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Life beyond the Washington Consensus: An Introduction to Pro-poor Macroeconomic Policies

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Life beyond the Washington Consensus: An Introduction to Pro-poor Macroeconomic Policies

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This article reviews the 'pro-poor' macroeconomic policy alternative to the Washington consensus. The pro-poor approach draws heavily on heterodox economic theory, and offers a compelling view of an alternative economic strategy oriented primarily to the satisfaction of the basic needs of the majority of the population, the equitable distribution of income, wealth and power, and the preservation of macroeconomic stability. These aims point to a specific set of fiscal, monetary, trade and exchange rate policies. The paper argues that such policies should be supported by social programmes designed to achieve the desired pro-poor outcomes as rapidly as possible.
Life beyond the Washington
Consensus: An Introduction to
Pro-poor Macroeconomic Policies
ALFREDO SAAD-FILHO
Department of Development Studies, SOAS, University of London, UK
ABSTRACT This article reviews the ‘pro-poor’ macroeconomic policy alternative to the
Washington consensus. The pro-poor approach draws heavily on heterodox economic
theory, and offers a compelling view of an alternative economic strategy oriented
primarily to the satisfaction of the basic needs of the majority of the population, the
equitable distribution of income, wealth and power, and the preservation of
macroeconomic stability. These aims point to a specific set of fiscal, monetary, trade
and exchange rate policies. The paper argues that such policies should be supported by
social programmes designed to achieve the desired pro-poor outcomes as rapidly as
possible.
1. Introduction
This article reviews a progressive development policy alternative to the Washington
consensus: the pro-poor macroeconomic policy framework associated with the
United Nations Development Programme (UNDP).
1
It also contributes to the devel-
opment of this literature through the integration of recent heterodox work in the areas
of industrial and social policy and democratic economic policy-making (see
MacEwan, 1999; Palley, 2001; Solimano, 1999). Promoting the dialogue between
heterodox academics and the applied economists developing the pro-poor policy
framework can be justified on three grounds. First, many economists reject the
Washington consensus because of its theoretical inconsistencies; because of its
close association with weak macroeconomic performance and recurrent crises,
Review of Political Economy,
Volume 19, Number 4, 513537, October 2007
Correspondence Address: Alfredo Saad-Filho, Department of Development Studies, SOAS,
University of London, Thornhaugh Street, Russell Square, London WC1H 0XG, UK. Email:
as59@soas.ac.uk
1
This article treats the terms ‘poor’ and ‘developing’ countries as synonyms. These countries are dis-
aggregated, when necessary, into ‘very poor’ and ‘middle-income’ countries. For an overview of the
pro-poor policy literature, see Dagdeviren et al. (2002), Kakwani (2001, 2002), Kakwani & Pernia
(2000), McCulloch & Baulch (1999), McKinley (2001, 2003, 2004), Osmani (2001), Palanivel
(2003), Pasha & Palanivel (2004), Rao (2002), UNDP (2002), Vandemoortele (2004) and Winters
(2002).
ISSN 0953-8259 print/ISSN 1465-3982 online/07/040513 25 # 2007 Taylor & Francis
DOI: 10.1080/09538250701622352
especially in poor countries, and with regressive shifts in the distribution of power,
income and wealth; and because Washington consensus policies thwart the
achievement of such pro-poor outcomes as the Millennium Development Goals
(MDG) mandated by the United Nations Millennium Assembly in September 2000
(see Jomo & Fine, 2005; Milanovic, 2002, 2003; Palma, 1998; and Weller &
Hersh, 2004).
2
Second, to counter the argument that the Washington consensus is
effectively the only game in town, these critiques need to be supplemented by
suggestions for alternative macroeconomic policies. Third, the pro-poor policy fra-
mework offers, simultaneously, a critique of mainstream development policy and a
set of progressive alternatives that may readily find resonance with large audiences,
including heterodox economists, other social scientists, government officials,
activists and concerned citizens in several countries.
Pro-poor policies and pro-poor development strategies draw upon insights
from several non-mainstream traditions, including the Post-Keynesian, Institution-
alist, Evolutionary, Kaleckian and Marxian schools, in order to offer a compelling
case for economic policies focusing on the basic needs of the poor and the
improvement of the distribution of income, wealth and power in the poor
countries.
3
Strengthening further the links between heterodox academics and
policy-makers can help to enrich the burgeoning pro-poor tradition with the signifi-
cant achievements of non-mainstream economic theory, while offering heterodox
theorists an institutional and policy framework to support the development of
alternatives to the mainstream.
This article is limited in two ways. First, it does not investigate the genesis or
the intellectual pedigree of the pro-poor policies. Second, there is no attempt to
assess the implementation of pro-poor policies in different countries. This
article aims only to introduce the pro-poor policy framework to a potentially sym-
pathetic audience, in order to facilitate the dialogue between non-mainstream
economists working in complementary fields. It will be shown below that
pro-poor policies can contribute to the achievement of democratic and distributive
economic outcomes in poor countries. This can be done optimally through a
combination of rapid, sustainable and employment-intensive growth, and the
redistribution of income and assets.
2
The MDG include the eradication of extreme poverty and hunger, universal primary education, pro-
motion of gender equality, reduction of child mortality, improvements in maternal health, combating
HIV/AIDS, malaria and other diseases, environmental sustainability and the creation of a global
partnership for development. Detailed quantitative targets are provided in all these areas, and the
goals should be achieved by 2015. For a detailed description and assessment of progress towards
the MDG, see http://www.un.org/millenniumgoals/,http://www.undp.org/mdg/ and http://www.
developmentgoals.com/UNDG%20document_final.pdf.
3
In what follows we shall not be concerned with the work of dissenting mainstream economists, such
as Jeffrey Sachs and Joseph Stiglitz (for overviews of their recent contributions, see http://
www.earthinstitute.columbia.edu/about/director/ and http://www.josephtiglitz.com; for a critique,
see Fine & Waeyenberge, 2006, and Waeyenberge, 2006). Despite their significant contribution at
the level of economic policy and their unrivalled capacity (among dissenting economists) to bring
to the attention of the media the problems of poverty, environmental degradation and the limitations
of the Washington consensus, Sachs’ and Stiglitz’s critiques of mainstream policies remain firmly
based on neoclassical economic principles (see Fine et al., 2001).
514 A. Saad-Filho
The next section summarises the principles of the pro-poor policy frame-
work. Section 3 considers the most important pro-poor macroeconomic policy
instruments, and Section 4 reviews pro-poor social policy. The final section
summarises the main findings of this article and their implications.
2. Policy Principles and Constraints
Pro-poor economic strategies are based on three principles. First, mass poverty is
the most important problem facing the developing countries, and its elimination
should be their governments’ main priority.
4
For the mainstream, poverty is
created by social exclusion, defined as segregation from ‘free market’ processes
through the imposition of arbitrary limitations to voluntary exchange, and it is
measured by the inability to reach arbitrary expenditure lines, for example
US$1 or US$2 a day. This viewpoint posits markets unproblematically as creators
of wealth, and ‘market integration’ as the main force for economic growth and
poverty reduction.
