The Washington Consensus Reconsidered Towards a New Global Governance Edited by Narcís Serra and Joseph E. Stiglitz 1 Contents List of Figures ix List of Tables x List of Contributors xi Foreword xiii Part I The Washington Consensus: From Its Origins to Its Critics 1. Introduction: From the Washington Consensus Towards a New Global Governance 3 Narcís Serra, Shari Spiegel, and Joseph E. Stiglitz 2. A Short History of the Washington Consensus 14 John Williamson 3. Inequality and Redistribution 31 Paul Krugman 4. Is there a Post-Washington Consensus Consensus? 41 Joseph E. Stiglitz 5. The Barcelona Development Agenda 57 Part II Analyses of Central Issues in Development 6. A Broad View of Macroeconomic Stability 63 José Antonio Ocampo 7. The Wild Ones: Industrial Policies in the Developing World 95 Alice H. Amsden 8. Sudden Stop, Financial Factors, and Economic Collapse in Latin America: Learning from Argentina and Chile 119 Guillermo A. Calvo and Ernesto Talvi 9. Towards a New Modus Operandi of the International Financial System 150 Daniel Cohen vii Contents 10. The World Trading System and Implications of External Opening 180 Jeffrey A. Frankel 11. The World Trading System and Development Concerns 215 Martin Khor 12. Reforming Labor Market Institutions: Unemployment Insurance and Employment Protection 260 Olivier Blanchard 13. International Migration and Economic Development 277 Deepak Nayyar Part III Towards a New Global Governance 14. The Future of Global Governance 309 Joseph E. Stiglitz 15. Growth Diagnostics 324 Ricardo Hausmann, Dani Rodrik, and Andrés Velasco 16. A Practical Approach to Formulating Growth Strategies 356 Dani Rodrik Index 367 viii List of Figures 3.1. Most Commonly Cited Data on Income Growth, US 32 3.2. Percentage Increases in Income from 1979 to 2001, US 33 3.3. Correlation between Changes in Inequality and Progress/Lack of Progress in Reducing Poverty 36 7.1. Growth in Income: 1950–80 and 1980–2000 101 8.1. LAC-7 External Financial Flows and Economic Growth 121 8.2. Boom and Bust in Capital Flows to LAC-7, 1990–2002 123 8.3. Sudden Stop and Macroeconomic Adjustment in LAC-7, 1990–2002 128 8.4. Sudden Stop and Macroeconomic Adjustment in Chile, 1990–2002 133 8.5. Sudden Stop and Economic Performance in Argentina and Chile 135 8.6. Sudden Stop, Dollarization, Financial Crisis, and Economic Collapse: Argentina in the Light of Chile 138 10.1. Countries’ Openness vs. their Share of Gross World Product 182 15.1. Growth Diagnostics 326 15.2. Average Years of Schooling of 12-year-old Children 338 15.3. Lending Rates in Latin America 341 15.4. Domestic Savings, National Savings and Investment 341 15.5. Returns to Education and Years of Schooling 342 15.6. Real Exchange Rate, Remittances, and the Trade Balance 345 ix List of Tables 3.1. International Comparisons of Inequality 34 7.1. Who Exports Labor Intensive Textiles, 2001–02 98 8.1. Boom and Bust in Capital Flows per Country 124 8.2. Current Account Reversals and the Real Exchange Rate (RER) per Country 130 8.3. Growth and Investment Reversals 131 8.4. Sudden Stop, Openness, and Real Exchange Rate (RER) Adjustment in Argentina and Chile 136 9.1. Debt Reschedulings in the 1980s 154 9.2. Market Value of Debt Circa 1990 155 9.3. Case 1: Foretold Crises in Argentina and Ecuador 157 9.4. Case 2: Unexpected Crises in Mexico and Korea 157 9.5. Case 3: Foretold Crises Without Apparent Macroeconomic Disequilibria 158 9.6. Summary Table 158 9.7. Debt Dynamics 159 9.8. Capital/Output Ratio (volume, Summers-Heston data) 160 9.9. Capital/Output Ratio (value, current dollars) 160 9.10. Capital/Output Ratio (manufacturing) 161 9.11. Selected Commodities 174 9.12. Endowment to Stabilize Prices 175 10.1. Deep Determinants of Growth 190 13.1. International Migrants in the World: The Distribution of the Stock Across Country Groups, 1960–2000 281 13.2. Remittances from Migrants: The Distribution of the Flows Across Regions, 1980–2000 298 15.1. GDP Growth Rates 335 15.2. Brazil: Basic Macroeconomic Indicators 336 15.3. Savings, Investment, and the Current Account 338 x List of Contributors Alice H. Amsden is Barton L. Weller Professor of Political Economy at the Massachusetts Institute of Technology. Olivier Blanchard is Class of 1941 Professor at the Massachusetts Institute of Technology. Guillermo Calvo is Professor of Economics, Public and International Affairs at Columbia University, and Former Chief Economist of the Inter-American Development Bank (IADB), Washington, DC. Daniel Cohen, Paris School of Economics, OECD Development Centre, and Center for Economic Policy Research (CEPR). Jeffrey A. Frankel is Harpel Professor at the Kennedy School of Government, Harvard University. Ricardo Hausmann, John F. Kennedy School of Government, Harvard Uni- versity. Martin Khor is a journalist, economist, and Director of the Third World Network, which is based in Penang, Malaysia. Paul Krugman is Professor of Economics and International Affairs at Princeton University. Deepak Nayyar is Professor of Economics at Jawaharlal Nehru University, New Delhi, India. José Antonio Ocampo is Co-President of the Initiative