[stop-imf] Washington Post: IMF's `Consensus" Policies Fraying

[Robert Weissman]

IMF's 'Consensus' Policies Fraying
By Paul Blustein
Washington Post Staff Writer
Thursday, September 26, 2002; Page E01

In moments of candor, the anti-globalization activists planning to storm
Washington streets Friday and Saturday admit that their movement is
struggling to regain momentum in the wake of last year's terrorist attacks,
which dampened the appeal of militant protest and diverted attention from
issues such as Third World debt cancellation.

But here is the irony: While the wind may have gone from the protesters'
sails, the same might be said of the free-market economic dogma promoted
during much of the past couple of decades by the International Monetary Fund
and the World Bank, the institutions whose meetings this weekend are the
activists' target.

Thanks to anemic growth, economic crises and stubbornly high poverty
rates in
a number of countries that pursued IMF and World Bank-backed programs, a
sense of disillusionment is spreading with the "Washington consensus," the
package of policies long touted by U.S. policymakers and international
lenders as keys to prosperity for the world's poor. The main elements of the
consensus include policies aimed at curbing inflation, opening markets,
dismantling government controls and privatizing state enterprises.

The disgruntlement is manifesting itself politically in countries such as
Brazil, where after eight years of rule by a government that embraced
economic orthodoxy, a left-wing presidential candidate, former factory worker
Luiz Inacio "Lula" da Silva, has taken a commanding lead in next month's
election.

But perhaps most telling is the letdown expressed by a chorus of voices from
within the economic establishment -- experts who once championed the
Washington consensus. A particularly rude shock for them was the recent
economic collapse in Argentina, because the Argentine government was once
viewed as a star pupil of the IMF and the World Bank. Now, although
mainstream economists still believe in the general wisdom of the policies
they espoused, many contend that at the very least, Washington's
prescriptions ought to be pushed less aggressively -- a view that has caused
the fund and the bank to change their approaches in some significant ways.

"It's disingenuous to negate the magnitude of the disappointment," said
Ricardo Hausman, a Harvard University professor who recalled that as chief
economist of the Inter-American Development Bank from 1994 to 2000, he helped
convince countries that they stood to reap enormous gains by reducing the
role of government in their economies and lowering barriers to trade and
investment. "I fully participated in the hope, so I'm fully a
participant in
the disappointment."

Consider some numbers for Latin America, Hausman said: Despite the adoption
of extensive free-market reforms in many Latin nations, gross domestic
product per average working-age person in the region has fallen 5 percent
since 1998, while during the same period the comparable figure for the United
States has risen 5.2 percent.

"Even our star reformer, Chile, is up only 3 percent," Hausman said, which
shows that instead of catching up with America as promised, "we are further
and further behind."

Such criticism of economic orthodoxy heartens anti-globalization activists.
Although the movement has long enjoyed support from a handful of dissident
economists, its leaders are now seizing upon evidence that the weight of
respectable opinion is shifting toward their position.

Soren Ambrose, a leader of the Fifty Years Is Enough network aimed at
abolishing the IMF and World Bank, cited with relish a recent New York Times
column by Princeton professor Paul Krugman, who wrote that he had once
"bought into much though not all of the Washington consensus" and that "my
confidence that we've been giving good advice is way down." At a news
conference earlier this month to announce plans for demonstrations at the
IMF-World Bank meetings, activists displayed a chart with data from a
book by
William Easterly, a former World Bank economist, showing that while the
bank's adjustment loans were going up, economic progress in the countries
receiving them was headed in the opposite direction.

It would be grossly misleading to suggest that mainstream economists are
abandoning their long-held beliefs and turning in favor of heavy-handed state
intervention and trade protectionism. Little controversy exists among
economists and policymakers over the necessity of taming inflation to foster
healthy economic growth, for example, or the long-term benefits of free
markets for spurring job creation.

