Unit One: Development Policymaking

and the Roles of Market and State

Development Economics II
By Teshome A.(PhD)
 Introduction
• Development policy and planning play the major role in
achieving sustainable economic development.
• The objective of any countries is to realize sustainable
development thorough effective and efficient development
policy and planning.
• There are different ways of government intervention based on
different economic system
– Command economic system
– Market base economic system
– Mixed economic system
 Concepts of development planning

• Economic plan a written document containing government

policy decisions on how resources shall be allocated among
various uses so as to attain a targeted rate of economic growth
or other goals over a certain period of time.
• In other word it may be described as a deliberate governmental
attempt to coordinate economic decision making over the
long run and to influence, direct, and in some cases even
control the level and growth of a nation’s principal economic
variables (income, consumption, employment, investment,
saving, exports, imports, etc.) to achieve a predetermined set
of development objectives.
 Cont.
• An economic plan is simply a specific set of quantitative
economic targets to be reached in a given period of time,
with a stated strategy for achieving those targets. Economic
plans may be comprehensive or partial.
– A comprehensive plan sets its targets to cover all major aspects of the
national economy.
– A partial plan covers only a part of the national economy—industry,
agriculture, the public sector, the foreign sector, and so forth.
• Finally, the planning process itself can be described as an
exercise in which a government first chooses social
objectives, then sets various targets, and finally organizes a
framework for implementing, coordinating, and monitoring a
development plan.
 Cont.
• In general development planning answer the following
question
– Where are we?
– What do we have to work with?
– Where do we want to be?
– How do we get there?
• The following are the major benefit of development planning
– Outline the steps to follow.
– Promote efficient use of scarce resources.
– Improve coordination.
– Build consensus.
– Increase public awareness.
– Encourage forward-thinking
 The Rationale for Development
Planning
• The major rational for development planning are market
failure, resources allocation, Attitudinal or Psychological
Impact and foreign aid
• Market Failure Markets in developing economies are
permeated by imperfections of structure and operation.
• Commodity and factor markets are often badly organized, and
the existence of distorted prices often means that producers
and consumers are responding to economic signals and
incentives that are a poor reflection of the real cost to society
of these goods, services, and resources.
• It is argued that governments have an important role to play in
integrating markets and modifying prices
 Cont.
• Various kinds of market and government failures are
examined in several of the earlier chapters, but a brief review
is in order here.
• There are three general forms in which market failure can be
observed:
– The market cannot function properly or no market exists;
– The market exists but implies an inefficient allocation of
resources;
– The market produces undesirable results as measured by
social objectives other than the allocation of resources.
 Cont.
• Resource Mobilization and Allocation This argument
stresses that developing economies cannot afford to waste
their very limited financial and skilled human resources on
unproductive ventures.
• Investment projects must be chosen not solely on the basis of
partial productivity analysis dictated by individual industrial
capital-output ratios but also in the context of an overall
development program that takes account of external
economies, indirect repercussions, and long-term objectives.
• Economic planning is assumed to help by recognizing the
existence of particular constraints and by choosing and
coordinating investment projects so as to channel these scarce
factors into their most productive outlets.
 Cont.
• Attitudinal or Psychological Impact It is often assumed that a
detailed statement of national economic and social objectives in
the form of a specific development plan can have an important
attitudinal or psychological impact on a diverse and often
fragmented population.
• It may succeed in rallying the people behind the government in a
national campaign to eliminate poverty, ignorance, and disease or
to boost national prowess. By mobilizing popular support and
cutting across class, caste, racial, religious, or tribal factions with
the plea to all citizens to work together toward building the nation,
it is argued that an enlightened central government, through its
economic plan, can best provide the needed incentives to
overcome the inhibiting and often divisive forces of sectionalism
and traditionalism in a common quest for wide-spread material
and social progress.
 Cont.
• Foreign Aid The formulation of detailed development plans
has often been a necessary condition for the receipt of bilateral
and multilateral foreign aid. With a shopping list of projects,
governments are better equipped to solicit foreign assistance
and persuade donors that their money will be used as an
essential ingredient in a well-conceived and internally
consistent plan of action.
The Development Planning Process
• Most development plans have traditionally been based initially
on some more or less formalized macroeconomic model. Such
economy wide planning models can be divided into two basic
categories:
– aggregate growth models, in-volving macroeconomic estimates of
planned or required changes in principal economic variables, and
– multisector input-output, social accounting, and computable general
equilibrium (CGE) models, which ascertain (among other things) the
production, resource, employment, and foreign-exchange implications of
a given set of final demand targets within an internally consistent
framework of interindustry product flows.
– Finally, the detailed selection of specific investment projects within each
sector through the technique of project appraisal and social cost-benefit
analysis.
 The Planning Process