The mainstream view is misleading, because it decontextualises poverty and
obscures its origins and mechanisms of reproduction over time and across
countries and regions. Marxist and other heterodox studies have shown that, in
minimally complex market economies, exclusion from local or international
markets is normally not the cause but, rather, a consequence of poverty. In
these economies, poverty tends to be created by the form of integration of specific
social groups into the dominant mode of social and economic reproduction
(Bracking, 2004; Bush, 2004). It is their modalities of economic and social inte-
gration that impose upon the poor highly exploitative labour regimes including
badly paid wage labour, precarious commodity production, insecure self-
employment and, potentially, degrading forms of labour such as child labour or
indentured labour. In turn, these labour regimes are associated with low pro-
ductivity, low incomes and precarious living standards.
The heterodox approach can offer not only a richer understanding of poverty,
but also useful policy guidelines for addressing its reproduction. For example, it
suggests that poverty cannot be reduced to the inability to reach an arbitrary
level of income. Rather, insufficient income is one of the implications of the struc-
tural inequalities constituting the economic system. The heterodox approach also
implies that markets can create poverty as well as wealth (for example, when pea-
sants are dispossessed by rural development projects, or when urban workers are
deskilled or left unemployed by technological change; see Section 3.1), while
being, at all times, vehicles for the exercise of economic and political power.
Markets are never neutral, and they always require nurturing, regulation and
control by a democratic state. At a further remove, the elimination of poverty
requires structural social and economic reforms, in order to eradicate the inequal-
ities responsible for the reproduction of poverty amid wealth. They include legally
4
This aim is not only important in itself; it is also mandated by the United Nations through the
Universal Declaration of Human Rights, the Declaration on the Right to Development, and the
Millennium Development Goals.
Life beyond the Washington Consensus 515
condoned inequalities of access to, and control over, labour, economic resources
and political power. It follows that the solution to deeply ingrained problems of
poverty and inequality is primarily political, rather than economic. Within these
limitations, macroeconomic policy can give an essential contribution to the
complex and, inevitably, contentious process of redressing structural inequalities
and eliminating the symptoms of poverty. The urgency of the problem, its ramifi-
cations and the difficulty of addressing them while preserving political and econ-
omic stability suggest that unless governments give absolute priority to the
elimination of poverty, it will almost inevitably fall by the wayside, in spite of
its high human and economic costs.
Second, pro-poor growth must benefit the poor more than the rich; growth is
pro-poor when it reduces relative as well as absolute poverty (McKinley, 2003;
Roy & Weeks, 2003). The choice of a pro-poor growth strategy is independent
of a long-term relationship between equity and growth. Traditionally, growth
and equity were perceived to be negatively correlated at least in the early stages
of growth, which was often used to justify regressive economic policies in the
poor countries. This claim was eventually discredited by careful econometric
studies and by evidence suggesting that greater equity supported rapid growth
in several East Asian countries.
5
This debate is informative, but it plays only a
marginal role in the case for pro-poor economic strategies. In the pro-poor frame-
work, economic policies are not selected in order to maximise growth; recipro-
cally, equity is not an instrument for the achievement of rapid growth. Although
high growth can facilitate the achievement of pro-poor outcomes, the type of
growth is at least as important as the rate of economic growth (see Section
3.1).
6
The case for pro-poor policies is based on their potential to eliminate
poverty and material deprivation faster than any other combination of policies,
on the intrinsic value of economic equity, and its potential contribution for democ-
racy and human rights (Sengupta, 2004). In this approach, GDP growth, inflation
control, high investment, low public debt and other conventional parameters of
economic ‘success’ should not be the most important objectives of government
policy. Instead, they should be seen as instruments for the elimination of mass
poverty and the achievement of secure, sustainable, equitable and empowering
human development.
Third, improvements in distribution and social welfare should be pursued
directly. These improvements should not be merely marginal or conditional on
trickle-down processes, and they must be unambiguous across a broad spectrum
of measures of welfare and distribution. Changes in the initial distribution
of income and wealth (for example, through land reform, universal basic
education and training and the introduction of pensions and other entitlements
funded by progressive taxation) can promote several pro-poor objectives
5
For an assessment of the relationship between growth and equity, see Bowman (1997), Cornia
(2004), Cramer (2000), Kanbur (1998), Niggle (1998) and Persson & Tabellini (1994). The case
of agriculture is examined by Karshenas (2001) and Kay (2002).
6
The expansion of the economy always helps to alleviate poverty, except in a small number of per-
verse cases. This is hardly sufficient: the point is how to maximise the impact of growth on poverty
over the long term (see Dagdeviren et al., 2002, p. 391).
516 A. Saad-Filho
simultaneously.
7
These distributional shifts can be achieved only through the inter-
vention of public policy, because ‘empirical evidence ...consistently indicates that
size distributions of income are quite stable, in the absence of radical changes in
institutions and political power’ (Rao, 2002, p. 7). In addition to those ex ante dis-
tributive shifts, the process of income generation also needs to be transformed in
order to benefit the poor disproportionately. Possible changes, discussed in
further detail in the Evolutionary and Institutionalist political economy literature,
include the deployment of industrial policy instruments to support strategic
economic activities, aggressive employment generation programmes, as well as
incentives for wage increases for low-skilled workers (see Amsden, 1997, 2001;
Chang & Grabel, 2004; McKinley, 2003; Osmani, 2001; Pasha, 2002).
Macroeconomic stability is evidently an important constraint to the achieve-
ment of pro-poor outcomes, including rapid growth, redistribution and the
structural transformation of the economy. Stability includes, at a minimum, inter-
temporal fiscal and balance of payments equilibrium, real exchange rate stability
and the minimisation of inflation and macroeconomic volatility. As was indicated
above, these are not objectives in themselves but such stabilising policies serve to
correct problems that interfere with the achievement of pro-poor goals. The inter-
ference can be either direct (for example, inflation can redistribute income towards
the rich, capital flight can trigger exchange rate instability, and balance of pay-
ments crises can limit essential imports), or indirect (if expectations of instability
erode the support for the government’s policies).
In order to minimise the scope for these destabilising outcomes, the macro-
economic limits of government policy should not be defined precisely in
advance. While the pro-poor goals should be described in detail and achieved
within a given time frame, the optimal policy stance with respect to macroeco-
nomic stability is constructive ambiguity. Stability must be pursued because of
its instrumental value, but listing a set of arbitrary restrictions on government
action (such as maximum fiscal deficits, inflation rates or exchange rate levels)
alongside the pro-poor targets devalues the latter, introduces artificial constraints
to the government’s programmes and undermines policy implementation because
it signals that the government is only conditionally committed to its pro-poor pol-
icies. For example, what should the government do if inflation marginally exceeds
the previously announced ‘maximum acceptable rate’? Which commitments
should be prioritised—the maximum inflation rate or the pro-poor income,
housing and health programmes? The answer cannot be given in the abstract; it
depends on the nature of the macroeconomic imbalances and the political circum-
stances. The government should decide how to address any macroeconomic
imbalances on a case-by-case basis, in order to minimise the economic and
political costs of achieving its distributive goals. This does not imply that stability
is unimportant, but it recognises that it has costs. On the one hand, the preservation
of stability should not become an objective in itself, much less an excuse to under-
mine the government’s pro-poor programme. On the other hand, the distribution of
7
In this literature, the rationale for distribution draws heavily on the work of Kalecki; see, for
example, Ghosh (2005) and Kalecki (1972, 1993).