for Policy Dialogue and Professor at Columbia University. Dani Rodrik, John F. Kennedy School of Government, Harvard University. Narcís Serra is President of the CIDOB Foundation, Centre for International Relations and Development Studies, Barcelona. Shari Spiegel is Senior Portfolio Manager, New Holland Capital. Joseph Stiglitz is Co-President of the Initiative for Policy Dialogue and University Professor at Columbia University. xi List of Contributors Ernesto Talvi is the Executive Director of Centro de Estudios de la Realidad Económica y Social (CERES), a public policy research institution in Montev- ideo, Uruguay, specializing in economic analysis of Latin America. Andrés Velasco, John F. Kennedy School of Government, Harvard University. John Williamson is Senior Fellow at the Peterson Institute for International Economics. xii Part I The Washington Consensus: From Its Origins to Its Critics 1 Introduction: From the Washington Consensus Towards a New Global Governance Narcís Serra, Shari Spiegel, and Joseph E. Stiglitz The point of departure for this book is the Washington Consensus—the set of views about effective development strategies that have come to be associ- ated with the Washington-based institutions: the IMF, the World Bank, and the US Treasury. John Williamson (1990) provided a brilliant articulation of that consensus. According to Williamson, ‘The Washington Consensus was a...responsetoa leading role for the state in initiating industrialization and import substitution. The Washington Consensus said that this era was over’ (Williamson 1990). Proponents of the Washington Consensus argue that the original conception had three big ideas: a market economy, openness to the world, and macroeconomic discipline.1 Since its inception in 1990, the term Washington Consensus has come to be used in ways that are both narrower and broader than what was envisioned in the original conception. The current interpretation is narrower in that it focuses primarily on privatization, liberalization, and macro stability— meaning price stability; it is broader in that it includes some forms of lib- eralization not included in the original definition, such as capital market liberalization. More generally, the Washington Consensus has come to be associated with ‘market fundamentalism,’ the view that markets solve most, if not all, economic problems by themselves—views from which Williamson has carefully distanced himself. As Joseph Stiglitz points out in his contribution to this volume, advances in economic theory in the 1970s showed that market failures are pervasive, especially in developing economies rife with imperfections in information, limitations in competition, and incomplete markets. Under these conditions, 1 See Williamson (2002). 3 Narcís Serra, Shari Spiegel, and Joseph E. Stiglitz there is a presumption that markets are not efficient. Stiglitz argues that these advances in economic theory had already removed the intellectual founda- tions of market fundamentalism before the Washington Consensus became fashionable. Accordingly, it should not have come as much of a surprise that the Washington Consensus prescriptions (as broadly interpreted) failed to work as promised, and that disillusion with the Washington Consensus grew throughout the developing world.2, 3 In the countries that followed Washington Consensus policies, economic growth was limited at best, and disproportionately benefited those at the top. In Latin America, for example, seven years of strong growth in the early 1990s were followed by seven years of stagnation and recession, so that for the period as a whole, growth under the Washington Consensus was half of what it had been from the 1950s through the 1970s when the region followed other economic policies, such as import substitution. Even in countries where Washington Consensus policies did appear to promote growth, such growth was often not accompanied by significant reductions in poverty. Meanwhile, the countries of East Asia followed a quite different set of policies, and had enormous successes. For instance, governments played an important role in promoting particular industries. In some cases, government enterprises (such as Korea’s national steel company) became global leaders in efficiency. To be sure, governments in the region did maintain macro stability, but they were slow to liberalize trade, and some countries, such as China, still have not fully liberalized capital markets. In short, both theory and evidence weigh heavily against what has come to be called Washington Consensus policies. 2 The first chapter of this book contains a brief discussion of the relationship between the Washington Consensus as formulated by Williamson, and how that term had come to be widely understood. We have already noted one key difference: Williamson never elevated capital market liberalization as one of the key policies that countries need to pursue, but this was at the heart of the IMF’s agenda. The IMF went so far as to try (unsuccessfully) to change its charter to allow it to push capital market liberalization on wary developing countries.