Assess Your Document Implement &

Current Reality Your Plan Adjust Course

Allocate Resources Develop Goals &

Manage the plan
Assemble a Team Objectives
Assign Roles Create Action Plans
Assess Internally Document the plan
Assess Externally
Summarize
 Market and government Failure
• The invisible hand of market forces generally gives resource
owners and business firms a strong incentive to use their
resources efficiently and undertake projects that create value.
• Will this always be true? The answer to this question is “No.”
• Market failure has a very precise meaning in economics. It does
not simply mean dissatisfaction with market outcomes. It refers
to a situation when a market left to itself does not allocate
resources efficiently.
• Where market failures exist, there is a potential role for
government to improve outcomes for the community, the
environment, businesses and the economy.
Cont.
• The following factors are the major reasons for market failure.
– Imperfect Competition
– Public sector
– Externalities
– Lack of information
 Imperfect Competition
• Imperfect competition is a cause of market failure.
– Under this market structure the firm faces a downward-sloping
demand curve for its product. Marginal revenue diverges from
average revenue and price no longer equals marginal cost. In
this scenario a monopolist charges a price that exceeds
marginal cost, in order to maximize profit.
– This leads to an output which is much lower than produced by
the perfectly competitive firm operating under similar cost
conditions.
– The consumer has no sovereignty in terms of resource
allocation under monopoly.
– The operation of the monopolist is said to be inefficient
because it leads to a less than optimal allocation of resources.
 Public goods

• Public goods are those goods and services which exhibit the
characteristics of non-rivalry in consumption and non-
excludability.
• Public goods include defence, national parks, weather
advisories, agricultural extension services and so forth.
• These two conditions(non-rivalry and non-excludability)
imply that the market will not be able to provide the goods or
services efficiently, since markets function by excluding
individuals who cannot pay for the good.
• Budgetary provision of public goods is therefore required in
the presence of market failure.
 Externalities
• Externalities occur when the activities of one person or firm
harms or benefits other people and the market cannot force the
individuals who create the harms to pay the costs of those
harms and the people who create the benefits cannot force
those who receive the benefits to pay for them. Thus, there are
negative and positive externalities.
– Negative externalities occur when producers or consumers
are able to shift some of their costs to the community.
– Positive externalities occur when the benefits of a good
are received by others in the community although they did
not pay for them. These benefits are not reflected in the
individual demand curve.
 Imperfect Information
• Imperfect Information occurs when one party to a transaction
has more or better information than the other party.
• Absence of perfect Information can prevent consumers from
making fully informed decisions.
• Regulation requiring information disclosure or placing
restrictions on dangerous goods that can be used to address
this type of market failure.
– For example, when providing financial advice, financial service
providers are required to disclose information about significant
benefits and risks, and the fees and charges associated with
the financial products, as well as remuneration they receive
in relation to the services offered.
 Argument for government intervention
• In general terms, there are three main arguments for
Government intervention
– efficiency arguments i.e. there are market failures which result in
inefficiencies in the allocation of resources. These inefficiencies mean
the mix of goods and services produced across the economy as a whole
diverges from the mix that would best meet consumers’ preferences (as
expressed by their willingness and ability to pay) in the absence of any
market failures;
– equity arguments, including distributional considerations of various
kinds goods and services;
– ethical arguments i.e. there may be boundaries to the role to be played
by markets irrespective of the efficiency of markets in allocating
resources.
 The role of state in development
• A government(state) is a body that has the power to make and
enforce laws within an organization or group. In the broadest sense,
“to govern” means to manage or supervise, whether over an area of
land, a set of people, or a collection of assets. The primary duty of a
government is to reward the people who do good things and punish
the wrongdoers.
• Do we actually need government? Is it possible to live without laws
or rulers? Because man needs a moral limits, government is
absolutely necessary.
• The French poet, Paul Valery, was reported to believe that “if the
state is strong, it will Crush us; if it is weak, we will perish. The idel
role must, therefore be between these two extremes.
 Cont.