Life beyond the Washington Consensus 517
the costs of stabilisation should support, rather than undermine, the achievement
of pro-poor outcomes.
From the pro-poor viewpoint, mainstream (Washington consensus) stabilis-
ation and structural adjustment policies centred on price stability and static
market-based allocative efficiency are flawed at several levels (Buira, 2003;
Fine & Stoneman; 1996; Pender, 2001). For example, mainstream policies
focus inordinately on short-term stabilisation while undercutting the basis for
long-term growth. Unsurprisingly, these policies have failed to trigger rapid econ-
omic growth or sustained poverty reduction. In the words of an informed
researcher linked to the World Bank,
How to expl ain that after sustained involvement and many structural adjustment
loans, and as many IMF’s Stand-bys, African GDP per capita has not budged
from its level of 20 years ago? Moreover, in 24 African countries, GDP per
capita is less than in 1975, and in 12 countries even below its 1960s level... .
How to explain the recurrence of Latin crises, in countries such as Argentina,
that months prior to the outbreak of the crisis are being praised as model
reformers... . How to explain that the best ‘pupils’ among the transition
countries (Moldova, Georgia, Kyrgyz Republic, Armenia) after setting out in
1991 with no debt at all, and following all the prescriptions of the IFIs [inter-
national financial institutions], find themselves 10 years later with their GDPs
halved and in need of debt-forgiveness? Something is clearly wrong.(Milanovic,
2003, p. 679; emphasis added)
The slow improvement of the welfare of the poor during the last 25 years is a
severe indictment of mainstream economics, the Washington consensus and the
so-called ‘international community,’ especially in the light of the substantial
resources currently available in the world economy, and those that could be gen-
erated through faster growth and more equitable distribution. Perversely, main-
stream policies are not self-correcting, and their failure often leads to the
intensification of the ongoing economic programmes under even closer supervi-
sion by the IMF, the World Bank, the US Treasury Department and many aid
agencies.
The Washington institutions have become increasingly aware of the limit-
ations of their economic programmes. The Heavily Indebted Poor Country
Initiatives (HIPC-1 and HIPC-2) are the most recent attempts by the IMF and
the World Bank to achieve pro-poor outcomes (including the MDG) through con-
ventional strategies (see Bird, 2001; Buira, 2003; IMF & IDA, 1999; Pender,
2001; UNCTAD, 2000, ch. 5; 2002, ch. 5; World Bank & IMF, 2004). Their
most important innovation in terms of policy formulation and implementation is
the requirement that countries should submit poverty reduction strategy papers
(PRSPs) as one of the requirements for debt relief. Unfortunately, the HIPC initiat-
ives remain wedded to the same failed macroeconomic strategies attempted in the
past, even though they are now supplemented by targeted poverty relief pro-
grammes and, ostensibly, by efforts to shift government expenditures towards
the provision of public goods, especially health and education. These targeted
interventions and small-scale adjustments to public sector expenditures are insuf-
ficient to address the severe problems associated with mass poverty in most
518 A. Saad-Filho
countries. If a country’s macroeconomic strategy fosters stagnation and the repro-
duction of poverty, targeted social programmes and exiguous safety nets cannot
reverse the trend (Pasha, 2002). The systematic failure of mainstream policies
to achieve their stated objectives, and their perverse social and economic impli-
cations, suggest that they should be abandoned. The pro-poor policies discussed
below offer a cogent alternative to these failed and regressive policies, and a
viable avenue for the achievement of socially desirable outcomes.
3. Pro-Poor Macroeconomic Policy Instruments
This section examines four macroeconomic aspects of the pro-poor development
strategies sketched in the previous section: investment and growth; fiscal policy
and public investment issues; employment and productivity; and the external
sector.
3.1. Growth and Investment
Rapid growth is important for the success of a pro-poor strategy. Growth reduces
absolute poverty directly because it creates new income generating activities and
boosts the demand for foodstuffs and raw materials produced by the poor. Growth
also increases the availability of goods, services and employment opportunities,
and it expands markets, sales revenue and consumption possibilities. Economic
growth can also support poverty reduction indirectly, by inducing financial devel-
opment and generating savings to support investment and the expansion of consu-
mer credit. If growth is appropriately targeted it can also improve the relative
position of the poor. For example, it can raise real wages through the creation
of labour scarcities, fund redistributive social programmes and finance the pro-
vision of public goods, potentially reducing ‘basic’ as well as ‘market-generated’
poverty.
8
In spite of these potential gains, economic growth is insufficient to secure the
elimination of poverty. This limitation arises because, while it contributes to
poverty alleviation, growth can also create poverty because it is often associated
with the dispossession and eviction from the land of large numbers of small
peasants and rural labourers, technological changes that deskill wage workers
and eliminate large numbers of jobs, and environmental changes that undermine
livelihoods and the productive capabilities of the poor, especially in rural areas
(Weeks et al., 2002, pp. 12 14). Many workers may be unable to find alternative
productive assets or jobs with equivalent pay, or to retrain in order to seek better
opportunities elsewhere. The self-employed may also find that their economic
prospects are depressed because of their insufficient access to credit and
markets. Experience shows that the mainstream’s optimistic expectations
are often misplaced. Even when they induce growth in selected sectors, the
8
Basic poverty is due to the low levels of income and productivity in a country, and it tends to decline
as the economy grows (‘a rising tide lifts all boats’). Market-generated poverty is due to the lack of
access to productive assets.
Life beyond the Washington Consensus 519
mainstream strategies systematically fail to address the structural inequalities
which create poverty even as the economy expands. If income and productivity
growth are sufficiently rapid, most people benefit even if inequality simul-
taneously grows (e.g. Brazil and Mexico from the 1950s to the 1970s, the
Gulf economies between the early 1970s and mid-1980s, and China since the
1980s). Alternatively, GDP growth may be insufficient or erratic, leading to
the stagnation or even the decline of the welfare standards of large numbers
of people (e.g. Russia and other former Soviet countries since the early 1990s,
and most Middle Eastern, African and poor Latin American countries since
the 1980s).
The complex relationship between growth and poverty implies that pro-
poor devel opme nt strategies must be ‘bolder a nd more expansionary’ than
what is permissible under the mainst rea m policy compac t (McKinley , 2004,
p. 1). However, as was indic ated above, high growth rat es are insufficie nt. In
order to maxi mise the distributive and poverty-allevi ating impact of growth it
should be concentrated in two complementary areas. First, sectors that directly
benefit the poor, especially those generating income and employment for the
poor and producing goods a nd serv ices con sumed pri marily by the poo r, for
example, small-scale a griculture, c onstru ction a nd t he i nformal s ect or (Pas ha,
2002).
9
Second, gro wt h should promote investment. It is well k nown that i nvest-
ment is the driving force of growth. However, growth is also the driving force o f
investment because rapid and sustained growth generates the demand that ma kes
individual investment p rojec ts viable (see McKinley, 2001, and, with particular
reference to t he ‘ East As ian mira cle,’ Amsden, 1997). Low inves tment a lso
complicates the task of r ealloc ating resources towards pro-poor se ctors . The
manipulation of interest rates is unli kely t o resolve thi s p roblem, s ince there is
no evidence that margi nal shifts in interest rates can trigger the require d response
(Rao, 2002). In orde r to kick-start the virtuous c irc le of growth and inves tment in
strategically selected a reas, the state should identify the sectors holding the key
to rapid and su staine d growth, the re ducti on of pove rty and inequality, and the
alleviation of the balance of payments constraint.
