# The Washington Consensus and Current Approaches to Development in Asia

Date April 20, 2004 Peter McCAWLEY(Dean, Asian Development Bank Institute) NAKABAYASHI Mieko(Fellow, RIETI)

## Summary

The philosophy of development changes as time goes by, partly as a result of facts and new experiences as well as events. The Global Development Agenda (GDA) is an amalgam of various things, particularly ideas on the one hand and interests on the other. Before I begin discussing the GDA, there are two points I would like to make since they condition much of the discussion.

The first point concerns resources. It seems to me that a lot of the discussion of the GDA really fails to make an allowance for a quite simple fact about the development process around the world and the interaction between donor and recipient countries. There is a perception that global spending by rich countries to promote or support development in developing countries is quite significant. Global ODA is roughly $60 billion. It sounds like a large amount but there has been a question emerging in the last four to five years of why has aid failed and why are so many countries still in a terrible mess. This problem is particularly acute in the case of Africa and it has led to a very large concern in the international community over the effectiveness of aid. Concerning the$60 billion, there is a misunderstanding about the magnitude. What is interesting about this figure is how small it is. The $60 billion goes to four billion people, including those in India and China. That equals$15 per person per year, or roughly $1 per person per month in developing countries. Hence, I suggest to you that one of the reasons aid has been ineffective is that it has barely ever been tried. A transfer of$1 per person per month is hardly a significant transfer and it is a tiny transfer compared to those that we are used to inside rich countries. When we have a problem with the agriculture sector, it is not at all unusual for governments in rich countries to provide transfers of $20,000 or$30,000, or even $100,000, per farm. A recent regulation brought out by the European Commission put a cap on transfers that any single farmer can receive. From memory, the cap is €300,000 per year. There are other sorts of transfer that one can look at and all of them are huge compared to$1 per person per month. It is very important to get the magnitude right. We are talking about tiny amounts of money so to some extent this debate as to whether aid is effective is like trying to measure whether pouring one bucket of water into the ocean is effective.

The second main point I want to emphasize is the importance of the concept of mass poverty. In talking about developing countries, I have often been asked why we are giving specific attention to, for example, poverty in Indonesia or to other countries, when we have poverty at home. This represents a fundamental misconception. The nature of poverty in rich countries tends to be segmented and tends to affect perhaps five to 10% of the population of a developed country. The nature of poverty in developing countries is not isolated and is not the sort of poverty that can be dealt with through transfers. Poor countries are fundamentally quite different from rich countries. They function in different ways.

It is notable that the developing world has not been as concerned about the most recent issues of security and terrorist threats as rich countries have been. There are various reasons for this but one is that in developing countries, people live with high levels of ambient risk all the time. In my mind, these are related to the phenomenon of mass poverty. When a society lives with very high levels of ambient risk, naturally the society tends to be a different type of society.

I would like to talk about the Washington Consensus and the most recent developments that have become known as the Post-Washington Consensus. The document you have in front of you summarizes the Washington Consensus, whose principles tended to condition a lot of the approaches to development in the 1990s. What is interesting about them is that there is a fairly strong emphasis on economic issues. The Post-Washington Consensus has begun to emerge fairly clearly in the past four to five years and one might say it represents a drift away from economics into a broader field, taking more account of anthropological, sociological, and institutional factors. There is now a very strong emphasis on the need for developing countries to reform institutions.

In some sense, a summary of the Post-Washington Consensus is given on pages 2, 3, and 4. It is my perception that there is a difference of view on many principles in the Washington Consensus between donors and borrowers, but the Post-Washington Consensus tends to be represented in this listing of items in the donor column. For example, 10 or 20 years ago, it was part of the international consensus to give a very strong emphasis to economic growth. To some extent, that has been watered down. It is very significant that the GDA has become extremely broad.

The current view is that the quantity of economic growth is important, but we have now learned that quality needs emphasis as well. Hence, there is much discussion on the quality of economic growth, including pro-poor growth. Twenty or 30 years ago, multilateral development banks (MDBs) talked much about investment and focused to a considerable degree on projects like infrastructure. We do not hear as much about the accumulation of capital, the levels of investment. The topic has tended to move aside and now we hear much more about the need for good governance and anti-corruption programs than the investment/GDP ratio. It is said that, to some extent, developing countries themselves are responsible for the levels of investment and they need to do more to improve the domestic investment climate.