• Generally the following are the major role of government in

economic development
– Resource allocation
– Resource distribution
– Macroeconomic stabilization
– Legal frame work
 State in the circular flow in the economy
• Circular flow describes the flow of resources, products,
income, and revenue among the four decision makers
(households, firms, output market, input market, government
and foreign market.)
• Circular flow is a diagram showing the income received and
payments made by each sector of the economy.
• A circular flow model of the macroeconomy containing three
sectors (business, household, and government) and three
markets (product, factor, and financial) that illustrates the
continuous movement of the payments for goods and services
between producers and consumers, with particular emphasis
on taxes and government purchases.
Cont.
• Let us start the circular flow with two sectors firms and
households. The following are the major assumptions.
 The economy consists of two sectors: households and
firms.
 Households spend all of their income (Y) on goods and
services or consumption (C). There is
 no saving (S).
 All output (O) produced by firms is purchased by
households through their expenditure (E).
 There is no financial sector.
 There is no government sector.
 There is no overseas sector.
Cont.
• Firms are producers of goods and services, while households
are people supplying labor and other resources to the firms.
• The diagram shows a flow of wages into households as
payment for those services. Households also receive interest
on corporate and government bonds and dividends from firms.
Many households receive other payments from the
government, such as Social Security benefits, veterans’
benefits, and welfare payments.
• If households did not supply resources to firms, then the firms
would not be able to supply output to the households. The
circular flow exists because households supply the resources
that produce the output for households.
Figure 1.1 The two sector and market Circular Flow
Cont.
• Goods and services flow clockwise, and the corresponding
payments flow counterclockwise.
• The clockwise flows of goods and services through these
markets are balanced by counterclockwise flows of payments.
• One lesson of the circular flow diagram is that everyone’s
expenditure is someone else’s receipt.
 Saving and investment
• When saving and investment are added to the circular flow,
there are two paths by which funds can travel on their way
from households to product markets.
– One path is direct, via consumption expenditures.
– The other is indirect, via saving, financial markets, and
investment.
• The most familiar form of saving is the use of part of a
household’s income to make deposits in bank accounts or to
buy stocks, bonds, or other financial instruments, rather than
to buy goods and services.
• Investment includes all spending that is directed toward
increasing the economy’s stock of capital.
Cont.
• Saving by households is sometimes termed a “leakage” from
the circular flow because it withdraws income, or current
purchasing power, from the system.
• FINANCIAL MARKETS As we have seen, households tend
to spend less each year than they receive in income, whereas
firms tend to spend more than they receive from the sale of
their products.
• The economy contains a special set of institutions whose
function is to channel the flow of funds from households, as
savers, to firms, as borrowers.
• These are known as financial markets. Financial markets are
pictured in the center of the circular-flow diagram in Figure
1.2.
Figure 1:2 The Circular Flow with Saving and Investment
 Adding government to the circular flow
• The next step in our analysis of the circular flow is to add the
public sector.
• This circular-flow shows three links between public
sector/government and the rest of the economy.
– The first is net taxes (taxes minus transfer payments),
which flow from households to government.
– The second is government purchases, which flow from
government to product markers. If government purchases
exceed net taxes (a budget deficit),
– The government must borrow from financial markets.
Figure 1.3 : The Circular Flow with Government Included
 Leakages and Injections
• Compare the circular from figure 1.1 with 1.3. In Figure 1.1,
all of domestic income flows directly from households to
product
• markets in the form of consumption spending. Nothing is
withdrawn from the stream of income and consumption
spending, and nothing is added to it.
• In Figure 1.3, however, additional flows have been added.
– First, there are two uses for income that do not result
directly in purchases of goods and services. These are net
taxes, which flow to government rather than to product
markets, and saving, which flows to financial markets
rather than to product markets. These two uses of funds are
termed leakages from the circular flow.
Cont.
– Second, there are two kinds of expenditures,
namely investment and government purchases, that
do not come directly from households. These are
termed injections into the circular flow.
 What happens when the government sector is
included in the circular flow model?
• First, the government diverts a portion of the circular flow. But this
diversion that does not necessarily change the total amount of gross
domestic product, factor payments, or national income. It merely diverts
income from consumption and saving to taxes. And it diverts gross
domestic product from consumption and investment to government
purchases.
• Second, the total flow of government purchases is as important, if not
more so, than the source of financing. If the government sector spends a
