The New York Times
The New York Times Magazine, CRASH COURSE
May 25, 2003
New Washington Consensus
By Dirk Olin
Earlier this year, the Bush administration requested $1.3 billion, or a first installment, for the ''Millennium Challenge Account,'' the president's plan to increase foreign aid to unprecedented levels. When combined with his pledges of greater international financing for the fight against AIDS and more loans for developing countries, total foreign aid would spike fully 75 percent, well above Clinton administration levels. But certain academics who have long advocated improving the effectiveness of American largess abroad say that wealthy nations must refine the rules of giving. Specifically, they call for reforming the ''Washington Consensus,'' which tethers development money to ''conditionalities'' that include market deregulation, privatization of state-owned enterprises and trade liberalization by recipient nations. Otherwise, critics say, aid will be marginally effective, at best.
A chief complaint, for example, is that the rich are inconsistent on the issue of trade liberalization. European countries have skewed policies to favor banana imports from former colonies; the United States slaps discriminatory tariffs on steel. A recent study of ''developmental friendliness'' by the Center for Global Development, published in this month's Foreign Policy magazine, indicates that the relative contributions of the United States and Japan -- which donate the most in absolute dollars -- rank last among big givers when you factor in dynamics like how large the donors' economies are and whether their trade or environmental policies end up counteracting the charity. Hence the reformers' support for ''reciprocal obligation'' and ''development coherence.'' Unsurprisingly, the criticism has a political analog: President Luiz Inacio Lula da Silva of Brazil and others in South America have gained traction by inveighing against the Washington Consensus.
Thesis-Antithesis
The origin of foreign aid as we know it came in the waning days of World War II,
when American and European economists met in Bretton Woods, N.H., and conceived
the International Monetary Fund and the World Bank. After the war, these
institutions helped to augment the Marshall Plan's emergency stabilization
efforts in Europe. Soon, the I.M.F. and the World Bank were directing loans
toward poor governments in Asia, Africa and Latin America, typically for
specific short-term projects. During the cold war, aid often became politically
charged, and by the 1980's the bank and the fund, basically run by the United
States State and Treasury Departments, were heavily managing the markets of
borrowing countries.
In 1989, John Williamson, a senior fellow at the Institute for International Economics in Washington, coined the term Washington Consensus to describe a shift in American foreign aid policy that had occurred. Though this formulation mutated over the years, elements of it proved highly popular throughout the 1990's. In a paper prepared for a 1999 conference of the I.M.F., Moises Naim, a former Venezuelan trade minister and now editor of Foreign Policy, contended that the approach filled an ''ideological vacuum'' at the end of the cold war -- just as interventionist state regimes and entrenched protectionist practices were coming into widespread disrepute: many developing countries had ''no other choice but to fall into the welcoming but stern arms of the Washington Consensus.''
Prof. Jagdish Bhagwati, a development expert at Columbia University, concedes that some unregulated capital flows contributed to crises in certain developing countries and regions. But, he says: ''As for the criticism that we foolishly imposed a single-size-fits-all approach, that's nonsense. The critics have to decide whether they want the countries to move toward freer trade or toward increased protection. They cannot shirk that choice.''
A New Consensus
This is all more family feud than cat fight. There's not much talk about
socialist five-year plans and state commodity pricing. There is shared
commitment to market instruments and local accountability. Dani Rodrik, a
professor of economics at Harvard University, says, ''The problem with the
consensus is not that it placed the onus on developing countries themselves --
it's that it so often gave them the wrong recipe to follow.'' But Rodrik is
careful to distinguish his argument from the mere advocacy of ''gradualism,''
whose proponents are embroiled in a theoretical tiff with advocates of economic
''shock therapy.'' Rodrik argues for less ideology and more agnosticism.
''Gradualism presumes that policy makers have a pretty good idea of the
institutional changes they want to make but that for political reasons they have
to go step by step,'' he says. ''My argument is that there is typically a large
amount of uncertainty about what institutional changes are even desired.''
Jeffrey Sachs, director of Columbia's Earth Institute, says you often can't even start to talk about institutions and trade routes and currency policy until you've looked at a society's pre-existing environment: ''A lot of the problem with the poorest countries has to do with geography, rather than which new market dial you're going to turn. Africa needs much more help with malaria and AIDS than macroeconomic management. You have to start focusing on real investments that need to be made to alleviate real problems that are barriers to progress, whereas economists -- and I was trained as one -- go on fiddling with the rules without dealing with crippling health problems, the lack of paved roads, miserable soil content, drought or the inaccessible locations of many societies. That's why the same policies can have extremely different effects in different places.''
Of course, it wouldn't be wise to allow a revival of ham-handed state controls and onerous reregulation. Even da Silva, in Brazil, has pursued strict monetary and fiscal policies, as well as a variety of market-oriented experiments. The most pressing monetary needs moving forward would seem to be ''second generation'' reform of currency policies to make them more supple and capital controls that improve ''crisis proofing.'' Outside the ambit of market-speak, inducements to the development of institutions -- think schools, roads, courts and hospitals -- also make sense. Oh, and a little less hypocrisy on the trade front wouldn't hurt.
Outline of an Idea
From ''Did the Washington Consensus Fail?'' (delivered at the Center for
Strategic and International Studies, Nov. 6, 2002), by John Williamson
''Let me remind you of the 10 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): 1) 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. . . . 2) Reordering public expenditure priorities. This suggested switching expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education. 3) Tax reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates. 4) Liberalizing interest rates. . . . 5) A competitive exchange rate. . . . 6) Trade liberalization. I stated that there was a difference of view about how fast trade should be liberalized. 7) Liberalization of inward foreign direct investment. I specifically did not include comprehensive capital account liberalization. . . . 8) 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. 9) Deregulation. This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons. 10) Property rights. This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost.''
For Further Aid
• ''Globalization and Its Discontents,'' by Joseph E. Stiglitz (W.W. Norton,
2002).
• For a look at the World Bank's ''Poverty Matters'' campaign: www.worldbank.org/html/extdr/gc/index.htm.
• For information on the ''Commitment to Development Index'' from the Center
for Global Development: www.cgdev.org.
• ''The Ills of Aid: An Analysis of Third World Development Policies,'' by
Eberhard Reusse (University of Chicago Press, 2002).
• For a critique of U.S. foreign aid, see Marlon Brando in ''The Ugly
American'' (1963). Dirk Olin is national editor at The American Lawyer.
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©2002 by the President and Fellows of Harvard College.
Last revised 05/27/2003