"Personally like most economists. I am in fact in favor of free trade and free investment flows; but they are surely given too much credit." (1)
The ongoing Financial and economic crisis has challenged the economic and political orthodoxies that have been dominant since the 1980s. Following the financial and economic meltdown that started in 2008, voices critical of pre-crisis economic development have gained increasing prominence. Joseph Stiglitz chairs the Commission on the Measurement of Economic Performance and Social Progress (with Amartya Sen as his adviser) that was created at the beginning of 2008 under a French government initiative. Even more importantly, Stiglitz also chairs The Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System.
Paul Krugman is similarly now one of the most influential economists, and not only in the USA--his academic papers, columns or blog posts have an impact on policy debates at the global level. Similar things can be said too about Dani Rodrik in the field of development economics.
All of these authors are known for their critique--dating back at least to the 1990s--of the international development policies of the so-called Washington Consensus, particularly as preached by the World Bank and the IMF. The Washington Consensus has come under fire for several reasons.
Krugman's words quoted above reflect the spirit of what has become called the post-Washington Consensus, a potential corrective for the somewhat one-dimensional and heavily criticized Washington Consensus. But at the same time, and despite the fierce critique, many methodological aspects and policy implications of the post-Washington Consensus do not seem to depart so far from the previous mainstream. This review article deals primarily with the post-Washington Consensus arguments in the fields of trade, the role of states in economies, foreign direct investment and finance. There will be analysis of to what extent this relatively recent tradition in development economics differs from its predecessors, where a degree of continuity can be observed, and what this may mean for policy making.
The term post-Washington Consensus was first introduced in 1998 by the then World Bank chief economist Joseph Stiglitz. (2) At this point, the new concept was meant simply to complete the policies advanced by the Washington Consensus that were 'sometimes misguided' according to Stiglitz. He called for sound financial regulation, competition policy, and policies to facilitate the technology transfer and to encourage transparency. (3)
It can be argued that Stiglitz's criticisms after the end of his tenure at the World Bank went further than the original 1998-version of the post-Washington Consensus. (4) However, many authors are sceptical that his writings can provide an adequate critique of, let alone an alternative approach to, development economics. (5) In the following paragraphs, I shall introduce the post-Washington Consensus developmental arguments as presented by their authors (notably Stiglitz (6)); discussion of how far these arguments differ from neoliberal dogma will follow.
The post-Washington Consensus--at least Stiglitz's version--is built on a rejection of the previous development economics doctrines. According to Stiglitz, they focused narrowly on economics and failed to see the broader context. (7) For decades, development was seen by mainstream economists both of the left and the right purely as a technical problem requiring technical solutions (better planning algorithms, pricing and trade policies, macroeconomic frameworks)--as a matter of increasing capital stock and improving the allocation of resources. This inability of early development economics, with its Washington Consensus, to see the broader and more complex development context is attributed to their lacking of a participatory approach and reluctance to take into account societies' grassroots. (8)
Stiglitz distanced himself from the early development economics as it underestimated the role of markets and rationality. (9) He disagreed with the economists of the left who attributed the problems of development mostly to market failures. Unlike the early development economists, he did not think that the primary recipients of the developmental models should have been governments that were supposed to replace the absent and imperfect markets and to guide the economy towards a more efficient allocation of resources. (10) He thought instead that a broader scope had to be embraced with more actors engaging in developmental efforts.
However, Stiglitz distanced himself even more from the Washington Consensus than from the early development economics. First, he pointed out that the Washington Consensus intellectual doctrine is too simplistic, i.e. based on simple accounting frameworks and a few economic indicators, such as inflation, money supply growth, interest rates and budget and trade deficits. (11) Policy recommendations based on this simple logic and administered in very, short periods by technocratic economists took a form of copy-paste templates applicable more or less in any developing country without regard to its specifics and stage of development.
Second, Stiglitz not only attacked the simplicity of the Washington Consensus macroeconomic policy advice, but also its content. At the level of theory, he disapproved of the assumption that competitive equilibrium theorem is universally applicable in developing countries. He refers to "a growing awareness of the limitations of the competitive paradigm, with its assumptions of perfect information, perfect competition, and complete markets, and with the correlate propositions that distribution and institutions do not matter". (12) On the practical level, be objected for example to the excessive focus on inflation--it was not conducive to long-term economic growth, and it detracted attention from other major sources of macro-instability, namely weak financial sectors. He further claims that due to too much focus on trade liberalization, deregulation, and privatization, other issues necessary for an effective market economy (such as competition) were ignored. (13) The final point that Stiglitz makes both as a critique of the Washington Consensus and as a suggestion for the new consensus is that it can no longer be derived in Washington, and that developing countries must claim ownership of policies if they are to be sustainable. (14)
In line with identifying himself against the previous development economics concepts, particularly against the Washington Consensus, Stiglitz then recognizes a need for the post-Washington Consensus to embrace a broader set of instruments to achieve broader goals of development:
"We seek increases in living standards--including improved health and education--not just increases in measured GDP. We seek sustainable development, which includes preserving natural resources and maintaining a healthy environment. We seek equitable development, which ensures that all groups in society, not just those at the top, enjoy the fruits of development. And we seek democratic development, in which citizens participate in a variety of ways in making the decisions that affect their lives". (15)
As opposed to the previous mainstream development economics traditions, the post-Washington Consensus version of development thus involves and depends on the adjectives 'sustainable', 'egalitarian', and 'democratic'.
Given the fact that the post-Washington Consensus is identified not only against the Washington Consensus, but also against earlier development economics concepts, it is notable that Stiglitz's discussion of development sometimes resembles in many aspects the thoughts of early development thinkers. In his account, development represents a transformation of society from 'traditional' to 'modern' and 'scientific' relations, ways of thinking, and methods of production. An active drive for change that aims to improve the lot of individuals is a key characteristic of this transformation. Development is not an end per se, but should enrich the lives of individuals, and provide them and societies with more control over their destiny. (16)
Stiglitz's arguments resemble those of early development structuralism in another particular aspect--Stiglitz insists that development efforts will be successful only if they manage to contribute to transforming the whole societies, not only to transferring technology via so-called...