Fairness and the Washington Consensus

1. Fairness and the Washington Consensus Joseph E. Stiglitz Century Foundation April 7, 2000

2. What is the Washington Consensus? • Criticisms of the Washington Consensus • How the policies of the Washington Consensus have affected poverty • How the policies of the Washington Consensus have affected inequality within the developing countries • How the policies of the Washington Consensus have affected distribution between developed and less developed countries • The emerging consensus and reforms in the international architecture

3. WHAT IS THE WASHINGTON CONSENSUS? • Set of policies, largely formulated in Washington among the IMF, World Bank, and US Treasury • Countries should focus on • Stabilization • Liberalization (including trade, financial market, and capital account liberalization, and eliminating subsidies) • Privatization

4. APPLICATION TO ECONOMIES IN TRANSITION • Privatization more important than competition • Restructuring existing enterprises through privatization more important than job creation • Stabilization more important than growth or enterprise creation • Rapid reform (read: rapid privatization) more important than establishing institutional infrastructure • Social capital, consensus building less important

5. APPLICATION TO CRISES • Fiscal austerity • Monetary austerity • More attention to impact on foreign investors than to capital flight • Little attention to impact of social and political turmoil on economy • More attention to ensuring that capital adequacy standards are satisfied than to macro-economic consequences of resulting liquidity constraints

6. CRITICISMS OF THE WASHINGTON CONSENSUS POLICIES • Dissatisfaction with the global economic architecture • Increasing frequency and depth of financial and economic crises • Five failures of response: East Asia (Thailand, Indonesia, Korea), Russia, Brazil • Huge costs of crisis response imposed on innocent bystanders • Adverse legacy, e.g. huge indebtedness

7. CRITICISMS OF THE WASHINGTON CONSENSUS POLICIES (continued) • The failure of the economies in transition • Plummeting GDP • Increased poverty • Increased poverty in the developing world

8. GOING BEYOND THE WASHINGTON CONSENSUS Recognition of: • Failures • The most successful developing countries have ignored precepts of Washington Consensus (and avoided IMF programs) -- e.g. China, Botswana • Inadequacies of underlying economic models • The important role that ideology played in formulation of Washington Consensus • The important role that special interests have played

9. BROADER OBJECTIVES • Democratic development • Sustainable (politically, environmentally) development • Equitable development

10. MORE INSTRUMENTS • Even in pursuing narrow objectives, have been excessively narrow • e.g. macro-instability can also arise from financial sector weakness • Economic efficiency requires competition, good legal system • Issue is getting right role of government, not minimalist role

11. IMPACT OF WASHINGTON CONSENSUS ON POVERTY • Some policies have increased economic volatility • Volatility increases poverty, insecurity • Ironic: a principle objective was to increase stability • But there was no explicit analysis of impacts that policies would have on stability • Particular way that IMF has interpreted stabilization objective has exacerbated problems

12. IMPACT OF WASHINGTON CONSENSUS ON POVERTY (continued) • Liberalization has not brought promised benefits • Wage flexibility has not lowered unemployment in Latin America • Capital market liberalization has not led to faster economic growth • Crisis response strategy • Protected foreign creditors and • Led to • deep recessions and depressions • lower real wages • increasing unemployment

13. IMPACT OF WASHINGTON CONSENSUS ON INEQUALITY • Policies in transition economies directly contributed to the increase in inequality and negative growth—thereby contributing to the increase in poverty • Free capital mobility impedes ability to tax capital • Bail-outs in crisis leave huge debts—burden borne by workers

14. IMPACT OF W.C. ON DISTRIBUTION BETWEEN DEVELOPED AND LESS DEVELOPED COUNTRIES • Capital-rich countries (that can bear risks better than capital-poor countries) benefit from policies that • increase risk in developing countries and • lower taxation of capital • “Buyers” (in developed countries) have advantage over “sellers” during rapid privatization (like a fire sale) • Asset values in crisis countries fell due to high interest rate policies -- then, pressure to sell assets to foreigners • Foreigners benefited from a wealth of bargains

15. ELEMENTS OF AN EMERGING CONSENSUS • Need to consider impacts of policies on poor people • But with existing structures, including governance, will this be done effectively?

16. NEEDED REFORMS: • Limit IMF to crisis lending • Change governance structure • Change operating “modes” • e.g. more transparency • Impose restrictions • e.g. on extent of crisis lending, • nature of conditionalities that can be imposed