Speech given by
at the Conference of the Liberal International
San José, November 5, 2004
You know that the phrase “Washington Consensus” is today a very popular and, simultaneously, a very pilloried term in debates about trade and development.
It is often considered as synonymous with catchwords as “neoliberalism” and “globalization”.
Or as the phrase’s originator, John Williamson from the Institute for International Economics, once said:
“Audiences the world over seem to believe that this signifies a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery.
There are people who cannot utter the term without foaming at the mouth.”
But foaming at the mouth, I suspect, is, as whistling in the dark or muttering occult incantations, not the true method of analyzing and solving problems.
Let’s look instead at some of theses arguments, facts and figures.
With the term “Washington Consensus” Williamson did refer to a set of ten policy advices being addressed by Washington-based institutions to Latin American countries.
These policies were:
Without any doubt, all these policies are of genuine liberal descent.
Nevertheless, I want to concentrate upon the last topic, the issue of property rights, because non-existent or insufficiently defined property rights arguably are the most serious problem in poor countries.
You all know Hernando de Soto, the best-selling author of “The Other Path” from 1989 and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” from 2000 and founder/director of Peru’s Institute for Liberty and Democracy (ILD), a sort of Latin America’s Adam Smith.
His starting point is the economic system that the poor of this world find themselves in, and he points out that these people do not have access to the legal instruments and institutions that make a market economy efficient:
Instead, the poor are faced with a legal system, which is excessively complicated and inefficient.
Even when courts are independent and professionally organized, lawsuits drag on for years.
Government regulations are hideously complicated and intrusive, making any economic activity dependent of numerous approvals and rubber stamps.
Poor people might control assets such as a piece of land in a slum, but these assets are not legally registered in their name.
De Soto and his co-workers did a practical experiment:
They tried to set up a simple textile workshop with one worker, following all the prescribed rules and regulations, but without paying bribes.
After one year, the conclusion was obvious:
Achieving legality is clearly impossible for any micro-entrepreneur.
The issue of property rights is therefore of utmost importance.
In nearly all countries of the south, property rights are either ill defined, ill-protected or difficult to transfer.
These countries do have systems of property rights, often very complicated ones, as they do not reflect the reality in which the poor live, and they are inefficiently managed.
The inefficiency of the property market results in the fact that, for instance, not enough land and housing is available for the growing number of people migrating into the cities.
Therefore, they have to grab land, usually from the state that owns it.
Such land grabs are organized by “informal entrepreneurs”, also known as “slumlords”, who organize the defenses of illegal settlements and their illegal protection.
The poor, who live in these new slums pay rent to them, cast their votes as they are told and make up numbers at political rallies.
It is obvious that this does harm both democracy and economic development.
However, the poor don’t have any choice.
The economic effects of these circumstances are nothing short of momentous:
Assets such as houses, huts or land whose ownership is unclear or contested cannot be transformed into capital.
We liberals all know that the moment ownership of an asset is clearly defined and protected by the law; the transfer of it can be done safely and efficiently.
It can then be used as collateral to raise money.
The asset thus assumes a second virtual life as capital.
The poor people on this globe are usually excluded from this:
They control assets, but they don’t have any access to the legal institutions that turn their assets into property and thus into capital.
Hernando de Soto estimates the amount of unused or “dead” capital caused by insufficient property rights in the countries of the south to be in excess of 9 trillion US$, and much of that is controlled by the poor!
We now can see clearly:
The best way to overcome poverty is helping the poor to get access to sound property rights.
It turns out that in many cases this could be done virtually free of cost:
It just means recognizing in law what is already a reality, namely the control of assets.
The poor in a slum already know who “owns” which piece of land or hut.
All the state would have to do is to record the fact and give it the formal protection of the law.
Formulating law should be seen, in de Soto’s parlance, as a process of discovering the reality, and in this process the need for a bundle of legal instruments might become apparent.
To take one example:
Land held for centuries collectively by tribes could be integrated into a formal system of individual property rights by using not just natural but also legal personalities, e.g. cooperatives or share-based companies.
In Europe, we already have examples such as monasteries where the monks or nuns own land collectively and the monastery becomes the actor in the marketplace.
If a tribe of indigenous people wished to continue its age-old practice of collective land use, this would be an appropriate instrument within a market economy.
Recognizing the property rights of the poor and defending them is not a mere technical but rather a political task.
For too long self-proclaimed spokespersons of the poor have systematically ignored the issue of property rights, thinking this is only relevant for rich people. All over the world, including the south, this is a fatal fallacy. The rich don’t need formal protection of their property rights as much as the poor do – they can already use their influence and money to support their causes.
In reality, it is the ill-defined and often undefended, and in fact indefensible, property rights of the poor that get attacked or destroyed by the rich.
An example from Bangladesh might illustrate this situation: A female member of the Grameen Bank had escaped out of poverty by taking loans from this bank, investing them wisely and, combined with hard work, managed to build up a small capital base. She then wanted to start a small sawmill. When the local competitor, a politically well-connected local businessman, came to know of this, she was visited by his henchmen and threatened with assault and rape if she didn’t abandon the project.
