Towards a New Consensus

Analyzing Bolivian Poverty Reduction Strategies

“It is fair to say that nobody really believes in the Washington Consensus anymore.”

From: “Goodbye Washington Consensus,

Hello Washington Confusion?”

Dani RodrikHarvard UniversityJanuary 2006

Long wave: depressive phase

• Lower growth• Increased unemployment• Regressive redistribution• Decaying “techno-economic paradigm,” or

“mode of regulation” (“Fordism”)• Laissez-faire, Washington Consensus

policies• “Real business cycles” types of economic

theory

Long wave: expansive phase

• Higher growth

• Increased employment

• Progressive redistribution

• Consolidated techno-economic paradigm

• Policy optimism, New Consensus

• (Post-)Keynesian, (post-)structuralist theory

Changed focus

From policy deconstructionism:

• Deregulation

• Decontrol

• Denationalization

Changed focus

To policy constructivism:

• Policy sovereignty

• Structural change

• Social justice (economic ethics, distributive justice)

New focusNew instruments

Indebtedness policy Policy sovereignty

Investment policy Structural change

Income distribution policy Social justice

Indebtedness policy:regulation of financial flows

From :

Cycles of massive inflows and euphoria

followed by

capital flight and debt crises

To:

Desendeudamiento and

regulation of international capital flows

Foreign saving = trade deficit = a knowable variable

t

Investment policy:output structure matters

Structure matters• Natural resource exports = low growth• Primary specialization = high inequality• Employment intensity = poverty reduction

elasticity of growth

Investment policy

ttt xdx

11

Income distribution policy:tax and expenditure reform

• Increasing inequality in most countries during the low growth phase

• Latin America: Most unequal income distribution, low tax/GDP ratio, regressive tax reforms

Income distribution policy

ttt xVy

New Consensus model

Income distribution

Investment efficiency

Saving propensity

Saving propensities

Public investment allocation

Private investment allocation

Public income

s

Private saving

Public saving

Sectoral investment

Private incomes Gross

outputs

Incomedistribution

policy

Investmentpolicy

Indebtednesspolicy

Foreigndebt

tXtV

gtz

t

Base scenario: Estrategia Boliviana de Reducción de la Pobreza

(Poverty reduction 200-2015: 5.7 points, from 50.3 percent to 44.6)

0

5,000

10,000

15,000

20,000

25,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ions

of

boliv

iano

s

1. Food staples agriculture 2. Exports crops agriculture 3. Petroleum, gas and mining 4. Big industry

5. Small and medium industry 6. Petroleum processing 7. Construction 8. Commerce

9. Transport 10. Infrastructure and services 11. Public administration 12. Finances

Poverty minimizing structural change(Poverty reduction 2000-2015: 10 points, from 50.3 to 40.3 percent)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ions

of

boliv

iano

s

1. Food staples agriculture 2. Exports crops agriculture 3. Petroleum, gas and mining 4. Big industry

5. Small and medium industry 6. Petroleum processing 7. Construction 8. Commerce

9. Transport 10. Infrastructure and services 11. Public administration 12. Finances

Redistribution policies• Millennium tax [and expenditure] reform: Tax rate 8.1 percent (4.6 percent of GDP)• Rawlsian tax reform: Tax rate 16.7 percent (9.5 percent of GDP)• Undercollection: 3.6 percent of GDP

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Per

cent

age

1. EBRP 2. Millennium investment policy 3. Millennium tax reform 4. Millenium employment strategy 5. Rawlsian tax reform

Millennium employment strategy

Employment maximizing investment strategy

• Strong similarity with poverty minimization

Similar GDP and poverty reduction

Similar changes in output structure

Stronger focus on Food staples agriculture (weaker on Small industry)

• Confirmed cross-country by World Bank study (Perry et al. 2006)