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The Cure is the Sickness: Combatting Poverty and the Washington Consensus

"Stiglitz identifies the essential elements of the post-Washington-consensus: the demand for a more active role of the state particularly in financial sector reform and promotion of investments in education, training and technology development.. pro-poor growth.."
THE CURE IS THE SICKNESS

Experiences with Combating Poverty according to the Washington Consensus

By Jorg Goldberg

[This article originally published in: Blatter fur deutsche und internationale Politik, Bonn 9/2001, p.1091-1100 is translated from the German on the World Wide Web,  http://www.blaetter.de.]

The social movement of "globalization critics" or "global justice" advocates growing since the botched WTO summit in Seattle deserves attention for many reasons, for its global character, its capacity for using modern communication technologies and for the protest itself. This movement is directed against the effects of relatively abstract economic theories and principles and against these theories and principles themselves. If the conflicts between neoliberals and Keynesians, between free traders and protective tariff supporters and between representatives of the "Washington consensus" and the "post-Washington consensus" were waged in lecture halls and luxury hotels (while the consequences of the policies were themes of many bloody conflicts), these arguments have shifted to the streets. This has a certain justice. If supporters of the Washington Consensus recommended abolition of food subsidies all over the world for example in the interests of free markets (1), those who had to convert this recommendation concretely had to dodge stones long after the advisors left. Today the political and intellectual authors of this policy admit that they often had to entrench themselves behind steel bars and armed police when they wanted to discuss proposals. Seemingly abstract debates about financial architecture and intellectual [property rights, currency exchange regimes and monetary policy became themes of mass protests. The movement altogether discusses its themes on a comparatively high technical level, as the Internet makes clear (2).

IS THERE STILL A CONSENSUS IN WASHINGTON?

Ravi Kanbur, a leading World Bank economist and coordinator of the 2000 world development report of the World Bank "Attacking Poverty" (who resigned under pressure of the US Treasury Department) declared that the attacks of the global protest movement provoked different acts of defiance among the intellectual and political representatives of the financial faction (3). The final declaration of the G8-summit in Genoa confirmed Kanbur's speculation. It says quite stubbornly in the introduction: "The most effective strategy for reducing poverty is a strong, dynamic, open and growing world economy" (4).

The siege of their international meetings accompanied by a friendly economic press in a pleasant atmosphere far from the public a few years ago seems to be "a traumatic experience" for representatives of the financial group (5). The cast-iron public reactions by "group A" (6) to the massive criticisms could not hide the fact that they were in great embarrassment with their concepts. The apparent certainties from the first half of the nineties still proclaimed in official declarations have long fallen victim to reality. While it was said dogmatically in the final declaration of Genoa "Open trade and investments are the engines of global economic growth and combating poverty" (Point 10), the economic shack of the financial faction is already burning at all corners. This general assertion is only still defended by a few researchers as evident in publications from the World Bank. Reality actually speaks another language. Thus Kenny and Williams (former colleagues at the World Bank) in a survey article on recent empirical studies on the determining factors of economic growth could not establish a positive connection between openness of trade and economic growth. The authors summarize the results of the case studies: "We find few indications that open trade policy in the sense of low tariffs and non-tariff trade barriers is significantly related to economic growth" (7).

In a certain way, the massive reaction of demonstrators and the loss of public credibility (8) of the confessions announced again in the final declaration of the G8 is also a response to the attempt of the financial faction at building a monopolistic scientific-political position simply presented as the only possible approach for solving the development problems of the whole world (from unemployment in industrial countries and the mass poverty of the Third world to reconstruction in the transformation countries) after the collapse of the socialist camp and the renunciation on socialist concepts. The "Washington Consensus" was born in 1990 and proclaimed as a "universal convergence" or "one-world-consensus, a scientific-political project of the "end of history". John Williamson, prominent colleague at the Institute for International Economics, claims to have invented this term (9). He listed ten economic- and socio-political principles as constituting this consensus:

Budget discipline
Orientation of public spending in the most productive areas (education, health care and infrastructure in developing counties)
Tax reform (lowering tax rates, expanding the tax base)
Liberalization of interests
Competitive rates of exchange
Liberalization of foreign trade
Liberalization of capital traffic (direct investments)
Privatization
Deregulation (of markets)
Securing property rights.

At that time, Williamson only oriented the term to Latin America while admitting that his recommendations would not look different for Asia or Africa. "Good policy" in the sense of the Washington Consensus can be paraphrased with these ten principles. The key to development successes lies only in a correct policy mix. Development backlogs, continuing poverty and so forth are referred back everywhere to "bad policy" in the sense of disregarding the ten principles. Simultaneously the Washington Consensus means that policy that according to Williamson follows four internationally dominant financial institutions located in Washington, D.C.: the US Treasury Department, the US Federal Reserve, the International Monetary Fund and the World Bank. This list assumes absolute US dominance in questions of the world economy and the dominance of three institutions without formal democratic legitimation.

