"Rethinking Growth Policies in the Developing World:" Comments 8

By Lourdes Agnes K. Roncesvalles (Philippines)

Introduction

The article seeks to answer the question “what should developing countries do to increase their growth rates and speed up the rates at which their citizens converge to the level of material well-being obtained in today’s advanced nations?”

It discusses the Washington Consensus as an instrument, which Washington including the International Monetary Fund, among others, urged developing countries to adopt during the 1980’s as against the heterodox policies most developing Asian countries implemented. Further, it continues to show that the Washington Consensus may still be applied in developing policies if certain adjustments as explained through its augmented version are also achieved.

In the end, the author recognizes that there is no “one-size fits all” solution to economic development and thus presents a diagnostic approach to growth strategies wherein main bottlenecks to development are isolated and analyzed to determine strategic solutions. This methodology allows a government to address its weak points while giving it enough flexibility to address the latter strategically and within its capacities.

Comments

Washington Consensus vs. Heterodox Policies

The three main ideas around the Washington Consensus are macroeconomic discipline, a market economy, and openness to the world.[i] These concepts are probably derived from the neoclassical economic point of view. On the other hand, heterodox policies, adopted in most Asian countries, took on a more developmental strategy wherein their individual governments had more control over implementation of strategies.

Based on the Latin American cases, which adopted the Washington Consensus as an ideology and their failures vis-à-vis the apparent gains of the Asian countries that have “marched to their own drum,” it can be concluded that a single formula to development is not a solution to achieving development.

Boxing up such policies and assuming they could induce growth in all developing countries is therefore not a wise presumption. Factors such as political, social, cultural, as well as investor confidence, growth drivers, etc. of each country greatly affect development. Thus adoption of a certain policy that may have been effective for one country may not have the same results in another.

Saying that “no one size fits all” is a cliché. However, there is also an obvious truth to it. Strategies should be tailor fit to the implementers’ capacities as well as the society’s ability to adhere to the policies.

The recommended diagnostic approach would indeed allow developing countries determine strategies applicable to them. However, a vital step is not discussed in this strategy. This step refers to the determination of the main bottleneck. Many developing countries are faced with multiple impediments to growth. And for them to break out from this level, they have to address all of these within the limits of their financial, technical and physical capacities. As such, a prioritization process should be included as well.

Significance to the Philippine Case

The Philippines unlike its Asian counterparts has basically followed the Washington Consensus path since the 1980’s. Thus, I would like to highlight the effects of the three core recommendations of the Washington Consensus, i.e., to stabilize, liberalize and privatize on the country’s economy within the last two decades.

Stabilization

1) Government spending was reduced, as the focus was to balance the budget and pay for outstanding foreign debt this resulted in poor allocation of investments. As opposed to neighboring Asian countries where the government has been actively participating and investing in capital development, the Philippine government has not kept at pace in such investments.

Liberalization

1) From import substitution to export oriented – While foreign direct investments increased and improvements in some sectors such as the electronics industry, they overall process did not deliver the expected benefits to the manufacturing sector. This failure led to high unemployment rates as the manufacturing sector could not absorb the continuously growing labor market. As a result, employment generally shifted to the services sector. Productivity in the manufacturing sector thus remained low.

2) Agriculture – Unlike Japan, which is strongly protecting its agriculture sector, liberalization created problems for the agriculture sector. Farmers were, and still are, finding it hard to compete with imported products such as rice from Thailand and Vietnam due to a few main reasons. First is the high transportation costs within the country. Due to inefficiencies of the government in developing much needed railway systems, for example, that can cut transportation time and cost of products from both northern and southern regions has been slow. Furthermore, the agrarian reform act, which was intended to alleviate rural farmers from poverty, resulted in problems of economies of scale which further constrained farmers from competing with imported agricultural products.

Privatization

1) Privatization has been pursued since the political crisis of 1986. Since then the government has engaged in various privatization efforts, including the power, water supply and transportation sectors. However, initial attempts to privatize were maligned with various cases of corruption. At the same time, the government itself was not adapt to private sector mind sets thus would create misunderstandings during contract negotiations. This lack of capacity also resulted in unfair contractual obligations for the government, as in the case of the Metro Rail Transit Line 3 Project, giving the general public a negative perception of public-private partnerships. Despite this, the government continued its privatization policy in transportation, watery supply, power, and communications. Metro Manila’s water supply and sewerage system can now be said to have improved due to the privatization of the Metropolitan Waterworks and Sewerage System. The North Luzon Expressway and the Subic-Clark Tarlac Expressways are also examples of good privatization projects.

Conclusion

The Washington Consensus, in my opinion, is a generalization based on the western values and experience in development hinged on their belief in democracy. Furthermore it can be related to the neoclassical economic thinking wherein markets are left to develop on their own, thus promotes liberalization and privatization.

However, what the economists then forgot to consider is the value set of other developing countries, especially that of Asia. Heterodox policies are only “heterodoxical” from the western perspective. This may be what is normal or required for development in Asia given our nature or culture.

Furthermore, in light of the already globalized nature of trade, absolute liberalization may not be recommended as internal/local industries may not be able to catch up with the already competitive market thus instead of expanding could eventually die out as what happened in the Philippine case. It was therefore wise of both China and Vietnam to adopt partial liberalization. In the end, they were both able to participate in the world market as well as protect some of their industries.

As for the Philippine case, adopting the Washington Consensus had both positive and negative effects, albeit, in my opinion, more negative. By trying to stabilize the economy, the government was not able to utilize its capital to spur investments and, thus failed stimulate the economy especially during crises.

Liberalization, on the other hand, led to the Philippines dependence on both import and foreign capital, which led to fluctuations of growth and recession over the years.

Among the three recommendations, only privatization has thus far offered development in the sectors of transportation, water supply, telecommunications and power, if you do not consider the amount of “corruption” that came along with it.

At this point, the Philippines is still facing many obstacles to development. Economists, developers and planners alike have, in one way or another, utilized the diagnostics approach, however, the difficulty lies in determining which of these problems is to be prioritized. Given the very democratic nature of Philippine Government decision-making, policies end up as wish lists that try to address everything at the same time. In the end, targets are not achieved, as manpower and budget would always come up short of the requirements.

References:

1. The Washington Consensus as Policy Prescription for Development; John Williamson; Institute for International Economics; 2004.

2. Did the Washington Consensus Fail?, John Williamson, Peterson Institute for International Economics; Outline of speech at the Center for Strategic & International Studies; Washington, DC; 06 November 2002.

3. “External Liberalization, Growth and Distribution in the Philippines;” Joseph Y. Lim and Carlos C. Bautista; A paper for the international conference on “External Liberalization, Growth, Development and Social Policy;” Hanoi, Vietnam; 18 to 20 January 2002.

4. In the Shadow of Debt: The Sad but True Tale behind a Quarter Century of Stagnation; Walden Bello.

5. An Assessment of the Philippine Economy; Germelino M. Bautista; 2003.

6. Chapter 15: Privatization in the Philippines; Lauro A. Ortile; Challenges and Opportunities in Energy.

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[i] Did the Washington Consensus Fail?; John Williamson, Peterson Institute for International Economics; Outline of speech at the Center for Strategic & International Studies; Washington, DC; 06 November 2002