Giving the WIDER annual lecture in Helsinki the World Bank Chief Economist called for a reexamination of the “Washington consensus”, the World Bank/IMF/US development formula. He said the policies were agreed in response to Latin America’s problems of the 1980s, and cannot provide remedies for areas like Asia in the 1990s. Low deficits, low inflation, deregulation, privatisation and open market policies do not necessarily achieve stabilisation or growth.
Stiglitz said the consensus was successful because of its simplicity but that
“there are no easy to read guages of the economy’s health; and there may be trade-offs in which the economists’ task is to describe alternative consequences of different policies, but in which the political process may actually have an important say in the choices of economic direction. Economic policy may not be just a matter for technical experts!”
The focus on inflation, argued Stiglitz, has led to macroeconomic policies which may not help long-term economic growth. He said “controlling high and medium inflation should be a fundamental policy priority, but pushing low inflation even lower is not likely to significantly improve the functioning of markets.” He also said current acccount deficits should be allowed to increase when productive investments can be made with low cost international capital.
He concluded that “all too often, the dogma of liberalisation became an end in itself not a means to a better financial system.” Regulatory frameworks must be created first. Financial market liberalisation “may actually have had a perverse effect, contributing to macro-instability through weakening the financial sector.”
Stiglitz warned that: “unless the economy is competitive, the benefits of free trade and privatization will be dissipated in rent-seeking, not directed towards wealth creation. And if public investments in human capital and technology transfers are insufficient, the market will not fill in the gap”.
Whilst this critique is refreshing coming from a senior Bank official, Ben Fine, Professor of Economics at SOAS in London points out that the demise of the Consensus must not be simply a palace revolution: the succession should be vigorously contested to ensure that what Stiglitz dubs the “post-Washington Consensus” is not as flawed as the old.
Joseph Stiglitz, 1998, More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus , available on www.wider.unu.edu/stiglitz.htm, from firstname.lastname@example.org or from the Bretton Woods Project.