The Washington Consensus and its aftermath

The power of markets: Adam Smith and the Wealth of Nations

• “The invisible Hand” distributes goods and resources where they are most productive and demanded

The market revolution: background

• 1930s-1960s: heroic period of state intervention

• John Maynard Keynes and counter-cyclical state action

• state ownership--”national champions”, regulation

1970s--the party ending, views changing

• over-extended states, slow growth

• inefficiencies apparent in Communist world, and state enterprises everywhere

• Hayek and Milton Freidman win Nobel prizes, becomes mainstream

1980s--the revolution arrives: “British American Capitalism”

• Thatcher privatizes national industries--airlines, telecom, utilities, transport, etc.

• Reagan follows--tax cuts, deregulation

• airlines (‘78), banks, telecom, etc.

Chilean “miracle”

• 1973 After Allende coup, Pinochet imposes free market model

• Workers thrown out of work

• Then Chilean economy booms, still . . .

• 1990 Pinochet steps down

“Socialism with Chinese Characteristics”

• 1978 Deng Xiaoping reverses course• “glorious to be rich”--colored cats

• household responsibility system

• 1980 “Special Economic Zones” created, then expanded

India: no more “Hindu rate of growth” and “permit Raj”

• post-independence models: socialist England and USSR

• state-ownership and discouraging foreign investment

• Massive regulation

• Production for protected domestic market alone

• 1991 PM Rao, and successors implement reforms• investment, growth, trade increase

Russia—failed reform?

• 1985 Gorbachev’s perestroika

• then the sales of national assets—”crony capitalism”

The world follows the neoliberal “Washington Consensus”

• trend around the world to:• privatize govt owned industries• cut protective tariffs or subsidies• deregulate• lower taxes/benefits

• Some places less than others--Continental Europe still defending the “welfare state”

• tax-financed health care, education, retirement, transport, childcare, and more

Tax rates as % of GDP

• Sweden: 53.2% • U.S: 29.8%

Latin America today: rejecting the “Washington consensus”

• Venezuela—Hugo Chavez expanding the role of the state

• Bolivia—Evo Morales—nationalizes oil and gas

• Most of LA follows, more or less

good and bad of markets

• benefits of markets:• distributing products and resources efficiently--the invisible hand

• rewarding ingenuity and effort

• problems with markets:• can ignore claims of justice, need, and other ideals

• can boom and bust

• do not provide “public goods”

• often require governing rules to function

working out a balance?

• should we have publicly financed higher education, health care, social security?