International bureaucracies such as the IMF and the OECD used to give fairly good advice. This is no longer always the case, as they drift ever-leftward along a tide of popular opinion.
Many developing country governments, including that of South Africa, are hostile to the idea of structural adjustment programmes, believing that they undermine sovereignty and impose neo-colonial and neo-liberal constraints upon governments.
The phrase Washington Consensus as a description of what it means for a country to ‘get its house in order’ is even more of a swearword, nowadays, both in developing countries and among the larneys who presume to plan the world’s affairs at the World Economic Forum each year. It has become a lightning rod for the anti-globalisation and anti-capitalist sentiments of left-wing opinion.
The belief that the International Monetary Fund (IMF) and other multinational bureaucracies such as the Organisation for Economic Cooperation and Development (OECD) remain wedded to the policies they advocated in the wake of the Reagan and Thatcher revolutions is mistaken, however. As public opinion has moved on, so has their advice.
Washington Consensus
The term Washington Consensus has long been abused by left-wing economists to refer to what they describe as ‘market fundamentalism’ or ‘neo-liberalism’.
When it was originally described by John Williamson in relation to policy reform in Latin American countries suffering debt crises, it referred to ten specific policies:
- Fiscal discipline, to avoid large budget deficits relative to GDP and prevent the debt-to-GDP ratio from rising;
- A redirection of public spending priorities from bloated administration and narrow industry subsidies to broad services that offer high economic returns and improve income distribution, such as primary health care, primary education, and infrastructure;
- Tax reform, to lower marginal rates and broaden the tax base;
- Interest rate liberalisation to ensure market-related, moderate, but positive real interest rates;
- A competitive, stable, though not necessarily free-floating, exchange rate that encourages exports while keeping the current account deficit sustainable and inflation under control;
- Trade liberalization, particularly for imports, by keeping tariffs low and uniform and removing quantitative restrictions, noting especially that protecting domestic industries against foreign competition creates costly distortions that penalise exports and impoverish the domestic economy;
- Lifting restrictions on the inflow of foreign direct investment, although liberalisation of all capital controls are not a priority;
- Privatisation, both to improve the efficiency of hitherto state-owned industries, and to relieve the burden of these enterprises upon the fiscus;
- Deregulation, particularly to abolish barriers to entry and exit for new competitors in the market;
- Secure property rights.
Structural adjustment
Although one can have legitimate disagreements about the details of each of these policy adjustments and the speed at which they ought to be implemented, it is hard to dispute that these are sensible reforms for which there is much theoretical and empirical support.
Williamson specifically rejected the use of the term to imply broader neo-liberal policies or market fundamentalism: ‘Some of the most vociferous of today’s critics of what they call the Washington Consensus, most prominently Joe Stiglitz… do not object so much to the agenda laid out above as to the neoliberalism that they interpret the term as implying. I of course never intended my term to imply policies like capital account liberalisation…monetarism, supply-side economics, or a minimal state (getting the state out of welfare provision and income redistribution), which I think of as the quintessentially neoliberal ideas.’
Typical structural adjustment policies imposed by the IMF did not differ greatly from the Washington Consensus principles, with the addition of injunctions to improve governance, combat corruption, liberalise labour markets, enter into and abide by World Trade Organisation agreements, adopt internationally-recognised financial codes and standards, independent central banks mandated to target inflation, maintaining social safety nets and implementing poverty reduction programmes.
Again, none of these seem like spectacularly bad ideas.
It has also been shown that that success or failure of structural adjustment programmes have depended not on the nature or quality of the advice they contain, but on the domestic political will to commit to the needed reforms. A country must want to do what is necessary to improve its economic performance, for outside help to be effective.
Neo-liberal neo-colonialism
But that was then. This is now.
Structural adjustment programmes have gained a bad reputation, even if the fault lies not with the programmes, but with the governments charged with implementing them.
Many countries have rebelled against the Washington Consensus, viewing it as neo-liberal neo-colonialism.
Popular political views, especially among people too young to remember the ravages of socialism, have turned left again, vigorously opposing capitalism, free trade and the belief that government never furthered any enterprise but by the alacrity with which it got out of its way.
Under the influence of popular opinion, the pride and obstinacy of developing-country governments, and fellow travellers such as Joe Stiglitz, George Soros, Paul Krugman, and Thomas Piketty, international institutions have started to repudiate the sound advice they once offered, and substituted it with very poor advice, indeed.
Inequality dogma
All now subscribe to the dogma that income and/or wealth inequality is a pressing concern facing the world’s economic planners. The OECD is convinced that inequality reduces GDP growth, for example, and maintains that less inequality benefits all. It advocates government-led redistribution policies, paid for by taxes on the rich and on corporations.
In truth, the link is highly debatable, and numerous studies have produced contradictory results. More importantly, the supposed channels by which the effect of income inequality is meant to transmit to GDP growth do not consistently hold up, demonstrating that greater inequality, when it occurs, is more likely an effect, and not a cause of anything in particular.