trillion on government purchases, this must be paid for with national
income, either through taxes or saving. If borrowing declines and
purchases remain unchanged, then taxes must rise. If taxes decline and
purchases remain unchanged, then borrowing must rise.
Cont.
• Third, although the total flow is unchanged, shifting income
between taxes, consumption, and saving can and does affect
the economy. If the tax flow increases, then less remains for
consumption and saving. Either the household sector satisfies
fewer wants and needs or the business sector borrows less to
invest in growth-promoting capital goods. Diverting income to
government purchases and away from investment is termed
the crowding-out effect, and worries people concerned about
big government.
Cont.
• Fourth, while the size of government is important, so too are
specific government purchases. Government spending can be
wasteful and unneeded, or it can provide valued goods,
including national defense, education, transportation systems,
police and fire protection, the judicial system, and
environmental quality. In some cases, household consumption
and business investment are more valuable than government
purchases. In other cases, government purchases are more
valuable.
 What are the risks of government
intervention?
• The following are the major risk of government/public
intervention.
– Public sector intervention may also fail to deliver the anticipated
benefit if private agents do not respond to the intervention in the
way the public sector thought they would.
– Political failings arise when individual interests override
the public interest, for example when special interest
groups are successful in lobbying for an intervention for
their own rather than the public’s benefit.
– Administrative failings arise primarily because public
servants work for others rather than themselves and face
different incentive structures to those of the private sector.
 Government Failure
• The foregoing analyses emphasized the importance of
government intervention as a means of correcting market
failure as well as stimulating development and growth.
• However, government can also be inefficient. The
imperfections of government can be described as government
failure.
• The following are the main causes of government failure
– Short-sighted regulation
– Imperfect knowledge
– Special interest groups and lobbyists
– Low productivity and incentive for profit
 Short-sighted regulation
• One of the best known areas of government failure is short-
sighted regulation.
• Government regulation may focus on a very specific area of
activity without considering some of the social or
environmental effects of the activity.
• Public transport may be regulated by creating bus terminals in
certain city areas thereby leading to congestion and pollution
problems.
• Regulation may also impose significant implementation costs
on the economy. These costs include the administrative costs
of monitoring the system as well as the compliance costs
imposed on individuals.
 Imperfect knowledge
• The failure of government regulation is often due to imperfect
knowledge of the type of technology to apply in order to
achieve the best results.
• Government may apply inappropriate and costly technology
because of a lack of research on the part of the bureaucracy.
 Special interest groups and lobbyists
• The other causes of government failure stemming from the
problems posed by special interest groups and lobbyists.
• These groups may be able to influence government to pass
legislation or implement policies in their own interests rather
than in the interests of the economy as a whole.
• Rent-seeking is an important activity of special interest groups.
Rent can be defined as a return in excess of a resource owner's
opportunity cost.
• Rent-seeking is a normal feature of economic activity in
competitive markets. However, government can create rents for
certain interest groups by granting legal rights to certain firms or
individuals to pursue specified activities or perform certain
services.
 low productivity and incentive for profit
• Another cause of government failure is low productivity in the
civil service and the lack of incentive for technological
efficiency.
• Government inefficiency is characterized by bureaucratic red
tape.
• Public sector reform has been advanced as a means to reduce
government failure.
 The choice of economic system
• Both the market and the state are indispensable for
allocating resources.
• The major task in choosing an economic system is to
find the proper combination of market and state by clearly
recognizing possible failures of these two organizations.
• For developing countries it is especially important to
recognize that the types and magnitudes of both market
and government failures are different for different
cultural heritages as well as for different stages of
development.
• In general, the less developed the economies are, the more
imperfect the information is, and the less organized the
institutions are in support of the market (such as
protection of property rights).
 Cont.
• In such economies, market failures are pervasive and
serious, thereby apparently demanding strong government
action to correct them. However, in these less developed
economies, the citizens' educational level is low and mass
media for public opinion formation is underdeveloped.
• Correspondingly, the civic tradition of political participation
and sense of national integrity are not well established among
people. Under such social conditions, the possibility is
greater for government failure to become more serious than
market failures.
• With the recognition of this possibility, the choice of an
