Concerns over consensus

Shifting paradigm

This time, in Asian Development Review, volume 20 No.2 (2003), he wrote on consensus: "From the Washington Consensus to the Post-Washington Consensus: A Perspective on Development Paradigm Change". He starts with an account of the major changes in the paradigm of international development assistance that the world has witnessed over the decades. For the first three decades after the Second World War, a regime of Import Substitution (IS) strategy backed by strong government support, was proposed as the penacea. In the 1980s, this paradigm gave way to a new paradigm -- Washington Consensus -- that identified market as the universally efficient mechanism of resource allocation and effective motor of economic growth. And we all know, how and to what extent, the International Lending institutions especially, the IMF, encouraged governments to dismantle controls on markets. But that did not last long in the face of falling from the grace of growth. "Scarcely a decade later, in the mid-1990s, the Washington Consensus was replaced by a contrasting paradigm called the post-Washington Consensus. It emphasized the need of different institutions for different economies and recognised cases in which government's market interventions can play a pivotal role. The post-Washington Consensus focussed on poverty reduction, emphasizing the need of delivery to the poor of social services, such as education and health care, by government and civil society and advocating the initiative ("ownership") of aid-receiving countries."

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Thesis and anti-thesis

The Washington Consensus -- describes Yujiro Hayami -- emerged as an anti-thesis to IS strategy by aiming to correct the government failures looming large on the horizon of realising respectable growth and poverty reduction. Likewise, the post-Washington Consensus poised as an anti-thesis to the Structural Adjustment Policy (SAP) package aiming to correct failures of liberalised markets, lurking large, by increasing the role of the government. "Such a sequence of paradigm changes resembles the shift from mercantilism to Adam Smith's doctrine of market liberalism, and further to Friedrich List's strategy of infant industry protection. Whether to increase the role of government relative to market or vice versa is an eternal topic in debate over policy choices for development. The net social gain from one strategy (e.g. Smith's) by another (e.g. List's) is the sum of differences in both government failures and market failures associated with the two strategies, a sum which varies country by country depending on social tradition and development change. Thus, in contemplating the strengthening of government's role for any developing economy along the guidelines of the post-Washington Consensus, corresponding changes in the respective failures must be assessed very carefully and objectively. If the decision is based on ideological perception, it will prove to be devastating. Policy makers must always be aware of the danger of being trapped by a 'consensus' on any kind of 'paradigm'."

While the Washington Consensus found the market as the motor for growth, the post-Washington consensus observed market as maligned, if not a monster itself. The former emphasised economic factors -- narrowly focused on neoclassical economics -- while the latter, leaned more on non-economic factors (social norms and power balance, institutions). Needless to mention, the post-Washington Consensus -- compared to the earlier consensus -- had been hailed as a better source for a sigh of relief. But is that so?

Reeling recipe

Hayami looks at the argument by Ishikawa and Stiglitz who criticised SAP reforms on the ground that in regime of information asymmetries, a reduction in government's role would hurt the low-income developing countries by magnifying market failures. The argument theoretically sounds good but may be refuted on the grounds that in such regime, government failures could be more damaging than the market failures.

By identifying poverty reduction as an immediate goal instead of consequence of growth, the post-Washington Consensus advocates that a greater share of public resources be devoted to the delivery of social series to the poor rather than for strengthening the productive capacity of any sort. Though not explicitly stated, it appears that programmes in the post-Washington Consensus context are strongly oriented toward improving the quality of life of the poor through redistribution of social income in their favour.

But the danger of such approach is that it might lead to under-investment in productive capacity of the sectors from which the poor tend to eke out a living. "Typically, the majority of poor people live mainly on returns to their labour applied to agriculture, small-scale manufacturing and petty trade. If the productivity and profitability of these sectors are not increased, how can poverty reduction be sustainable?"

One could cite the examples of wide diffusion of primary education and health care as examples of achievements to that end and admittedly, they are foundations of upgrading skills. But vocational education and training, which are vital for support to agriculture and small-scale manufacturing, are still missing. On the other hand, the critical need of public investment in production oriented infrastructure are not properly recognised. Unfortunately, driven by the doses of both Washington and post-Washington prescriptions, developing countries have been withdrawing resources from agricultural and industrial research, inflicting a further blow to the already fragile research capacity in theses countries.

Forthcoming fate

While delivering social services to the poor for improving quality of life could become important, it remains to be seen that provisions of these resources do not jeopardise the availability of resources for creating productive infrastructure for the poor. A disproportionately larger allocation for the former could be counter productive to kill the poverty reduction goal itself.

Abdul Bayes is Professor of Economics at Jahangirnagar University