Development debates in interesting times – is the Washington consensus on the way out or are free market solutions creeping back in?

December 1, 2010

     By Duncan Green     

Kirsty Hughes is the Head of  Oxfam’s Advocacy and Policy Team.

Two years ago, as Lehman’s collapsed, the world economy fell into recession and the G20 surfaced as a prime ministerial-level outfit to stem the chaos, it looked as if one positive outcome, at least for the optimist, would be the end of the “Washington consensus” and the start of a more sensible approach to regulating markets – something that would benefit all but especially the poorest countries.

But while the latest G20 meeting in Seoul this November embraced a new Seoul development consensus (with a welcome emphasis on allowing each developing country to map out its own approach) even so much old-style economic thinking remains: from those who are still emphasising the wonders of market forces to those who would propose 1920s-style deficits cuts in order to appease the bond markets – surely leaving Keynes turning in his grave and certainly creating higher unemployment and decimated public services, and in many cases decimated aid budgets too.

Perhaps it takes longer than two years for an outgoing consensus to die. When the post-world war two Keynesian “growth-plus-welfare-state” decades came to an end with the mid-1970s recession and ‘stagflation’, it wasn’t obvious two years later in 1977 that the world was heading for 30-years of the liberal free market “Washington consensus”. No one knew Reagan and Thatcher were about to dominate (or even be elected). So let’s hope it’s too early to say we’ve missed the moment for a major change of direction – and that indeed the shoots of a new more positive global economic consensus are pushing upwards.

We need to rethink the recent decades of global economic policy-making – and not only because of the economic collapse of the last 2-3 years, or the domino-effect destruction of European economies and the Eurozone by the bond markets, As climate change negotiators assemble again, this time in Cancun – a year after they failed in Copenhagen to address the biggest most threatening challenge we face in global warming – it is clear that political leaders in the richest countries appear unable to respond seriously to major medium to long term challenges – even when they are as clear and as devastating as a 3-4 degree warmer world. This looks like a failure of multilateralism and, to varying degrees, of national political systems.

And yet – in the face of market forces creating the global economic crisis and the huge market failure of global warming – what are different voices saying to the poorest developing countries? We hear that development is about growth and physical infrastructure. We hear that the forces of the private sector must be unleashed to ensure wealth creation. We hear that we must get value-for-money and measure results. And we hear that unfettered free trade is still the answer. Listen in to some of the politicians’ and officials’ pronouncements at G20 summits or EU gatherings and that is what you can still too often hear.

And on top of that – across the same sweep of political stages – there’s a worrying trend now that risks subsuming a chunk of development aid (with a clear poverty-reduction focus) within foreign policy priorities. This is likely to push us back to the past, with the increasing politicisation and militarisation of aid.

Too pessimistic? Let’s hope so. The failure of the Washington consensus in the global economic crash of 2008 means that developing countries no longer see the same need to simply accept or mimic Western-style free-market policies – not least as the US and EU themselves struggle desperately to recover. And it seems clear that the economic crisis has rapidly accelerated the shift to a multipolar world. Wherever this takes us politically and economically, it’s unlikely to be a renewal of the Washington consensus under an OECD/US lead.

Unregulated growth is not the way to overcome poverty and build a fair society, as a quick look at poverty and inequality in middle income countries shows (and as Andy Sumner has recently demonstrated). And the challenges of adapting to climate change or creating dynamic low carbon development paths are not ones that a short-termist, free market consensus can answer.

All this suggests the need for a new development narrative. This should describe a set of coherent new political and policy strategies that are based on inclusive climate-resilient growth and on new regulation of markets in order to nurture public goods and to mitigate better against shocks and market failures. Such strategies are vital and relevant not only for the poorer developing countries but for the richer countries too, which are failing both to decarbonise their economies fast enough and failing to protect their own welfare systems and so their own poor.

Can we build this as a new consensus for the coming decades? Can we do so before vested interests regather their strength? That’s both the opportunity and the scale of the challenge.

December 1, 2010
Duncan Green