Knowing that the police would be on the side of a member of the local elite and that a court case would last many years, she resigned.
Stories like this are by no means exceptions in the south. Talk to businesspersons in countries of the south about relocating a plant or building up a new one and you will find that they will not dare to go into unfamiliar territory. The reason is that the state fails to implement the rule of law, and its place is taken by local power arrangements that prey on outsiders, the poor, and the ethnic and religious minorities. This is a significant impediment to growth as it creates a glass ceiling for the economic activities of the poor.
Several studies of the aforementioned Grameen Bank in Bangladesh have wondered why their borrowers don’t seem to graduate smoothly and easily beyond a somewhat stable but simple subsistence economy.
The obvious answer is the lack of well-defined, stable and secure property rights, and more generally, of the lack of the rule of law, especially of economic law that eases their transition into the formal economy.
The absence of well-defined, stable and secure property rights also has been the cause for the widespread misery of poor people, often indigenous groups, that have been displaced by so-called “development-projects” such as large dams.
The state of India actually abolished the constitutional right to property that would imply full compensation in the case of expropriation by the state for the simple reason to make such projects cheaper.
The rhetoric has been directed at big landlords – the reality has meant displacing tens of thousands of poor people without appropriate compensation.
And the lack of clearly defined, stable and safe property rights did mean that the courts could not offer protection to the poor. Tragically, most of the campaigners against dam projects don’t have even begun to understand such problems in terms of property rights.
The Friedrich Naumann Foundation is one of around 52 co-publishers of an annual, conscientiously computed and compiled survey called “Economic Freedom of the World”.
The purpose of this survey is the measurement and the comparison of economic freedom in 123 countries.
These continuous studies have clearly shown that there is a remarkable correlation between economic freedom and economic growth.
It has also been shown that the freest countries of the world have significantly lower poverty rates, less illiterate people, less corruption and a much higher life expectancy than the unfree ones.
However, the most important finding concerning the cause of poverty is this:
The group of the poorest and least growing countries is nearly identical with those who have not opened their economies and constantly interfere with the freedom of their people, especially with their access to private property.
Sustainable economic growth and reduction in poverty can only be achieved on the basis of a clearly defined legal framework securing all aspects of private property and ownership.
Hence, neither liberalization nor liberalism have failed – it is much more the abuse of the legal setting; it is corruption, nepotism and bribery which prevent private initiatives from developing economic growth and poverty reduction.
For many years, the debates on the Washington Consensus mainly focused on the concept of so-called Poverty Reduction Strategy Papers (PRSPs).
The whole contexts of conditionalities that define the prerequisites for the engagement of donors extensively have paralyzed many political and private initiatives.
Ways must be found how forces can be mobilized for growth in developing and transition countries.
Politicians must consider it as their main task to secure a reliable legal framework and legal security in order to give any initiative a fair chance to develop.
International institutions like IMF and World Bank can safeguard this process by offering support when it comes to shield economies against external shocks and instability.
But, of course:
In first place the countries themselves and their people must get into the position of taking over the initiative.
Since the Millennium Development Goals (MDGs) were defined in September 2000, four years and numerous initiatives have passed by.
Today, we must face the fact that chances to achieve the main goal – Reduction of Absolute Poverty by 50% until 2015 – are low.
The Millennium Development Goals can only be reached by economic growth in the long term – the key to poverty reduction.
The international community will have to find ways to avoid that Highly Indebted Poor Countries (HIPCs) and Middle Income Countries (MICs) are hostages to their debts.
They must be given leeway for economic development, which will easier be achieved when free individuals are motivated to contribute – in their own interest and in a sense of responsibility for the community.
Developing and transition countries will have to plot their own course.
Also, there must be space for unconventional policy measures.
The role of institutions in politics and society comes increasingly into the focus of analysis, when shortcomings of the Washington Consensus are discussed.
It is clear that policy measures have no long-term impact without efficiently working institutions, which curb insecurity and increase readiness to invest.
But:
The role of government must again be limited to the essentials.
Namely, the state should only give rules to safeguard equal opportunities from the start and promote competition and pluralism as motivating forces for development.
Liberalizing action will only be successful if the minimal requirements are met in institutional and macroeconomic terms.
Universal recipes for development will never be at hand which means that solutions must be specific to countries and societies.
Reform needs always must have a higher priority than ideology for its own sake.
Pure doctrine does not feed people.
Account needs also to be taken of the interaction between macro- and microeconomic level.
Economic growth and poverty reduction are only possible where these two levels are functionally interwoven.
Both levels have an equally important role and similar requirements:
Free access to all markets, education, information, labor, goods and capital markets are prerequisites for countries and its citizens to reach the goal of economic success.
Indeed, there are people who are “underdeveloped”, “left behind” or “backward”, but they are not victims of neoliberalism, free trade or globalization.
They are victims of their own governments´ failures!
Changing this deplorable state of affairs does need a sweeping legal and political process.
If the word “revolution” had not been so misused in the course of human history we could say:
It needs a liberal revolution.