10
Their expansio n should be
fostered by targeted industrial policies, public investment and focused i ncentive s
for the expansion of capacity and output:
The concept of ‘focused’ incentives excludes the traditional sort of broad invest-
ment incentives often employed by governments—tax holidays for investments
of any type or general protections from foreign competition. In shaping an
alternative economic development strategy, a government does not simply
want more investment; it wants more investment of a certain kind. This require s
that incentives be focused. (MacEwan, 2003, p. 13)
9
These examples are merely indicative. The impact of growth on poverty depends on the initial dis-
tribution of income and, especially, its distribution near the poverty line, as well as the occupational
composition, skills and other features of the workforce.
10
There is an extensive literature on industrial policy and the developmental state; for a critical
survey, see Fine (2005). The importance of the balance of payments constraint for growth and
development is examined by Thirlwall (2003).
520 A. Saad-Filho
In the middle-income countries, these priorities should be funded primarily
by domestic sources, because foreign savings and investment tend to be volatile,
difficult to target, and they are often inimical to pro-poor objectives; for example,
foreign investors in poor countries often produce luxury goods and services
rather than basic consumer goods and manufacturing inputs.
11
Raising the necess-
ary resources domestically will require a concerted effort, since the available
savings tend to be insufficient to support ambitious pro-poor development pro-
grammes. Tax revenues will need to rise in most countries in order to help to
fund these programmes. This will demand a more progressive tax system, the taxa-
tion of unearned incomes and financial transactions, and the taxation of part of the
benefits of growth. It will also be necessary to set up or expand long-term public
private savings initiatives (such as development banks, as in Brazil and Chile) in
order to fund infrastructure, housing, education and training programmes, pen-
sions and other costly pro-poor projects (Collier & Sater, 2004, chs 910). In con-
trast, in very poor countries, the savings potentially available domestically could
be insufficient to permit the achievement of MDG and other pro-poor goals even
under the best combination of policies. In this case, rapid pro-poor growth may
demand additional foreign aid, other unrequited transfers (such as workers’ remit-
tances) and large-scale debt forgiveness (see Vandemoortele, 2004).
3.2. Fiscal Policy and Public Investment
Fiscal policy is a powerful macroeconomic policy tool.
12
The Washington consen-
sus claims that the size of the public sector should be kept to a minimum because
low taxes, limited regulation and low levels of public spending will increase the
scope for private sector activity, which should drive economic growth and
poverty alleviation. In contrast, pro-poor strategies require the public sector to
induce, regulate and sustain the process of growth, to target resources into priority
sectors and to preserve macroeconomic stability.
It has long been claimed by most heterodox economists that public expendi-
tures and, in particular, public investment can boost aggregate demand, loosen the
supply constraints on long-term growth and support the reallocation of resources
towards poverty reduction goals, especially in economies operating below poten-
tial. Although the mainstream insists that public investment crowds out, and is less
efficient than, private investment, empirical studies offer no firm evidence support-
ing this claim. Quite the contrary: a significant body of research indicates that
public investment can crowd in private investment in upstream and downstream
sectors such as those which supply inputs and consumables, cleaning, maintenance
and security services, trading and finance, workforce training, and so on (these
11
The suggestion that middle-income countries should rely primarily on domestic rather than foreign
savings is supported by the pioneering work of Feldstein & Horioka (1980) and by more recent
research by Calvo et al. (1993). For a compelling heterodox interpretation of these findings, see
Palma (1998).
12
For a heterodox assessment of the importance of fiscal policy for the current (neoliberal) period,
see Arestis & Sawyer (2003). Pro-poor fiscal policy is reviewed by Kakwani & Son (2001) and Roy &
Weeks (2003).
Life beyond the Washington Consensus 521
claims are increasingly being accepted by the IMF; see, for example, IMF, 2005).
Public investment can also support private investment and output growth if it
expands the physical infrastructure (roads, ports and airports, water, sewerage
and irrigation systems, electricity generating capacity and transmission lines,
and so on), boosts labour productivity (through public education and training pro-
grammes, public transport or public health provision), or fosters private savings
(see Pasha, 2002).
Historical evidence shows, first, that public investment has played an essen-
tial role fostering growth and reducing poverty in several dynamic economies in
East Asia, Latin America and elsewhere (Roy & Weeks, 2003; Vandemoortele,
2004) and, second, that when public investment falters, aggregate profits
decline, reducing the incentives (and the resources available) for private invest-
ment (McKinley, 2004, after Kalecki, 1972). Public investment can also support
quality foreign investment; Roy & Weeks (2003, p. 24) note that:
two [Asian] countries with the strongest public investment programmes, China
and Vietnam, also had the highest rates of growth. Both countries attracted large
inflows of foreign direct investment, suggesting that, at least, major public
investments did not discourage such inflows and may have facilitated them.
In order to finance the required public investment programmes poor country
governments must jettison the excessively restrictive fiscal policy stance imposed
by the Washington consensus. This will not necessarily be inflationary; in spite of
the mainstream claims to the contrary, there is no obvious relationship between
fiscal deficits and inflation (see Fischer et al., 2002, pp. 876877). Public invest-
ment programmes can be deficit-financed without any adverse macroeconomic
implications if the economy is operating below capacity, if the balance of pay-
ments constraint is not binding, and if the deficits can be financed in a sustainable
manner (for example, if the additional public sector debt can be paid off by the tax
revenues generated by future growth). In this case, public deficits should have no
inflationary impact (see Rao, 2002). However, if the government needs to mone-
tise its deficit on a regular basis (perhaps because the financial markets in very
poor countries are insufficiently developed), the expansion of demand must be
regulated because of its potential implications for inflation and, especially, the
balance of payments.
The expansionary fiscal policies required for the success of a pro-poor devel-
opment strategy will be sustainable in the long-term only if the tax system is mod-
ernised and the tax base is expanded significantly. It is simply impossible to
finance the necessary initiatives with tax rates much lower than 20% of GDP,
as is commonly the case in poor countries (see MacEwan, 2003; Vandemoortele,
2004). Tax revenues play a fundamental role in the mobilisation of resources for
the allocative, distributive, growth and stabilisation functions of the state in poor
countries, especially in the light of their weak financial systems. As MacEwan
(2003, p. 5) notes,
Whether or not higher taxes retard economic growth depends a great deal on
what is done with those taxes—i.e., on how the government spends the
money. If, for example, the government spends the money on creating a more
522 A. Saad-Filho
effective infrastructure and a more productive workforce, the higher taxes are
likely to lead to more, not less economic growth.
