Joe Hanlon A SECOND LOOK
`Greater humility” is needed, admitted the World Bank’s chief economist and senior vice- president, Joseph Stiglitz, in a speech in which he called for an end to “misguided” policies imposed from Washington. Stiglitz’s condemnation of the “Washington Consensus” and the conditions imposed on poor countries must raise fundamental questions about the entire debt relief process now being coordinated by the International Monetary Fund (IMF) and the World Bank. Debt relief under the heavily indebted poor countries initiative is conditional on six years of faithfully obeying demands from the IMF and the World Bank which Stiglitz now calls “misguided”.
Stiglitz says “the set of policies which underlay the Washington Consensus are neither necessary nor sufficient, either for macro- stability or longer-term development”. They are “sometimes misguided”, “neglect … fundamental issues”, are “sometimes even misleading”, and do “not even address … vital questions”.
“Had this advice been followed [in the United States], the remarkable expansion of the US economy … would have been thwarted.” Russia followed the Washington Consensus line while China did not, Stiglitz notes, and “real incomes and consumption have fallen in the former Soviet empire, and … risen remarkably rapidly in China.”
The Washington Consensus only sought to achieve increases in measured gross domestic product, whereas “we seek increases in living standards, including improved health and education. We seek equitable development which ensures that all groups in society enjoy the fruits of development, not just the few at the top. And we seek democratic development.”
Stiglitz made his speech in Helsinki on January 7, and so far it has been little reported. Perhaps he needed to be as far away from Washington as possible, because he undermined virtually every pillar of the structural adjustment and stabilisation policies that serve as necessary conditions under the heavily indebted poor countries initiative. These are some of the points he made:
l Moderate inflation is not harmful. Hyper- inflation is costly, but below 40%, inflation a year, “there is no evidence that inflation is costly”. Furthermore, there is no evidence of a “slippery slope” – that one increase in inflation causes further increases. Thus “the focus on inflation … has led to macro-economic policies which may not be the most conducive for long-term economic growth.”
l Budget deficits can be okay, “given the high returns to government investment in such crucial areas as primary education and physical infrastructure, especially roads and energy. It may make sense for the government to treat foreign aid as a legitimate source of revenue, just like taxes, and balance the budget inclusive of foreign aid.”
l Macro-economic stability is the wrong target. “Ironically, macro-economic stability, as seen by the Washington Consensus, typically downplays the most fundamental sense of stability: stabilising output or unemployment. “Minimising or avoiding major economic contractions should be one of the most important goals of policy. In the short run, large-scale involuntary unemployment is clearly inefficient; in purely economic terms it represents idle resources that could be used more productively.”
l “The advocates of privatisation overestimated the benefits and underestimated the costs.” The gains occur prior to privatisation, through a process of “corporatisation” which involves creating proper incentives. China “eschewed a strategy of outright privatisation”.
l Competition, not ownership, is the key. Private monopolies can lead to excess profits and inefficiency. Governments must intervene to create competition.
l Markets are not automatically better. “The unspoken premise of the Washington Consensus is that governments are presumed to be worse than markets. I do not believe [that].”
Stiglitz notes, in particular, that “left to itself, the market will tend to underprovide human capital” and technology. “Without government action there will be too little investment in the production and adoption of new technology.”
l Primary education may not be the right priority. Tertiary technical education has a particularly high economic return because it enables the economy to import ideas. But here Stiglitz has two caveats: he wants to see the training of more scientists and engineers and not extra liberal arts graduates; and he warns that university education causes an immediate increase in inequality because “the direct beneficiaries … are almost always better off than average”.
l “The dogma of liberalisation has become an end in itself and not a means to a better financial system.” Financial markets do not do a good job of selecting the most productive recipients of funds or of monitoring the use of funds, and must be controlled. Deregulation led to the crisis in Thailand and the “notorious Savings and Loans debacle in the United States”.
Perhaps the problem is that the Washington Consensus “political recommendations could be administered by economists using little more than simple accounting frameworks”. This led to “cases where economists would fly into a country, look at and attempt to verify these data, and make … recommendations for policy reforms, all in the space of a couple of weeks”.
Stiglitz calls for a new “post-Washington Consensus”. He adds: “One principle of the emerging consensus is a greater degree of humility; the frank acknowledgement that we do not have all the answers.”
Joe Hanlon is an author and journalist who focuses on ecoomic issues