The views of poor countries tend to be somewhat different. On economic growth, poor countries tend to place more emphasis on the quantity of economic growth, especially in the case of China. There is no doubt that the rate of economic growth is important. Countries that are growing slowly are seen as weak, where the world tends to be attracted to stars that are doing well. Policymakers in developing countries also are inclined to place a lot of emphasis on the quantity of investment. They would prefer to aim for levels of at least 25% of GDP or higher. They also make another interesting point. They say that while foreign direct investment is useful, the majority of their investment is from domestic savings so the climate for domestic investment is at least equally important.

The approach of donors to infrastructure is that it is needed but there have been many mistakes in the past. Concerning dams, for example, the reaction of developing countries is that developed countries should focus more on their own much higher levels of electric power consumption, which is about 30 times higher. In my opinion, our major challenge is not to constrain the rate of growth of energy consumption because there really is no way to do that. The responsibility for the global community is to help the developing world find ways to reduce the amount of energy they need in relatively clean ways. We are not doing that very well at present.

Donors have placed an increasing emphasis on poverty and they have been talking about the so-called Millennium Development Goals (MDGs). Developing countries are not quite as interested in the topic of poverty because they say that they know all about it, they have been living with it for decades, and the fact that donors have recently discovered that poverty is an important issue is not really of any great concern to them. What they are more interested in is what can be done about poverty and they are inclined to feel that transfers of \$1 per person per month is not going to help very much and that what they have to do is promote economic growth at home.

For environmental issues, donors tend to emphasize the green and blue agenda and developing countries generally emphasize the brown agenda.

Good governance, democracy, and the rule of law tend to be grouped together and they come up in all sorts of discussions. The Europeans, in particular, often recognize the importance of good governance, suggesting that it is a problem of the leaders of developing countries and to a lesser extent their institutions. The response of developing countries is that leadership is an issue but good leadership and good governance cannot be attained without structures and institutions, and that these do not exist in the developing world and they are very expensive to build. There is an underlying argument here about money. Donors tend to imply that a lot of these things can be gained with goodwill and good intentions, while the developing countries differ. As for democracy, developing countries have a slightly different take on it from the developing world, and argue that it does not necessarily guarantee good governance or the reduction of poverty. In my opinion, for those who argue that these institutions are important, we need to look at the Philippines because many of the things that donors say are needed to facilitate development, the Philippines rates very well in them. Yet, income per capita in the country has not gone up in the last 20 years. The rule of law is relatively weak in the Philippines but it is better than in many other developing Asian countries.

Donors these days are placing a great deal of emphasis on eliminating corruption. The developing country response has been that it is important but corruption is a complex problem that is not easy to overcome, especially with weak legal institutions that likely will not be fixed for a long period. The developing world also points out that corruption exists in the developed world. Hence, while corruption is an important issue, the developing world says it should not be used as an excuse to withhold aid or make the development process more difficult.

The view of many donors, particularly the Nordic countries, is that gender is a central issue in developing countries and that gender discrimination is widespread and more action is needed. I think there is very little doubt that this is true, but again this is an institutional thing and extremely difficult to fight.

There is increasing emphasis on so-called knowledge and President Wolfensohn has really trumpeted the knowledge agenda as a central theme at the World Bank. The response of developing countries is that while this is commendable, half of their populations have never even used phones and more than half do not have access to electricity. Nevertheless, the response to that is that countries cannot afford to pass up the information and communication technology (ICT) revolution because it is an instrument to growth.

The view of donors is that foreign aid is an important tool in the global battle against poverty and that aid represents a generous attempt by them. The response of developing countries is that aid is not really important because the volume of aid is too small and aid programs usually reflect the political priorities of donors.

Concerning the role MDBs, donors tend to emphasize the so-called new complex international agenda while developing countries generally say banks should concentrate on what they do best, which is building roads, irrigation canals, dams, and power stations. This is quite a sharp debate.

