The Indicator from Planet Money - Evaluating the Washington Consensus

In 1985, then Treasury Secretary James Baker gave a speech in South Korea laying out a series of economic proposals that would transform economics around the world.

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you want a blast from the past try this from NPR in 1985 US Treasury secretary James Baker is picking in Seoul South Korea outlined a new American approach for dealing with a third world debt crisis when treasury secretary James Baker gave that speech in 1985. She was trying to convince poor countries to put in place reforms so that their economies would grow faster and he also wanted banks around the world to commit to lending money to these countries to help them pay off their existing debt provide these amounts of new lending and make it publicly provided that the debtor Nations also make similar growth-oriented policy commitments some of the specific reforms Baker recommended for these countries came to be known later as the Washington consensus and in the subsequent debates after Baker speech

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Dozens of poor and middle-income countries actually did put in place those reforms any ideas in the Washington consensus shaped the way the countries all across the world from Mexico to Hungry to Thailand approached Economic Policy, but did the reforms work. This is indicator from Planet Money. I'm Cardiff Garcia and I'm Patty Hirsch today on the show. You study by three Economist has looked at dozens of countries that put these policies in place did the policies work or not. We speak to one of the office of the study to explain the lessons the Washington consensus.

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About the economic reforms. Sacramento and I have some unresolved over the last 30 35 years. So I knew she and her co-authors asked a simple question that will grow faster after compared to 22 and her colleagues studied. There were four of these reforms reform number one bringing dine installation when the prices of goods and services in the economy are skyrocketing that can be really bad for economic growth inflation makes it hard for people and companies to plan for the future because they don't know what things will cost in the future and one reason why High inflation is so bad for you.

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Find me is it Banks and other financial institutions might become afraid to lend money to companies and two people the banks worried that if they lend the money now, they'll just get paid back later with money. That's not worth as much as it doesn't go as far because inflation has been so high. So if a country brings done inflation that makes it easier for companies to planning to borrow money and the economy can hopefully grow faster reform number to trade liberalization is opening up for economy to International Trade which is buying and selling goods and services from different countries. Don't charge High tariffs on Goods that your country imports from other countries, and this can also mean encouraging companies in your own economy to make goods and services that can be exported to other countries. Once you have Open Door free trade that allows countries.

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Specialize in a mix of goods and services to which their economies are best suited to producing the specialization should help clean Usha says because it makes the economy more efficient more productive reform number 3 allowing more foreign investment into your country specifically a new shirt and her co-authors studied what would happen if a country allowed foreign investors to invest in a country's stock market? Here's the idea what a company needs money to build Factory or hire people are start a project it can get that money from investors. For example by selling shares on the stock market investors or lie to buy shares of that company. That's another source of money that the company can use to fund its projects and companies can raise more of the money. They need the Capital One foreign investors are allowed to give it to them capital is cheaper and easier to get that way and with more Capital to invest in projects the overall economy can

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Go faster as what they said was that country's good now have access to cheap a capital that they could invest into doctors investment opportunities, which spurred the economic growth. We saw privatization specifically that have countries want their economies to grow faster than in theory. They should sell some of the companies that are owned by the government to the private sector and then hopefully the private sexual do a better job of running the company than the government can be bloated with too much bureaucracy or claims by corruption Norman of little things like that. So those are the four reforms of the Washington consensus that the paper study taken together Furniture says here is the overall result countries that We examined average these countries were growing at an average rate of 3.0.

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8% per year between about 1980 to 1994 years following the implementation of the reforms which is about 1985 to 2,000. We find that these countries were going on at an average growth rate of 5.3% or 3.3% of year to 5.3% is a huge deal. It's like a miracle pill for economic growth. It means living standards. Overtime grow much much faster. Is it a bottom line is that the reforms recommended in the Washington consensus according to this paper worked but I saw the end of the story. I knew she says there's a number of caveats some of these reforms are more controversial than others. They have an old Works in every country. They were tried and sometimes it depends on how they are implemented. I want Anushka and her co-authors study the reforms individually, they found that lowering inflation opening up.

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Trade-in allowing foreign investment were generally followed by faster economic growth for the record of privatizing parts of the economy. The fourth reformed that was more mixed and harder to a more complicated. These reforms are friendly to markets are designed to add line markets to work without too much interference from governments, but I knew she says that doesn't mean that there's no road toll for governments to play NSYNC of a country's economy is a pie. You're not going to have a gift I ever with that needs to be accompanied by a redistributive policies that make this more fair and just what it means is this as a country's economy gets bigger and bigger richer and richer governments have the option to use other policies to redistribute.

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Some of that new wealth so that everyone in the country benefits so that everyone gets a slice of the bigger pie the reforms from James Baker speech won't do that on their own, but without them in without the economic growth. They generate the pie won't grow in the first place.

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Will include a link to the paper buy a new shirt and her co-authors at NPR. Org money. This episode of the indicator was produced by Jamila Huxtable and fact-checked by Sean saldania. It was ended and co-hosted by Patty Hirsch and the indicator is a production of NPR.

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