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Eleven
MAKING THE WORLD

A BETTER PLACE

CHAPTER OUTLINE
‘The best of all possible worlds’? 355
TNCs and corporate social responsibility 357
‘The business of business is business’ 357
Approaches to CSR 358
International CSR and GPNs 358
Types of code of conduct 361
How effective are codes of conduct? 362
States and issues of global governance 363
Global–national tensions 363
Regulating the global financial system 365
The established ‘architecture’ of the global financial system 365
Towards a new global financial architecture? 367
Regulating international trade 369
The evolution of world trade regulations 369
Battles within the WTO 371
Regulating TNCs 374
International guidelines and multilateral agreements 374
Dealing with problems of tax avoidance 375
Burning issues: global environmental regulation 378
The evolution of climate change initiatives 378
Where are we now? 379
A better world? 380
Alternative economies? 380
To be ‘globalized’ or not to be ‘globalized’: that is the question 383
Eradicating extreme poverty: the UN Millennium Development
Project 384
Goals, aspirations and collective will 384
A moral imperative 387

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MAKING THE WORLD A BETTER PLACE 355

‘THE BEST OF ALL POSSIBLE WORLDS’?

As we have seen, the world has changed dramatically over the past several decades.
It is, in very many ways, a different place. But is such a ‘globalized’ world a ‘better’
world? Voltaire, the eighteenth-century French writer, wrote a wonderful satirical
novel, Candide, in which the eponymous hero lives in a world of immense suffer-
ing and hardship, yet whose tutor, Dr Pangloss, insists that Candide’s world is ‘the
best of all possible worlds, where everything is connected and arranged for the
best’.1 Today, such a Panglossian view is held by those to whom an unfettered capi-
talist market system – based on the unhindered flow of commodities, goods, ser-
vices and investment capital – constitutes the ‘best of all possible worlds’. Although
they might agree that globalization is a savage process, they also argue that it is a
beneficial one, in which, they claim, the winners far outnumber the losers.2 But it
is arguable that ‘now is the best time in history to be alive’.3

Certainly, there is considerable divergence in the views of ordinary people in
different parts of the world. For example, a poll of 34,500 people in 34 countries,
commissioned by the BBC World Service in 2008, concluded that

in 22 out of 34 countries around the world, the weight of opinion is
that ‘economic globalization, including trade and investment’ is grow-
ing too quickly … Related to this unease is an even stronger view that
the benefits and burdens of ‘the economic developments of the last
few years’ have not been shared fairly … In developed countries, those
who have this view of unfairness are more likely to say that globaliza-
tion is growing too quickly … In contrast, in some developing coun-
tries, those who perceive such unfairness are more likely to say
globalization is proceeding too slowly.4

There is, in fact, a highly differentiated geography of attitudes towards globalization.5

Without doubt, large numbers of people in the developed economies, and also
in the rapidly growing economies of East Asia, have benefited from much
increased material affluence: ‘The average person is about eight times richer than
a century ago, nearly one billion people have been lifted out of poverty over the
past two decades.’6 There has been immense growth in the production and con-
sumption of goods and services and, through international trade, a huge increase
in the variety of goods available. But the evidence discussed in Chapters 7 to 10
suggests a very different reality for a substantial proportion of the world’s popula-
tion, not only in the poorest countries and regions, but also among certain sectors
of the population in affluent countries, who have not benefited – or have bene-
fited very little – from the overall rise in material well-being. The fact remains that
there is vast inequality between the haves and the have-nots (or, as some have put
it more ironically, between the ‘have-yachts’ and the ‘have-nots’). And that gap has
been widening, despite the operation of precisely those globalizing processes that
are supposed to create benefits for everybody. For many, insecurity has become the
norm, much exacerbated by the impact of the 2008 financial crisis:

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY356

Globalization increases objective and subjective insecurities among a
great many workers and producers … different faces of economic
globalization can be expected to have different implications for risk.
For instance, some faces of globalization more than others are visible,
direct, and palpable with respect to job risks – for instance, via threats
of outsourcing by companies rather than via trade competition.7

What can or should be done? How can the world be made a better place for all,
including those at the bottom of the heap? There is no simple answer. Choices are
never unconstrained:

Our choices … are shaped by systems and structures over which we,
as individuals, have no control. Economic, political, technological and
social dynamics make some choices available and remove others from
the table.8

We are all deeply embedded in specific contexts, structures and places and con-
strained by our knowledge and resources. As we have seen, the map of such con-
straints is immensely uneven; for many people, in many parts of the world, the
exercise of choice is extremely limited. More broadly, of course, it depends on
one’s political and ideological point of view. It is about values.9 It is about where
we want to be. In terms of ‘making the world a better place’, one person’s ‘utopia’
is another person’s ‘dystopia’.

