The myth of the universal remedy

Peter Sinclair finds the Washington Consensus isn't a reliable prescription for developing economies.

February 7, 2008

Forty years ago, development economists blamed misfortune on failing markets. They saw salvation in planning and import substitution by well-meaning, all-seeing government. Mainline economics, they preached, was for rich countries only. Then came the new view: the failing state; big government the problem, not its solution. Are both views mistaken?

Dani Rodrik thinks so. This book is about why developing countries grow at such different rates and what they may or should do to grow faster. Conventional wisdom in the West says that market distortions impair growth; so to grow faster simply deregulate, tax lightly, trade freely, entrench the rights of property and sell off state firms. In other words, any mess is due to mistaken government interventions. This is the Washington Consensus, whose name recalls the location of the International Monetary Fund and the World Bank.

Rodrik's view of the consensus is nuanced: its key weakness is that it is an oversimplified blueprint that fails to recognise the individual circumstances in which countries are told to apply it. There can be many answers to the question: "What is it that is really blocking growth here?" Markets distorted by government might be the culprit. Other possibilities include inadequate infrastructure, training or deficiencies in national institutions. So the Washington consenters are like haughty senior doctors who prescribe the same cure for every ailment, without inspecting patients, reading their notes or determining what is wrong. The one thing they feel sure of is that the illness is iatrogenic - caused by bad advice. So it is mainly "patient, heal thyself". For Rodrik, this diagnosis and prescription sometimes fit, but often they do not.

For me, the Washington Consensus is not just arbitrary - it is surreal. First, the belief that the long-run Phillips Curve is vertical (so that extra inflation buys no extra jobs that last), despite accumulating evidence that it has been flattening in the short and medium run. Second, the idea that it is good for us to pretend that fair bargains between all parties affected by an act, contestability, good information channels and lump-sum taxes are in place to keep markets efficient and just, even though we know they often aren't. Third, our rigid acceptance of simple first-best rules, in the face of theory and evidence telling us that the gains from reducing each distortion one by one in sequence can be iffy and are at best subject to diminishing returns. Fourth, if so many national governments aren't the blameless referees we imagine they are, but incompetent, crooked or self-interested players, why are international institutions immune from that gibe? Fifth, the irony that if everyone accepted the IMF/World Bank rules on how to escape crises and poverty, and if those rules were to work these august institutions would do themselves out of a job.

Rodrik is no refugee from "neoclassical" economics. He praises it lavishly, suggesting that the Washington Consensus has abused it by implying, wrongly, that there is only one recipe for success. The volume is spiced with tables, diagrams and a few equations, but the meat is accessible to all. His message is this: diagnose the causes of slow growth; implement a bottom-up approach to rectifying them; forswear wholesale privatisation and retain an industrial policy instead. Later, after growth has quickened, worry about how institutions can be transformed to sustain it. By all means cut trade barriers, but free the restrictive rules that the World Trade Organization enjoin on poorer countries and consider rotating temporary job permits for poor country workers in rich countries.

Rodrik rightly queries why the consensus should be so keen on letting capital jump borders but be so silent on labour doing so. But his emphasis on social harmony explains why this might be impractical in some countries. He shows how trade liberalisation may raise growth, while the facts show it is neither necessary nor sufficient for doing that.

The Washington Consensus may exaggerate government failure, but why no mention of the Democratic Republic of Congo or Zimbabwe? I would have liked more, too, on the lessons from the great success stories (such as Botswana) and some analysis of recent statistical mega-studies, such as that by Doppelhofer, Miller and Sala-i-Martin. The stress on growth accelerations and the challenges in sustaining them is welcome, although specialists may detect some fuzziness or lacunae on time frames and lags, on convergence and multiple peaks, on distinguishing between policies that ultimately raise levels and those that could raise growth permanently, and on conceptual devices to handle the issues of less equal shares of larger cakes.

But these are minor cavils. Rodrik packs a great deal into his 260 lucid, cogent pages. Orthodoxies always need serious criticism. Rodrik has supplied it. He has no simple, single recipe for remedying deficient growth - just the eminently sensible advice that there is none - there are many.

One Economics, Many Recipes: Globalization, Institutions and Economic Growth

By Dani Rodrik
Princeton University Press
8pp
£19.95
ISBN 9780691129518
Published 28 October 2007

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