Transcript Document

The New Economic Policy
Consensus
Week 1 SF Intermediate
Economics
Professor Dermot McAleese
OUTLINE
 The new consensus
 Why policy has changed
 Implications for the future
 Will the consensus last?
THE NEW CONSENSUS
 Competition and the market system
 Macroeconomic stability
 Globalisation
A Successful Strategy for Growth Requires:
 openness towards international trade
 limited government intervention in the economy, and
 macroeconomic stability
IMF, World Economic Outlook, May 1997, p 92
COMPETITION AND THE MARKET SYSTEM
 Pro-competition policies
 Labour market flexibility
 Privatisation
 De-regulation
 Enterprise-friendly environment
MACRO-STABILITY
 Price stability (independent CB, ‘hard’ ER)
 Budget balance
 Control of government spending
GLOBALISATION
 Free trade
 Foreign investment
 Liberalisation of capital
 Labour mobility
GLOBALISATION
 Open door policies
(free trade, encourage foreign investment relax or abolish capital
controls)
 Extending the scope of international trade
(agriculture, services, new issues)
 Emphasis on export promotion
(instead of import restriction)
 Multilateral and regional trade agreements
(Uruguay Round, WTO and Regional Trade Agreements)
WHY POLICY HAS CHANGED
 Dissatisfaction with past performance
 Lack of alternative paradigm -failure of socialism
 Government “failure”
 Technology – external pressures
IMPLICATIONS FOR THE FUTURE
 Business climate
 lower taxes
 weaker trade unions
 rewards for managers, skilled workers
 less government
 but, more competition
 Work environment
 labour market flexibility
 less job security
 more jobs
 structural adjustment and low cost countries
 International economy
 role of World Trade Organisation (WTO)
 foreign investment and the multinationals
 capital mobility and the shifting balance of economic power
 mutuality of benefits
WILL THE CONSENSUS LAST?
 Only as long as it delivers on faster growth
 Convincing outcome for the developing countries will
require:
 correct sequencing of the new policies
 consistent application of reforms
 attention to income distribution
 international cooperation and increased aid
 State intervention at macro and micro level an essential
complement to private sector
Moving towards the Post-Washington Consensus
• There are important advantages to the Washington consensus
approach to policy advice. It focuses on issues of first-order
importance, it sets up an easily reproducible framework and it is frank
about limiting itself only to establishing prerequisites for development.
But ….
•
Policies advanced by the Washington consensus are not complete and
they are sometimes misguided.
Professor Joseph Stiglitz 1998
Incomplete
• In focusing on trade liberalisation, deregulation and privatisation, other
important ingredients of an efficient market, most notably competition,
were ignored. Add to this education and technology improvement.
• Government regulation of financial sector (building robust financial
systems) is essential for effective market system – easily ignored by
economists from developed countries
• Macro-stability should not preclude active use of fiscal and monetary
policy to stabilise output and employment [controversial point]
Misguided
• Trade liberalisation over-estimated, importance of
domestic competition ignored
• Benefits of privatisation over-estimated. Need for
regulation and income distribution effects
overlooked
• Capital liberalisation pushed too strongly
• Problem for developing countries is not too much
government but not enough government
capabilities (independent judiciary, competitive
wages for civil servants, administrative and
technical capacity, incentive systems in public
sector).
The Central Bank and the New Consensus
• Irish GNP 3% 2002, 4 % in 2003
• Ireland’s price level now substantially above that of the
euro area
• In euro area, nominal pay rising 2.5% pa since 1999. In
Ireland by over 8% (and 9% 2001)
• Competitiveness lost and job creation more difficult
• Fiscal policy (Irish) and monetary policy (ECB) have
“facilitated” inflation -- especially in sheltered
(“nontraded”) sectors of economy
• Major concern of macroeconomc policy is to reduce
inflation rate to euro average
Policies
• Enforce competition
• Insist on greater price transparency
• Lower rates of pay increase, especially in the public
sector, must be part of the disinflation process
• Allow automatic stabilisers to work
• But a discretionary stimulus is precluded by high inflation
and the weaker budget position
• The primary task of fiscal policy must be to contain the
excessive growth in public spending (p.8)
Central Bank of Ireland Quarterly Bulletin August 2002
ARGENTINA -- A CASE STUDY
 Failure up to 1991 - hyperinflation, inefficient government,
economic performance
 Old policies did not help the poor - inequality
 New post 1991 policy regime delivered price stability and for a
while faster growth and new confidence
In 2002 it all went horribly wrong.
 Three possible explanations:
a) new consensus policies not fully applied (e.g. fiscal
balance)
b) new consensus policies provide wrong template (capital
flows)
c) policy mistakes (fixed exchange rate with dollar, loss of
competitiveness), bad luck and inadequate response.
As part of the objective of raising growth and reducing
poverty, the IMF will continue to encourage African
countries to pursue strong macroeconomic policies:
 no one benefits from high inflation, particularly not the poor;
 large budget deficits crowd out private investment and discourage exports;
 and arrears [large public debt] deters investors.
“
Raising Growth and Investment” Finance and Development December 2000 p. 33
and the Report continues ….
 improve economic efficiency by liberalising trade and maintaining competitive
exchange rates
 remove the state from direct involvement in the production of marketable goods and
services
 enhance domestic competition in all sectors, especially agriculture
 support regional integration efforts
 improve infrastructure, particularly ports and communications
 increase the share of government spending directed to education and health and
improve the delivery of services in these areas
 root out corruption and improve the quality and integrity of the legate system
“Raising Growth and Investment” Finance and Development December 2000 p. 33