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New Consensus Emerges from Social Debris

By Estrella Gutierrez, IPS, 15 June 1998

CARACAS, Jun 15 (IPS) - Economic theorists and social scientists in Latin America believe the "shock therapy" prescribed by the "Washington Consensus" economic model has failed, and a new prescription is needed - one that includes human and social capital as key ingredients.

They support their argument with statistics from Latin America which, after it faithfully applied the US-led prescriptions for economic stabilisation, has earned the region the dubious distinction of having the greatest social disparity.

Argentina's Bernardo Klinsberg says in his book "Pobreza, un Tema Impostergable" (Poverty, an issue that cannot be put off) that statistics and experience coincide in demonstrating that poverty and inequality are more serious problems today, than when the foreign debt crisis broke out in 1982.

Klinsberg cites statistics showing that 41 percent of the population in Latin America suffers from some degree of malnutrition, while the average schooling received by each inhabitant is only 5.2 years - not even enough to finish primary school.

The average height of children is shrinking, and nearly half of the population is afflicted by poverty, which has had to be broken down into categories like "extreme poverty" to define the situation of those who it is difficult to conceive just how they survive, or the "new poor," expelled from the middle class.

Mexican writer Carlos Fuentes, referring to the army of excluded, the feminisation of poverty, growing labour instability and street children, says that "something has come to an end in Latin America: pretexts to justify poverty."

Klinsberg criticises the fact that the fight against poverty was not at the top of the agenda of governments and social activists, or even the key focus of debate in the region, and that governments and their economists remained bound to the orthodoxy that was conceptualised as the sole approach in the 1980s - in spite of its devastating social effects.

Something different is occurring in the industrialised North, where what was defined in the mid-1980s as the "Washington Consensus" - which became the formula prescribed by multilateral lending institutions - is at the core of a major re-examination.

The "Washington Consensus" is the name given to the economy theory combined with the prescriptions of the Washington-based multilateral financial entities to apply neoliberal "shock therapy" aimed at economic stabilisation, to correct the imbalance plaguing countries in the wake of the foreign debt crisis.

The label sums up the theory, put into practice by the International Monetary Fund and World Bank, underlying structural adjustment programmes.

Joseph Stiglitz, a candidate for the Nobel Prize for Economy described earlier this month by the 'New York Times' as the most prominent economist in the United States, recently wrote a paper on how the core concepts of the Washington Consensus translated into "highly inefficient" results.

Amartya Sen, professor emeritus at Harvard University, wrote in "Reflections on Development" that in the past 15 years, "a model of blood, sweat and tears" with major defects was sold to the developing South, a model that failed to make good on its promises.

In an article ironically titled "Better but Worse", the British weekly 'The Economist' summarised how economic progress in Latin America was accompanied by more poverty and less equality. Unemployment, for example, far from shrinking, grew in all countries except Chile from 1989 to 1997.

Structural adjustment programmes that put the market, fiscal balance, the whittling down of the state, stabilisation, openness and competitiveness up on a pedestal, assumed an initial imbalance of social variables as a cost, but only as a forerunner to a new equilibrium that would entail better living standards for all.

Stiglitz, previously U.S. President Bill Clinton's chief economic adviser and now head economist at the World Bank, made it clear in his paper "More Instruments and Broader Aims, from Washington to Santiago" that the "virtuous circle" would never be completed.

The economist traces what happened in the region since the Washington Consensus was imposed up to the second Summit of the Americas, which brought together the leaders of all the countries in the hemisphere - with the exception of Cuba - in Santiago, Chile in April.

He argues that it was not Latin American countries that went wrong in applying the recipes, but rather it was the recipes themselves that were faulty. Stiglitz is an advocate of a new thesis based on the need for non-traditional state intervention to correct the market's shortcomings.

The state has stretched itself too thin and done so in a disorderly manner, which has made it inefficient, says Stiglitz. But, he underlines, the need for the state to focus on the basics does not mean it should become minimalist.

The question is how, not whether, the state should be involved, he says, pointing out that countries with successful economies and balanced societies have governments that are active in a number of areas, which makes the state more efficient.

Regulation, social security, health and education are areas in which Latin American governments must play a strong role, he maintains, and which must nourish what has been labelled "the post-Washington consensus" or the agenda for the 21st century.

Klinsberg, a consultant to the United Nations Development Programme (UNDP), points to the emerging view within economic thinktanks, financial entities and the United Nations that the new model must be based on two basic principles.

First of all, there is growing agreement that the new consensus must not come out of Washington, that it cannot be imposed from one place, but that "there has to be a consensus for developing countries arising from developing countries, so they feel the policies are their own."

Secondly, the new model must incorporate a major dose of humility. The model about to be buried was based on an absolute truth applicable to all with only small variations, a gross error in Klinsberg's view.

Moreover, the economic component, which has been dubbed "traditional capital," must be rounded out by two other motors: human capital and social capital.

Human capital refers to the living standards of the population of any given country based on health, education and nutrition. Its heavy influence on levels of productivity, competitiveness and economic growth has already been measured.

Social capital expresses the shared values of a society, like culture, the level of associativity, cooperation or trust in society's key actors.

Social capital has recently begun to be measured, and it has been demonstrated that the most stable, democratic and economically and socially balanced countries are those whose societies reinforce their basic values and ethics and stimulate civil society.

A forerunner of post-Washington thinking, Alberto Hirstman, coined the phrase that social capital is the only capital which does not run out, but rather grows with use. But he warned of the risk of destroying it by marginalising its ingredients.

Social capital has begun to be considered another key lever of growth, and the World Bank announced in April that it would incorporate it as an objective, measuring the negative or positive impact of each project.

Klinsberg underlined that the new view is of a symmetry between equality and growth, by contrast with the model imposed last decade. "Now we know that inequity only reproduces inequity."

"The more polarised a society, the more difficult it is to turn back," he said, adding that it has been empirically proven that inequity hurts national savings and the development of a domestic market and skilled labour power.

It also undermines democratic governance, because the greater the inequity, the less credibility governments enjoy, and the greater their difficulty in introducing innovative policies suited to a changing world on the threshold of a new century.

The Inter-American Development Bank aims to provide a setting for this debate, so unfamiliar in Latin America despite its immense importance for the region. The Bank is organising an international conference to discuss how to revive the neglected link between ethics and the economy.