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Economists in Denial

Global economic growth has taken a hit in the last two decades, endangering the lives and health of hundreds of millions of people in developing countries.
 
 
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This week's trip to South America by Treasury Secretary Paul H. O'Neill is Washington's latest response to growing discontent about economic failure in the developing world. O'Neill, who has become known for his blunt remarks about economic policy, should take an honest look at what has happened to most low- and middle-income countries during the past 20 years. For these countries, the last two decades of the 20th century were witness to the worst economic failure since the Great Depression.

Consider this: Income per person in Latin America grew by 75 percent from 1960 to 1980. From 1980 to 2000 it grew by 7 percent, or hardly at all. Africa fared even worse, with a decline -- some 15 percent -- in income per person during the past two decades.

Of course, there are some important exceptions: China registered the fastest growth in world history during the past 20 years. But even including China, weighted by its enormous population of 1.3 billion, the developing economies as a group have grown at half the rate they had achieved during the previous two decades.

It is really just a historical coincidence that U.S. political leaders have not even had to acknowledge this drastic economic failure, let alone account for it. The movement that burst onto the world stage in Seattle 2 1/2 years ago had other priorities. The protesters and their organizations have focused on the usurpation of governmental authority by undemocratic, unaccountable bodies such as the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank. They rallied against the environmental damage caused by the reckless globalization these institutions and their corporate allies have led. And they have called attention to the worsening distribution of income at home and abroad.

Worthy causes all. But economic growth also matters. For example, if we look at the countries where poverty has increased during the past 20 years, or where progress toward reducing poverty has slowed, the main cause is not a change in the distribution of income or wealth: It is the slowdown in growth.

In fact the past two decades also have seen significantly reduced progress on major social indicators such as life expectancy, infant and child mortality, literacy and education. This is exactly what we would expect in a period of sharply reduced economic growth. So we are not just talking about dry economic statistics here: The lives and health of hundreds of millions of people have been stunted.

It is of course difficult to isolate the causes of such a protracted, geographically widespread economic failure, but there are some prime suspects. Higher interest rates, often enforced by the IMF, have slowed growth throughout much of the developing world. This trend was reinforced by the central banks of the developed countries, further slowing the developing economies by reducing worldwide growth.

Before the 1980s, it was common for low- and middle-income countries to pursue a country-specific development strategy. This has been replaced, in most cases, with a formulaic set of principles involving opening up to international trade and financial flows, privatization of state-owned industries and other deregulatory measures. These "Washington Consensus" policy prescriptions have not fared well in practice, and they have led to a number of economic disasters in recent years. The Asian economic crisis of 1998, for example, was brought on by reckless opening to "hot money" from abroad. Financial and economic crises in Mexico, Russia, Brazil and Argentina also have taken their toll on global economic growth.

Searching for good news, partisans of the Washington Consensus (such as the World Bank) point to countries such as China and Vietnam as successful "globalizers." But China's banking system is mostly state-owned, its domestic markets highly protected and its capital flows strictly controlled. Most of Vietnam's investment is undertaken by the state.

These Washington economists do not seem to notice the irony in their argument: "Our brand of neo-liberalism seems to have failed, but the Commies are doing great!"

O'Neill's Treasury Department controls the most powerful institutions that enforce the rules of the Washington Consensus: the IMF and the World Bank. Our government also has the biggest voice in the WTO, whose rules are widely seen as stacked against developing countries. The prolonged economic malfunctioning of the past two decades is the elephant sitting in the middle of their conference rooms, and they are trying to ignore it. But an honest debate over the causes of this failure is long overdue.

The writer is co-director of the Center for Economic and Policy Research. This column originally appeared in The Washington Post.