The Washington Consensus: When Facts Get in the Way Of Economic Orthodoxies

Listener 8 February, 2003.

Keywords: Globalisation & Trade; Growth & Innovation; Macroeconomics & Money;

Overseas economists visit New Zealand regularly, seeing politicians, officials, business people, and even independent commentators. One, late last year, began his session with me, by saying that New Zealand’s economic relativity in the OECD had deteriorated throughout the last half century. The government wanted to accelerate our economic growth, he said ,but since coming to office it had
– delayed unilateral tariff cuts;
– raised income tax rates;
– ruled out further privatisation;
– toughened regulation;
– introduced a more active industrial policy ;
– re-regulated the labour market.
He concluded that he did not see a single policy change which would contribute to increasing economic growth.

You will recognise his critique as an unreconstructed ‘Washington Consensus’ position, formulated in the early 1990s (although advocated earlier), that economic growth would be promoted by free trade, low taxes, privatisation, market de-regulation, a non-interventionist industrial policy and a ‘free’ labour market.

I could have responded that there was no agreement that the policies he was advocating were beneficial to economic growth citing, for instance, Joseph Stiglitz’s Globalisation and its Discontents. The book has been a cause celebre because of its accusation that the IMF and the US Treasury have acted as agents for the US financial community, using their financial power to enforce (Washington Consensus type) policies which, Stiglitz says, are often to the detriment of the countries they are meant to be helping. I was more intrigued with the book’s bemusement about how these policies are not based on sound economic theory. In part it is because Stiglitz pioneered these theories – he was awarded a Nobel prize for some of his insights – and one cannot expect ordinary economists to be up with the latest developments. (Keynes famously said ‘in the field of economics and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age’, and there is a further lag when their teachers and other sources are behind the frontier too.)

But rather than arguing the theoretical deficiencies of the Washington Consensus (based on an extreme version of theories almost forty years old, but ideologically attractive to the powerful financial community) I pointed out that it was not true that there had been a continuous economic deterioration in the post-war era. For about two thirds of the period the New Zealand economy grew at the same average rate as the rest of the OECD (perhaps a fraction faster). There were just two periods when we grew markedly slower. One was the decade after the collapse of the international wool price in 1966, in the days when wool was so important that economic performance would inevitably suffer. The other period of disastrous economic performance was from 1985 to 1993 when New Zealand was implementing policies which would be called ‘the Washington Consensus’. So even were the visiting economist’s policy framework not theoretically flawed, the empirical evidence said they did not work when they were applied to New Zealand a decade ago..

I could not help wondering whether he had not been challenged earlier, because the numerous New Zealand economists to whom the visitor had already spoken were sympathetic to his analysis, despite its theoretical and empirical contradictions. There may not be a lot of support in the New Zealand economics community for the government’s policies. Too many were committed to the past policies – they are over thirty, or were trained by those so committed.

In fact, the list exaggerates the change in the government’s policies, for the reversals are small compared to the radicalism of the 1980s. This partly reflects that many of the 1980s changes made good economic sense – as indeed Stiglitz would argue. It was the ideological and obsessive extremism that was so damaging. But it also reflects that this government is cautious, not only because MMP encourages incremental rather than radical government but because its Labour predecessor of the 1980s instituted extremist policies and made a terrible mess. And in truth the government is not sure what will work – even though it is sure the Washington Consensus will not. Perhaps the marker of the government’s approach is that last year’s business leader’s conference was dominated by producers, with very few from the financial sector – a dramatic change from the last two decades, despite the increasing power of finance here too. (It helps that the government accounts are running a financial surplus and do not have to borrow from financiers.)

About the same time, the Director-General of the far more pragmatic OECD gave a public address on the way through. He looked at our economic policies and said they were all good or very good – better than the OECD average. Of course their implementation could be improved, but he concluded by saying he did not know what else to advise to accelerate the New Zealand economic growth rate.