After the Washington Consensus: Latin American Growth and Sustainable Development

Keynote speech at the Seminar on Latin American Financing and the Role of Development Banks organized by the IDB, BDMG, and ALIDE Belo Horizonte, Brazil

The author is indebted to Ronaldo Locatelli and Edwin Truman for comments on a previous draft and to Jacob Kirkegaard for research assistance.

March 30, 2006

A common view of Latin America is roughly as follows: The Washington consensus held sway in the early 1990s and only modestly revived growth even after the debt crisis was resolved and the “lost decade” ended. There followed another terrible half-decade of growth, from 1998 to 2002, until the sudden stop of capital inflows ended in 2003, permitting growth to resume. However, by this time, the voters had finally revolted against more of the same and begun moving left. Depending on whether one foams at the mouth when uttering the term “Washington consensus” or embraces it as a panacea, one may regard the resulting widespread advent of left-wing governments as promising a new dawn or condemning the region to continued failure.

I find this common view of Latin America difficult to reconcile with some salient facts about the region. The most telling is that at least five of the seven large countries of Latin America are following extremely prudent macroeconomic policies. These five may be compared with at best two of the seven about whom I would have said the same thing when capital was last flooding in and the Washington consensus was supposedly riding high. Look at table 1 to see what I mean. Growth is somewhat lower except in Mexico and the two countries, Argentina and Venezuela, that were recovering in 2004–05 from macroeconomic collapses, which presumably reflects a policy decision not to splurge this time around. But in five of the seven countries, inflation is vastly lower and comfortably in single digits, the fiscal balances are substantially more robust, the current account is everywhere much stronger, the proportion of short-term foreign debt has fallen (in some cases drastically) except in Argentina and Venezuela, and debt/export ratios have fallen dramatically. I see no sign here that the present expansion is destined to end in a regional crisis, like twice before.

Perhaps I do not read the Latin American press diligently enough, but (except in the case of Venezuela) I do not recall reading stories about financial repression increasing, or trade restrictions being toughened, or budget deficits being increased, or foreign direct investment (FDI) being restricted as it used to be. The trend to privatize utilities seems to have run into the sand, and there may even be some reverse movement (as there certainly is with Bolivian hydrocarbons). Certainly fewer leaders choose to emphasize their liberal policies, and it is indeed true that less liberalization is taking place, but this is at least in part because the economies are now much less dirigiste than they were. But I see no sign of a general attempt to turn the clock back.

A hopeful view of the present situation would hold that Latin America has now caught up with the rest of the West in no longer expecting to find simple solutions to complex problems. It is recognized that growth does not come from increasing capital formation without any need to worry about the quality of the investments. The claims of dependência theorists that salvation is to be found in curtailing relations with more advanced countries are not taken seriously. Import substitution isnot looked to as the solution to balance of payments difficulties or demand deficiencies. No one now believes that growth will follow automatically if only their government implements the ten points that I listed in the Washington consensus—which surely does not imply that they believe that doing the reverse would be smart!

There is no less need to consider an appropriate set of policies just because one no longer believes that an ideological label can be affixed to the resulting package. What it does imply is that the discussion of policy options can take place with ideological labels in their proper role, which isthat of markers that can help make a quick first appraisal of particular policies, not a final judgment.

The set of policies that I think would be helpful are essentially those outlined in a book that I coedited and that was published in 2003, called After the Washington Consensus: Restarting Growth and Reform in Latin America. I propose to outline these policies, amplifying what we wrote in 2003 in certain dimensions. In doing this, however, I hope that it will be clear that I am not claiming that these policies amount to a cookbook that absolves those applying them of the need to think, that they offer any sort of panacea, or that they should always be applied in the same way everywhere. I do believe that there are enough similarities between the various problems faced by different countries to make it useful to discuss solutions that may be relevant in a number of countries, but I also believe that there are enough differences to require policymakers to work out what is applicable and most urgent in their particular situation.