Arguments for Post-Washington Consensus Consensus by Joseph Stiglitz - Essay Example

1.Introduction John Williamson, the person responsible for the phrase Washington Consensus says: “Audiences the world over seem to believe that this signifies a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery. There are people who cannot utter the term without foaming at the mouth.”(1).The phrase is taken “to refer to the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.” (2).Such policies often include-fiscal discipline; a reorientation of public expenditure priorities toward fields offering both high economic returns and targeting evener income distribution,.e.g. primary health care, primary education, and infrastructure ;tax reform (to lower marginal rates and broaden the tax base);Interest rate liberalization ;a competitive exchange rate ;trade liberalization ;liberalization of inflows of foreign direct investment ;privatization ;deregulation (to abolish barriers to entry and exit) and secure property rights. This privatization agenda in pursuit of globalization has come under criticism as (1) says,” Some of the most vociferous of today's critics of what they call the Washington Consensus, most prominently Joe Stiglitz... do not object so much to the agenda laid out above as to the neoliberalism that they interpret the term as implying. I of course never intended my term to imply policies like capital account liberalization...monetarism, supply-side economics, or a minimal state (getting the state out of welfare provision and income redistribution), which I think of as the quintessentially neoliberal ideas”. In development literature it is examined and accepted that The Washington consensus emerged out of a kind of counter reaction in development economics (3) to what has been termed as rather operationally successful neoliberal revolution against Keynesianism prescriptions of the 1970s.The Washington Consensus, materialized in large and specially built Structural Adjustment Programmes (SAPs) suggested for a substantial portion of the developing countries in the ensuing years of 1980s and 1990s.It was the outcomes of these SAPs that were not along expected lines and which resulted in external criticism of The Washington Consensus itself. Joseph Stiglitz a World Bank Economist was the most prominent insider to offer criticism of the neoliberalism inherent in The Washington Consensus and the body of criticism is now termed as post Washington consensus consensus (4) in the sense that it agrees on drawbacks and weak points of the consensus. This paper examines the critical body of arguments posed in this new consensus. 2.Post Washington Consensus Consensus (5) exemplify in detail the various outcomes of the SAPs, based on The Washington Consensus, which not fell short of mark in their prime objective of achieving economic growth through market deregulation but also created other weak spots.Amin states that SAPs resulted in ,” a sharp increase in unemployment, a fall in the remuneration of work, an increase in food dependency, a grave deterioration of the environment, a deterioration in healthcare systems, a fall in admissions to educational institutions, a decline in the productive capacity of many nations, the sabotage of democratic systems, and the continued growth of external debt. “This made Stiglitz look out for an intellectual alternative t economic growth model. An alternative which was not based on sole emphasis on deregulations of all categories of markets to attain economic growth targets. Stiglitz writes about ‘a new paradigm for economic development’ (6).This idea of anew consensus arrived from Stiglitz when global development financial institutions had undergone a major policy shift after having witnessed the Asian crisis and analyzed its reasons that were traced to deregulated markets. The new policy shift is towards instilling social equality in the form of eradication or reduction of poverty and improving social capital in which the markets are essentially embedded. These shifts and Stiglitz’s rhetoric on new paradigm made the UNCTAD Secretary General look out for a new social democratic and development consensus (7) Thus there is a clear indication that a new consensus is emerging in reaction to The Washington Consensus. Stiglitz main arguments can be found in the following extract taken from one of his lectures at the UNCTAD,” Development represents a transformation of society, a movement from traditional relations, traditional ways of dealing with health and education, traditional methods of production, to more "modern" ways. For instance a characteristic of traditional societies is the acceptance of the world as it is; the modern perspective recognizes change, it recognizes that we as individuals and societies can take actions that, for instance, reduce infant mortality, extend life spans, and increase productivity. Key to these changes is the movement to "scientific" ways of thinking ... All societies are a blend [but] in less advanced societies traditional sectors predominate. Indeed, one characteristic of many less developed countries is the failure of the more advanced sectors to penetrate deeply into society, resulting in what many have called "dual" economies in which more advanced production methods may co-exist with very primitive technologies. [...] The changes that are associated with development provide individuals and societies more control over their own destiny. Development enriches the lives of individuals by widening their horizons and reducing their sense of isolation. It reduces the afflictions brought on by disease and poverty, not only increasing life spans but improving the vitality of life. Given this definition of development it is clear that a development strategy must be aimed at facilitating the transformation of society, in identifying the barriers to, as well as potential catalysts for, change. (6). In his book Globalizations and its Discontents Stiglitz made a critical analysis of what went wrong with market deregulation obsessed neoliberal economic policies and emphasized the need for developing several safety nets to the list of economic issues that emerged out of straight and rapid market deregulation.Stiglitz cautioned countries from the pitfalls of following and economic policy of beggar thyself as follows,” trade liberalization accompanied by high interest rates is an almost certain recipe for job destruction and unemployment creation . . . Financial market liberalization unaccompanied by an appropriate regulatory structure is an almost certain recipe for economic instability – and may well lead to higher, not lower interest rates, making it harder for poor farmers to buy the seeds and fertilizer that can raise them above subsistence. Privatization, unaccompanied by competition policies and