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Resurrecting the Washington Consensus

Submitted by Ryan Hahn on Mon, 2008-08-25 14:20

A new paper available from the National Bureau of Economic Research called Is The Washington Consensus Dead? attempts to resurrect the Washington Consenus, or at least the bit of it that argued for trade liberalization. Authors Antoni Estevadeordal and Alan Taylor let it be known that this was no easy task: "[W]e painstakingly collect new and more detailed tariff data on consumption, capital, and intermediate goods from primary sources, using easy digital sources for recent years, but with recourse to some extremely cumbersome and hitherto unused archival sources for the 1980s." In other words, econometrics is not for the faint of heart. Here is what their hard work has led them to conclude:

We think these results show that there is quite strong support for the trade policy prescriptions of the 1990s Washington Consensus. The WC claimed that lowering tariffs would promote growth in the developing world. Theory suggests a mechanism: lower tariffs will lead to cheaper capital and intermediate goods imports.

One of the really interesting features of this paper is that the authors draw on trade data both prior to the Washington Consensus and after its rise. This allows Estevadeordal and Taylor to gauge the differences between those who adopted Washington Consensus-style liberalization and those who did not. Their key finding? Liberalization of tariffs on imported capital and intermediate goods raised GDP growth by about one percentage point per annum.

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Comments

I admit I'm not an economist; I've only taken a couple of survey

Submitted by Andrea Shettle, MSW on Tue, 2008-08-26 09:48.

I admit I'm not an economist; I've only taken a couple of survey courses in the field.

But that said, my understanding of your quick summary leads me to note that the conclusion supporting liberalized trade seems to be specific to products that can be used to produce value added goods. This makes sense: a country cannot profitably produce value-added goods if aspiring businesses can't even purchase the capital or intermediate products they need at reasonable prices.

But, this would still seem to leave open the question of whether tariffs on VALUE-ADDED GOODS necessarily help or hinder.

reply

Hi Andrea...

Submitted by Ryan Hahn on Tue, 2008-08-26 13:28.

Hi Andrea, your point is well taken. The authors of the paper do indeed address this issue. They find that "consumption tariffs may have limited or ambiguous impacts on growth." In other words, tariffs on consumer goods probably don't have a large impact on growth.

However, I would be quick to point out that growth is not identical to consumer welfare - simply having a larger variety of goods to choose from through trade can be a benefit to consumers even without raising incomes.