WASHINGTON CONSENSUS + POVERTY REDUCTION = POST-WASHINGTON CONSENSUS

The position that was at best a temporary consensus among the above four institutions was scrutinized and ridiculed in the second half of the 1990s. The term post-Washington consensus was formulated in the studies by Burki/Guillermo, Joseph Stiglitz and Ravi Kanbur who was forced to retire as a World Bank economist (10). Like many "post-" theories, this theory represents a definitional compromise solution and reflects the absence of uniform or standardized paradigms.

Stiglitz identifies the constitutive elements of the post-Washington consensus: the demand for a more active role of the state particularly in financial sector reform and promotion of growth by favoring investments in education, training and technology development. A broader approach is necessary. "The Washington consensus promoted the use of a few instruments (like macro-economic stability, open trade and privatization) to reach a narrowly defined goal (economic growth). The post-Washington consensus recognizes that more instruments are necessary and that the catalogue of goals is wider" (p.16). The "post"-consensus (even if it is far removed from a real consensus) underlies the new poverty reduction strategy (11) as an integration of structural adjustment policy, distribution policy and social policy advanced since 1999 by the Bretton-Woods institutions. The post-Washington consensus starts from the empirically certain discovery that the policy packages laced up by representatives of the traditional Washington consensus - defined as a combination of measures for producing macro-economic stability and open markets - did not bring any economic growth sufficient for clearly reducing mass poverty. Both the current debates on poverty reduction strategies and the practical experiences with strategy papers (PRSP) presented as prerequisites for reducing debt service in many poor, heavily indebted countries (HIPC) hardly drew practical conclusions from this discovery. A conceptual gap (the necessity of active, socially-oriented growth- and distribution policy) is identified but not adequately filled.

The conceptual helplessness is expressed most clearly in the section of the PRSP-handbook published by the World Bank (12) that discussed the connection between macro-economic structural adjustment, economic growth and poverty reduction and made recommendations (13). At the outset is the admission: "Macro-economic stability alone does not assure high growth rates" (p.2). The supplementary proposals read like the themes of the Washington consensus: "regulatory reform, privatization, civil service reform, improved government trade liberalization and banking ser5vice reform". The "Sourcebook" - chapter on the connection between macro-economic policy and poverty reduction repeats two basic errors of development policy:

Some universally valid supra-historical statements alleged a connection between certain economic-political measures and growth and
Implementing "good policy" in the sense of combining stability policy with market opening is enough to produce economic growth and poverty reduction.

The first error is very striking when one realizes that the addressants of the "Sourcebook" include the poorest 70 countries of the world that lack integrated monetary- and commodity economies... Most rural poor in the poorest countries of the world (with less than one US dollar in purchasing power per day) live from subsistence production. The problem whether they prefer indigenous currency or foreign currency is as real as the question whether they would prefer staying at the Hilton or the Sheraton. That such academic finger-exercises seriously claim to be practical economic recommendations in the real world of poor countries can hardly be believed.

That the second assumption is also a crass error can be shown empirically. In their survey of comparative analyses on the connection between growth and economic policy (and other factors), Kenny and Williams conclude that there is no evidence for the link between growth and a certain policy mix assumed in the Washington consensus. "Given their structural differences, different political measures are probably appropriate" (p.12). As country comparisons show, neither an open trade policy, an anti-inflation policy nor the removal of budget deficits is empirically connected to growth and poverty reduction. The structural adjustment policy went along with annual growth rates of 0.5% in those African countries where it was applied "conscientiously" (p.10). The authors conclude from the results of numerous country comparisons that universally valid measures of "good policy" simply do not exist. "Empirical examination shows that there is hardly any evidence for the universal validity of a certain political concept" (p.1).

This does not mean that "Washingtonian" packages of measures should be generally rejected and a new "consensus" found that is more effective. The idea that societies function everywhere the same way in the globalized world should be dismissed. The economy is a social science. Thus the bottom is methodically knocked out of the mainstream of past development policy and the present trend to the creation of globally effective mechanisms. The attempt to explain and treat the world with uniform, supra-historical models ultimately goes along with economic globalization in its present form. Social and economic processes are actually highly complex. This complexity is not global. Measures that function in one country and one region could completely fail in another country, another region or another time period.