oversight to ensure that monopoly powers are not abused, can lead to higher, not lower, prices for consumers. Fiscal austerity, pursued blindly, in the wrong circumstances, can lead to high unemployment and a shredding of the social contract. (8). (9) viewed this approach of Stiglitz as based on a new Keynesian economics wherein Stiglitz went on a scrutiny of the on the micro foundations of growth and developmental macro-economics with a fervent and sharp focus on market failures resultant due to imperfect information prevailing between pockets of market and on the new and emerging concept of the social capital defined by the World Bank as 'the networks and relationships that both encourage trust and reciprocity, and shape the quality and quantity of a society's social interactions' (10).Some other economist’s have similar view of the globalization lead economic growth process. These are new and emerging rends in the developmental economics. For instance, Jay Mandle argues that while globalization has benefited the developing countries; however the globalization has an essential adjunct in heavy corporatization of these countries. Such coporatization is invariably absolute and controlling and often results in exploitative use of such vantage position.Labour, environmental laws, for instance are violated in pursuit of production and markets. Jay Mandle, therefore, offers a balancing approach to globalization.Mandle’s system attempts a balance between development and bridling of corporate actions through a corporate nurturing programme. A careful balancing is needed in which excessive corporate power is curbed, but doing so does not put in jeopardy the prosperity that large firms help to create. As (11) says,” With globalization, this problem of balance has become an international one. In the past, individual nations were able to pursue their own balance without giving much consideration to how that same process was evolving in other societies. With the increased integration of global markets, however, this ability to pursue insular strategies with regard to corporate governance has become attenuated. Advances in the technology of information processing, communications, and transportation mean firms increasingly are able to locate production wherever they choose. This new corporate mobility means that if a country attempts to curb corporations by, for example, increasing business taxation or reducing their ability to retrench workers, it could be exposed to a loss of corporate investment.” This, in fact, addresses directly the issue of social capital encourse globalization. Similarly Prof Ha-Joon states that the developed countries press the argument that, in the same way all of them had used free trade policy in order to become rich, they all have benefited from free trade policies welcoming foreign investors; therefore, the developing countries should do the same. Such developing countries by refusing to promote free trade agreements and liberal investment agreements are making a futile attempt to go against the current of history – by trying to walk on an uncharted path of economic development of trade control whereas history has evidenced that free trade promoted economic development in the developed countries. (12) Ha-Joon proves through analysis of trade policies of developed countries that this was not actually so. The developed countries astutely fine tuned their trade regimes depending upon the capital requirements and that in general they did not used liberal policies towards foreign investment before to reach highly developed status. For instance USA, when it was a capital-importing country, it had all kinds of provision to ensure that foreigners invest in the country but do not control its economy.regulation. Similarly the UK, France, and Germany did not have to control foreign investment until the Second World War, as they were capital-exporting countries before that. However, faced with US forays globally after the Second World War, they used a number of formal and informal mechanisms to ensure that their national interests are not hurt. (12) 3.Conclusion It is fair to adopt a stance that trade and market liberalization leads to economic growth and development in the short run; however several social safety nets are required to ensure that it does not result in either market failures or enhancement of economic inequalities which instead of improving the overall well being of individuals only exacerbates it further. Hence the concept of social capital is assuming importance and a new and improved orthodoxy, called the ‘meta-narrative’ with emphasis on the Millennium Development Goals (MDGs) and laying out the link between the MDGs, nationally owned poverty reduction strategies, macro-economic policy (including trade), effective public expenditure management, and harmonized aid in support of good governance and good policies, is becoming popular. (13) Work Cited 1.Williamson, John. “Did the Washington Consensus Fail?” Outline of Remarks at CSIS. Washington DC: Institute for International Economics, November 6, 2002. 2.Naim, Moses. “Fads and Fashions in Economic Reforms: Washington Consensus or Washington Confusion?” Working Draft of a Paper Prepared for the IMF Conference on Second Generation Reforms, Washington DC: Moses Naim, October 26, 1999. 3.Toye J. (1993). Dilemmas of Development; Reflections of the Counter-Revolution in Development Economics, second edition, Oxford: Blackwell. 4.Stiglitz J. (1998-i).'More Instruments and Broader Goals: Moving Towards the Post-Washington Consensus' Presented as the WIDER Annual Lecture, at the at the World Institute for development Economics Research in Helsinki. 5.Amin S. (1997).Capitalism in the Age of Globalization, London: Zed Press. 6.Stiglitz J. (1998-ii). 'Towards a New Paradigm for Development: Strategies, Policies, and Processes' Presented as the Prebisch Lecture, at UNCTAD, Geneva. 7.Ricupero R. (2000). 'From the Washington Consensus to the Spirit of Bangkok'. Closing statement at the tenth session of the United Nations Conference on Trade and Development, Bangkok, 19 February. 8.Stiglitz, J. (2002). Globalization and its Discontents.Penguin.London. 9.Fine B. (1999). 'The Developmental State Is Dead – Long Live Social Capital?, Development and Change, Vol 30. 10. World Bank .(1999). Entering the 21st Century: World Development Report 1999/2000, New York: Oxford University Press. 11.Mandle Jay. Reforming Globalization - Industry Trend or Event ,Challenge,  March, 2001. 12.Ha-Joon Chang.Foreign Investment Regulation in Historical Perspective- Lessons for the Proposed WTO Agreement on Investment.Cambridge University.2003. 13.Maxwell,Smon.(2005). The Washington Consensus is dead! Long live the meta-narrative!. Working Paper 243. ISBN 0 85003 740 9.Overseas Development Institute.London. Read More