1. IADB Conference on Development Banks Belo Horizonte March 31
Latin American Development and the post Washington Consensus Consensus
Joseph Stiglitz, Columbia University
IADB Conference on Development Banks Belo Horizonte March 31

2. I. CONTRASTING EXPERIENCES
Rapid growth in Asia
Disappointment in the economies in transition and Africa
And in Latin America
Only limited growth
And it was not sustainable
And it was not sustained
But even when growth did occur, it was not equitably shared
Trickle down economics does not work
At best indifferent, and at worst hostile, to policies that would have promoted equality

3. China’s growth is unprecedented
Previous economic revolutions—like the industrial revolution of the nineteenth century—had seen growth rates peak at around 2 to 3%
The golden age of growth in America in the fifties and sixties saw similar growth rates
China’s growth has been three times these numbers
Even faster than Asia miracle countries

4. BUT CHINA IS NOT ALONE India’s enormous success
More than two decades of growth of 5 to 6%, now approaching 8%

5. And it’s more than just GDP
China has had success not only in increasing GDP
The fraction of the Chinese population living on less than $1 a day has fallen from 63.8% in 1981 to 16.6% twenty years later

6. II. THE MEANING OF SUCCESS
We need to be careful in assessing what we mean by success
US: GDP increasing, but
Increased poverty
And even those in the middle worse off—as real median incomes falling
Real wages stagnating—incomes would have fallen even more were it not that Americans are working more and more
Imposing costs to the family
Huge social costs
Perhaps partially reflected in high level of violence and crime—ten times higher than others

7. Meaning of success (2)
Poor performance in other indicators—health
Spends more, poorer results
Lower ranking on HDI
Growing problem: rich countries with poor people?
U.S. and elsewhere, GDP increasing, but environment worsening
Will growth be sustainable?
Not only environmentally, but socially and economically
Especially with huge deficits
Important not to be misled by using wrong measures of success
What we measure affects behavior
Do not be beguiled by GDP
Also look at HDI, median real income, Green NNP
OBJECTIVE SHOULD BE SUSTAINABLE, EQUITABLE, DEMOCRATIC DEVELOPMENT

8. III. LATIN AMERICA IS NOT LIVING UP TO ITS OWN PAST—and falling behind others

9. DECLINING GROWTH IN PER CAPITA INCOME IN LATIN AMERICA

10. GROWTH RATES: BRAZIL, CHINA AND INDIA

11. LATIN AMERICA ALSO EXPERIENCED TREMENDOUS VOLATILITY OF GROWTH

12. Unemployment in Latin America is relatively high

13. There has not even been a catch up from the lost decade

14. POVERTY RATES IN LATIN AMERICA HAS NOT DECLINED

15. IV. INTERPRETING THE FAILURES AND SUCCESSES
India’s success
In spite of weaknesses in infrastructure
Including electricity
Better infrastructure would have led to even more growth
In spite of absence of natural resources
Or perhaps because
The “natural resource curse”
Growth occurred before trade liberalization
And, like China, there is still not full capital market liberalization

16. China’s success
IN SPITE OF IT NOT FOLLOWING MOST OF DICTATES OF “CONVENTIONAL WISDOM” (WASHINGTON CONSENSUS)
Not even clear property rights
But clearer property rights might have led to even more impressive growth!
Large role of government
Including Industrial policy
No free trade in earlier high growth period
No free capital market liberalization—even today
SUCCESS BECAUSE THEY FOLLOWED A DIFFERENT AGENDA
Appropriate to their circumstances and history
MUCH OF CONVENTIONAL WISDOM IS OFF THE MARK

17. China’s success (2)
China’s success is not just because of its cheap labor
Labor costs in textiles actually higher than many other developing countries
Chengdu becoming software center
Jilin –example of how to deal with “rust belt problems”