optimum combination between the market and the state
under given historical conditions is most fundamental in the
design for development.
 The Washington Consensus on the Role of the
State in Development
• The concept and name of the Washington Consensus were first
presented in 1989 by John Williamson, an economist from an
economic “think-tank” in Washington, D.C.
• The term Washington Consensus was used to summarize the
commonly shared themes among policy advice by Washington-
based institutions at the time such as the International Monetary
Fund, World Bank, and the U.S. Treasury Department
• It was a set of Structural Adjustment Policies (SAPs)/economic
policies which countries must follow in order to qualify for new
World Bank and IMF loans and help them make debt repayments
on the older debts owed to commercial banks, governments and
the World Bank
 Elements of Washington consensus
• The WC comprised four elements.
– First is the hegemony of modern neoclassical theory within
development economics. In general, the neoclassical theory assumes
that the market is efficient and the state is inefficient. It naturally
follows from this assumption that the market rather than the state
should address such economic problems of development as industrial
growth, international competitiveness and employment creation.
Unquestioned belief in the neoclassical theory also leads to the
assumption that capital mobility and the relentless advance of
globalization” is good for the world economy and all individual
economies. Although these policies offer the possibility of rapid
growth by attracting foreign capital, this can be achieved only if
domestic policies conform to the interests of the (financial) markets—
otherwise capital will be driven elsewhere. Finally, given the priority
attached to monetary policies over fiscal policies, interest rates became
the most important economic policy tool. It was believed that
“correct” interest rates could deliver balance of payments equilibrium,
low inflation, sustainable levels of consumption and investment,
improved allocation of resources and, therefore, high long-run growth
rates.
 Cont.
– Second, for the pre-WC, the main reason why poor countries remain poor is their lack of
capital (machines, infrastructure and money), and development is a process of systemic
transformation through modernization and industrialization, driven by domestic
consumption and domestically-financed capital accumulation. In contrast, in view of the
WC, countries are poor because of misconceived state intervention, corruption,
inefficiency and misguided economic incentives. According to WC, development is the
inevitable outcome of a set of “appropriate” incentives and neoclassical economic
policies, including fiscal restraint, privatization, the abolition of government intervention
in prices, labor market “flexibility”, and trade, financial, and capital account
liberalization. There is little specification of what the end-state would look like but,
presumably, all countries would eventually approach an idealized version of the United
States.
– Third, the WC emphasis on the virtues of the market was supported by the neo-
Austrianism associated with Friedrich von Hayek and the general equilibrium theory of
mainstream economics (see Fine and Saad-Filho, 2011). Despite the libertarian streak
associated with these theories, even the most ardent supporter of freedom of the
individual in general, and through the market in particular, agrees that these freedoms
can be guaranteed only through state provision of, and coercion for, a core set of
functions and institutions. These range from fiscal and monetary policies to law and order
and property rights, and includes military intervention to secure the “market economy”
when this becomes necessary. Not surprisingly, then, WC policies are often associated
with authoritarianism, while the WC declarations of support for political democracy are
hedged and conditional in practice (Chile serves as a classic illustration; see Barber,
1995). While the WC claimed to be leaving as much as possible to the market, in practice
it encouraged state intervention on a discretionary basis, and directed to systematic
promotion of a globalized and heavily- financialized capitalism.
 – Fourth, under the WC the World Bank set the agenda for the study of development, with
the Bank and the IMF imposing the standards of orthodoxy within development
economics, and enforcing the relevant policies through conditionalities imposed on poor
countries facing balance of payments, fiscal or financial crises.
• It is apparent that this combination of policies, regulations and incentives is
designed to shift the economic role of state institutions away from direct
intervention in the allocation of resources, and transfer to the (financial)
markets control over the levels of investment and consumption, the
allocation of investment funds, the composition of output and employment,
and the selection of competitive advantages.
• In these circumstances, poverty alleviation cannot be a priority except only
rhetorically and, even then, distributive aspirations were tempered by
“recognition” of their alleged inefficiency-generating implications.
• Significantly, with the WC, states lost much of their capacity to select,
implement and monitor distributive and welfare policies because of
legislative changes, departmental reorganizations, salary reductions and
large-scale redundancies. Given these pressures, the improvement of the
lot of the poor under the WC would depend upon the vicissitudes of the
trickle-down process.
Recommendation of the Washington Consensus

