The Poor Need a Stake in Developing Countries

Thirteen years ago, as Latin America emerged from the debt crisis and the Berlin wall came down, there was an unusual degree of consensus about the main elements of the policy agenda that Latin American countries needed to pursue. Just like the countries in the Organisation for Economic Cooperation and Development, where these objectives had been motherhood and apple pie for decades, Latin American countries needed to stabilise, liberalise, and open up their economies to trade and foreign direct investment.

Until some time in the 1980s these ideas had not been part of the
conventional wisdom in developing countries. Prior to that there was a sort of intellectual apartheid, which held quite distinct policies to be appropriate in industrial versus developing countries. To convince a sceptical Washington that policies were changing, I laid out criteria by which to judge progress in policy reform, and termed this agenda "the Washington Consensus."

To my surprise, the term acquired a life of its own. In the early days some of the reformers wore it as a badge of honor that would associate them with the ideology of the side that had just won the cold war. But others resented it as suggesting that reform was being imposed on them by Washington rather than adopted out of self-interest. Opponents of reform were only too pleased to exploit such resentment to attempt to discredit reforms, and reinterpreted the term to imply a distinctly more right-wing agenda including a minimal state and rapid elimination of all capital controls than ever commanded a consensus in Washington or anywhere much else. This straw man has been widely blamed by anti-reformers for the disappointing economic outcomes of recent years repeated crises, low growth, rising poverty, and a continuation of strikingly unequal income distributions.

That is ridiculous. The Argentine tragedy, for example, was not caused by import liberalisation, or privatisation, or any of the other reforms the country implemented in the early 1990s, but by two fatal decisions. One was the attempt to peg the peso firmly to the dollar, which proved disastrous because of the devaluation of the Brazilian real and the upward levitation of the US dollar. The second was the decision to splurge when Argentina was the darling of Wall Street, instead of using the good times to work debt down to a safe level. Since a competitive exchange rate and fiscal discipline were two of the "10 commandments" in the Washington Consensus, I find it a bit rich to blame the latter for Argentina's crisis.

Nevertheless, economic outcomes in Latin America in recent years have by any standards been disappointing. It therefore seemed time to re-examine the policy agenda that the region should be pursuing, to see whether a reformulation of policy was needed to launch a period of faster, sustainable, and more equitable growth.

The resulting agenda differs from the original Washington Consensus for two reasons. First, time has passed and some reforms (such as the liberalisation of foreign direct investment) have already been accomplished, while new priorities have become evident. Second, the original Washington Consensus was an attempt to distill what commanded a consensus among third parties, which was not as broad as we would have liked. The latest effort is the policy agenda that we would like to see. If an idea is not included, it is because we do not believe it should be.

The new agenda does not reject the liberalising reforms of the Washington Consensus, although there may be a need to correct details. On the contrary, it emphasises the need to push liberalisation further in some dimensions, such as making labour markets more flexible. But it also recognises the need to complement those reforms by building, or strengthening, the institutions needed for a smart state to play its role in stimulating and regulating a market economy. Another topic that receives much attention is the need to make the economies of the region less crisis-prone than in the past. Among other things, more discipline is required over public sector debt in order to provide the latitude to make
fiscal policy anti-cyclical.

A final key respect in which policy needs to adjust is in the pursuit of lower inequality of income, alongside faster growth. Fiscal instruments (such as using property taxes to finance regional and local government) can help, but they need to be paralleled by efforts to supply the poor with assets (education, land, microcredit, titling) that will enable them to work their way out of poverty.