Ben Bernanke and the Washington Consensus
Ben Bernanke gave a speech in Cleveland Wednesday on what we can learn from developing economies about economic growth. The speech revolves around three principles, macroeconomic stability, increased reliance on market forces, and strong political and economic institutions that "are important for sustainable growth." These principles are derived from the Washington Consensus, which, as Bernanke notes, is "a list of 10 broad policies to promote economic development ... judged as commanding ... substantial support between both economists and policymakers."
The Washington Consensus is, at its heart, a call to let free market forces lead development. Thus, it emphasizes minimal government, and minimal interference with internal and external trade. However, one of the lessons of the recent crisis is that market forces alone may not be enough to stabilize the financial system, i.e. the financial system may not be self-regulating. The conclusion of the speech seems to recognize this:
Indeed, advanced economies like the United States would do well to re-learn some of the lessons from the experiences of the emerging market economies, such as the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability.However, while Bernanke does note the need for regulation of the financial sector, and while he qualifies his remarks about the Washington Consensus in other ways, his reliance upon the Washington Consensus as a basis for evaluating policy and the free market perspective that comes with it brings doubts about whether the Bernanke Fed will be aggressive enough in imposing and enforcing the regulations needed to minimize the chance of another financial meltdown.
And in any case, the reliance upon the Washington Consensus to evaluate growth is problematic:
Is there a new Washington consensus?, by Dani Rodrik, Project Syndicate: ...Two and a half years ago,... the World Bank approached the Nobel laureate Michael Spence to ask him to lead a high-powered commission on economic growth. The question at hand could not have been more important. The "Washington consensus" -- the infamous list of do's and don'ts for policymakers in developing countries -- had largely dissipated. But what would replace it? ...As just noted, Bernanke does qualify his remarks about the Washington Consensus to include many of these objections. For example, he acknowledges that "best-performing" China and Korea used industrial policy to spur growth -- and industrial policy is a large departure from the Washington Consensus -- but he is nevertheless mostly dismissive of the industrial policy approach.Thus was born the Spence Commission on Growth and Development, a star-studded group of policymakers ... whose final report was issued at the end of May.
The Spence report represents a watershed for development policy... Gone are confident assertions about the virtues of liberalisation, deregulation, privatisation, and free markets. Also gone are the cookie cutter policy recommendations unaffected by contextual differences. ...
It is to Spence's credit that the report manages to avoid both market fundamentalism and institutional fundamentalism. ...
I am not saying that we should abandon free market principles entirely, or even mostly, or that the types of growth policies applicable to developing countries necessarily carry over to developed economies. The point is that the framework Bernanke adopted in his remarks is far more free-market oriented than the state of the literature, and this may tell us something about attitudes toward free market and self-regulation of financial markets within the Fed.
One final comment. There is a clue about the Fed's hawkishness toward inflation in Bernanke's remarks:
...many emerging market economies in the 1990s emulated the success of the advanced economies in the 1980s in controlling inflation. .... Improvements in macroeconomic management have been particularly striking in Latin America, where large budget deficits and high inflation rates had produced costly swings in economic activity in previous decades. ...So Bernanke sees low and stable inflation as one of the keys to long-run economic growth, it avoids "costly swings in economic activity," and from the Fed's actions recently it appears that the Fed is reluctant to risk an outbreak of inflation. I don't think this should be a worry, the Fed could be more aggressive now to try to help the unemployed, i.e. let inflation rise above target, without risking its long-run commitment to price stability. But apparently the Fed does not trust itself to bring down the inflation rate in the long-run if it allows it to rise in the short-run. I guess I have more faith in Bernanke and others at the Fed than they have in themselves.