• There were ten recommendation of Washington Consensus

1. Fiscal Discipline. This was in the context of a region where almost all countries had run
large deficits that led to balance of payments crises and high inflation that hit mainly the
poor because the rich could park their money abroad.
2. Reordering Public Expenditure Priorities. This suggested switching expenditure in a pro-
growth and pro-poor way, from things like non-merit subsidies to basic health and
education and infrastructure. It did not call for all the burden of achieving fiscal
discipline to be placed on expenditure cuts; on the contrary, the intention was to be
strictly neutral about the desirable size of the public sector, an issue on which even a
hopeless consensus-seeker like me did not imagine that the battle had been resolved with
the end of history that was being promulgated at the time.
3. Tax Reform. The aim was a tax system that would combine a broad tax base with
moderate marginal tax rates.
4. Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as
financial liberalization, stressed that views differed on how fast it should be achieved,
and—especially—recognized the importance of accompanying financial liberalization
with prudential supervision.
5. A Competitive Exchange Rate I fear I indulged in wishful thinking in asserting that there
was a consensus in favor of ensuring that the exchange rate would be competitive, which
pretty much implies an intermediate regime; in fact Washington was already beginning
to edge toward the two-corner doctrine which holds that a country must either fix firmly
or else it must float “cleanly”.
 Cont.
6. Trade Liberalization. I acknowledged that there was a difference of view about
how fast trade should be liberalized, but everyone agreed that was the
appropriate direction in which to move.
7. Liberalization of Inward Foreign Direct Investment. I specifically did not
include comprehensive capital account liberalization, because I did not believe
that did or should command a consensus in Washington.
8. Privatization. As noted already, this was the one area in which what originated
as a neoliberal idea had won broad acceptance. We have since been made
very conscious that it matters a lot how privatization is done: it can be a highly
corrupt process that transfers assets to a privileged elite for a fraction of their
true value, but the evidence is that it brings benefits (especially in terms of
improved service coverage) when done properly, and the privatized enterprise
either sells into a competitive market or is properly regulated.
9. Deregulation. This focused specifically on easing barriers to entry and exit, not
on abolishing regulations designed for safety or environmental reasons, or to
govern prices in a non-competitive industry.
10. Property Rights. This was primarily about providing the informal sector with
the ability to gain property rights at acceptable cost (inspired by Hernando de
Soto’s analysis).
 Cont.
• In the late 1980s and 1990s, the hegemony of the WC came under attack
both in the academia and in the emerging social movements, with three
(not necessarily complementary) criticisms pushed to the fore.
– The first was inspired by the notion of the developmental state (see Fine, 2006), thought
to apply to the successful East Asian newly industrializing economies (NIEs), with Japan
as the precursor, followed by the four “tigers” (Hong Kong Special Administrative Region
of China, Republic of Korea, Singapore and Taiwan Province of China) in the 1960s and
1970s, followed, in turn, by China, Indonesia, Malaysia, Thailand and Viet Nam. In all
these cases, it was found that the state had violated the main tenets of the WC through
long-term planning, protectionism, directed finance and other departures from the free
market.
– The second approach focused on the notion of “adjustment with a human face.”
Irrespective of the merits of WC in bringing stability and growth, the adverse impact of
