Thirty years after the tipping point for a series of economic reforms carried out in many developing countries including in sub-Saharan Africa, there appears to be a consensus by a group of experts that the reforms worked for the countries that adopted them.
Writing in an American Journal of Economic Perspectives, the experts including Ngozi Okonjo-Iweala who heads the World Trade Organisation, conclude that the reforms - driven largely by the Bretton Woods institutions - worked.
They hold a position counter to that held by another school of thought that the reforms did not turn out as well as their proponents had expected.
Recently, there was a symposium held in the US to discuss a series of research papers on the reforms that came to be dubbed the Washington Consensus because they revolved around ideas being pushed from Washington by the US Treasury as well as by multilateral financial institutions, namely, the World Bank and the International Monetary Fund (IMF).
The discussion is important because economic reformers such as in the current administration in Kenya should not adopt reform ideas without also revisiting the effectiveness of what has been implemented in the past.
Again, the government is also facing demands from both the IMF and the World Bank on reforms to implement.
With some adjustments, the IMF still pushes for reforms that closely resemble those associated with the Washington Consensus.
Judging from the situation in Kenya in the past 30 years the Washington Consensus did not have as much impact as other ideas that have been implemented especially after 2002.
In fact, implementing the reforms could well have reversed, during the 1990s, some of the gains of the 1980s and 1970s.
What was the essence of those reforms? Initially, they had been proposed by US Treasury secretary James A. Baker in 1985 as 10 points but they could be collapsed into three proposals.
One was macroeconomic stabilisation through lower inflation and fiscal discipline. The second was market liberalisation in the form of privatisation and the third was openness to trade and investment.
In the Kenyan case, carrying out the reforms gained pace after 1990 but for most of that decade, the country’s economic performance was lacklustre.
Between 1992 and 2001, gross domestic product (GDP) growth averaged just two per cent compared to the previous period of 1982 to 1991, when such growth was at an average of 3.8 per cent or nearly double that achieved during the heyday of Washington Consensus reforms.
When you look at the period between independence and 1991, GDP growth was higher at an average of 5.3 per cent compared to the 31 years after Bretton Woods-type reforms properly began in 1990 during which the average growth has been 3.8 per cent.
This gives the impression that Kenya was better off before it adopted the Washington Consensus remedies.
The Journal of Economic Perspectives focuses on the growth after the year 2000 but this could give the wrong picture because the reforms that were carried out after this were not exactly in line with the recommendations of the Washington Consensus type.
Privatisation can be seen as following these recommendations but the others may not really have followed the 1990s script.
One of the journal’s articles, titled ‘’Washington Consensus reforms and lessons for economic performance in sub-Saharan Africa’’, concluded: ‘’Following initial declines in per capita economic growth over the 1980s and 1990s, reform adopters experienced notable increases in per capita real GDP growth in the post–2000 period.’’
Though this could generally be the case for sub-Saharan Africa, the reasons for the per-capita growth have other, probably weightier, reasons.
In the Kenyan case in 2003, when the late president Mwai Kibaki took power, a series of reforms and projects were carried out.
Among these was the development of infrastructure that improved access to markets and cut costs for business.
Funds for these were available because there was a phenomenal increase in the amount of tax revenue the government was able to raise following reforms at the Kenya Revenue Authority.
The Kibaki administration in its very first year cut the proportion of deposits that banks keep with the Central Bank of Kenya by a massive 400 basis points (four percentage points) in one fell swoop, significantly boosting the cash banks could lend to private businesses and individuals.
This liquidity had a major impact on economic activity from then on.
Free primary education also reduced the financial burden of many poor Kenyans thereby enabling them to put money into consumption and investment.
Though money was available across the economy in large amounts, such stabilisation measures as cutting inflation are not something that the administration was overly concerned about since there was high economic growth.
GDP growth started off slowly at about three per cent before rising annually to reach seven per cent in 2007.
Being open to trade and investment, another of the Washington Consensus reform prescriptions, was not something it pursued aggressively but in fact, came as a result of the other policies the regime pursued.
Financial access for the masses, a pro-poor reform, also contributed to the growth in a greater way than any of the Washington remedies ever did.
‘’Notably, the ability to implement pro-poor policies alongside market-oriented reforms played a central role in successful policy performance,’’ says the paper authored by Belinda Archibond of Columbia University, Brahima Coulibaly of the Brookings Institution in Washington and Okonjo-Iweala, who is also formerly finance minister in Nigeria.
Incidentally, the series of papers appearing in the journal also focuses on other parts of the world and the preponderant conclusion is that the Washington Consensus positively impacted growth in the past 30 years or so.
‘’A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after stabilizing high inflation, the average growth rate of real GDP in EMDEs (emerging markets and developing economies) is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points,’’ says another article titled ‘’The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth’’, which is published in the same journal.
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