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Policy Advisory: Intellectual Grid Lock

Author: Bruce Stokes

National Journal


Travel Advisory: Traffic Grid lock expected in the vicinity of Washington's Marriott Wardman Park Hotel September 28-30. Expect significant delays as the limos of finance ministers from around the world choke the streets during the annual meeting of the World Bank and the International Monetary Fund.

Policy Advisory: Intellectual grid lock expected in the Wardman Park meeting rooms. Expect bureaucrats to point fingers over who lost billions of dollars in Russia. But they will largely ignore mounting evidence of crumbling support around the world for the economic reform policies they advocate, the "Washington Consensus" of deregulation, privatization of state-owned assets and free trade.

The Washington Consensus— reflecting the free market ideologies of Ronald Reagan and Britain's Margaret Thatcher— worked economic wonders in America and the United Kingdom in the 1980s. Hoping to replicate that experience in the Third World, the Fund and the Bank have been freely prescribing these economic remedies for sick economies for more than a decade. But their nostrums have produced questionable results, recently contributing to mounting political unrest in Venezuela, Ecuador and elsewhere.

"We have to acknowledge that these policies are highly problematic," said Steve Hellinger, president of the Development GAP, a Washington-based Third World advocacy group, "and that it is time to open the door to other approaches."

But no clear cut alternative to the Washington Consensus yet exists. In fact, critics of Bank and Fund policies contend that one size can not fit all and that economic reforms must be tailored to the needs and conditions of each individual country. They argue for a slow down in privatization, less precipitous opening of domestic markets to foreign competition and efforts to spur domestic investment and consumer demand.

The defuse nature of these "alternative" proposals hobbles Bank and Fund critics in their battle for the hearts and minds of international bureaucrats, who thrive implementing simple paradigms. But the growing political backlash against the Washington Consensus suggests that the intellectual grid lock at the Bank and the Fund may yet be broken.

Over the last two decades, the Bank and the Fund convinced governments in Africa and Latin America to sell off state-owned properties and slash industrial subsidies. Tariffs were cut dramatically. And many nations were rewarded with faster economic growth.

"But just because the nostrums of adjustment worked in some places is not relevant," said Nancy Alexander, director of the Washington-based Globalization Challenge Initiative. "The nostrums have been relatively impotent in the countries that are really in dire straits."

By privatizing the jute industry, Bangladesh threw tens of thousands of people out of work. By precipitously opening its borders, Kenya undercut indigenous farmers. By holding down wages to attract foreign investment, Ecuador sapped demand for local production.

The result has been impoverishment and widening income disparities. In Ecuador, more than 60 per cent of households do not have sufficient income to cover the cost of a basket of basic goods. In Brazil, a fifth of the population still controls two-thirds of all income.

To reverse these trends, "there is no fixed menu," said Alex Wilks, coordinator of the Bretton Woods Project, a group of non-governmental organizations in the United Kingdom. "It has to be a la cart in each place." People at the local level have to analyze their own problems, set priorities and come up with their own economic reforms.

Such initiatives will be most successful if they hue a rather pedestrian economic course: stimulate domestic investment, support education and health care and ensure good governance, according to recent research by Harvard economist Dani Rodrik, author of The New Global Economy and Developing Countries: Making Openness Work (Overseas Development Council, 1999).

And such prescriptions already have support inside the Bank. Joseph Stiglitz, the Bank's own chief economist, has long been preaching similar course changes. Stiglitz argues that if economic change is to be sustainable, it must be equitable. And that if reform is to have widespread support, it must be the product of robust political debate that gives people a stake in the outcome.

To his credit, Bank President James D. Wolfensohn "has allowed Stiglitz to speak the truth as he sees it," said Alexander. And, for the first time, the Bank is consulting with consumers and workers around the world, assessing the impact of Bank policies. "But nobody in the Bank is actually carrying through on what Stiglitz is saying," lamented Alexander.

One obstacle is money. If countries are to keep state-owned enterprises running a little longer to maintain employment, someone has to pay that subsidy. The funds are unlikely to come from the industrial world, whose foreign aid has fallen 30 per cent in real terms since 1992. Development advocates say the Bank and the Fund have the money, they just have to spend it in different ways. Easier said than done. More aid would grease the skids.

Unfortunately, don't expect to hear any such questioning of the Washington Consensus over the canapes at the Wardman Park. Finance ministers there are likely to be too busy grousing about traffic jams on Connecticut Avenue. It would be better if they worried about the gridlock within their own institutions that so far has kept them from adapting their economic prescriptions to meet the needs of the times. This is a much more fundamental concern than who fed the kleptomaniacs in Russia.

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