The Hindu Business Line : Another consensus, new prescriptions

THE developing world has heard of the Washington Consensus, ad nauseam. It has been a prescription for reform, enunciated by gurus of the Brettonwoods institutions.

At the core of this Consensus are Ten Commandments, prominent among which are fiscal discipline, financial liberalisation, including freedom from financial repression, trade liberalisation, exchange rate flexibility and foreign investment liberalisation. Privatisation was also part of the Consensus.

Arrived at in a Conference designed to discuss the experience of Latin American countries in 1989, the phrase "Washington Consensus" passed into the public usage as an object of reverence or derision, depending on the point of view.

And now, Mr James D. Wolfensohn, the head honcho of the World Bank, speaking at the Shanghai Conference on May 25, 2004, has himself turned apostate.

He said: "This is not a Conference for teaching the Washington Consensus. The Washington Consensus has been dead for years. It has been replaced by all sorts of other Consensuses". He is, however, delightfully vague about what particular Consensus has replaced the presiding deity — the Washington Consensus.

Speaking as he did in Shanghai, Mr Wolfensohn rightly paid tribute to Chinese achievements. Presumably, he thinks China has many lessons to teach the developing and developed world.

"The first thing is that you have to set stretch targets. You don't set targets just by the available money. We in our own institution have often fallen into the trap of saying we have X million dollars for such-and-such a country and, therefore, we will do a project that spends X million dollars.

"We should not look at it on the basis of whether we have X million dollars. We should look at it on the basis of what is the challenge, what is the stretch target, what is it that we're trying to achieve, and then look at ways in which over time we can reach that target. Because the success is not spending the $50 million or $100 million successfully. The success is approaching the overall strategic target that we are seeking to achieve."

He mentioned that the Shanghai Conference discussed the various aspects of the challenge — "the challenge of management, the challenge of leverage, the challenge of resources".

It is obvious that short of admitting that the Chinese experience is a world-class exemplar in planning and implementation, China `s experience offers a paradigm shift for the world and emphasises the need to shake off the shackles imposed by the reigning Consensus. Above all, it means taking up the challenge of development with a "can-do" spirit.

In this context, I recently came across another economic experiment in building a new type of Consensus — the Copenhagen Consensus under an initiative provided by the Copenhagen-based Environmental Assessment Institute and supported by the Danish Government.

The Consensus emerged out of a number of papers written by eminent experts and discussed by equally eminent economists at a Conference held on May 24-28. Coincidentally, the Copenhagen Consensus was ironed out at about the same time that Mr Wolfensohn was participating in the Shanghai Conference, halfway around the globe. The Copenhagen Consensus Conference had no shortage of eminent economists. Among those present and participating were Nobel Laureates Robert Fogel of the University of Chicago, Vernon Smith of George Mason University.

Besides, it had the presence of distinguished economist, Jagdish Bhagwati of Columbia University and Justin Yifu Lin of Beijing University. The only (important) element missing was of practitioners — both political and economic — from developing countries. The papers for the Copenhagen Conference are all provocative.

They are extremely competently written and attempt the almost impossible task of ranking various programmes in terms of cost-benefit calculi. The Copenhagen Consensus does represent the almost first ever attempt by economists to order a ranking of possible economic/social programmes on this basis.

The panel was asked to assess the challenge areas with a view to answering the question "What would be the best ways of advancing global welfare and particularly the welfare of developing countries supposing that an additional $50 billion of resources were at governments' disposal?" The exercise yielded interesting outcomes.

The Copenhagen Consensus has discussed ten challenges that face the world and ranked them mostly in order of cost-benefit ratio.

Civil conflicts

Climate change

Communicable diseases

Education

Financial stability

Governance

Hunger and malnutrition

Migration

Trade reform

Water and sanitation

The cost-benefit ratio was adopted as a useful organising principle for evaluating the various proposals. Ranked first from the point of view of benefit-cost ratio was a package of measures aimed at control of HIV/AIDS. The implied ratio of benefits to costs for this programme is nearly 500. This casts new light on our own priorities in India.

Implosion of AIDS in India is also one of the dangers to be averted. The Copenhagen Consensus deserves to be commended for highlighting the attractiveness of a HIV/AIDS focussed programme to the economists of our own Planning Commission.

It is important to stress that the Copenhagen Consensus does not claim absolute accuracy about the benefit-cost ratios it provides. But, it does indicate that these programmes offer the best bet for the world that seeks the best value for the dollars that it gets either from aid or from our resources.

Equally interesting is the analysis in the challenge papers provided for the Copenhagen Consensus meetings is the high benefit-cost ratio for prevention of malnutrition. Another programme that received attention was malaria prevention, which ranks high in terms of benefits.

The Copenhagen Conference favoured free trade, but did not specifically calculate cost-benefit ratios as it did not involve budgetary outlays. This view is, however, likely to be mistaken because removal of subsidies in developed countries is a necessary offshoot of genuine free trade.

But the Copenhagen Consensus is aimed at how to distribute $50 billion of aid among developing countries. That is obviously not within the range of proposals covered by removal of free trade barriers and consequent reduction of subsidies in the US or EU. One of the challenge papers in the Copenhagen Conference focussed on the provision of education. Where spending on education is at present very low, the potential admittedly exists for large benefits in return for moderately increased spending.

However, the institutional preconditions for success are demanding aid vary. Experience suggests, says the summary of conclusions at the Conference, that it is easy to waste large sums on education initiatives.

A necessary cautionary note for the UPA Government's proposed expansion of expenditure on education!While the Washington Consensus was rich in prescriptions on financial liberalisation and reorganisation, the Copenhagen Consensus skirted the issue.

It sums up saying "Four proposals before the panel addressed the issue of international financial stability. The panel noting the complexities and uncertainties in this area chose not to come to a view, which if any of the proposals to recommend." A strange conclusion, indeed, typical of academics!

One important conclusion of the Copenhagen Conference was that it did not recommend further investments on the Kyoto Protocol. The expert panel concluded that the costs of the proposals were likely to exceed benefits. Global warming enthusiasts beware!

The Copenhagen Consensus may be criticised for giving false precision to programmes, which involve many intangible elements, including social behaviour and response to medical cures.

But, it is a good start as such and deserves to be taken into account by our new team of planners under the imaginative leadership of the Mr Montek Singh Ahluwalia.

The result of both Shanghai and Copenhagen is a convergence of ideas. The old order of prescriptions has given way to the new. And, who knows, the new order may seem a return of the old culture, of governance and planning with concern for the poor, discarding purist ideas of austerity just to satisfy fiscal goals.

While fiscal goals are important, they are not enough. While we should strive to use our resources to attain the highest benefit, they have to take into account the complexities of the problems that development faces.

Neither Copenhagen nor Washington Consensus per se can provide a definitive answer to our problems. We have to find an Indian solution, learning, however, from the experience of the rest of the world — Shanghai, Copenhagen and Washington.

The world awaits a truly Indian Consensus on what it takes to make our millions move out of poverty and deprivation. It has to be an attempt to stretch the system to the maximum and not to leave options aside because they are difficult or costly.

The CMP offers a feasible and desirable option for a poor country trying to discover a way-out of a situation that has parts of India shining and parts in darkness. Let us build on it to evolve a practical Indian consensus.