There is scope for raising tax revenues in most developing countries and, sim-
ultaneously, to redistribute income. These reforms require the enforcement of the
existing tax laws and the reduction or elimination of the deductions, exemptions
and loopholes favouring the well-off. It will also normally be necessary to increase
the existing tax rates, to tax wealth and large or second properties in rural
and urban areas, and to tax interest income, capital gains, financial transactions
and international capital flows (see McKinley, 2003). Experience shows that the
most important constraint to the expansion of the tax base in the developing
countries is not poverty or the lack of managerial capacity to apply the law; the
constraint is primarily political. However, domestic pressures for the preservation
of inequitable privileges or threats of capital flight should not deter the state from
mobilising additional resources:
While systematic international evidence of the relationship between tax rates
and capital movements is generally lacking, experience within the United
States is instructive. There are no restrictions on capital movements among
the fifty states, but state governments have a good deal of taxing and spending
authority. Thus the United States economy provides a useful basis on which to
draw general inferences about the response of business location decisions to
government taxation and spending policy. The evidence from US experience
suggests that governments’ macroeconomic policies certainly make a difference
for business location decisions, but overall there remains a good deal of leeway
for government action. (MacEwan, 2003, p. 5)
In sum, pro-poor programmes require more expansionary fiscal policies
funded by a larger tax base. I t is important to avoid excessivel y expansionar y
policies, although not because of groundless fears of runaway inflation. Pro-
poor development strategies should normally avoid loosening significantly the
fiscal, monet ary and exchange rate policies at the same time for three reasons.
First, arguments for these ‘fully expansionary policies’ draw upon a narrow
reading of the expe rienc es of the US a nd the lar ge Eur opean ec onomies in the
20th century. They are not representative because these countries either could
print the world currency (as with Britain before World War I and the US a fter
World War II), or ha d grea ter acc ess to foreign currenc y than today’s poor
countries, whose ba lance of payments constraint is much tighter (Itoh & Lapa-
vitsas, 199 9, c hs 8 9 ). Se cond , in poor countri es, loose fisc al, monetary and
exchange ra te policies could generate un sustai na ble b ooms that would d estab i-
lise both the e conomy and the political system. This is especially true for econ-
omies that have been starved of investment for long periods, and where high
unemployment coexists with low spare capacity in key sectors of the
economy. In this ca se, a sudden and radica l policy reversal could trigger accel-
erating inflation and send the curre nc y spi ralling downwards. This would b e
especially likely if the policy change is accompanied by capita l flight (see
Glewwe & Hall, 1994, Lago, 1991, and Paus, 1991, for discussions of the
Peruvian case). Third, the ‘fully expansionary’ option is not al ways pol itically
feasible. If t he eco nomic p olicy change t riggers a rapid deterioration of the
Life beyond the Washington Consensus 523
fiscal balance , o ppone nts o f t he pr o-poo r stra teg y—inclu ding the I MF, the
World Bank, the US Treas ury Department, the financial sector and sections of
the m edia—will have a convenient platform to attack the government’s priori-
ties. Their hostility could trigger poli tical instabil ity and speculation with
foreign currency or treasury bills, l eading to inflation and bal ance o f payments
difficulties be fore the impact of t he expansionary and distri but ive policies can
be felt.
13
Fiscal policy should be calibrated c aref ull y in or de r to de live r wh at
monetary and exchange rate policies cannot offer: targeted investment pro-
grammes, incentives for the private sector to support the government’s pro-
poor goals, and economic stabilisation w hen this becomes necessary.
3.3. Employment and Productivity
Developing countries need to upgrade their technological and productive capabili-
ties continuously because productivity gains are the key to sustained growth and
rising incomes in the long-run. These gains can be achieved in at least two ways
(MacEwan, 2003). One is the development of mass production facilities where
low-paid unskilled workers engage in repetitive tasks at high speed, for
example, in traditional plantations or in manufacturing industries producing cloth-
ing, shoes or standard electronic products, as in Mexico’s maquiladoras or in most
Asian export processing zones. Alternatively, relatively well-paid skilled workers
can apply more sophisticated technical skills and advanced machinery in the pro-
duction of non-traditional electronic products and capital goods, chemicals,
specialist agricultural commodities or in the services sector. Both avenues offer
important advantages to the poor countries, but most of them would find it difficult
to internalise advanced production techniques rapidly because they lack the man-
agerial capacity, skills, finance, technology and infrastructure to do so.
In spite of these limitations, pro-poor programmes should aim to incorporate,
at least in the medium and long-run, and in selected areas, aspects of the ‘high
road’ to development outlined above (Korzeniewicz & Smith, 2000; Ocampo,
2002). The ‘high road’ offers several advantages. It opens new export opportu-
nities in ‘growth’ sectors, which can help to relieve the balance of payments con-
straint. It requires the development of chains of related activities that will expand
growth and employment in other areas of the economy. It demands a skilled work-
force, which can be trained by public and private programmes and that will trans-
fer their expertise to other sectors when they change jobs or if they open small
businesses. These workers will be better paid than the average, which will raise
the aspirations of the workers employed elsewhere in the economy. Finally,
more productive firms can set high standards of workplace safety and security
that will facilitate the regulation and eventually the elimination of unsafe and
degrading working conditions in other sectors.
13
Even the prospect of policy change can trigger economic instability. This was the case in Brazil in
2002, when the impending election of President Lula led to capital flight and a severe exchange rate
crisis (see Saad-Filho & Morais, 2003).
524 A. Saad-Filho
These outcomes are neither necessary nor automatic. Higher productivity gives
firms the scope to grow and improve pay and conditions, but the market does not
always spontaneously generate exports, internalise value chains, pay salaries com-
mensurate with productivity or deliver adequate health and safety standards in the
workplace. It has been shown by the Post-Keynesian, Evolutionary and Institutional-
ist literatures that state regulation and incentives are essential to achieve these out-
comes. Regulation should make it difficult for firms to increase profitability by
cutting wages, arbitrarily extending the working day or bypassing health and
safety rules. Productivity growth and better working conditions can also be promoted
by legislation raising the minimum wage and reducing wage dispersion, supporting
trade union activity and offering tax and other incentives for firms investing in pri-
ority sectors, introducing new technologies and paying high wages. These policies
can be partly funded by progressive income taxes and social security contributions
(Onaran & Stockhammer, 2002; Taylor, 1988).
Raising average wages gradually and continuously while reducing wage dis-
persion will benefit not only the low-paid workers but also the most productive
firms, especially in the capital-intensive sectors. These firms will capture extra-
ordinary profits not only through their higher productivity but also through the
expansion of the domestic market, while their less efficient competitors will
face losses. Export incentives, targeted credit and import protection (to the
maximum extent permitted under WTO rules) will support the adjustment of
the labour-intensive sectors to the new policy regime, while offering an alternative
avenue for profitability and growth. Finally, the workers left unemployed because
of the bankruptcy of the inefficient firms or the declining availability of low-paid
jobs will have to be retrained with public funds in order to find more productive
and better-paying employment elsewhere. These medium-term policies will help
to raise productivity, increase labour market flexibility and reduce structural
unemployment, while creating incentives for exports and for long-term pro-
ductivity growth in the economy.
Higher levels of employment and higher wages are essential for the improve-
ment of the welfare of the majority. However, wage growth cannot exceed pro-
ductivity growth by a large margin and over long periods because of its
potential implications for profitability, investment and (in the case of public
sector employees) the fiscal balance (for a Post-Keynesian assessment of some
of these limitations, see Lavoie, 1993). There is no ready-made solution to this
dilemma, and short-term and sector-specific answers will have to be negotiated
periodically. In certain sectors, unit costs fall when sales increase, permitting rela-
tively generous pay increases; in other sectors costs are constant or even increas-
ing, while others are funded by general taxation. No solution will be optimal for all
sectors. In general, however, there should be maximum leeway for improvements
in wages and equity through sustained productivity growth and centralised nego-
tiations involving workers, employers and the government, in order to strike a
balance between wage increases, productivity growth and economic stability.
