Life beyond the Washington Consensus: An Introduction to Pro-poor Macroeconomic Policies

Abstract

This article reviews the ‘pro-poor’ macroeconomic policy alternative to the Washington consensus. The pro-poor approach draws heavily on heterodox economic theory, and offers a compelling view of an alternative economic strategy oriented primarily to the satisfaction of the basic needs of the majority of the population, the equitable distribution of income, wealth and power, and the preservation of macroeconomic stability. These aims point to a specific set of fiscal, monetary, trade and exchange rate policies. The paper argues that such policies should be supported by social programmes designed to achieve the desired pro-poor outcomes as rapidly as possible.

Acknowledgment

The author is grateful to two anonymous referees for their generous comments on a previous version of this article. The usual disclaimers apply.

Notes

¹This article treats the terms ‘poor’ and ‘developing’ countries as synonyms. These countries are disaggregated, when necessary, into ‘very poor’ and ‘middle-income’ countries. For an overview of the pro-poor policy literature, see Dagdeviren et al. (2002), Kakwani (2001, 2002), Kakwani & Pernia (2000), McCulloch & Baulch (1999), McKinley (2001, 2003, 2004), Osmani (2001), Palanivel (2003), Pasha & Palanivel (2004), Rao (2002), UNDP (2002), Vandemoortele (2004) and Winters (2002).

²The MDG include the eradication of extreme poverty and hunger, universal primary education, promotion of gender equality, reduction of child mortality, improvements in maternal health, combating HIV/AIDS, malaria and other diseases, environmental sustainability and the creation of a global partnership for development. Detailed quantitative targets are provided in all these areas, and the goals should be achieved by 2015. For a detailed description and assessment of progress towards the MDG, see http://www.un.org/millenniumgoals/, http://www.undp.org/mdg/ and http://www.developmentgoals.com/UNDG%20document_final.pdf.

³In what follows we shall not be concerned with the work of dissenting mainstream economists, such as Jeffrey Sachs and Joseph Stiglitz (for overviews of their recent contributions, see http://www.earthinstitute.columbia.edu/about/director/ and http://www.josephtiglitz.com; for a critique, see Fine & Waeyenberge, 2006, and Waeyenberge, 2006). Despite their significant contribution at the level of economic policy and their unrivalled capacity (among dissenting economists) to bring to the attention of the media the problems of poverty, environmental degradation and the limitations of the Washington consensus, Sachs' and Stiglitz's critiques of mainstream policies remain firmly based on neoclassical economic principles (see Fine et al., 2001).

⁴This aim is not only important in itself; it is also mandated by the United Nations through the Universal Declaration of Human Rights, the Declaration on the Right to Development, and the Millennium Development Goals.

⁵For an assessment of the relationship between growth and equity, see Bowman (1997), Cornia (2004), Cramer (2000), Kanbur (1998), Niggle (1998) and Persson & Tabellini (1994). The case of agriculture is examined by Karshenas (2001) and Kay (2002).

⁶The expansion of the economy always helps to alleviate poverty, except in a small number of perverse cases. This is hardly sufficient: the point is how to maximise the impact of growth on poverty over the long term (see Dagdeviren et al., 2002, p. 391).

⁷In this literature, the rationale for distribution draws heavily on the work of Kalecki; see, for example, Ghosh (2005) and Kalecki (1972, 1993).

⁸Basic poverty is due to the low levels of income and productivity in a country, and it tends to decline as the economy grows (‘a rising tide lifts all boats’). Market-generated poverty is due to the lack of access to productive assets.

⁹These examples are merely indicative. The impact of growth on poverty depends on the initial distribution of income and, especially, its distribution near the poverty line, as well as the occupational composition, skills and other features of the workforce.

¹⁰There is an extensive literature on industrial policy and the developmental state; for a critical survey, see Fine (2005). The importance of the balance of payments constraint for growth and development is examined by Thirlwall (2003).

¹¹The suggestion that middle-income countries should rely primarily on domestic rather than foreign savings is supported by the pioneering work of Feldstein & Horioka (1980) and by more recent research by Calvo et al. (1993). For a compelling heterodox interpretation of these findings, see Palma (1998).

¹²For a heterodox assessment of the importance of fiscal policy for the current (neoliberal) period, see Arestis & Sawyer (2003). Pro-poor fiscal policy is reviewed by Kakwani & Son (2001) and Roy & Weeks (2003).

¹³Even the prospect of policy change can trigger economic instability. This was the case in Brazil in 2002, when the impending election of President Lula led to capital flight and a severe exchange rate crisis (see Saad-Filho & Morais, 2003).

¹⁴According to Philip Arestis, ‘Sweden, Norway, Australia and Austria are the best examples in this respect’ (cited in Sicsú, 2001, p. 676).

¹⁵See, for example, Chang (2003), Chang & Grabel (2004, ch. 9), Eichengreen (2003), Epstein et al. (2003), Grabel (2004), Helleiner (1996), Kaplan & Rodrik (2001) and MacEwan (2003).

¹⁶Moderate exchange rate undervaluation finds strong support in the literature on trade and industrial policy; see Agosín & Tussie (1993), Chang (1994) and Gereffi & Wyman (1990).

¹⁷Universal basic income (UBI) is the only type of non-targeted cash transfer. However, it is unaffordable for most very poor countries, and this is hardly the best use for the scarce resources of the middle-income countries. UBI is also vulnerable to most criticisms of cash transfers listed above.

¹⁸For example, Vandemoortele (2004, p. 12) notes that user fees can ‘aggravate gender discrimination. … Since the mid-1990s, school fees have been abolished in Malawi and Uganda and more recently in Kenya. That pro-poor policy was followed by a surge in enrolment in all three countries—with girls being the prime beneficiaries. These positive experiences illustrate that even a small nominal fee can be a formidable obstacle for poor families.’