the WC policies on those in, or on the borders of, poverty was highlighted by a growing
literature beginning with Cornia, Jolly and Stewart (1987). They documented the human
costs of the crisis, showed that poverty was rising in the “adjusting” countries, and
demonstrated the tendency of the adjustment costs to fall on the most vulnerable. The
WC stood accused of being at least oblivious to the disproportionate burden on the poor
arising from the processes of adjustment and stabilization .
 Cont.
– The third criticism of the WC concerns the interface between
economics and politics. The closely related transitions to neoliberal
economic policies and to political democracy in several countries in the
South and in Eastern Europe have introduced a potentially severe
tension because of the deployment of democratic and supposedly
inclusive political systems to enforce exclusionary economic policies.
The neoliberal economic policies demand a state hostile to the
majority, even though a democratic state should be responsive to
majority pressures.
 Post Washington Consensus
• Inspired by new institutional economics, the PWC can provide a more nuanced
understanding of economic development (see Harriss and others, 1995). For
example, the PWC acknowledges that at the core of the development process lies a
profound shift in social relations, the distribution of property rights, work patterns,
urbanization, family structures, and so on, for which an analysis limited to
macroeconomic aggregates is both insufficient and potentially misleading. Policy-
wise, the rhetoric of the PWC is comparatively state-friendly but in a limited and
piecemeal way, with intervention only justified on a case-by-case basis, should it
be demonstrable by mainstream criteria that narrow economic benefits would most
likely accrue.
• Despite its obvious limitations, the PWC offers a rationale for discretionary
intervention across a much wider range of economic and social policy than the WC.
Nevertheless, the PWC remains fundamentally pro-market, supporting a poorly
examined process of “globalization” which, however, should have a more human
face because it would be supported by appropriate institutions and the gentle steer
of the national state and the IFIs.
Comparison of WC and PWC policies or reforms

Washington Consensus post-Washington Consensus (Original

WC plus)

Secure property rights Anti-corruption

Deregulation Corporate governance
Fiscal discipline Independent central bank and IT
Tax reform Financial codes and standards
Privatization Flexible labour markets
Reorientation of public expenditures WTO agreements
Financial liberalization “Prudent” capital account opening
Trade liberalization Non-intermediate exchange rate regimes
Openness to FDI Social safety nets
Unified and competitive exchange Targeted poverty reduction
rates
 Beijing Consensus
• A Beijing Consensus? Joshua Cooper Ramo, an analyst at the
Foreign Policy Centre in London, has coined the term “Beijing
Consensus” in opposition to the Washington Consensus in
2004.
• He holds that state capitalism has been the dominant form and
offers an attractive alternative for developing countries
compared to the classical liberal model.
• Cooper defines the consensus as simply three theorems, of
which the first concerns using innovations that offer the best
bargain, the second promotes working through chaos
management, and the third is that the concept of the
consensus contains a theory of self-determination.
 Recommendations of Beijing Consensus
• According to Cooper , the following are the major
recommendation of Beijing Consensus
 Innovation-based development
 Economic success measured not by per capita GDP
growth but by its sustainability and level of equality
 Self-determination for China and for other countries vis-a
`-vis the United States:
• Opposition to the Washington Consensus
• Globalization on their own terms
• Chinese influence by example, not weaponry
• Develop asymmetric capabilities to balance against the
United States