14
14
According to Philip Arestis, ‘Sweden, Norway, Australia and Austria are the best examples in this
respect’ (cited in Sicsu
´
, 2001, p. 676).
Life beyond the Washington Consensus 525
In these negotiations regulation, targeted credit, export and employment incen-
tives, import policies and public sector intervention are some of the instruments
available to support the achievement of pro-poor outcomes.
Incentives must also be available for labour-intensive sectors producing
non-tradables, such as small-scale agriculture, the construction industry, repair
workshops and most services industries in the poor countries. These industries
have a significant employment-generating potential and they train new entrants
to the labour markets, in addition to producing food and industrial inputs.
Public works programmes will almost certainly need to be expanded in most
countries. They can also relieve supply constraints through the construction of
rural roads and irrigation facilities. In most poor countries it is especially import-
ant to support the development of agriculture and its linkages with other economic
sectors for three reasons: its economic importance, the fact that large numbers of
poor people live in rural areas, and the potentially severe dislocations to agricul-
tural production and rural labour after trade liberalisation. The poor countries can
draw upon the Chinese, Indonesian and Vietnamese strategies between the 1970s
and the 1990s, as they attempt to raise agricultural productivity, boost the links
between agriculture, manufacturing industry and other dynamic activities, and
increase the output of exportable goods. In order to do this, it may be necessary
to reform the land tenure systems in some countries and invest heavily in better
technology and in physical and social infrastructure, for example, better seeds
and fertilisers, improved crop selection, irrigation, storage and transportation
facilities and so on, as was done in several Asian countries (Karshenas, 2001).
These programmes can be funded by a combination of taxation (at any level of
government) and targeted credit by state-owned and private financial institutions.
3.4. The External Sector
The currencies of poor countries are not international means of circulation or
reserve value, and they do not serve as units of account for international trans-
actions. This limitation severely restricts the ability of these countries to
command resources in the world economy: it imposes a balance of payments con-
straint (Thirlwall, 2003; see also Jha, 2003). The balance of payments constraint is
probably the most important barrier to sustainable growth in poor countries. It can
trigger exchange rate crises, inflation, unemployment and other destabilising pro-
cesses, with serious consequences for the poor. Rich countries also have a balance
of payments constraint, but it is more flexible and supply bottlenecks can usually
be bypassed through imports, at least in the short-run.
The balance of payments constraint includes two types of restrictions, on
trade (the current account) and on capital flows (the capital and financial
account). Washington consensus economic programmes almost invariably rec-
ommend import liberalisation in order to foster productivity growth, economic
reforms to shift resources towards the economy’s (presumably given) comparative
advantages, and incentives for capital inflows in order to attract foreign savings
(Jomo & Fine, 2005; Saad-Filho, 2005b). This recipe is not conducive to macro-
economic stability or to the welfare of the poor. To begin with, foreign trade and
financial policies should be linked to a broader industrial strategy fostering
526 A. Saad-Filho
productivity growth and the development of domestic production capability in
selected areas. An alternative set of policies, compatible with macroeconomic
stability and pro-poor outcomes, is sketched below.
The first element is the promotion of exports. The Evolutionary and Institu-
tionalist political economy literature shows that export growth can give an import-
ant contribution to productivity growth because it exposes producers to the
stringent test of competition in foreign markets (Chang, 1994). Export growth is
also essential for the generation of healthy trade surpluses and the accumulation
of foreign currency reserves, which will support the stabilisation of the exchange
rate. In the absence of sizable currency reserves obtained through trade surpluses
poor countries would have to seek, at least periodically, more volatile forms of
international finance (especially short-term loans and portfolio capital inflows)
or borrow from the international financial institutions, whose conditionalities
would limit their ability to pursue pro-poor policies.
Export growth requires a competitive and stable real exchange rate, as well as
coordinated industrial policy initiatives to develop the country’s competitive
advantages in strategically important sectors (see Amsden, 1997, 2001; Chang,
2003). The promotion of domestic industries requires government involvement
in the complex task of ‘picking winners’, which has been addressed successfully
by several East Asian and Latin American countries (Agosı
´
n & Tussie, 1993;
Geref & Wyman, 1990). It goes without saying that these initiatives should
avoid tilting incentives excessively towards the tradables sector. Although sus-
tained income growth requires the expansion of the production of tradables, the
non-tradables sector is also important because it has a large employment-
generating potential and it employs simpler technologies that tend to be less inten-
sive in foreign resources.
The second element of this pro-poor trade policy framework involves the
management of the country’s import restrictions. In spite of mainstream myths
to the contrary, ‘openness and trade integration, either separately or together, do
not have a measurable impact on long-run growth’ (Weller & Hersh, 2004,
p. 492). Imports must be liberalised cautiously and selectively because of their
potentially adverse impact on the poor and on strategically significant sectors.
In fact,
it is incorre ct to assume that trade liberalisation will automatically yield out-
comes that are pro-poor, pro-jobs and pro-growth. ... [O]pen trade is more a
result of development rather than a prerequisite for it. As countries grow
richer, they gradually take advantage of new opportunities offered by global
trade. Trade follows development; it seldom leads development. (Vandemoortele,
2004, p. 14; emphasis added)
Rapid trade liberalisation and surging imports should be avoided because
they are often destabilising (the experience of Latin America is reviewed in
Saad-Filho, 2005b). Regulation is important not only because import liberalisation
can trigger severe social and economic dislocations, especially in strategic sectors
such as agriculture, construction and new ‘growth’ industries, but also because
experience shows that relatively autonomous late development is possible only
if it is supported by strategic trade policies (Chang, 2002, 2003; Shafaeddin,
Life beyond the Washington Consensus 527
2005). Trade liberalisation could have an especially severe impact on the poor for
three reasons. First, the gains from trade can be concentrated in enclaves, or they
can raise the returns for skills or assets that are beyond the reach of the poor,
increasing income and wealth inequality. Second, liberalisation can increase pre-
datory competition, reducing economic growth and the wages and the employment
opportunities of the poor. Third, subsidised exports from the rich countries (grain,
sugar, cotton, fruit, meat and dairy products) can undermine the viability of small-
scale agriculture and the livelihoods of millions of rural poor. In their study of
openness, Weller & Hersh (2004, pp. 499500) concluded that:
the income shares of the poor are lower in countries with deregulated current and
capital accounts compared to more regulated ones. This is not because trade is
directly harmful for the poor but because of the institutional design under which
trade is conducted. ... [T]he short-term adverse effects of current and capital
account deregulation on the income shares of the poor are not offset by faster
income growth in the long-run, which could raise the possibility of faster
income growth for the poor ... [because] liberalization has no robust impact
on growth rates. But ... trade may have a benefic ial effect on the income
shares of the poor in the short-run in a regulated environment. ... [In sum,]
countries where trade and capital flows [are] regulated ... do best for the poor.
Pro-poor strategies also require the regulation of the capital and financial
account of the balance of payments. Unbridled liberalisation of the capital
account can be destabilising for four main reasons, discussed extensively in the
heterodox literature (Chang & Grabel, 2004; Helleiner, 1996; Palma, 1998).
