Approaches to Poverty Eradication and Economic Development VI
Despair and the Washington Consensus
The 2003 UNDP Human Development Report said: "For many countries the 1990s were a decade of despair.In the 1990s average per capita growth was less than 3% in 125 developing and transition countries, and in 54 of them average per capita income fell. These include many priority countries but also some countries with medium human development."
Susan George, then associate director of the Transnational Institute, gave one of the reasons for this despair as what had happened during the 1980s. In an article, "How the Poor Develop the Rich", she said: "According to the OECD, between 1982 and 1990 total resource flows to developing countries amounted to $927 billion. During the same 1982-90 period, developing countries remitted in debt service alone $1,345 billion (interest and principal) to the creditor countries.In spite of total debt service, including amortisation, of more than $1.3 trillion from 1982 to 1990, the debtor countries as a group began the 1990s fully 61 percent more in debt than they were in 1982."
In a background paper to the 2003 UNDP Report, the economist Richard Jolly wrote: "The Bretton Woods Institutions, BWI, (the IMF and the World Bank) have been keen to negotiate with individual countries time dated, quantitative economic targets as part of the conditionalities of adjustment programmes. These targets have typically focused on such variables as the public sector deficit, the balance of payments and the inflation rate - each of which are, of course, means to improving economic performance rather than ends of development, let alone goals of human development. More serious, the single-minded focus of the BWI on economic variables has been driven by a narrow view of structural adjustment which in turn has led, especially in the 1980s, to policies and actions which often diverted attention from the social dimensions of adjustment, set back progress in the social sectors, and worked against the achievement of global goals in education, health and nutrition." What Jolly was referring to as "a narrow view of structural adjustment" is what is called "the Washington Consensus". The former Chief Economist of the World Bank and Nobel Prize winner, Joseph Stiglitz, has described this "consensus" as "consensus between the IMF, the World Bank, and the U.S. Treasury about the 'right' policies for developing countries - that signalled a radically different approach to economic development and stabilisation."
Confronted by the fact of the further impoverishment of the poor as a result of these policies, the Administrator of the UNDP, Mark Malloch-Brown, spoke out at the launch of the 2003 Human Development Report (HDR) and said there was need to launch a "guerrilla assault" against the "Washington Consensus." He added: "The IMF and the World Bank should no longer set these kinds of ceilings on spending. These measures were introduced at a time when finances were leaking red ink all over the place and there was an urgent need to stabilize. The strategy had its time and place. The Washington Consensus did some good things, but people stuck with it too long - and it wasn't enough." Obviously conscious of the successful development interventions to which we have referred, the principal author of the 2003 HDR, Sakiko Fukuda-Parr, said, "Public interventions are necessary to set the preconditions for market-led economic growth." Accordingly, as we would expect, the 2003 HDR argues for bigger volumes of development assistance, as promised at the UN Monterrey Summit on Financing for Development, to enable the "public interventions" that Fukuda-Parr was talking about to take place.
In this context, in April 2004, Peter McCawley, Dean of the Asian Development Bank Institute said: "Global ODA [Overseas Development Assistance] is roughly $60 billion. It sounds like a large amount but there has been a question emerging in the last four to five years of why has aid failed and why are so many countries still in a terrible mess. This problem is particularly acute in the case of Africa and it has led to a very large concern in the international community over the effectiveness of aid.
"Concerning the $60 billion, there is a misunderstanding about the magnitude. What is interesting about this figure is how small it is. The $60 billion goes to four billion people, including those in India and China. That equals $15 per person per year, or roughly $1 per person per month in developing countries. Hence, I suggest to you that one of the reasons aid has been ineffective is that it has barely ever been tried. A transfer of $1 per person per month is hardly a significant transfer and it is a tiny transfer compared to those that we are used to inside rich countries. When we have a problem with the agriculture sector, it is not at all unusual for governments in rich countries to provide transfers of $20,000 or $30,000, or even $100,000, per farm.
"Twenty or 30 years ago, multilateral development banks (MDBs) talked much about investment and focused to a considerable degree on projects like infrastructure. We do not hear as much about the accumulation of capital, the levels of investment. The topic has tended to move aside and now we hear much more about the need for good governance and anti-corruption programs than the investment/GDP ratio. It is said that, to some extent, developing countries themselves are responsible for the levels of investment and they need to do more to improve the domestic investment climate. "The views of poor countries tend to be somewhat different. On economic growth, poor countries tend to place more emphasis on the quantity of economic growth." Wisely, Peter McCawley also said: "The philosophy of development changes as time goes by, partly as a result of facts and new experiences as well as events."
