The New York Times
May 25, 2003 Sunday
Correction Appended
Late Edition - Final
SECTION: Section 6; Column 1; Magazine Desk; Pg. 21
LENGTH: 1445 words
New Washington Consensus
BYLINE:   By Dirk Olin;   Dirk Olin is national editor at The American Lawyer.
   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.
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
   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,
* For a look at the World Bank's "Poverty Matters" campaign:
* For information on the "Commitment to Development Index" from the Center for
Global Development:
* "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"
   The Crash Course column on Page 21 of The Times Magazine today, about
different viewpoints on distributing foreign aid, misstates part of a Web
address for further information. It is
extdr/gc/index.htm, not worlbank.
GRAPHIC: Photos: (Zoe Selsky for The New York Times); President Luiz Inacio Lula
da Silva of Brazil. (Mauricio Lima/Agence France-Presse. Bottom Corbis)
LOAD-DATE: May 25, 2003