For the international aid program overall, donors believe the process has become more complicated. The response of developing countries is that they cannot cope because the process is too complicated, goes on for too long, and takes too many resources, and as such, they want out of the process because they cannot handle it.

Finally, there are big differences in views about markets. There is almost an acceptance of the idea that markets are an important mechanism but what developing countries point to are the extreme difficulties of getting market structures to work well.

The Post-Washington Consensus is on the left side of the column but what I have also tried to provide is the sorts of things that donors, themselves, say about the global development debate.

### Questions and Answers

Q: When looking at oil-producing countries, you could argue that the income they receive from it is like foreign aid. They do not have to do much for it and they receive a large amount of money. The oil-producing countries with larger populations have not been great development successes and it is unclear that vast amount of foreign exchanges have done much for them. Hence, are we not back to the issue of institutions?

A: One important issue is that resources alone are not enough to tackle issues of poverty. If we look at certain depressed communities in developed countries, the problem seems to be that the issue is not one of resources alone. Western societies have developed very complex programs to tackle these issues but on the global level, we do not have anything like that volume or complexity of transfers in foreign aid. I would need to do the calculations, but also I would expect that the amount per capita of oil revenue is in many cases still extremely small compared to transfers in rich countries. Clearly, processes of good government and good management are important, and the key issue is how do you get good policies in developing countries. I would say that one key part of the answer, which at present many rich countries do not like to consider much, is stability. Another reason I am interested in this debate is that for 30 years Suharato brought stability and a reasonable amount of good governance to Indonesia and yet it is now widely agreed that he was an awful man, awful dictator and that he ruined Indonesia.

Q: Could you elaborate on what are the different critical priorities between Japan and Europe concerning ODA?

A: There is a curious split in the international dialogue and international donor community between those who are idealistic and those who are more realistic. I would argue that in most donor countries, aid has three broad characteristics: to advance the political strategic interests of the donor country; there are often commercial interests attached; and there are broader development objectives in the region or globally which are in the interest of recipient and donor countries.

Q: Concerning donors in Europe, the disbursement of aid is not split up just as you explained to us along the approaches of the Post-Washington Consensus. EuroAid has a more practical implementation. There is a program-based approach on different issues. Afterwards it is implemented in a special section of EuroAid. Their projects are evaluated every year or two. It is a clear-cut approach along the donor side. It seems as well that Japan is moving away from the brown agenda to a program-based approach of looking more closely at institution building, getting Asia closer together. My question is, therefore, what is the right approach for Japan to take in Asia?

A: Japan did bring about a major revision to its aid charter six or seven months ago. My impression was that although it was not a dramatic change in policy, elements of international thinking were reflected in this new approach, such as security and stability. Concerning the right approach for Asia, I prefer to stand back from pronouncing what is best for them because I think they have the ability to make the right decisions themselves. The "voice" I hear from the region is a strong emphasis on economic growth. Accompanying that, there is also recognition that the quality of growth is an issue. But, while donor countries tend to emphasize both, developing countries have more concern about environmental issues than income distribution.

Q: I assume that you are familiar with the Japanese government's break with the previous traditional principal of waiting until they hear a request for ODA. I assume therefore that there may be some situations whereby our ideas and the views of recipient countries may not be entirely identical. Do you foresee a situation where Japanese aid policy and a developing country's interests may differ? My second point is that Japanese aid policy has been kind of faceless. A lot of money has been disbursed to Asian countries but very few Asian people are aware of this. Let us put our faces on our aid. Yet there is a policy that no government should use ODA as a means to promote exports, investments. Again, what is your view on this?

A: Concerning who takes the initiative in starting an aid project, many countries face this issue. My own experience is that there is always some give and take. I would urge people not be too worried about this because in my experience, developing countries are not bad at protecting their own interests and aid flows are generally not large enough to be distortionary. On the question of putting a badge on aid, most countries and donor institutions are keen to do this. Provided this is done in a careful and sensible way, it is usually not a problem.

Q: Why does Japan not promote its aid more?

