Rejecting the orthodoxy

[Robert Weissman <rob@essential.org>]

The following article by Joseph Hanlon appears in the March 1998 edition
of 'Debt Update', a newsletter of the Jubilee 2000 Coalition. It can be
used to publicise the globalisation conference and the presence there of
the author, as long as Jubilee 2000 is given prominence in any release of
this article.

================

>From 'Debt Update', March 1998.
This is a quarterly newsletter of the Jubilee 2000 Coalition, a group of
more than 60 European and African organisations calling for the
cancellation of all unpayable debt owed by the world's poorest countries.
The year 2000 should be a 'Jubilee' year, based on the biblical concept
under which, every 50 years (the 'Jubilee' year), all slaves are freed and
debts cancelled. The Jubilee 2000 Coalition can be contacted at POBox 100,
London SE1 7RT. E-mail: mail@jubilee2000uk.org

BANK ADMITS HIPC CONDITIONS WRONG

'Greater humility' is needed, admitted the World Bank's chief economist 
and senior vice president Joseph Stiglitz, in a speech in which he called
for an end to 'misguided' policies imposed from Washington.

Joseph Stiglitz's wide-ranging condemnation of the 'Washington Consensus'
and the conditions imposed on poor countries must raise fundamental
questions about the entire debt relief process now being coordinated by
the IMF and World Bank. Debt relief under the HIPC (Heavily Indebted Poor
Countries) initiative is conditional on six years of faithfully obeying
demands from the Fund and Bank which Stiglitz now calls 'misguided'.

The World Bank's senior vice president and chief economist is scathing
about what he calls the '"Washington Consensus" of US economic officials,
the International Monetary Fund (IMF), and the World Bank'. He says that
'the set of policies which underlay the Washington Consensus are neither
necessary nor sufficient, either for macro-stability or longer-term
development.' They are 'sometimes misguided', 'neglect .. fundamental
issues', are 'sometimes even misleading, and do 'not even address ...
vital questions'. 

'Had this advice been followed [in the United States], the remarkable
expansion of the US economy ... would have been thwarted.' Russia followed
the Washington Consensus line while China did not, Stiglitz notes, and
'real incomes and consumption have fallen in the former Soviet empire, and
real incomes and consumption have risen remarkably rapidly in China.'

The Washington Consensus only sought to achieve increases in measured GDP,
whereas 'we seek increases in living standards  including improved health
and education. ... We seek equitable development which ensures that all
groups in society enjoy the fruits of development, not just the few at the
top. And we seek democratic development.' 

Joseph Stiglitz made his speech in Helsinki, Finland, on 7 January 1998,
and so far it has been little reported. Perhaps he needed to be as far
away from Washington as possible, because he undermined virtually every
pillar of the structural adjustment and stabilisation polices that serve
as necessary conditions under HIPC. He asserts:
+ MODERATE INFLATION IS NOT HARMFUL. Hyper-inflation is costly, but below
40% inflation per year, 'there is no evidence that inflation is costly'.
Furthermore, there is no evidence of a 'slippery slope'  there is no
evidence that one increase in inflation causes further increases. Thus
'the focus on inflation ... has led to macroeconomic policies which may
not be the most conducive for long-term economic growth.'
+ BUDGET DEFICITS CAN BE OK, 'given the high returns to government
investment in such crucial areas as primary education and physical
infrastructure (especially roads and energy).' Thus 'it may make sense for
the government to treat foreign aid as a legitimate source of revenue,
just like taxes, and balance the budget inclusive of foreign aid.' +
MACRO-ECONOMIC STABILITY IS THE WRONG TARGET. 'Ironically, macroeconomic
stability, as seen by the Washington Consensus, typically down-plays the
most fundamental sense of stability: stabilizing output or unemployment.
Minimising or avoiding major economic contractions should be one of the
most important goals of policy. In the short run, large-scale involuntary
unemployment is clearly inefficient  in purely economic terms it
represents idle resources that could be used more productively.'
+ 'THE ADVOCATES OF PRIVATIZATION OVERESTIMATED THE BENEFITS of
privatization and underestimated the costs.' And the gains occur prior to
privatization, through a process of 'corporatization' which involves
creating proper incentives. China 'eschewed a strategy of outright
privatization'.
+ COMPETITION, NOT OWNERSHIP, IS KEY. Private monopolies can lead to
excess profits and inefficiency. Government must intervene to create
competition.
+ MARKETS ARE NOT AUTOMATICALLY BETTER. 'The unspoken premise [of the
Washington Consensus] is that governments are presumed to be worse than
markets. ... I do not believe [that]'. Stiglitz notes, in particular, that
'left to itself, the market will tend to underprovide human capital' and
technology. 'Without government action there will be too little investment
in the production and adoption of new technology.' 
+ PRIMARY EDUCATION MAY NOT BE THE RIGHT PRIORITY. Tertiary (university)
technical education has a particularly high economic return because it
enables the economy to import ideas. But here, Stiglitz has two caveats.
He wants to see the training of more scientists and engineers and not
extra liberal arts graduates as were trained in much of Africa. And he
warns university education causes an immediate increase in inequality
because 'the direct beneficiaries ... are almost always better off than
average.'
+ 'THE DOGMA OF LIBERALIZATION HAS BECOME AN END IN ITSELF AND NOT A MEANS
TO A BETTER FINANCIAL SYSTEM.' Financial markets do not do a good job of
selecting the most productive recipients of funds or of monitoring the use
of funds, and must be controlled. Deregulation led to the crisis in
Thailand and the 'notorious Savings and Loan debacle in the United States.'

Perhaps the key problem is that Washington Consensus 'political
recommendations could be administered by economists using little more than
simple accounting frameworks.' This led to 'cases where economists would
fly into a country, look at and attempt to verify these data, and make
macroeconomic recommendations for policy reforms, all in the space of a
couple of weeks.' 

Stiglitz calls for a new 'post-Washington Consensus' which, he says,
'cannot be based on Washington'. And, he adds, one 'one principle of the
emerging consensus is a greater degree of humility, the frank
acknowledgement that we do not have all the answers.'

End of 'Debt Update' article

++++

COMMENT:

Ann Pettifor, Director of the Jubilee 2000 Coalition, comments:

'Ethiopia and Nicaragua have had their debt relief under HIPC delayed
because they tried to do what Joseph Stiglitz said was right. Mozambique
is following the rules, but has been explicitly told that debt relief is
conditional on rejecting Stiglitz policy. This leads to the bizarre
position that the IMF  and some of Stiglitz' own staff  are making debt
relief conditional on policies Stiglitz says are not conducive for long
term growth. Stiglitz may say "we do not have all the answers," but his
own staff disagree.' 

'But if top IMF and World Bank officials do not agree on any of the
policies being imposed on Asia and on poor countries of the south, perhaps
it is time to take a closer look at the emperor's wardrobe. Conditionality
exists because OECD governments, both as donors and as members of the
Paris club of creditors, have agreed to make aid and debt relief
conditional on IMF programmes. Many governments claim their aid programmes
are poverty focused, yet they support conditions that the World Bank's own
chief economist says do not promote an end of poverty.'

'Conditionality is a chain, like the chains of debt themselves, and it
only takes one country to break the chain. If Britain, or the Netherlands,
or Sweden decided to end IMF conditionality, the chain would be broken;
other countries would follow and IMF policy would change.'

'But until that happens, we wonder what advice is being given to embassies
in Addis and Managua, on how to respond to the question from local
ministers about why they are not allowed to follow the advice of the World
Bank's chief economist.'

ENDS