Towards a New Consensus Analyzing Bolivian Poverty Reduction Strategies

“It is fair to say that nobody really believes in the Washington Consensus anymore.” From: “Goodbye Washington Consensus, Hello Washington Confusion?” Dani Rodrik Harvard University January 2006

Long wave: depressive phase Lower growth Increased unemployment Regressive redistribution Decaying “techno-economic paradigm,” or “mode of regulation” (“Fordism”) Laissez-faire, Washington Consensus policies “Real business cycles” types of economic theory

Long wave: expansive phase Higher growth Increased employment Progressive redistribution Consolidated techno-economic paradigm Policy optimism, New Consensus (Post-)Keynesian, (post-)structuralist theory

Changed focus From policy deconstructionism: Deregulation Decontrol Denationalization

Changed focus To policy constructivism: Policy sovereignty Structural change Social justice (economic ethics, distributive justice)

New focus New instruments Indebtedness policy Policy sovereignty Investment policy Structural change Income distribution policy Social justice

Indebtedness policy: regulation of financial flows From : Cycles of massive inflows and euphoria followed by capital flight and debt crises To: Desendeudamiento and regulation of international capital flows Foreign saving = trade deficit = a knowable variable

Investment policy: output structure matters Structure matters Natural resource exports = low growth Primary specialization = high inequality Employment intensity = poverty reduction elasticity of growth Investment policy

Income distribution policy: tax and expenditure reform Increasing inequality in most countries during the low growth phase Latin America: Most unequal income distribution, low tax/GDP ratio, regressive tax reforms Income distribution policy

New Consensus model Income distribution policy Investment policy Indebtedness policy Foreign debt

Base scenario: Estrategia Boliviana de Reducción de la Pobreza ( Poverty reduction : 5.7 points, from 50.3 percent to 44.6)

Poverty minimizing structural change (Poverty reduction : 10 points, from 50.3 to 40.3 percent)

Redistribution policies Millennium tax [and expenditure] reform: Tax rate 8.1 percent (4.6 percent of GDP) Rawlsian tax reform: Tax rate 16.7 percent (9.5 percent of GDP) Undercollection: 3.6 percent of GDP

Millennium employment strategy Employment maximizing investment strategy Strong similarity with poverty minimization Similar GDP and poverty reduction Similar changes in output structure Stronger focus on Food staples agriculture (weaker on Small industry) Confirmed cross-country by World Bank study (Perry et al. 2006)