POVERTY REDUCTION THROUGH SOCIALLY BALANCED GROWTH (14)

The two-year old praxis of the new structural adjustment- and poverty strategy of the Bretton-Woods institutions shows the helplessness and lack of orientation in the sourcebook chapter and the strategy papers (PRSPs)... When one considers the economic catalogue of measures, one finds past recommendations on stabilization and market opening on one side and proposals for orienting public budget policy more strongly to the needs in the education- and health areas on the other side. Poverty reduction could result as a combination of classical stability policy and increased expenditures in education and health care. The support activities of the Bretton-Woods institutions are concentrated in stabilization- and budgetary policy so the impression often arises that the strategy papers are mainly concerned with more efficient methods of re-structuring public budgets. This focus is understandable since the papers were accepted by the HIPC-countries as a conditionality for debt relief. Although the Bretton-Woods institutions in the PRSP-process put great weight on "ownership" and "participation" - the strategy papers should reflect national priorities -, the form and the substantive criteria of the papers are still worked out and resolved in Washington. Often the governments of the indebted countries only reluctantly accepted the new conditionality. The PRSPs could only be integrated with difficulty in the national planning processes and as a result frequently strained planning capacities.

The PRSP approach brought novelties to the process. The strategy papers were no longer worked out in private in Washington institutions and national governments but were accompanied by a public discussion process. Therefore the past results of the PRSP-process despite great substantive deficits must be judged positively since broad public debates on distribution, poverty and development options occurred for the first time in many countries and civil society organizations and groups of the South utilized this greater openness to position themselves as development actors in the general public of their countries. Nevertheless a realistic growth strategy with reference to poverty is lacking in all the documents. Supplying the poor with better basic social services emphasized in the PRSPs would make an important contribution to reducing poverty. However employment and income are crucial. Only when the productive incomes of poor groups permanently increase can there be a general improvement in the situation of the majority of the population in the poor countries of the world. Utilization of social services depends largely on the income situation. People who must worry daily about naked survival have neither the time nor the energy to be properly concerned about the education of their children, hygiene or discussions of community affairs.

The poor are in a vicious circle that actually excludes them from participation in important social processes and binds their energy to the struggle for survival. More and better schools and health facilities are necessary but by themselves do not lead to more employment and income for the poor.

An economic growth with more income and employment of the poor ("pro-poor growth") - as experience demonstrates - does not arise either automatically as the result of a "correct" policy in the sense of the Washington consensus or only through better supply of basic social services. What are lacking - and this could be a theme of the post-Washington consensus - are concepts of an active growth policy stressing mobilization of the productive resources of the poor. With a few exceptions (16), hardly any references to this active growth policy can be found in the PRSP-documents. Sectorally or regionally targeted promotion strategies are necessary that include all political fields and start where the greatest lasting poverty reductions (income and employment) can be realized subject to the respective structural realities. The starting point should be identifying the existing economic potentials of a country or region as well as the factors promoting or preventing the development and mobilization of these potentials. This can only occur country by country. Universally valid prescriptions do not exist. To realize these promotion strategies, decision-makers (public and private) must have adequate and effective economic and socio-political instruments.

NATIONAL ECONOMIC POLICY IN THE GLOBALIZATION PROCESS

The fact that this globalization process limits the national economic possibilities of poor countries more and more is one central developmental problematic of the current globalization process. This is very manifest in international trade and financial markets where the classical instruments of foreign trade policy can only be applied very restrictedly today on the national scale.

This limitation is not a natural law but the result of conscious political decisions by those with economic and political power. In this case the G7 summit is in fact the right addressant for protests since a small radical minority of states make decisions here that should be landmarks for the whole world economy. That the United Nations has no voice at the G7-summit is not an accident. Political decisions in the areas of currency- and trade policy, international property rights, regulation of capital traffic and so forth are reactions to "objective" economic internalization processes that are irreversible in principle. Ignoring the consequences of internationalization for economic policy and retaining past national instruments do not make any sense. The fact that single-handed national economic efforts are no longer possible or sensible in certain areas should not be mistaken for general renunciation on (national) control. Replacing national control with a uniform global control also is not a solution. There are no universally valid rules for promoting growth and prosperity! In view of the crass development differences in the world, the claim of the G7 that open trade policy advances prosperity everywhere contradicts all historical experience.

"Pro-poor growth" can only be attained by nationally or regionally adjusted strategies in which regulation of foreign trade relations is important. However adjustment to the respectively different national or regional conditions must be guaranteed by globally valid and enforceable rules that include insurance for poor developing countries against external shocks conditioned by the world market. This is not a new strategy but was once discussed under the symbol of the new international economic order when raw material suppliers temporarily strengthened their position in the 1970s. Industrial countries quickly ended these debates when the raw material suppliers were forced again to the defensive. The consequences of the shock waves of international financial crises (whose starting points could have nothing to do with the policies of the affected countries), uncontrolled price fluctuations for imported- and exported goods, internationally caused shifts in exchange rates and interest changes and so forth can hardly be resisted with national resources by smaller countries. These countries are in a deep development dilemma:

Targeted economic promotion strategies geared to national or regional potentials, shortages and risks are necessary.
The possibilities for implementing these nationally and regionally adjusted measures by national governments or other national or regional actors of poor countries through economic internationalization and through acts of political liberalization are simultaneously restricted under globalization.

