My newest column for Project Syndicate discusses the Spence Commission report on growth, and places it in the context of a new intellectual climate which, I argue, departs significantly from the strictures of the old Washington Consensus.
The Spence report represents a watershed for development policy — as much for what it says as for what it leaves out. Gone are confident assertions about the virtues of liberalisation, deregulation, privatisation, and free markets. Also gone are the cookie cutter policy recommendations unaffected by contextual differences. Instead, the Spence report adopts an approach that recognises the limits of what we know, emphasises pragmatism and gradualism, and encourages governments to be experimental.
Yes, successful economies have many things in common: they all engage in the global economy, maintain macroeconomic stability, stimulate saving and investment, provide market-oriented incentives, and are reasonably well governed. It is useful to keep an eye on these commonalities, because they frame the conduct of appropriate economic policies. Saying that context matters does not mean that anything goes. But there is no universal rulebook; different countries achieve these ends differently.
The Spence report reflects a broader intellectual shift within the development profession, a shift that encompasses not just growth strategies but also health, education, and other social policies. The traditional policy framework, which the new thinking is gradually replacing, is presumptive rather than diagnostic .
It starts with strong preconceptions about the nature of the problem: too much (or too little) government regulation, too poor governance, too little public spending on health and education, and so on. Moreover, its recommendations take the form of the proverbial "laundry list" of reforms, and emphasise their complementary nature — the imperative to undertake them all simultaneously — rather than their sequencing and prioritisation. And it is biased toward universal recipes — "model" institutional arrangements, "best practices," rules of thumb, and so forth.
By contrast, the new policy mindset starts with relative agnosticism about what works. Its hypothesis is that there is a great deal of "slack" in poor countries, so simple changes can make a big difference. As a result, it is explicitly diagnostic and focuses on the most significant economic bottlenecks and constraints. Rather than comprehensive reform, it emphasises policy experimentation and relatively narrowly targeted initiatives in order to discover local solutions, and it calls for monitoring and evaluation in order to learn which experiments work.
The new approach is suspicious of universal remedies. Instead, it searches for policy innovations that provide a shortcut around local economic or political complications. This approach is greatly influenced by China's experimental gradualism since 1978 — the most spectacular episode of economic growth and poverty reduction the world has ever seen.
It is to Spence's credit that the report manages to avoid both market fundamentalism and institutional fundamentalism. Rather than offering facile answers such as "just let markets work" or "just get governance right," it rightly emphasises that each country must devise its own mix of remedies. Foreign economists and aid agencies can supply some of the ingredients, but only the country itself can provide the recipe.
If there is a new Washington consensus, it is that the rulebook must be written at home, not in Washington. And that is real progress.