Enterprise Issues: Consensus should apply to both rich and poor

If this is crony capitalism, it is an ailment that does not just afflict developing countries

IT WAS at a conference in 1990, sponsored by the prestigious Institute for International Economics, that the term "Washington Consensus" was coined. This was a collection of policy prescriptions for developing economies which were squarely in the tradition of orthodox economics: sound government finances, liberalisation of trade and investment, privatisation, deregulation, and so on.

It was a received wisdom that was probably never widely enough shared to deserve the term consensus, even though most governments in most parts of the world put its precepts into practice throughout the 1990s. But since the financial crisis of last summer, the Washington consensus has looked a bit threadbare. The tigers of South-east Asia had embraced it wholeheartedly and yet many of them still plunged into crisis.

A new World Bank publication has ridden to the rescue. Called "Beyond the Washington Consensus: Institutions Matter", it concludes that the standard policy recommendations were not wrong, just incomplete. Critics will say this is a bid by one of the Big Brother institutions of the world economy to alter the content of the consensus while keeping the Washington bit intact. For the World Bank still has a shopping list of appropriate policies for emerging economies.

But it is worth looking at the lessons drawn from the crisis given that the original Washington consensus did generate such spectacular growth in the countries that embraced it. The new report concludes that the mistake was to overlook the importance of the institutional structure of economies. The sound macroeconomic policies were applied regardless of the historical and cultural context of individual economies, as if there really were such as thing as a pure free market. Of course there is not, and it seems mad that anybody could have imagined otherwise. But it is not that obvious, except with hindsight, that there is any link between the need for a small government budget deficit and, say, the regulation of the banking system or the types of contract on which civil servants are employed.

The report summarises research on the links between certain types of institutions in developing economies and their growth rates and poverty levels. The results are unsurprising. Respect for property rights, honest civil servants and politicians, protection of investors' and depositors' rights, and so on, are all correlated with higher GDP and lower poverty and inequality. There is a similar link with strong shareholder rights, such as allowing small shareholders to vote by proxy, not setting too high a threshold for the calling of exceptional shareholder meetings, and making it possible for shareholders to oust directors. So in this sense the World Bank vindicates the commonplace conclusion that, broadly speaking, "crony capitalism" was to blame for the severity of the east Asian crisis.

This does not just mean the tendency of eminent politicians to appoint members of their family and entourage to all the top jobs. It includes, also, things like legal protections for creditors. One fascinating table ranks countries according to whether or not their laws guarantee that secured creditors get paid first, whether there is an automatic stay on assets, whether managers are forced to leave a bankrupt company, and so on. The developed economies mostly enjoy a high score. So do many countries whose legal system is derived from the Anglo-Saxon tradition, including Hong Kong, Singapore and Thailand. But those with traditions more like the French or German - most of Latin America, Korea and Japan - have a lower average score. The same groups do worse on indicators of accounting standards, too.

This comparison prompts the interesting thought that if this is what constitutes crony capitalism, it is an ailment that does not just afflict developing countries. For Germany, too, has close links between banks and corporations not mediated by markets, overlaps of personnel and misty accounting standards. Even taking a narrower view of crony capitalism, the rich countries share with the developing countries many institutional problems. Russia is not alone in being plagued by the web of Mafia control ensnaring its businesses or by massive tax evasion; but Italy is a very wealthy country and Russia is not. Just recently the entire European Commission was forced to step down over allegations of fraud and mismanagement; the EU budget forms one of the world's biggest gravy trains. The Anglo-Saxons do not escape; after all the US has given us the phrase "pork barrel" politics.

Perhaps it is true, then, that in the end the rich are just different from the rest in having more money. The lesson seems to be that developing economies have to get their macroeconomic policies right (the first version of the Washington consensus); then their microeconomic policies and institutions right (the updated version). And then they need to get richer too, because that is what really helps weather the storms of financial crisis.

But I think this would be too defeatist a conclusion. The World Bank's authors conclude that, just as the 1980s debt crisis spurred the afflicted countries to cut deficits, liberalise their trade rules and start privatisation programmes, the 1990s crisis will set in train a process of detailed institutional reform. Let's hope the developed economies should be busy applying the same logic to themselves as well as hectoring poorer countries about what they ought to do. For the same set of solutions might well help solve the different kinds of problems faced by different groups of countries. After all, a breath of free-market fresh air in Germany's jobs and capital markets might help reduce its seemingly permanently high unemployment rate. More equal access to education and healthcare in the US might give young men in its ghettos an alternative career to prison. There cannot be one Washington consensus for the poor and another for the rich.

Start your day with The Independent, sign up for daily news emails
Life and Style
Fans line up at the AVNs, straining to capture a photo of their favourite star
life Tim Walker asks how much longer it can flesh out an existence
Life and Style
Every minute of every day, Twitter is awash with anger as we seek to let these organisations know precisely what we think of them
techWhen it comes to vitriol, no one on attracts our ire more than big businesses offering bad service
Professor David Nutt wants to change the way gravely ill patients are treated in Britain
people Why does a former Government tsar believe that mind-altering drugs have a place on prescription?
Norway’s ‘The Nordland Line – Minute by Minute, Season by Season’ continues the trend of slow TV
Arts and Entertainment
Jonny Evans has pleaded not guilty to an FA charge for spitting at Papiss Cisse
Life and Style
Kate Moss will make a cameo appearance in David Walliams' The Boy in the Dress
The image released by the Salvation Army, using 'The Dress'
Liverpool defender Kolo Toure
football Defender could make history in the FA Cup, but African Cup of Nations win means he's already content
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Relations Officer

£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Jemma Gent: Project Coordinator

£12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable