development efforts in the United
    States, as well as many other countries, had
    involved an active role for government
  • Development was the exception around the world,
    not the rule
  • capitalist economies before the era of greater
    government involvement were characterised by high
    levels of economic instability, but also by
    widespread social/economic problems large
    groups, such as the aged and the unskilled, were
    often left out of any progress and were left
    destitute in the economic crashes that occurred
    with such regularity.

30
  • Change is not an end in itself, but a means to
    other objectives. The changes that are associated
    with development provide individuals and
    societies more control over their own destiny.
    Development enriches the lives of individuals by
    widening their horizons and reducing their sense
    of isolation. It reduces the afflictions brought
    on by disease and poverty, not only increasing
    lifespans, but improving the vitality of life.
  • A new growth theory should tackle the issue of
    poverty and equity in the growth process.
  • Development is a transformation of society, from
    traditional relations and traditional ways of
    thinking to more "modern" ways?reduction of
    dualism (urban/rural, modern/traditional
    technologies)? Cohemprensive programs.
  • Developing countries are markedly different from
    the more advanced countries and from each other.
    Each must follow his development path.

31
The post-Washington Consensus
  • A revision in the dominant thinking of
    multilateral agencies and policy economists in
    Washington produced a broader research agenda,
    the second generation reforms recognizing that
  • i) market orientated reforms were ineffective
    without institutional changes
  • ii) financial liberalization would lead to
    crises without a sensible macroeconomic framework
    and prudential supervision
  • iii) a trickle-down approach to poverty
    reduction policies was not succesfull. Thus there
    was a need for social policies and anti-poverty
    programs.

32
The Augmented Washington Consensus the role of
Institutions.
  • The Augmented Washington Consensus interpreted
    the negative outcomes of the original Consensus
    as the result of the inadequate application of
    the policies recommended, concluding that the
    original policies were based on sound principles.
  • The Augmented Washington Consensus consists of
    the 10 original Washington Consensus policies
    plus a representative sample of 10 items of the
    second-generation of reforms.
  • This extended list contains some items that are
    not new reforms in themselves but rather were
    necessary changes to make the policies in the
    original list work, or to prevent some of those
    original reforms from failing.
  • Finally Williamson partially accepted the
    criticisms associated with the original
    Washington Consensus. With the proposal of the
    After the Washington Consensus added new policies
    without dismissing the original ones.

33
New Agenda I Crisis Proofing
  • An objective of highest priority. Governments
    should attempt to reduce vulnerability to crises
    and stabilize the macro-economy.
  • Volatility also explains the high unequal
    distribution of income. This policy requires
    stabilizing inflation (consistent with the
    original Washington Consensus)
  • To stabilize the real economy through
    Keynesian policies establish a stabilization
    fund flexible exchange rates minimize the use
    of the dollar monetary policy targeting a low
    rate of inflation strengthening prudential
    supervision and increase domestic savings.

34
New Agenda II Completing First-Generation Reforms
  • The original formulation of the Washington
    Consensus was a sensible, yet an incomplete
    reform agenda. First of all, liberalizing the
    labour market, so as to encourage labour back
    into formal sector where labour will get at least
    minimal social protection.
  • Complementing import liberalization with
    better access to export markets in developed
    countries.
  • Continuing the privatization program, even
    though in some cases it was carried out badly.
    Supplementing financial liberalization by the
    strengthening of prudential supervision.

34
35
New Agenda III Second-Generation Reforms
  • In the 1990s a key innovation in development
    economics was the recognition of the crucial
    importance of institutions in ensuring that the
    economy functions effectively.
  • This generation consists in reforming the
    judiciary, providing teachers and civil services,
    building a national innovation system to promote
    the diffusion of technological information.

36
New Agenda IV Income Distribution and the Social
Sector
  • An increase in tax revenue should be used to
    reduce inequality by expanding opportunities for
    the poor, spending on basic social services,
    social safety net, education and health.
  • However, the strategy focuses more on
    measures to empower the poor to exploit
    potentialities rather than a massive
    redistribution of income through tax.
  • It is a long run strategy to allow access to
    assets that will enable the poor to earn their
    way out of poverty by improved educational
    opportunities, titling programs to provide
    property rights to the informal sector, land
    reform and microcredit. Williamson now is in
    favour of reversing the process and increasing
    direct tax revenue by establishing property
    taxation as the major source of revenue
    elimination of tax loopholes and taxing income
    earned on flight capital.

36
37
An agenda for restarting growth
  • The final question is there is now a new
    consensus on economic
  • development, in light of the recent report of the
    Commission on
  • Growth and Development?
  • The new consensus keeps key elements of the
    shift away from the
  • post-second-world-war consensus on development
    policies, but
  • restores other elements, and adds new ingredients
    of its own.
  • It is eclectic and not as focused on the
    liberal orthodoxy of the
  • 1980s. It is mostly based on the historical
    experience.
  • It is the basis for a deeper discussion of the
    policies that a country
  • should undertake in order to achieve the long run
    objective of
  • economic development.

