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

 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

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

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

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

CRITICISMS OF THE WASHINGTON CONSENSUS POLICIES âDissatisfaction 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

CRITICISMS OF THE WASHINGTON CONSENSUS POLICIES (continued) âThe failure of the economies in transition  Plummeting GDP  Increased poverty âIncreased poverty in the developing world

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

BROADER OBJECTIVES  Democratic development  Sustainable (politically, environmentally) development  Equitable development

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

IMPACT OF WASHINGTON CONSENSUS ON POVERTY â 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

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

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

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

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?

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