Policy Complementarities and the Washington Consensus

Abstract

Why some developing countries grow rapidly and others do not is one of the most compelling questions in economics. Some researchers argue that good economic policies play an important role and can contribute to fast growth. Williamson (1993) even describes a set of policies that he calls the .Washington Consensus,. promoting open trade, deregulation, and liberalized financial markets, that supposedly hasten the pace of economic growth the most. Other researchers, however, claim that growth rates among developing countries are determined primarily by factor endowments and natural proclivities, such as a country.s ratio of investment to GDP. They argue that there is little that Washington-Consensus-type policies can do. This paper argues that critical policy complementarities are missed on both sides in this debate. Policy complementarity refers to the mutually reinforcing benefits of policies that seem to be jointly critical for fast growth. Such a policy package seems to work largely by creating a good environment for investment and might include, for example, openness to trade, policies to secure macroeconomic stability, and measures to limit the degree of government intervention in an economy. Policy complementarity is shown to be statistically important and robust in helping to explain growth outcomes. Among developing countries that had the most complementary policies, nearly four out of five posted either medium or fast growth. This paper concludes that, while the types of policies referred to in the Washington Consensus are generally the right ones for developing countries to pursue, progress along a multifaceted set of policy dimensions is more critical than sometimes appears to be thought, especially as the world economy becomes more globalized. This finding suggests that efforts to sequence economic reforms in developing countries could lead to outcomes that are less successful than is desirable.