dec06_Article3 11/15/06 9:23 PM Page 973 Journal of Economic Literature Vol. XLIV (December 2006), pp. 973–987 Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform ∗ DANI RODRIK Proponents and critics alike agree that the policies spawned by the Washington Consensus have not produced the desired results. The debate now is not over whether the Washington Consensus is dead or alive, but over what will replace it. An important marker in this intellectual terrain is the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform (2005). With its emphasis on humil- ity, policy diversity, selective and modest reforms, and experimentation, this is a rather extraordinary document demonstrating the extent to which the thinking of the development policy community has been transformed over the years. But there are other competing perspectives as well. One (trumpeted elsewhere in Washington) puts faith on extensive institutional reform, and another (exemplified by the U.N. Millennium Report) puts faith on foreign aid. Sorting intelligently among these diverse perspectives requires an explicitly diagnostic approach that recognizes that the binding constraints on growth differ from setting to setting. 1. Introduction which poor nations had succumbed, any well-trained and well-intentioned economist ife used to be relatively simple for the could feel justified in uttering the obvious peddlers of policy advice in the tropics. L truths of the profession: get your macro bal- Observing the endless list of policy follies to ances in order, take the state out of business, give markets free rein. “Stabilize, privatize, ∗ Harvard University. I am grateful to Roger Gordon for and liberalize” became the mantra of a gen- his encouragement and comments; to Ricardo Hausmann, eration of technocrats who cut their teeth in Lant Pritchett, and John Williamson for their reactions; and to Roberto Zagha for the many insights he has shared the developing world and of the political with me over the last few years. John Williamson remind- leaders they counseled. ed me that my title is far from original, having been used Codified in John Williamson’s (1990) well- in almost identical form by Moises Naim (1999). In its present form, the title also makes allusion to the classic known Washington Consensus, this advice paper by Carlos Diaz-Alejandro (1985). inspired a wave of reforms in Latin America 973 dec06_Article3 11/15/06 9:23 PM Page 974 974 Journal of Economic Literature, Vol. XLIV (December 2006) and Sub-Saharan Africa that fundamentally between, but the market-oriented reforms of transformed the policy landscape in these the 1990s proved ill-suited to deal with the developing areas. With the fall of the Berlin growing public health emergency in which Wall and the collapse of the Soviet Union, the continent became embroiled. The critics, former socialist countries similarly made a meanwhile, feel that the disappointing out- bold leap toward markets. There was more comes have vindicated their concerns about privatization, deregulation, and trade liberal- the inappropriateness of the standard reform ization in Latin America and Eastern Europe agenda. While the lessons drawn by propo- than probably anywhere else at any point in nents and skeptics differ, it is fair to say that economic history. In Sub-Saharan Africa, nobody really believes in the Washington governments moved with less conviction and Consensus anymore.2 The question now is speed, but there too a substantial portion of not whether the Washington Consensus is the new policy agenda was adopted: state dead or alive; it is what will replace it. marketing boards were dismantled, inflation The World Bank’s Economic Growth in reduced, trade opened up, and significant the 1990s: Learning from a Decade of amounts of privatization undertaken.1 Reform (2005, henceforth Learning from Such was the enthusiasm for reform in Reform) is one of a spate of recent attempts many of these countries that Williamson’s at making sense of the facts of the last decade original list of do’s and don’ts came to look and a half, and probably the most intelligent. remarkably tame and innocuous by compar- In fact, it is a rather extraordinary document ison. In particular, financial liberalization insofar as it shows how far we have come and opening up to international capital flows from the original Washington Consensus. went much farther than what Williamson There are no confident assertions here of had anticipated (or thought prudent) from what works and what doesn’t—and no blue- the vantage point of the late 1980s. prints for policymakers to adopt. The Williamson’s (2000) protestations notwith- emphasis is on the need for humility, for pol- standing, the reform agenda eventually came icy diversity, for selective and modest to be perceived, at least by its critics, as an reforms, and for experimentation. “The cen- overtly ideological effort to impose “neo- tral message