Only approaches are viable that secure and guarantee the necessary political possibilities of the national and regional actors of poor countries (including businesses and unions of the South) through corresponding international rules. Beginnings exist, mostly only in the form of (limited) exemptions. The conversion of such an approach implies three things for development policy and international development agents:

Selling the same developmental prescriptions worldwide must be finally dismissed in practice. The "best practice" in Armenia can have catastrophic consequences in Zambia or vice versa. To speak with Kenny/Williams, "experiences with growth processes in different countries are extraordinarily heterogeneous" (p.12).
Macro-economic stability, free markets and investments in the social realm by themselves do not produce economic growth with the desired poverty reduction. "Pro-poor growth" requires a targeted growth policy that must turn out differently according to substance (what are the growth potentials?) and instrumentally according to land and region. Faith wars over export orientation or import-substitution do not help us advance. Development agencies should promote or prepare the local know-how of poor countries necessary for designing and converting these adjusted concepts.
The practical conversion of adjusted growth strategies presupposes economic possibilities that are often not available or no longer available to poor countries because international rules, decisions of power politics or oligopolist practices of dominant multinationals cut them off. The function of international development agencies is to provide rules in the stabilization process that secure or make possible these openings needed for the development of poor countries.

The (theoretical) rejection of universal supra-historical developmental prescriptions for the whole world also involves traditional progressive concepts like import substitution or world market uncoupling that are hardly still defended today. The proposal to tackle the poverty- and developmental problem from the respective national or regional conditions (where every case is probably unique) finds an interesting starting point in the often decried colorfulness and alleged conceptionlessness of the movement of "globalization critics". The claim of the G7 that there is one medicine - namely open markets - suitable for all the sicknesses of the world - is the real sickness. In confrontation with this one-dimensionality, the diversity of the demands, motives and proposed actions (elements) of the globalization movement has proven to be a strength.

Notes

(1) What was sensible in some cases had catastrophic consequences in others.
(2) For example, in the European Network on Debt and Development EURODAD (www.eurodad.org) and in World Economy and Development - WEED (www.weedbonn.de). Gerhard Klas surveys the movement and its themes in "Another World is Possible", in: "Entwicklungspolitik", 13/2001.
(3) Kanbur calls them "Group A" consisting of leading representatives of treasury departments, international financial institutions and the economic press along with economists who gained their education in the spirit of Anglo-Saxon traditions. Ravi Kanbur, Economic Policy, Distribution and Poverty: The Nature of Disagreements, in: "World Development", 29/2001, p.1083ff.
(4) www.bundesregierung.de/dokumente/Artikel/ix_49466_1305.htm.
(5) Kanbur, op.cit. P.1092.
(6) Ex-BDI head Olaf Henkel, a prominent German representative of "Group A", still believes "rejection of globalization is as absurd as rejecting the weather". Cf. "Frankfurter Rundschau", August 2, 2001.
(7) K.Walde and C.Wood, The empirics of trade and growth: Where are the policy recommendations?, World Bank, Washington D.C. 1999, quot. According to Charles Kenny and David Williams, What do we know about economic growth? Or why don't we know very much? in: "World Development", 1/2001.
(8) "DIE ZEIT" on July 27, 2001 quotes a German opinion poll according to which "two thirds of the population was on the side of the protestors".
(9) John Williamson, What should the world think about the Washington Consensus? in: "The World Bank Observer", August 2000.
(10) Cf. for example Shahid Javed Burki and E. Perry Guillermo, Beyond the Washington Consensus: Institutions matter, World Bank, Washington D.C. 1998, and Stiglitz, More Instruments and Broader Goals: Moving toward the post-Washington consensus, United Nations University, Helsinki 1998.]
(11) Since 2000, the heavily indebted poor developing countries (according to criteria of the Bretton-Woods institutions, presently 41 states) that want to profit from debt cancellation measures and concessionary credits of the Washington Institute must present poverty strategy papers ("Poverty Reduction Strategy Papers"-PRSP(. On July 1, 2002, 76 countries will have a right to concessionary IDA-credits through a PRSP. Cf. also "Blatter", 4/2000, p.456ff.
(12) Poverty Reduction Strategy Sourcebook, on the Internet under www.worldbank.org.
(13) B.Ames, W.Brown, S.Devarajan and A.Izquierdo, Macro-economic Policy and Poverty Reduction, draft, World Bank, Washington D.C., April 2001.
(14) That this growth must be ecologically sustainable is mentioned here without further discussion.
(15) The texts can be read under the Internet address of the World Bank.
(16) The PRSPs discuss sectoral and regional growth poles and their influence on the situation of poor populations.

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