In some ways, the consensus on the benefits of free trade is stronger than
ever; many African governments, and the aid group Oxfam, have taken up the
rallying cry that the most pressing need for developing countries is to
secure unfettered access for their products in rich countries' markets, which
are often blocked or distorted by import barriers and subsidies for farm
products.

But much doubt has arisen over whether governments in the developing world
are being prodded to move too hastily on the free-market path, because so
many countries that have taken the plunge have ended up battered by
speculative attacks in financial markets, or disappointed by the absence of
foreign investors, or mired in corruption scandals over privatization schemes
that enriched insiders.

The diminished faith in the reform programs undertaken by developing
countries has even infected the Cato Institute, whose scholars are renowned
for their fervent advocacy of free markets.

"Globalization has turned out to be a lot harder than a lot of us
thought it
would be," said Brink Lindsey, a Cato trade specialist. "In the early '90s,
there was the sense that if you just opened your markets, and stabilized
prices, and privatized industries, foreign investors would come to your door
and you could enjoy rapid catch-up growth rates. And what has become
painfully clear is that life is much more complicated than that."

Globalization's staunch defenders point to evidence indicating that countries
are well advised to open their markets. Studies by two World Bank
researchers, David Dollar and Art Kraay, show that the developing world's
"globalizers" -- defined as countries that have increased trade the most
relative to their national income -- have enjoyed much faster growth in
recent years than non-globalizers.

But many economists find this argument unpersuasive, because it relies on
including two giant, fast-growing countries -- China and India -- in the
ranks of the globalizers, even though both the Chinese and Indian governments
keep their economies closed in many important respects, and India's growth
spurt began several years before it started opening up. "The irony is, China
and India are hardly paradigmatic open-market economies," said Nancy
Birdsall, president of the Center for Global Development and a former
official at the World Bank and the Inter-American Development Bank.

Other defenders of the Washington consensus contend that countries such as
Argentina run into trouble because they fail to implement sound policies
rigorously enough, or because additional reforms are needed -- most notably
the establishment of institutions necessary to make markets work properly,
such as a decent legal and judiciary system that protects property rights.
Without such institutions, after all, investors -- both foreign and domestic
-- will be reluctant to sink money into productive enterprises.

"Issues such as the rule of law, making contracts enforceable, reducing
corruption -- these haven't been emphasized enough," said John Taylor, the
U.S. Treasury undersecretary for international affairs.

But these defenses of the free-market model leave some experts cold.

"It's like telling countries, 'If you would only fix everything, you would
grow,' " Birdsall said. "Well, I think that's a discouraging message for
Brazil and Argentina, let alone Malawi. . . . Latin America had deep reforms
in many respects; it has a serious web of sensible regulatory arrangements;
it did a lot of privatization -- and it's going nowhere."

Wherever the blame belongs for past failings, the IMF and World Bank say they
have learned important lessons and have been altering their advice and
lending practices accordingly.

The crises in Asia's "tiger" economies, for example, showed how developing
countries that allow an inflow of foreign money into their financial markets
are vulnerable to disastrous, panicky withdrawals, especially if they haven't
developed sound banking systems first. So instead of pressing
governments to
open their financial systems as it used to, the IMF now counsels that "there
is no need to rush," said Horst Koehler, the fund's managing director.

As for the World Bank, "We went beyond the Washington consensus long ago,"
said the bank's chief economist, Nicholas Stern. The bank, he noted, puts
much more emphasis than it used to on helping countries develop institutions,
and it is encouraging governments that borrow its money to draft their own,
comprehensive "poverty reduction strategies," so that they establish
"ownership" over their policies instead of grudgingly accepting recipes
dictated from Washington.

Still, skepticism abounds that the erstwhile practitioners of the Washington
consensus have fine-tuned it so adroitly.

"This is very dangerous. You don't want to throw the baby out with the bath
water," Hausman said. "But you don't know how to distinguish the baby from
the bath water."

© 2002 The Washington Post Company