of this volume,” Gobind liberalism” and “market fundamentalism” on Nankani, the World Bank vice-president developing nations. who oversaw the effort, writes in the preface The one thing that is generally agreed on of the book, “is that there is no unique uni- about the consequences of these reforms is versal set of rules . [W]e need to get away that things have not quite worked out the from formulae and the search for elusive way they were intended. Even their most ‘best practices’. .” (p. xiii).3 Occasionally, ardent supporters now concede that growth the reader has to remind himself that the has been below expectations in Latin book he is holding in his hands is not some America (and the “transition crisis” deeper and more sustained than expected in former socialist economies). Not only were success 2 In a book edited with Pedro-Pablo Kuczynski in 2003, stories in Sub-Saharan Africa few and far in John Williamson laid out an expanded reform agenda, emphasizing crisis-proofing of economies, “second- generation” reforms, and policies addressing inequality and social issues (Kuczynski and Williamson 2003). 1 To cite just one example, fifty percent or more of the 3 Roberto Zagha led the team that prepared the state-owned enterprises were divested during the 1990s in report. Members of the team were J. Edgardo Campos, the Central African Republic, Cote d’Ivoire, Gambia, James Hanson, Ann Harrison, Philip Keefer, Ioannis Ghana, Guinea-Bissau, Kenya, Mali, Tanzania, Togo, Kessides, Sarwar Lateef, Peter Montiel, Lant Pritchett, Uganda, and Zambia (John Nellis 2003). On the extent of S. Ramachandran, Luis Serven, Oleksiy Shvets, and trade reform in Africa, see Vinaye D. Ancharaz (2003). Helena Tang. dec06_Article3 11/15/06 9:23 PM Page 975 Rodrik: Goodbye Washington Consensus, Hello Washington Confusion? 975 radical manifesto, but a report prepared by extreme poverty.4 The paradox is that that the seat of orthodoxy in the universe of was unexpected too! China and India development policy. increased their reliance on market forces, of course, but their policies remained highly 2. The Record unconventional. With high levels of trade protection, lack of privatization, extensive Here is how Learning from Reform sum- industrial policies, and lax fiscal and finan- marizes the surprises of the 1990s. First, cial policies through the 1990s, these two there was an unexpectedly deep and pro- economies hardly looked like exemplars of longed collapse in output in countries mak- the Washington Consensus. Indeed, had ing the transition from communism to they been dismal failures instead of the suc- market economies. More than a decade into cesses they turned out to be, they would the transition, many countries had still not have arguably presented stronger evidence caught up to their 1990 levels of output. in support of Washington Consensus Second, Sub-Saharan Africa failed to take policies.5 off, despite significant policy reform, Along with this telling, if anecdotal, evi- improvements in the political and external dence has come a more skeptical reading of environments, and continued foreign aid. the cross-national relationship between The successes were few—with Uganda, policy reform and economic growth. Tanzania, and Mozambique the most com- Characteristically, it is the World Bank itself monly cited instances—and remained frag- that has been prone to make grandiose ile more than a decade later. Third, there claims on the impact of policy reform. In one were frequent and painful financial crises in particularly egregious instance cited by Latin America, East Asia, Russia, and William Easterly (2005), Paul Collier and Turkey. Most had remained unpredicted by David Dollar (2001) argued that policy financial markets and economists until capi- reform of the conventional type could cut tal flows started to reverse very suddenly. world poverty by half. Work by Easterly Fourth, the Latin American recovery in the (2005) and Francisco Rodríguez (2005) first half of the 1990s proved short-lived. show that the data do not support such The 1990s as a whole saw less growth in claims. The evidence that macroeconomic Latin America in per capita GDP than in policies, price distortions, financial policies, 1950–80, despite the dismantling of the and trade openness have predictable, robust, state-led, populist, and protectionist policy and systematic effects on national growth regimes of the region. Finally, Argentina, rates is quite weak—except possibly in the the poster boy of the Latin American eco- extremes. Humongous fiscal deficits or nomic revolution, came crashing down in autarkic trade policies can stifle economic 2002 as its currency board proved unsustain- growth, but moderate amounts of each are able in the wake of Brazil’s devaluation in associated with widely varying economic January 1999. outcomes.6 Significantly, the period since 1990 was not a disaster for economic development.