More Instruments and Broader Goals: From Washington to Santiago

1. More Instruments and Broader Goals: From Washington to Santiago Joseph Stiglitz Senior Vice President and Chief Economist World Bank April 23, 1998

2. Outline of the Talk • Where we are in development realities • a. Growth rate, trade flows, international capital flows up • b. Inflation and public sector deficits down • Where we are not in development realities • a. Growth rate not enough to significantly reduce poverty • b. Inequality and unemployment stable or rising • Rethinking, reworking, and expanding development economics • a. Making markets work better: more than macroeconomics • b. Broadening the goals of development • c. Strategies to advance these new goals

3. Making Markets Work BetterEnhancing the Efficiency of the Economy Neoliberal Agenda Macrostability Liberalization The Confusion Between Ends and Means New Agenda Goes Further Financial Reform State as a Complement to the Private Sector

4. Making Markets Work Better:Enhancing Macrostability Controlling Inflation Important: But lowering inflation below 15% yields few marginal benefits. Managing the Budget Deficit: No simple formula for sustainable deficits. Stabilizing Output and Promoting Long-Term Growth: Policies should go beyond macroeconomics

5. Making Markets Work Better:Beyond Macroeconomics The Importance of Financial Reform Weak financial markets cause economic problems: High budgetary costs and negative impacts on growth. Strong financial systems promote growth Brain of the economy Correlation between Financial Depth and Growth

6. Making Markets Work Better:Financial Sector Government has played a large role in helping create and regulate financial markets General theorem concerning markets’ inefficiency when information is imperfect and markets are incomplete applies to financial markets Reforming financial sector regulation: Legitimate roles of regulation Limitations of government Special problems in less-developed countries

7. Making Markets Work Better:Beyond Macroeconomics (II) The Importance of Competition Policy: Promoting Free Trade Trade liberalization is necessary, but not sufficient. Privatization A. Privatization may convert public monopoly into private monopoly. B. The need for regulation. C. Ownership changes and market mechanisms may also be effective.

8. Making Markets Work Better:Government as a Complement to the Market Old focus: The size of the state New focus: The activities and methods of the government Examples: Building Human Capital Transferring Technology

9. Making Government More Effective Recognizing the Importance of Institutions Matching Role to Capability Using Markets and Market-like Mechanisms Encouraging Participation

10. Broadening the Goals of Development Old: Increasing GDP Macroeconomic Stability Liberalized Trade Privatization…... New: Sustainable Development Equitable Development Democratic Development

11. Implementing the Broader Goals Improving the State of Knowledge Creative Policies to Pursue Multiple Goals Education Creative Policies to Minimize Tradeoffs Environment The Inevitable Tradeoffs Tertiary education: helps close technology gap, but tends to benefit wealthier groups.

12. Concluding Remarks The Washington Consensus provided the foundation for well-functioning markets, but not the whole structure. “Development economics” must include the study of microeconomic factors and strive for human development goals. The new consensus must include more participants.