Saturday, September 12, 2020

What actually and demonstrably works is also unpopular among governing institutions and vested elites.

From The Washington Consensus Works: Causal Effects of Reform, 1970-2015 by Kevin B. Grier and Robin M.Grier.  

The Washington Consensus was a series of prescriptive governance and development guidelines which emerged in the 1980s.  They included:

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.
As can be seen, there is a general emphasis on freedom, market, and systemic objectives incompatible with more focused and ideological objectives.  

The findings of the Griers are:

Traditional policy reforms of the type embodied in the Washington Consensus have been out of academic fashion for decades. However, we are not aware of a paper that convincingly rejects the efficacy of these reforms. In this paper, we define generalized reform as a discrete, sustained jump in an index of economic freedom, whose components map well onto the points of the old consensus. We identify 49 cases of generalized reform in our dataset that spans 141 countries from 1970 to 2015. The average treatment effect associated with these reforms is positive, sizeable, and significant over 5- and 10- year windows. The result is robust to different thresholds for defining reform and different estimation methods. We argue that the policy reform baby was prematurely thrown out with the neoliberal bathwater.

Necessarily a small sample size (49) in absolute terms but given that it covers a significant portion of countries in the designated time frame, that is less of an objection it would normally be.  

The real prize is the effect size.  "Countries that had sustained reform were 16% richer 10 years later."

This is important information as the Washington Consensus has fallen into disrepute and unpopularity in many intellectual corners and institutions more inclined towards magical thinking or totalitarian control.  The Washington Consensus forces discipline and accountability on governing institutions and vested elites.  Two attributes which are rarely enjoyed by those in favor. 


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