Sat, Jun 14, 2008 - Page 9 News List

All hail the new ‘consensus’ from Michael Spence

The Spence report throws out some age-old universalistic liberal maxims on economic development in favor of a gradual approach

By Dani Rodrik

Two-and-a-half years ago, World Bank officials approached Nobel laureate Michael Spence to ask him to lead a high-powered commission on economic growth. The question at hand could not have been more important. The “Washington consensus” — the infamous list of dos and don’ts for policymakers in developing countries — had largely dissipated. But what would replace it?

Spence was not sure he was the man for the job. After all, his research had focused on theoretical issues in advanced economies; he had been dean of a business school; and he did not have much experience in economic development.

But he was intrigued by the task. And he was encouraged by the enthusiastic and positive response he received from the commission’s prospective members. Thus was born the Spence Commission on Growth and Development, a star-studded group of policymakers — including another Nobel laureate — whose final report was issued at the end of last month.

The Spence report represents a watershed for development policy — as much for what it says as for what it leaves out. Gone are assertions about the virtues of liberalization, deregulation, privatization and free markets. Also gone are the cookie-cutter policy recommendations unaffected by contextual differences. Instead, the Spence report adopts an approach that recognizes the limits of what we know, emphasizes 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 emphasize their complementary nature — the imperative to undertake them all simultaneously — rather than their sequencing and prioritization. And it leans 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 emphasizes 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.

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