18. China’s 11th five year plan
Two weeks ago, China adopted its 11th 5 year plan
Comprehensive approach to development
Emphasis on problems of inequality, and especially in the rural area
Emphasis on the environment
And emphasis on science and technology, maintaining competitiveness
Including establishing global class universities
A basis of independent innovation

19. THE EMERGING CONSENSUS
THE WASHINGTON CONSENSUS WAS NEITHER NECESSARY NOR SUFFICIENT FOR GROWTH
HAD A TOO NARROW FOCUS ON WHAT WAS MEANT BY SUCCESS
Ignored equity, democratic participation, environment

20. EVEN ITS ECONOMICS WAS FLAWED
CONFUSED MEANS WITH ENDS
Liberalization, privatization were means, not ends in themselves
And even accounting was flawed
Numbers neither provided pictures of sustainability (balance sheet) inflationary pressures
With enormous consequences, as privatizations were forced and land reform and other social initiatives were thwarted
FOCUSED ON PRICE STABILITY, NOT REAL STABILITY, GROWTH, EMPLOYMENT
Though high levels of inflation can be a problem

21. EVEN ITS ECONOMICS WAS FLAWED (cont.)
FOCUSED ON TOO NARROW A SET OF INSTRUMENTS
Because the Washington Consensus did not understand the limitations of markets, it focused on too limited a set of instruments it ignored:
Land reform
Industrial policies
Strengthening the financial sector
Improving education
Competition policy
Governance issues in both the public and private sector .

22. BASIC FRAMEWORK Need a balanced role for government
Market is at the center of the economy
But in every successful economy the government has played a large role
In science and technology (internet)
In making markets work (sound banking and securities market regulation
In protecting the environment
In maintaining social cohesion (income distribution, safety nets)
Countries suffer as often from too little government as from too much

23. Basic Framework (2): The importance of knowledge, technology
We now recognize that what separates developed from less developed countries is not just a gap in resources, but a gap in knowledge
There is a limit to the pace at which you can close a gap in resources
Though China’s savings rate in excess of 42% helps speed the process
But closing the gap in knowledge can occur at a very rapid rate
That is why even a natural resource rich country like Malaysia has, in the last two years, switched from focusing on investments in infrastructure to investments in people and research

24. The emerging consensus: trade
Exports have played a role in the success of the East Asian and other high performing countries
Import liberalization can destroy jobs
New jobs aren’t automatically created
Trade liberalization in general has not been associated with faster growth
Though obviously, autarky is not an option

25. Emerging Consensus: investment
Creating a favorable investment (business climate) is essential
But some countries have done well without foreign investment
One should probably not give preferences to foreign investors
Short term capital flows do not result in higher growth, investment
But do lead to more instability
At the root of many of problems of last decade

26. Emerging consensus: privatization
It makes sense for governments to focus on those areas where the markets, by themselves, fail to produce desirable outcomes
Externalities, like pollution—markets produce too much
Externalities and public goods—like research and social safety nets—markets produce too little
Income distribution—even if markets were efficient, there may be excessive poverty, inequality

27. Privatization (2) But privatizations have often failed
Corrupt privatizations
Failure to regulate—monopoly pricing (even better at exploiting consumers)
Agency problems
And there have been some highly successful government enterprises
In many countries, industries
Chile, Korea, Malaysia

28. Emerging Consensus: Macro policy
Of critical importance
Harder to manage macro-policy with fully open capital markets
High exchange rates and high interest rates hurt growth, employment
Puzzle
Brazil’s overall performance has not been as strong as one would have thought from its strong export performance
Explanation: excessively tight monetary and fiscal policies

29. Emerging consensus Importance of credit availability
Importance of competition policy
Importance of education
Both primary
Higher education

30. So where’s the controversy?
Industrial policy, development banks
Not question of picking winners, but looking for externalities, coordinating needed infrastructure investments, other investments
The record has been mixed
Almost every successful country has had such policies
Today, America’s is largely embedded in defense department
But current American Administration is finally recognizing importance for America to remain competitive, increased NSF budget

31. Brazil’s success Brazil has demonstrated technological leadership
Embraer airplane global best seller
Bio-fuels have helped Brazil achieve energy independence
All done with important support from government
Including through development bank (BNDES)
These have resulted in impressive export performance
But why then has Brazil’s growth been so lackluster?

