Global Policy Forum

by Paul Blustein

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."

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