Saturday, September 12, 2020

The Washington Consensus, 1970-2015: Despite the unpopularity of the Washington Consensus, its policies reliably raise average incomes; countries that had sustained reform were 16% richer 10 years later

The Washington Consensus Works: Causal Effects of Reform, 1970-2015. Kevin B. Grier, Robin M. Grier. Journal of Comparative Economics, September 8 2020. https://doi.org/10.1016/j.jce.2020.09.001

Highlights
• Sustained economic reform significantly raises real GDP per capita over a 5- to 10-year horizon.
• Despite the unpopularity of the Washington Consensus, its policies reliably raise average incomes.
• Countries that had sustained reform were 16% richer 10 years later.

Abstract: Traditional policy reforms of the type embodied in the Washington Consensus have been out of academic fashion for decades. However, we are not aware of a paper that convincingly rejects the efficacy of these reforms. In this paper, we define generalized reform as a discrete, sustained jump in an index of economic freedom, whose components map well onto the points of the old consensus. We identify 49 cases of generalized reform in our dataset that spans 141 countries from 1970 to 2015. The average treatment effect associated with these reforms is positive, sizeable, and significant over 5- and 10- year windows. The result is robust to different thresholds for defining reform and different estimation methods. We argue that the policy reform baby was prematurely thrown out with the neoliberal bathwater.

Keywords: ReformWashington ConsensusRule of lawProperty rightsEconomic development


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