First, liberalisation fosters the accumulation of foreign debt, especially by the
local banks, promotes speculative inflows that can finance consumption rather
than investment, facilitates capital flight and increases the country’s vulnerability
to balance of payments crises. Second, pro-poor strategies require monetary policy
autonomy, which is severely curtailed by international financial liberalisation
(Dı
´
az-Alejandro, 1985). Third, pro-poor strategies require the state to direct
investment and other resource flows to growth-promoting and poverty-reducing
objectives (as was shown in Sections 3.1 and 3.2), which may conflict with the
short-term interests of the financial sector. Fourth, and more prosaically, capital
controls are needed to curb tax evasion, since the tax rates required to fund pro-
poor programmes will be higher than abroad. Even if capital account liberalisation
raises growth rates in the short-term, this effect tends to vanish later. These
adverse implications of capital account liberalisation are especially damaging
for the poor:
The link between capital flows and incomes of the poor arises from a greater
probability of financial crises in a liberalized environment. More capital
flows, especia lly short-term portfolio flows, are often associated with a
greater chance of financial crises. ... [T]he burdens of financial crisis are
disproportionately borne by a country’s poor. ... Altho ugh high-income
earners are more likely to hold financial assets and hence to be hurt by a
crisis through declining asset values, low-income earners may be more likely
to be affected by declining demand as unemployment rises. ... [A]t the same
time that economic crises increase the need for well-functioning social safety
nets, unfettered capital flows limit governments’ abilities to design policies to
528 A. Saad-Filho
help the poor when they need it most—in the middle of a crisis. The poor are the
first to lose under such fiscal contractions, and the last to gain when crises
subside and fiscal spending expands. (Weller & Hersh 2004, pp. 478 479)
Several forms of capital control have been used recently by such diverse countries
as Chile, Japan, Malaysia, South Korea and Sweden.
15
In these countries,
The use of controls has not result ed in interruptions of economic growth; on the
contrary, when controls have been removed, as in Mexico in the early 1990s
and in East Asia in the late 1990s, financial crises and severe economic down-
turns have been the result. ... Whatever form they take, controls over the move-
ment of funds across a country’s borders are a necessary part of any general
program of economic change; without such controls, a government cedes the
regulation of its economy to international market forces, which often means
the forces of large internationally operating firms and powerful governments
of other countries. (MacEwan, 2003, p. 6)
Capital controls can include restrictions on foreign currency bank accounts
and on currency transfers; taxes or administrative limits on outflows of
direct and portfolio investment; restrictions on foreign payments for ‘technical
assistance’ between connected firms; non-interest bearing ‘quarantines’ on invest-
ment inflows; controls on foreign borrowing, and multiple exchange rates deter-
mined by the priority of each type of investment. Managing these controls will
burden the monetary authorities, but this task is not beyond the capabilities of
most central banks. The most significant obstacle to capital controls is not techni-
cal; it is political.
The choice involved in establishing a pro-poor exchange rate regime is rela-
tively straightforward. The basic alternatives are fixed exchange rates (including
currency boards), adjustable pegs or managed floating. (Free floating regimes
are too unstable to be considered seriously.) In order to preserve macroeconomic
stability, small poor countries with highly concentrated trade patterns and
countries where currency substitution is advanced may be forced to adopt fixed
exchange rate systems. This is far from ideal, because supporting an arbitrary
peg inevitably reduces the scope for pro-poor monetary policy initiatives, but it
may be unavoidable in the short-term. In this case, pro-poor fiscal policy
becomes even more important. Other countries may enjoy additional degrees of
freedom to adopt a managed floating exchange rate regime or, even better, an
adjustable peg, which maximises the scope for monetary policy discretion.
Whatever the exchange rate regime, it must be managed carefully. Although
overvaluation can offer immediate benefits to the poor through cheaper imports
and lower inflation, pro-poor strategies should normally avoid ‘exchange rate
populism.’ Currency overvaluation can have destructive implications for domestic
production and employment, and it can induce consumption and asset bubbles that
may be difficult to neutralise. Experience suggests that export growth and
the expansion of employment are more easily obtained with selective import
15
See, for example, Chang (2003), Chang & Grabel (2004, ch. 9), Eichengreen (2003), Epstein et al.
(2003), Grabel (2004), Helleiner (1996), Kaplan & Rodrik (2001) and MacEwan (2003).
Life beyond the Washington Consensus 529
protection, export incentives, capital controls and a moderately undervalued
exchange rate.
16
This may be achieved in different ways, including a relatively
low currency peg (if this is relevant), expansionary monetary policies, the taxation
and regulation of currency trading, capital controls and regular intervention in the
currency markets.
4. Social Programmes
Pro-poor strategies require specific polices and programmes to protect the poor
and improve social welfare. Most mainstream economists claim that ‘trickle
down’ and targeted social programmes can deliver significant benefits for the
poor at low cost. However, the contractionary policies associated with mainstream
strategies can easily overwhelm these compensatory programmes: they become a
tool of poverty management, rather than poverty elimination. Targeted social pro-
grammes are expensive to run and tend to miss out many potential claimants. They
are also prone to corruption, and allocation is always arbitrary at the margin.
Vandemoortele (2004, p. 12) observes:
Narrowly targeted programmes are increasingly prescribed for reasons of effi-
ciency and cost savings—for they claim to minimise leakage to the non-poor.
... As far as basic services are concerned, narrow targeting can have huge
hidden costs. They result from the fact that it is often difficult to identify the
poor and to reach them because the non-poor—most of whom remain ‘near-
poor’—seldom fail to capture a large part of subsi dies destined for more desti-
tute people. Also, administering narrowly targeted programmes is at least twice
as costly as running untargeted ones. In addition, the poor must frequently docu-
ment eligibility—which involves expenses such as bus fares, apart from the
social stigma they generate. Such out-of-pocket costs can be a real obstacle.
Most importantly, however, is the fact that once the non-poor cease to have a
stake in narrowly targeted programmes, the political commitment to sustain
their scope and quality is at risk. The voice of the poor alone is usually too
weak to maintain strong public support.
In order to maximise their impact, pro-poor social programmes should be uni-
versal. They should also prioritise the provision of public goods and the social
wage, rather than monetary handouts. Social programmes including the provision
of public education, training, public health, housing, water and sanitation, parks
and public amenities, environmental preservation, food security, and affordable
clothing, shoes and public transportation can have relatively low managerial
costs and they improve the standard of living of the poor directly:
These programs meet people’s basic needs, cont ributing to the reduction of
poverty and to the equalization of the income distribution; they thus generate
immediate benefits. Many of these programs ... contribute to people’s pro-
ductivity, laying a foundation for more successful, long-term economic expan-
sion. The production process to create and operate social programs is often labor
16
Moderate exchange rate undervaluation finds strong support in the literature on trade and industrial
policy; see Agosı
´
n & Tussie (1993), Chang (1994) and Geref & Wyman (1990).
530 A. Saad-Filho
intensive, and thus their implementation tends to use the resource most abundant
in low and middle income countries and, which is to say the same thing, tends to
be employment-creating. ... Often these programs can be shaped in ways that
directly and indirectly contribute to the development of democratic partici-
pation, which is valuable in itself and strengthens the foundation o f change.