The "Washington Consensus" represented such a change in the philosophy of development, resulting in the "narrow view of structural adjustment" that Richard Jolly complained about. The first person to spell out the goals of the "Washington Consensus" was the economist John Williamson. In remarks at the U.S. Centre for Strategic and International Studies in November 2002, thirteen years after he first announced the programme of the "Washington Consensus", he said: "Let me remind you of the ten reforms that I originally presented as a summary of what most people in Washington believed Latin America (not all countries) ought to be undertaking as of 1989 (not at all times):
- " Fiscal Discipline. This was in the context of a region where almost all the countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.
- " Reordering Public Expenditure Priorities. This suggested switching expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education.
- " Tax reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates.
- " Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, and stressed that views differed on how fast it should be achieved.
- " A Competitive Exchange Rate. I fear I indulged in wishful thinking in asserting that there was a consensus in favor of ensuring that the exchange rate would be competitive, which implies an intermediate regime; in fact Washington was already beginning to subscribe to the two-corner doctrine.
- " Trade Liberalization. I stated that there was a difference of view about how fast trade should be liberalized.
- " Liberalization of Inward Foreign Direct Investment. I specifically did not include comprehensive capital account liberalization, because that did not command a consensus in Washington.
- " Privatization. This was the one area in which what originated as a neoliberal idea had won broad acceptance. We have since been made very conscious that it matters a lot how privatization is done: it can be a highly corrupt process that transfers assets to a privileged elite for a fraction of their true value, but the evidence is that it brings benefits when done properly.
- " Deregulation. This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons.
- " Property Rights. This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost.
"The three big ideas here are macroeconomic discipline, a market economy, and openness to the world (at least in respect of trade and FDI [Foreign Direct Investment]). These are ideas that had long been regarded as orthodox so far as OECD countries are concerned, but there used to be a sort of global apartheid which claimed that developing countries came from a different universe which enabled them to benefit from (a) inflation (so as to reap the inflation tax and boost investment); (b) a leading role for the state in initiating industrialization; and (c) import substitution. The Washington Consensus said that this era of apartheid was over."
Regardless of what John Williamson's intentions were in 1989, the fact of the matter is that the Bretton Woods institutions and the developed world began using the prescriptions contained in the "Washington Consensus" as the alpha and the omega of a development model that all developing countries had to implement. In February 2003, the U.S. Global Policy Forum published an article written by Xavier Cano Tamayo entitled "Burying the 'Washington Consensus". To explain the real origins and effects of this Consensus as he understood it, he said: "Communism, having been disarmed and extinguished in combat; capitalism put on a brave face and in the death throws of the eighties formulated economic policy directives with mandatory effect; a process leading towards the final consequences of economic liberalism as formulated at the end of the eighteenth century and the beginning of the nineteenth.
"The 'Consensus' prescribed budgetary discipline (a passion for eliminating deficits), fiscal reform (favouring those who own most), trade liberalisation (removal of tariff barriers by less developed countries without any compensation from the rich), opening up to foreign investment (without rules or controls), privatisation (public patrimony within the grasp of the powerful), deregulation (weakening or removal of labour guarantees, social and environmental controls), absolute guarantee of right to property and management of lesser affairs (excepting police involvement)." He went further to report that: "Latin America, the principal victim of this 'Consensus', is a prime example of the disaster it has caused. In 1980 there were 120 million poor; in 1999 the number had increased to 220 million, 45% of the population; the richest 20% is almost 19 times richer than the poorest 20%, when the world average is that the rich are only 7 times richer than the poorest. After a decade of blindly devoted application of the Washington Consensus guidelines, Latin America stands on the edge of a precipice. Debt grew from US$492,000 million in 1991 to US$787,000 million in 2001. Railways, telecommunications, airlines, drinking water supplies and energy supplies were virtually wound up and handed over to giant US and European corporations. Public spending on education, health, housing and social benefits was reduced, price control was abolished, wages were frozen and millions of workers were dismissed by the new masters of the now-privatised public undertakings."