37
38
  • The same policy can yeld different results
    depending on country institutional context.
  • One country might strengthen private
    investment by, say, improving expectations,
    whereas another country could achieve the same
    result by, say, reforming the financial sector.

39
  • Brazil, China, and India were able to develop
    manufacturing, many segments of which became
    internationally competitive, whereas in small
    countries such as Jamaica and Uruguay, or Sri
    Lanka in the 1960s and 1970s, the market was too
    small the benefits of inward-looking
    industrialization were negligible and did not
    justify its costs.
  • Like that of policies, the effect of institutions
    depends on the context. Security of ownership
    rights has been achieved in different ways and to
    different extents in different country contexts.

40
  • There is a need to rethink the focus of growth
    strategies and of development assistance. Up to
    now, that focus has been on the nation state with
    the implicit assumptions that (1) development
    outcomes within the boundaries of a nation state
    are homogeneous, and (2) all developing
    countries per capita incomes could and should
    converge with those of industrialized countries.
  • There is now greater evidence and acknowledgment
    that these two assumptions do not always hold.
    Convergence is much less a force now than
    anticipated a decade or more ago. Within
    countries such as Brazil, China, and India,
    income differences across regions are as large as
    income differences across countries.
  • Ownership and empowrment must be goals to reach.
    Strategies must be elaborated not only at a
    national level, but taking in account the
    specific-country context, at various level of
    government.
  • Stiglitz, the chief economist at the World Bank
    from 1996 until November 2000, during the gravest
    global economic crisis in a half-century
    elaborated a new approach called The
    post-Washington Consensus.

41
  • In assessing development programs it is necessary
    to look not only at impacts on GDP, but also on
    the environment, poverty and democracy (short run
    and long run impact and sustainability of
    development programs)
  • Closing of the knowledge gap between developing
    and more developed countries (e.g. in its 1998
    World Development Report). Industrial policies
    have played an important role in the development
    of almost all of the successful countries.
  • Consistency, coherence, and completeness.
    Although the particular priorities will differ
    from country to country, there are some common
    elements.

42
  • (1) Education and Knowledge are the core of
    development (East Asian experience).
  • (2) Infrastructures.
  • (3) Health.
  • (4) Capacity-building. A successful
    transformation must come from within the country
    itself. Institutions and leadership must catalyse
    and manage the process of change, and the changed
    society.
  • (5) Country assistance strategies must be based
    on partnerships.
  • (6) Participation must act at different level
    (central government, local communities)
  • (7) More sovranational governance through
    stronger and not weaker International
    Institutions.

43
  • Rebuilding the international architecture and
    financial flows. Volatility of short-term
    capital? long-term investments. The high
    development costs exacted by abrupt capital-flow
    reversals - the lost years of education, the rise
    in infant mortality, the job losses - can easily
    swamp any marginal benefit derived from such
    flows, as happened in East Asia.
  • (8) Fair trade. Lower protection in strategic
    sectors for developing countries (PAC). Lower
    protection in intellectual property (Reduction of
    TRIPS and royalties)
  • (9) New policies instruments microcredit
    finance cancellation of poor countries debt
    reduction of conditionality rules unorthodox
    measures (currency control, redistribution
    policies and increases in real wages and public
    expenditure)) instead of ortodhox ones the Tobin
    tax cancellation of user fees on primary health
    care and education for poor people stop to WB
    and FMI promotion of privatisation of water
    resources.

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  • The Growth Commission report is a remarkable
    document, not only because it is the consensus of
    a group of people who represent, if any group
    could so represent, the policy making elite on
    economic development. It is also remarkable
    because it reflects the debates and discussions
    of the past two decades and earlier, and an
    evolution in stance as a result of those debates.
    It is clearly more market and trade oriented than
    the consensus of the 1950s, 60s and 70s. In some
    ways it is fully consistent with the shift away
    from that consensus that came about in the 1980s.
  • Perhaps the best example of the rethink that is
    underway in economic intellectual and policy
    circles is evidenced by the report of the Growth
    Commission (Commission on Growth and Development,
    2008). This is a Commission headed by Nobel Prize
    winning economist Michael Spence, with the other
    academic on it being another Nobel Prize winning
    economist, Robert Solow, the father of the modern
    theory of economic growth. All of the other 19
    names on the Commission are non-academics, most
    of them current or former policy makers.

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  • The Growth Commission thinks that market
    orientation should play a central role, and that
    sustained growth cannot be attained without an
    outward orientation. But in many other ways it is
    a departure from the consensus of the 1980s, from
    the Washington Consensus.
  • Here are no certainties of a one size fits all
    stance, and of the negotiating mindset. There is
    openness to country specificities. Distributional
    concerns are centre-stage. A broader perspective
    on developmentincluding education, health,
    environmentis adopted.
  • The hyper-mobility of capital, was an outcome
    that IFI and the US Treasury actively promoted.
    Attracting foreign capital was one of the raisons
    dêtre of the Washington Consensus-based reforms.
    Developing countries were forced to change their
    intellectual property laws as a price for
    promoting growth.

