Long goodbye from the Washington Consensus

The World Bank Commission studied 13 countries that grew at a rate of over 7 per cent for at least 25 years as from 1950. Despite all the differences, the Commission found one factor common to them all – a strong political leadership that was very keen on economic growth, and a State that actively promoted development. This contrasts starkly with the Washington Consensus, which was about «freeing market forces» from governmental supervision. According to the report, the role of government as defined back then needs to be overhauled. The economic prescription of the time, which was «stabilise, privatise, liberalise», defined the «role of government too narrowly. Just because governments are sometimes clumsy and sometimes errant, does not mean they should be written out of the script.»

Success factors

The governments in the successful developing countries stood out for massive public investments mainly in infrastructure, education and public health. They were not «market purists» but actively pursued industrialisation policies, managed exchange rates or resorted to selective capital controls. Besides, they had not simply relied on foreign investment, but also achieved their own very high rates of domestic saving and investment.

The report concludes that (strong) growth is indispensable to poverty reduction, but that at policy level, equal opportunity, and the advancement of women (they did not agree an equal rights), and economic security for individuals must be promoted in order to support that growth. Growth must be «inclusive». A growth policy calls for leadership, perseverance and pragmatism.

Diplomatic compromise

The report is an exercise in diplomatic compromise. Some matters still remain controversial. They include measures to promote industrialisation or capital controls implemented by the successful Asian countries. The report addresses this latter question in a somewhat positive light, however – at least it makes very clear that none of the successful countries studied had opened up its capital market from the outset.

The Commission also shies away from addressing the sweeping changes in the rules of international economics that occurred during the period covered by its study. Until 1980, the developing countries had enjoyed relatively advantageous non-reciprocal access to the markets of industrialised countries and a strongly regulated international capital market. Since then the industrialised countries together with the World Trade Organisation (WTO) and the World Bank, in particular, have imposed reciprocal market access and extensive capital market deregulation.

It is indeed stated that in the future, African and other disadvantaged countries too could introduce catch-up industrialisation programmes, yet the enormous obstacles standing in the way of such programmes are not mentioned. Nor is any mention made of the fact that many of the industrialisation policies then followed by the Korea, Taiwan, Brazil or China are today prohibited under WTO agreements. This is why the Commission stops short of explicitly supporting the call from all developing country groups for more economic policy space, although its findings do underpin that call. It does however recommend that African countries should be guaranteed preferential market access for a set period so as to compensate for their disadvantaged position vis-à-vis the Asian competitors.

The Growth Report takes the criticism of the Washington Consensus started in the late 1990s by former World Bank Chief Economist Joseph Stiglitz a bit further. Stiglitz was removed from the World Bank under US pressure. Today, World Bank President Robert Zoellick gives the report his express blessing.

Peter Niggli, Director of Alliance Sud

Commission on Growth and Development: The Growth Report. Strategies for Sustained Growth and Inclusive Development. 2008. www.growthcommission.org