The New Economic Policy Consensus Session 1 Professor Dermot McAleese

OUTLINE  The new consensus  Why policy has changed?  Implications for the future  Will the consensus last?

THE NEW CONSENSUS  Competition and the market system  Macroeconomic stability  Globalisation

 openness towards international trade  limited government intervention in the economy, and  macroeconomic stability IMF, World Economic Outlook, May 1997, p 92 A Successful Strategy for Growth Requires:

COMPETITION AND THE MARKET SYSTEM  Pro-competition policies  Labour market flexibility  Privatisation  De-regulation  Enterprise-friendly environment

MACRO-STABILITY  Price stability (independent CB, ‘hard’ ER)  Budget balance  Control of government spending

GLOBALISATION  Free trade  Foreign investment  Liberalisation of capital  Labour mobility

GLOBALISATION  Open door policies (free trade, encourage foreign investment relax or abolish capital controls)  Extending the scope of international trade (agriculture, services, new issues)  Emphasis on export promotion (instead of import restriction)  Multilateral and regional trade agreements (Uruguay Round, WTO and Regional Trade Agreements)

WHY POLICY HAS CHANGED?  Dissatisfaction with past performance  Alternative paradigm (failure of socialism, Africa vs Asia)  Government failure  Technology – external pressures  New policies deliver!

IMPLICATIONS FOR THE FUTURE  Business climate  lower taxes  weaker trade unions  rewards for managers, skilled workers  less government  BUT, more competition  Work environment  labour market flexibility  less job security  more jobs  structural adjustment and low cost countries  International economy  role of World Trade Organisation (WTO)  foreign investment and the multinationals  capital mobility and the shifting balance of economic power  mutuality of benefits

AFRICA – AGENDA FOR RECOVERY AND GROWTH

As part of the objective of raising growth and reducing poverty, the IMF will continue to encourage African countries to pursue strong macroeconomic policies:  no one benefits from high inflation, particularly not the poor;  large budget deficits crowd out private investment and discourage exports;  and arrears [large public debt] deters investors. “ Raising Growth and Investment” Finance and Development December 2000 p. 33

and the Report continues ….  improve economic efficiency by liberalising trade and maintaining competitive exchange rates  remove the state from direct involvement in the production of marketable goods and services  enhance domestic competition in all sectors, especially agriculture  support regional integration efforts  improve infrastructure, particularly ports and communications  increase the share of government spending directed to education and health and improve the delivery of services in these areas  root out corruption and improve the quality and integrity of the legate system “Raising Growth and Investment” Finance and Development December 2000 p. 33

Questions Q1. Outline the three pillars of the new economic consensus. Show how policy changes along new consensus lines can lead to better economic performance. E1. WHAT WENT WRONG WITH ARGENTINA?. Q3. Is the new economic consensus likely to last? What factors might tend to undermine it?

WILL THE CONSENSUS LAST?  Yes …. Provided it delivers!  Successes (East Asia) and Doubtfuls (New Zealand, Argentina)  Convincing outcome for the developing countries will require:  correct sequencing of the new policies  consistent application of reforms  attention to income distribution  good governance  international cooperation and increased aid  State intervention is needed to deal with market failure

‘The gains from trade liberalization should not only be seen through a narrow economic lens. Trade has also been a vehicle for promoting broader political objectives, especially peace and stability. Trade establishes mutually beneficial links among nations, creating interest in cooperation. It cements relationships among disparate peoples and societies, lessening the risk of conflict, and it strengthens the commitment of governments to rules in the place of realpolitik’ World Trade Organization, Annual Report, 1998

‘ Unlike the threat of war, which nowadays is usually intermittent or sporadic, the challenge of the global economy is ceaseless. The entire viability of India’s democracy will therefore come to be tied more closely to its economic performance, assessed in terms of stability, growth and distribution. Rulers and those who elect them will together have to devise effective practical responses to the opportunities and hazards of the international marketplace. How they respond, what decisions they take..... will determine the future prospects of the sub-continent.’ Sunil Khilnani, The Idea of India, Penguin 1997

 Failure - hyperinflation, inefficient government, economic performance  Old policies did not help the poor - inequality  Need to emulate Chile  US trained economists put into positions of influence  Need to become internationally competitive  Stability needed to attract FDI and grow faster WHY THE CHANGE IN ARGENTINA?