32. Controversy (ii) Institutions Importance associated with various items
Independent central banks focusing exclusively on inflation…
America focuses on employment and growth
UK has government set inflation target
Sweden makes sure that voice of workers is heard
Importance associated with various items
Equality/progressivity
VAT is a regressive tax, and not even an efficient tax, in an economy with a large informal sector
Land reform—
sharecropping introduces a major distortion in the economy
Most successful countries began with major land reforms

33. Controversies (iii)
Credit—key role of making credit available at affordable interest rates
Markets by themselves lead to undersupply in many areas
In U.S., other successful countries—large role of government (guarantees, CRA)
Foreign banks may lead to reduced supply to small and medium sized enterprises
Important niche for Development Banks
High profits suggest lack of competition—what should be done?

34. What matters is both availability and lending rate (not just T-Bill rate)
Greenwald and Stiglitz, New Paradigm in monetary economics
Importance of reducing T-Bill rates and spreads
Regulatory policy, competition policy and standard macro-economic policy instruments all have to be employed

35. Which country looks in better shape
Which country looks in better shape? Which country looks like it should be growing faster?

36. What accounts for this growth differential?

37. It’s not inflation…

38. Can high real interest rates explain differences in performance?

39. Excessively tight fiscal and monetary policies in Brazil?

40. Controversies Macro-policy
Too narrow a view of objective—controlling inflation
Good policy also looks at growth and employment
Controlling inflation does not automatically lead to faster growth
And indeed it may hamper long run growth
Lower GDP now is associated with lower GDP long into the future
Stabilization and growth policies are interconnected
Relying on interest rates in crises limits use of debt
Weakens financial markets and impairs efficiency of allocation of capital

41. BEWARE OF WASHINGTON CONSENSUS PLUS
Lip-service to issues of distribution
better safety nets
or improved female education
Emphasis on second generation of reforms
Items left off in earlier agenda
In particular about governance issues
Step in the right direction
But does not deal with fundamental inadequacies in the current approach

42. V. Globalization will be imposing new challenges
Heightened competition
Based on education, technology
And heightened forces for inequality
Particularly problematic in countries, like those of Latin America, where there is already high levels of inequality
Will require an active role for government

43. Changing Global Landscape
Thomas Friedman has suggested that “the world is flat”—for first time in human history, poor countries are competing on a level playing field
But the world is not flat
Disparities between the haves and have nots have increased
Power of entrenched monopolies, like Micro-soft, is probably greater than ever before
Importance of research gives enormous advantage to those who have the resources and skills to undertake it
The Uruguay Round made the world less flat
Especially TRIPs
But the nature of competition is enormously changed
Successful countries cannot simply rest on laurels
And those coming from behind will have to work harder
THESE CHANGES WILL AFFECT EVERYONE

44. The successful countries are shaping globalization, and winning
Nordic countries have been so successful, not only in growth, but in broader measures of success
Readjusted their “welfare state” model to new realities
But still retained model—including high taxes
With better safety net, there can be more risk taking, entrepreneurship
Success in modern technology based economies requires risk taking
There may even be less of an equity-efficiency trade-off than we once thought

45. VI. INSIGHTS FROM ECONOMIC THEORY
The successful countries have actually followed models which are more in accord with economic theory than the Washington consensus
They have recognized the importance of MARKET FAILURES

46. MARKET FAILURES IN DEVELOPING COUNTRIES
Problems are particularly significant in developing countries
Markets also by themselves do not produce efficient outcomes when technology is changing or when there is learning about markets
Such dynamic processes are at the heart of development
There are important externalities in such dynamic processes
Giving rise to an important role for government
Successful East Asian countries recognized this role
The Washington Consensus policies did not