He reported that in the light of all these negative outcomes of the "Washington Consensus" policies, "James Wolfensohn, President of the World Bank, declared in November 2002 at a Latin American Meeting in preparation for the Davos World Economic Forum; 'the Washington Consensus is dead'." The World Bank also issued a statement on the results of a seminar it had convened in Paris to discuss the "Washington Consensus". It said: "The so-called Washington Consensus on market-oriented policy measures and macro economic balance either failed to achieve expected results in terms of growth and poverty reduction or was interpreted from an ideological point of view in many developing countries, a group of experts and analysts agreed at an international roundtable hosted by the World Bank last week in Paris. The gathered experts sought a new approach that would include investment in social development, environmental responsibility, and a strong regulatory role for the state, as well as international cooperation through multi- and bilateral development institutions. They also agreed that people's needs must be at the center, when formulating an economic policy."
It has also been reported that when he addressed the Foreign Correspondents Club in Tokyo in January 1999, in the aftermath of 1997-98 Asian crisis, Japan's vice-finance minister for international affairs, Eisuke Sakakibara, criticised the IMF's handling of the Asian crisis, and said the Fund's philosophy reflected the "Washington consensus" of "free markets and sound money", which had been blindly applied as a universal model on emerging economies.
He went on to say: "Since I was personally involved in the process and agreed, although reluctantly, in the end to what was recommended, I am in no position to criticise others for what has happened. But unlike the (IMF) managing director Michel Camdessus I can only say that if I am confronted with similar situations in the future I will probably handle them differently."
At the time still the Managing Director of the IMF, Michel Camdessus participated in UNCTAD X in Bangkok, Thailand in 2000. During an interactive session with the public, among other things he said: "It is recognised that the market can have major failures, that growth alone is not enough or can even be destructive of the natural environment or precious social goods and cultural values. Only the pursuit of high quality growth is worth the effort - growth that can be sustained over time... growth that has the human person at its centre.... growth based on continuous effort for more equity, poverty alleviation, and empowerment of poor people. "Systematically dismantling the state is not the way to respond to the problems of modern economies; rather, we must aim for a slimmer yet more effective state.
"The new emerging paradigm, rooted in fundamental human values, taken together with a better ability to prevent and manage the crises, is a distinct and positive chance of our times... A new perception of globalisation is emerging a call for common action to transform globalisation into an effective instrument for development." The Managing Director of the IMF also made the comment, "I don't know what the Washington Consensus was. I never signed it." In 2001, Mark Weisbrot delivered a paper entitled "The Need to Rethink Development Economics", at a conference in Cape Town organised by the United Nations Research Institute for Social Development. Among other things he said: "Most of the neo-liberal principles that have replaced the discipline of development economics - most importantly, the idea that simply opening up to international trade and investment constitutes a development strategy -enjoy widespread acceptance in educated circles.
"This is true in spite of the fact that the last 20 years of the experiment in applying these principles, during which most low and middle income countries significantly opened their economies and followed Washington's economic advice, have been an unquestionable economic failure. In Latin America, GDP per capita has grown by about 7 percent over the last two decades; from 1960-1980 it grew by 75 percent. In Africa, income per capita grew by about 34 percent from 1960-80; it has since declined by more than 15 percent. This decline in growth has occurred throughout the vast majority of developing countries. The major exceptions are China and India, but neither can be pointed to as an example of success in adopting neo-liberal policies. China, which recorded some the highest growth rates in world history over the last 20 years, maintains strict currency controls, considerable protection of its domestic consumer markets, and its financial system is dominated by state-owned banks. "If we group countries by their starting level of per capita income, rather than by region, the growth slowdown is very pronounced. The lowest quintile went from a per capita GDP growth rate of 1.9 percent annually in 1960-80, to a decline of 0.5 percent per year (1980-2000). For the middle quintile (which includes mostly poor countries), there was a sharp decline from an annual per capita growth rate of 3.6 percent to just less than 1 percent. These declines in growth represent an enormous difference in living standards as compared to what was considered normal and feasible in the past, and there were declines across all groups of countries.