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  • Strong, enduring growth requires high rates of
    investment. If the sustained, high-growth cases
    are any guide, it appears that overall investment
    rates of 25 percent of GDP or above are needed,
    counting both public and private expenditures.
    The high growth countries often invested at least
    another 78 percent of GDP in education,
    training, and health (also counting public and
    private spending), although this is not treated
    as investment in the national accounts.
  • Growth of 7 percent a year, sustained over 25
    years, was unheard of before the latter half of
    the 20th century. It is possible only because the
    world economy is now more open and integrated.
    Growth strategies that rely exclusively on
    domestic demand eventually reach their limits.
    The home market is usually too small to sustain
    growth for long, and it does not give an economy
    the same freedom to specialize in whatever it is
    best at producing.
  • Reforms represent major achievements, but if
    growth does not accelerate, or if large numbers
    of people do not feel any improvement in their
    conditions, then there is more work to do.
    Relying on markets to allocate resources
    efficiently is clearly necessary, but only some
    combination of markets and a menu of reforms
    determine good outcomes.

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  • Wedded to the goal of high growth,
    governments should be pragmatic in their pursuit
    of it. Our models or predictive devices are, in
    important respects, incomplete. It is, therefore,
    prudent for governments to pursue an experimental
    approach to the implementation of economic
    policy.
  • Governments should sometimes proceed step by
    step, avoiding sudden shifts in policy where the
    potential risks outweigh the benefits. In recent
    decades governments were advised to stabilize,
    privatize and liberalize. This prescription
    defines the role of government too narrowly. As
    the economy grows and develops, active, pragmatic
    governments have crucial roles to play.
  • (p4). The Commission strongly believes that
    growth strategies cannot succeed without a
    commitment to equality of opportunity, giving
    everyone a fair chance to enjoy the fruits of
    growth. But equal opportunities are no guarantee
    of equal outcomes. Indeed, in the early stages of
    growth, there is a natural tendency for income
    gaps to widen. Governments should seek to contain
    this inequality, the Commission believes, at the
    bottom and top ends of the income spectrum.
    Otherwise, the economys progress may be
    jeopardized by divisive politics, protest, and
    even violent conflict. Again, if the ethical case
    does not persuade, the pragmatic one should.

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  • The high-growth countries benefited in two ways
    from globalization. One, they imported ideas,
    technology, and know-how from the rest of the
    world. Two, they exploited global demand, which
    provided a deep, elastic market for their goods.
    The inflow of knowledge dramatically increased
    the economys productive potential the global
    market provided the demand necessary to fulfil
    it. To put it very simply, they imported what the
    rest of the world knew, and exported what it
    wanted.
  • The Growth Commission analyzes cases of high,
    sustained growth in the post-war period. Thirteen
    economies qualify Botswana Brazil China Hong
    Kong, China Indonesia Japan the Republic of
    Korea Malaysia Malta Oman Singapore Taiwan,
    China and Thailand. Two other countries, India
    and Vietnam, may be on their way to joining this
    group. These cases demonstrate that fast,
    sustained growth is possibleafter all, 13
    economies have achieved it.
  • The sample is remarkably diverse. The familiar
    Asian examples may dominate the list, but every
    other region of the developing world (Africa,
    Latin America, the Middle East, and emerging
    Europe) is also represented. Some of the
    countries are rich in natural resources
    (Botswana, Brazil, Indonesia, Malaysia, Oman,
    Thailand) the remainder are not. The sample
    includes one country with a population well over
    1 billion (China), and another with a population
    well below 500,000 (Malta).

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  • A close look at the 13 cases reveals five
    striking points of resemblance
  • 1. They fully exploited the world economy
  • 2. They maintained macroeconomic stability
  • 3. They mustered high rates of saving and
    investment
  • 4. They let markets allocate resources
  • 5. They had committed, credible, and capable
    governments

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  • During their periods of fast growth, these 13
    economies all made the most of the global
    economy. This is their most important shared
    characteristic and the central lesson of this
    report.
  • 1) Sustained growth at this pace was not possible
    before 1950. It became feasible only because the
    world economy became more open and more tightly
    integrated. The high-growth countries benefited
    in two ways. One, they imported ideas,
    technology, and know-how from the rest of the
    world.
  • 2) Two, they exploited global demand, which
    provided a deep, elastic market for their goods.
    The inflow of knowledge dramatically increased
    the economys productive potential the global
    market provided the demand necessary to fulfil
    it.

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  • 3)Macroeconomic volatility and unpredictability
    damage private sector investment, and hence,
    growth. During their most successful periods, the
    13 high-growth cases avoided the worst of this
    turbulence. Their quick expansion was
    accompanied, from time to time, by moderately
    high inflation.
  • 4) But prices were stable enough not to scramble
    market signals, cloud the view of long-term
    investors, or deter savers from entrusting their
    wealth to banks. Governments were also fiscally
    responsible. Many ran budget deficits for
    extended periods some nursed high ratios of debt
    to GDP. But this public debt did not get out of
    hand, not least because the economy grew faster
    than the stock of public liabilities.

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