47. WASHINGTON CONSENSUS AND EQUALITY
Justifications for ignoring equity
It was argued that one could separate equity and efficiency considerations, and economics should just focus on efficiency
Trickle-down economics meant that the poor gain if growth is pursued and attained
There were really no “trade-offs”- the single best policy would benefit everyone
Could essentially leave economic policymaking to technocrats to find that “best policy”

48. PROBLEMS WITH THESE JUSTIFICATIONS
These arguments are neither theoretically or empirically correct
Modern theories emphasize that equality and efficiency cannot be separated
Agency theory
The arguments for land reform
Sharecropping attenuates incentives just as taxes do
Washington Consensus policies did serve the interests of technocrats
And established special interests
Too much faith in markets
Even under the best of circumstances, there is no reason to believe markets are consistent with social justice
But even if one did not care about equity, distribution of income, there is an important role for government because of market failures

49. Equity is an “end” in itself
But equity promotes growth and even efficiency
Better use of human resources
Social and political sustainability

50. VII. A Social Democratic Agenda
Premised on the belief that those in Latin America know better what they want—and how to get it—than those in Wall Street or Washington or elsewhere
Though they should seek advice, experience of others
And they need to take into account reactions of others
And what they care about puts weight on democracy, the environment, health, poverty, values besides increases in GDP
Puts people first
Both as the means of success—and the objective of success

51. A Competitiveness/Growth Strategy which puts people and values first
1.Enhancing Competition
Requiring strong anti-trust laws
Strong regulations of natural monopolies
2. Strengthening the public sector (reinventing government)
Strengthening progressive taxation
Less reliance on V.A.T.
More taxation of oligopolies
Increasing transparency
One of great achievements of current Administration
Benchmarking efficiency

52. A Competitiveness/Growth Strategy (ii)
3. Putting people first
Investments in education, health
Land reform
Strengthened safety nets
4. Pro-growth policies
Expanding credit
Maintaining a pro-growth macro-policy
Industrial/export promotion policies at national and state level
Including investments in advanced education and research

53. Latin America faces a choice
The policies just described have worked
In Asia, in the Nordic countries
They can work in Latin America as well
Latin America has a choice between two strategies
One has not been working well in Latin America or elsewhere
Failed in promoting well-being of ordinary citizens

54. Latin America faces a choice (2)
The alternative strategy—pursued in much of Asia-- has worked well, beyond the wildest expectations
Though any strategy has to be adapted to local conditions; one size fits all policies do not work
Fifteen years ago there was considerable uncertainty about the relative merits of alternative strategies
Enormous successes and failures has now brought clarity
Though in many circles ideology/interests still prevail
Success of alternative model consistent with modern economic theory, with its recognition of the strengths and limits of markets
Hopefully, the countries of Latin America will choose the strategy which is not only likely to enhance economic growth
But also will have a greater chance of ensuring that the benefits of that growth are shared widely among the people of the region

55. CONCLUDING REMARKS (i)
Elements of the Post Washington Consensus Consensus
Importance of equity
Importance of employment
Balanced role of government and market
Promoting and regulating markets
Providing institutional and physical infrastructure
Promoting education, innovation and technology
Providing social safety net, redistribution

56. MORE THAN THEORY
The ideas are not just of academic importance, but are of relevance to every major aspect of public policy
Development is possible, but clearly not easy
Equitable, sustainable and democratic development may even be more difficult
Policies do matter
The intellectual framework for thinking about policies provided by the Washington Consensus was badly flawed

57. Concluding Comments (ii)
There are other frameworks
More rooted in economic theory
And historical experience
Which, at least in other countries, have worked better
Faster, more sustainable growth
More equitably shared
These provide the basis of the Post Washington Consensus Consensus