(MacEwan, 2003, pp. 67)
In many countries, the administrative infrastructure required by these universal
public goods programmes is already in place, or it can be created relatively
cheaply. Public goods and social wage programmes can also be rolled out gradually
(e.g., one product or service at a time, and they can be limited to selected regions),
making them simple and cost-effective. In spite of their universal coverage, they
can incorporate several advantages of targeted programmes, which may be called
‘smart targeting’: they are universal because they are available to all, and they are
targeted because distinct social groups will be affected differently by each project
or initiative. For example, in India and Brazil heavily subsidised food stores and
‘popular restaurants’ are open to all; yet, they target the poor through their selection
of products for sale (staple foods only) and the limited availability of the outlets
(which operate only in poor areas). The non-poor exclude themselves voluntarily:
a middle-class Indian will not drive into a slum to purchase ordinary rice, while
her Brazilian counterpart will never eat pork and beans in the company of her
social inferiors, even if the plate costs only one real. Obviously, the precise
balance between the targeted and universal aspects of the provision of public and
wage goods depends on policy decisions about access and the nature of each project.
Cash transfers are generally less desirable than public and wage goods pro-
grammes except for emergency support to very poor groups and long-term assist-
ance to dependent children, the elderly, and the chronically sick and disabled, who
have no alternative sources of income. Cash transfers are limited for cost, effi-
ciency and equity reasons. First, it is usually cheaper to provide public goods cen-
trally through state provision rather than privately, via cash transfers (unless the
domestic financial system is relatively sophisticated and bank cards are widely
used). The managerial costs of these programmes tend to be lower, their quality
is more uniform and, as long as provision is controlled democratically, corruption
is more easily avoided. Second, cash transfers are a form of targeting, which is
relatively inefficient.
17
Third, cash transfers imply that social welfare is deter-
mined by the individual capacity to purchase private goods, rather than the avail-
ability of public goods. These transfers foster the commodification of social life
and the development of competition, which conflicts with the social solidarity
engendered by the pro-poor strategy. In contrast, public goods and social wage
programmes ensure the provision of key goods and services to all, contribute to
the de-commodification of social exchange and foster the development of
community relations.
17
Universal basic income (UBI) is the only type of non-targeted cash transfer. However, it is un-
affordable for most very poor countries, and this is hardly the best use for the scarce resources of
the middle-income countries. UBI is also vulnerable to most criticisms of cash transfers listed above.
Life beyond the Washington Consensus 531
All social programmes are expensive to run, and the budgetary limitations
prevailing in poor countries should not be underestimated. However, these pro-
grammes can have a significant redistributive impact. They can also contribute
to the achievement of other pro-poor goals; for example, they can create employ-
ment in deprived areas, they can be plugged into regional development pro-
grammes through the creation of markets for local produce, and they can be
linked to the expansion of infrastructure, for example, through public works
initiatives (Dagdeviren et al., 2002, pp. 401, 404). In spite of these advantages,
limited funding is likely to pose severe difficulties, especially in very poor
countries. In general, these programmes should be funded by taxation or, excep-
tionally, foreign aid. Cost-sharing and user fees can be unfair and inefficient,
and they should normally be avoided.
18
5. Conclusion
Pro-poor rhetoric has become fashionable, even in IMF documents, and there is a
risk that the concept may be diluted beyond recognition. Everyone seems to be for
pro-poor growth; but, in some cases, this is simply a fig-leaf for the old Washington
consensus strategies that have failed to deliver their promised benefits in most
countries.
This article has reviewed the literature on pro-poor growth, and outlined a
progressive economic strategy inspired by heterodox economics, which can
deliver growth and equity simultaneously. Experience shows that it is essential to:
forge consistency between the macroeconomic framework and the national
poverty reduction strategy. This is usually interpreted as a ‘one-way’ consist-
ency, in which the anti-poverty strategy has to adjust to a fixed and rigid macro-
economic framework. However, both should be jointly determ ined to serve the
overriding objective of poverty reduction. (UNDP, 2002, p. 1)
Pro-poor development requires close coordination between private and
public sector activities and the regulation of intersectoral and intertemporal
resource allocation (including international capital flows) by the state, through
growth-promoting industrial and financial policies. This is not because the state
is either necessarily efficient or inherently ‘good.’ Policy activism and state-led
coordination of activity are necessary because the state is a fundamental tool
for collective action. The state is the only social institution that is at least poten-
tially democratically accountable and that can influence the pattern of employ-
ment, the production and distribution of goods and services and the distribution
of income and assets at the level of society as a whole. Only the state can limit
the power of unaccountable private interests, raise sufficient funds for democratic
economic reforms, and ensure that economic activity is guided by the demands of
18
For example, Vandemoortele (2004, p. 12) notes that user fees can ‘aggravate gender discrimi-
nation. ... Since the mid-1990s, school fees have been abolished in Malawi and Uganda and
more recently in Kenya. That pro-poor policy was followed by a surge in enrolment in all three
countries—with girls being the prime beneficiaries. These positive experiences illustrate that even
a small nominal fee can be a formidable obstacle for poor families.’
532 A. Saad-Filho
the majority. This does not imply that the state should ‘take over’ the economy,
however this may be defined. Pro-poor economic strategies are distinctive not
because the state manages individual firms or enjoys unlimited property rights,
but because of the way in which the state coordinates economic activity in
pursuit of distributive ends. State ownership of specific assets is a secondary
issue; what really matters are the objectives of government policy, and how
state institutions interact with one another and with private concerns.
Arguments against pro-poor economic strategies could be divided into three
groups. First, at a static level, some countries are said to be ‘too poor to redistri-
bute’; their per capita income is so low that redistribution would have little impact
on the level of poverty. This argument presumably applies to most countries in
sub-Saharan Africa, and to other highly indebted poor countries. However, it is
invalid: redistribution can have positive results both statically and over time, in
rich as well as poor countries (Dagdeviren et al., 2002). Second, at a dynamic
level, there may be a trade-off between growth and equity: although redistribution
can reduce poverty to some extent, it has been claimed that economic growth does
so more efficiently. This argument is logically flawed. Growth always redistributes
income and wealth, and the distinction between static and dynamic redistribution
is purely analytical; in reality, they are inseparable. Since redistribution is inherent
in the growth of a market economy, it is appropriate that it be subjected to policy
influence through a democratically selected development strategy. Third, it could
be argued that pro-poor strategies are difficult to implement, and that several gov-
ernments have failed in their attempts to follow similar strategies in the past. This
is true, and there is no guarantee that similar failures will not occur in the future.
However, several success stories should also be taken into account, in such
countries as Chile, Cuba, India (especially in Kerala State), Sri Lanka, Venezuela
and Vietnam, among others (see Heller, 1996; Haddad & Ahmed, 2002; Lipton &
Ravaillon, 1995; McKinley, 2001; Pasha, 2002; Ravaillon & Datt, 1999; Srinivasan,
2000). The success of pro-poor economic programmes depends less on their demon-
strable internal consistency or the number of successful examples in different parts
of the world than on political limitations to their implementation. More specifically,
the most important constraint to the introduction of pro-poor strategies is not
resource scarcity. Rather, it is the lack of political will to confront the conventional
wisdom and the ruling neoliberal hegemony and build alternatives based upon the
joint efforts of governments, heterodox economists and civil society.
Acknowledgment
The author is grateful to two anonymous referees for their generous comments on
a previous version of this article. The usual disclaimers apply.
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