A: Japan's relations with the rest of the region are complex. In addition, it is part of Japanese culture not to be as flamboyant as other countries. We also should not assume that this is undesirable; it is just different behavior.

Q: My question is on the private sector's role in this process. When we look at the wonderful summary that you have done of the development agenda, we see a lot of issues that the private sector also cares greatly about. How do you see opportunities for the private sector to be involved in this and where might there be tensions?

A: I start from the position that social entities, whether they are countries or firms, often blend a certain amount of narrow self-interest and broad self-interest in their actions and that the sensible thing to do is to balance these two. If I was the CEO of a major company, I would be operating from that framework, making sure that I was responsible to the shareholders but also crafting a reasonable social image. As for a specific action, that is a decision for the firm.

Q: Can you discuss with us the relationship between the promulgation of FTAs, or economic cooperation partnership agreements in the case of Japan, and ODA levels in the region?

A: Let me preface this with the observation that for a development person like myself, my own view is that this is getting more into the trade area rather than the development area. Having said that, it currently seems that the perceived failure at Doha last year was a turning point, and the difficulties in the multilateral area have led to an outbreak of attempts to negotiate bilateral FTAs. Concerning the FTAs and ODA, I may be wrong, but I do not see it as having a close connection. However, it is worth noting that trade lobbies often like to see ODA used to bolster trade negotiations, but at the end of the day the volume of aid is not really sufficient to make a lot of difference.

Q: After listening to your talk today, it sounds as though the recipient countries want something closer to what was the Washington Consensus. How do you propose we bridge what it seems like the recipient countries are asking for or need with what the donor community has decided is in its best interests?

A: My own answer to that, but one that I do not think will be successful in the international donor community, is that we need to listen more to our colleagues in the developing world. I have personally tried to do that for most of my life. Without better information about the other side, it is hard for the two sides to understand each other.

Q: Maybe I am being simplistic but if you earn ¥1,000 a day in Tokyo, it would be difficult to survive. In addition, please comment on why countries will not devote 0.7% of their GDP to ODA disbursements?

A: I accept your point about relative poverty. I think I would argue however that the emphasis on mass poverty and relative poverty is pretty important in this debate. There is sometimes a tendency to confuse mass poverty and relative poverty as the same. I would accept the idea that relativity is important but mass poverty and absolute issues are pretty basic. The second point about 0.7% of national income for ODA disbursements was a target set in the early 1960s, but no sooner than having set this target, nearly all donor countries began to decrease the percentage of their aid spending. The short answer of why countries will not reach the 0.7% target is that there is not the political will in donor countries to increase ODA spending sharply.

Q: When I receive documents dealing with mass poverty in Asia, I do not see the words "culture" and "religion." In the Post-Washington Consensus, what about fitting the pattern here and what, for example in the field of aid, do you regard as important for let us say Islamic financing or Chinese linguistic group interaction and support?

A: I agree that issues of culture and religion are very important. I think the reason they tend to not be incorporated in these sorts of documents is that they are very difficult issues to deal with and get clear answers to. Behind all of this, I would argue that it is important to have a theory of growth of how countries get rich.

Q: I am interested in the role of information technology in the development process in developing countries. Would you elaborate on what kind of projects are going on in the Asian Development Bank and do you have any specific focus on that area or obstacles when you promote your agenda in this region?

A: My own Asian Development Bank Institute is trying to give emphasis to this. The ICT revolution is a tremendously important technological change and will change many things for a long period of time. I am interested in how ICT can be used to tackle issue of mass poverty. The answer seems to be related to words like knowledge, information, and communication. We are trying to use ICT in four main ways, including the emailing of a daily newsletter, seeking out CD-ROMS that deal with development and getting people to write book reviews on them, and cooperating with the World Bank on the creation of a hub of the Global Development Learning Network in Tokyo. I am not sure if technology, however, will have an effect on mass poverty. This is so for two reasons. First, we already have experience with an important type of electronic technology that has not done a lot for development - television. Second, it is very difficult for a lot of the development world to access this new technology.

*This summary was compiled by RIETI Editorial staff.