"The failure of the last two decades also shows up in a substantial decline in the major social indicators (again dividing the countries into quintiles according to their initial level at the beginning of the period). For almost all groups of countries, there was considerably reduced progress in life expectancy, infant and child mortality, measures of education, and literacy in the past two decades, as compared with the period from 1960-1980. "If these basic facts were well known - especially the failure regarding economic growth - there would be a much different public debate about the last 20 years. The main question would be: what has gone wrong? What are the structural and policy changes that have led to this wide-ranging failure? "A change in the debate of this nature would help to create political space for a renewed practice of development economics. There are many paths to development, as Keith Griffin has argued, but the problem is that almost all of them are currently blocked by the reigning neo-liberal orthodoxy. And now we have the WTO [World Trade Organisation] throwing further obstacles in the way, for example, through its TRIPS (Trade Related Aspects of Intellectual Property Rights).
"By tightening the enforcement of patents and copyrights, the TRIPS agreement will make it much more difficult, if not impossible, for developing countries to industrialize in the way that countries such as South Korea and Taiwan did, on the basis of borrowed technology; while at the same time draining tens of billions of dollars of scarce capital from South to North, for royalties and other intellectual property payments. "Economists and policy analysts from throughout the world can play an important role in changing the public debate, and making it more honest. In the last year or two the World Bank has for the first time begun to respond to its critics on the economic arguments."
We should draw a few conclusions from the foregoing:
- The "Washington Consensus" constitutes a development model based on the ideology of "market fundamentalism".
- It has obliged the developing countries to depend on "the market" for the investment and other interventions that would enable them to reach their takeoff point, contrary to what happened to post-war Western Europe and the Asian Far East, and is happening within the EU.
- Private capital, however, is inherently driven by the profit motive and is incapable, on its own, of addressing the challenge of poverty and underdevelopment.
- Consequently, with regard to the majority of developing countries, in the context of weak supportive intervention by the governments of the developed countries because they do not feel threatened by the poverty in these countries, the pursuit of profit by global private capital has worked against the goal of people centred development.
- Contrary to its own development experience with regard to the Marshall Plan and its Regional Policy, the EU persuaded the ACP countries to adopt the Cotonou Agreement, which is based on the precepts of the "Washington Consensus", to which the EU Green Paper on its cooperation with the ACP countries referred when it said, "development thinking itself has moved on".
- The members of the OECD and the multilateral development institutions have taken the same position, in favour of the "Washington Consensus" positions. Accordingly, with regard to the developing countries, they are unwilling to adopt the position of the EU with respect to its Regional Policy, that this must entail the necessarily substantial resource transfers from the rich to the poor.
- Globally, the vast bulk of capital is in the hands of the private sector. The strategic posture represented by the "Washington Consensus", to rely on this sector to achieve development, means that the governments of the developed countries will resist all efforts to transfer a portion of global private capital to the public sector, which would give this sector the possibility to make the "public interventions" mentioned by Fukuda-Parr.
- Whereas, today, the "Washington Consensus" has few overt supporters among the global decision makers, it has not been replaced by any serious programmes that seek to replicate the successful Marshall Plan and the related development models.
- Freed of any challenge equivalent to the perceived threat posed by "communism", the developed capitalist countries will devote only such resources to meet the needs of the poor billions in the world as would ensure that these billions do not act in a manner that threatens their survival as prosperous capitalist countries.
- Conscious of the absence of such a threat, these countries are ready to argue against substantial resource transfers to the poor, on the basis that their constituencies suffer from "donor fatigue". In any case, they have a responsibility to address the serious challenge of poverty within their own societies.
- These positions have become the dominant ideology of contemporary society, and are therefore sustained by a veritable army of prophets in academia, the media and decision makers in many countries, regions and the multilateral organisations.
- The infinitely elastic determinations of this dominant ideology of what constitutes the basis for successful social and economic development inevitably lead to the realisation of the self-fulfilling prophecies of these prophets - there will be failure until success is achieved, in circumstances in which the pursuit of success prescribes continuing failure!
South Africa is fully integrated within the global economy. It is therefore open to the pressures imposed on all medium-sized middle-income countries of the South by the objective process of globalisation and the attendant subjective ideology of market fundamentalism. At the same time, a large part of our population is caught in an underdeveloped sector, the Second Economy, which cannot escape the trap of poverty and underdevelopment through reliance on "the market".
The question that arises is whether we have an autonomous domestic possibility to achieve what Sakiko Fukuda-Parr spoke about with regard to "public interventions (that are) are necessary to set the preconditions for market-led economic growth".
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