The OECD used questionable research to reach its predetermined conclusion. Its data cutoff for its 2015 inequality report was 2010. This conveniently excised the inconvenient fact that in the following three years, the five most unequal countries grew nearly five times faster than the others.
The correlation between GDP per capita and income inequality is also very weak. Notably, there are many poor countries with Gini coefficients lower than those of most rich countries, and there are rich countries with high inequality.
For instance, Slovenia is the most equal country in the world, but its GDP per capita is not particularly high. South Africa has the highest income inequality in the world, but Armenia, Moldova, Ukraine, and Azerbaijan, all of which have GDP per capita in the same ballpark as South Africa, are also all among the ten countries with the lowest income inequality in the world.
Among the top ten richest countries by GDP per capita, Gini coefficients vary widely, ranging from 53,9 (Hong Kong) to 26 (United Arab Emirates). Likewise, among the poorest ten countries by GDP per capita, Gini coefficients range from 35,3 (Liberia) to 56,2 (Central African Republic).
The countries with the lowest Gini coefficients are Slovakia, Belarus, Slovenia, Armenia, Czech Republic, Ukraine, Moldova, United Arab Emirates, Iceland and Azerbaijan. That is hardly a list of the richest, or fastest-growing, countries in the world.
OECD advice
Yet advice given to South Africa by organisations such as the OECD, based on its very latest Economic Survey of South Africa in August 2022, focuses on increasing taxes, including (inflation permitting) raising the VAT rate and increasing the carbon tax, increasing inheritance taxes, and making the tax system far more progressive, while ‘reducing spending inefficiencies’.
Note that it does not ask for reducing spending. It only wants spending to be more efficient (and presumably, although it doesn’t dare offend anyone by saying so, less corrupt). All its proposed interventions towards ‘restoring productivity growth’ involve government spending, and none of them address liberating private industry from its regulatory burden.
It soft-balls catastrophic government failures, for example by bemoaning ‘several years of deteriorating energy supply’. Try several decades, esteemed OECD analysts. To fix this little wobble, it recommends only what is already being done, such as splitting Eskom into three entities and easing barriers to entry for private power producers.
It lauds ‘[t]he South African government’s decisive response to the pandemic,’ which it says ‘helped to limit its socio-economic impact.’
Not a word about the brutal stay-at-home orders which actually accelerated the spread, the irrational alcohol and tobacco bans, and the suspension of all sales of goods other than what Ebrahim Patel arbitarily and capriciously declared to be ‘essential’. Not a word about how these draconian policies, especially in the absence of adequate fiscal support for its victims, decimated jobs and businesses.
No, instead, South Africa must focus on ‘the green transition’. Only improved taxation, and not reduced spending, will serve ‘to reduce the budget deficit and finance investments’, according to the OECD.
This is state-led redistribution, not market-oriented reform.
IMF advice
The IMF, too, ‘commended the authorities’ strong policy response to the pandemic’, and breathed nary a word of criticism.
Unlike the OECD, it says that fiscal consolidation ‘should be mainly focused on the expenditure side’, but it also emphasised more efficient spending, rather than less of it.
It acknowledges that South Africa’s tax revenue relative to GDP is already among the largest in emerging market economies, but still recommends broadening the tax base, ‘removing exemptions related to selected sectors and special economic zones that add little value to production’, limiting base erosion and profit shifting, and raising carbon and excise taxes.
The idea that a country with a high tax burden and high government expenditure that isn’t growing could do with a lower tax burden and significantly slashed spending does not seem to have occurred to them.
Its advice is in many respects substantially better than that of the OECD, especially on rationalising state-owned enterprises, labour market liberalisation, and opposing a basic income grant, but it also strongly encourages redirecting both public and private capital towards decarbonisation and the green transition.
While poverty alleviation ought to be a primary focus, the IMF, too, has fallen into the habit of linking it to inequality: ‘Directors [of the IMF] highlighted the need for well targeted social spending to reduce poverty and inequality.’ (Its opposition to a basic income grant is based largely on the fiscal cost of such an intervention and its lack of targeting.)
Poverty alleviation
Yet for all the genuflecting to inequality, it is neither a useful analytical tool nor a useful outcome metric. Policy interventions to reduce inequality may enhance or hinder economic growth. The absolute living standards of the poor, however, is a useful and meaningful metric, and a noble policy objective.
In South Africa, poverty is largely linked to a catastrophically high unemployment rate, so structural adjustments that improve capital formation, both human and financial, that promote private-sector dynamism and growth, and that liberalise the labour market, will have a major impact on poverty relief, and ease the fiscal burden of social welfare.
If international financial and economic institutions are to remain relevant to developing countries, they ought to maintain a rigorous focus on structural reforms that are known to have positive economic results, if implemented effectively.
Encouraging ever-higher taxation, advocating state-led redistribution instead of private-sector growth, and advising government spending on programmes that merely serve to stroke the conscience of the rich world, should be left to left-wing lobby groups.
The views of the writer are not necessarily those of the Daily Friend or the IRR.
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