For example, GCSOs vary widely both in their agendas and in how these agendas
are pursued: from vociferous, often violent, confrontation through to more reform-
ist movements. Anti-capitalist groups advocate the replacement of the capitalist
system,10 although precisely what the alternative should be varies between groups.
For some, it would be a democratically elected world government; for others, a
structure in which the means of production and distribution were controlled by
a nationally elected government. For some, it would be a system of locally self-
sufficient communities in which long-distance trade would be minimized. This is
the position, for example, of the ‘deep green’ environmental groups. For some, the
focus is on ‘fair’, rather than ‘free’, trade – although who decides what is ‘fair’ is a
crucial issue. For the more nationalist–populist groups, and for some labour unions,
the agenda is one of protecting domestic industries and jobs from external compe-
tition (especially from developing countries) and restricting immigration. For some,
the objective is removing the burden of debt from the world’s poorest countries or
improving labour standards in the developing world (especially of child labour). The
problem is that, very often, these agendas are contradictory.

Not surprisingly, GCSOs have themselves attracted considerable criticism from
some quarters, questioning their legitimacy and, in some cases, their abilities to
further economic and social development goals for the poor. Although the prolif-
eration of GCSOs has ‘unquestionably projected the globalization debate into the

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MAKING THE WORLD A BETTER PLACE 357

popular political consciousness in important ways … the movements themselves
have a severe democratic deficit: representing humanity ultimately requires legiti-
mation through some sort of people’s mandate’.11 Nevertheless, GCSOs undoubt-
edly force people – including politicians and business leaders – to recognize, and
to engage with, the uncomfortable reality that both the benefits and the costs of
globalization are very unevenly distributed and that there are severe and pressing
problems that need resolution:

The advocatory movements of global civil society are the originators,
advocates and judges of global values and norms. The way they create
and hone this everyday, local and global awareness of values is by spark-
ing public outrage and generating global public indignation over spec-
tacular norm violations. This they do by focusing on individual cases.12

In fact, the major responsibility for making the world a better place lies with two
dominant sets of actors/institutions: TNCs and states. The central argument of
this book has been that, among the multiplicity of actors involved in the global
economy, these two – whether in conflict or collaboration – are responsible for
much of the shaping and reshaping of the global economic map. As such, they
bear the primary responsibility for improving the lives and livelihoods of people
throughout the world. For that reason they form the focus of the next two sections
of this chapter. First, we will look at the role of TNCs in terms of their corporate
social responsibility (CSR). Second, we will focus on states in the context of global
governance issues.

TNCs AND CORPORATE SOCIAL RESPONSIBILITY

‘The business of business is business’
This statement, generally attributed to Milton Friedman, the free market econo-
mist, implies that the primary purpose of firms is to maximize shareholder value. In
other words, the only actors who matter are the shareholders (stockholders): the
ultimate owners of the company. Everybody and everything else – employees, cus-
tomers, suppliers, members of the communities in which the company’s facilities
are located, the environment – are not the company’s direct concern. This is the
ideology of business that dominates the USA and the UK economies in particular:
the neo-liberal model of free market capitalism. It is demonstrated most clearly
in the context of company takeovers, where the views of employees are usually
ignored, even though they are much more directly engaged in the company than
many of the shareholders (which are predominantly huge financial institutions for
whom a firm is simply part of a broader portfolio), and have more at stake (their
incomes and livelihoods). In fact, such a narrow view of business responsibilities

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY358

is far from universal. In many European countries, for example, a broader concept
of stakeholder capitalism exists in which other actors (‘stakeholders’, such as labour,
consumers, suppliers) are explicitly recognized as having legitimate interests in
business decisions.

Issues of corporate responsibility impinge on virtually all aspects of modern life
and span the entire spectrum of relationships between firms, states and civil soci-
ety.13 We cannot explore all of these. Instead we will concentrate on those aspects
of CSR that have an explicitly international dimension.14

Approaches to CSR
Rob van Tulder and his colleagues identify four approaches to CSR (Figure 11.1),
each of which reflects different degrees of relationship to the social environment
and to external stakeholders:15

•• Inactive CSR is essentially that embodied in the ‘business of business is business’
philosophy: ‘the only responsibility companies (can) have is to generate profits …
no fundamental ethical questions are raised about what they are doing’ (p. 143).

•• Reactive CSR is slightly different: it ‘shares the focus on efficiency but with
particular attention to not making any mistakes … entrepreneurs monitor
their environment and manage their primary stakeholders so as to keep
mounting issues in check … Entrepreneurs … respond specifically to actions
of external actors that could damage their reputation’ (p. 143).

•• Active CSR ‘represents the most ethical entrepreneurial orientation.
Entrepreneurs … are explicitly inspired by ethical values … on the basis of
which company objectives are formulated. These objectives are subsequently
realised in a socially responsible manner regardless of actual or potential social
pressures by stakeholders’ (p. 145).

•• Proactive CSR occurs where an entrepreneur involves ‘external stakeholders
right at the beginning of an issue’s life cycle’ (p. 145). It implies active and
ongoing discussion with stakeholders: a ‘discourse ethics’ approach.

International CSR and GPNs
As we have seen throughout this book, the production, distribution and consump-
tion of goods and services are primarily organized within GPNs, usually controlled
and coordinated by TNCs. Such networks raise hugely important questions, par-
ticularly regarding relationships between lead firms and suppliers and the treatment
of labour throughout the network. In Chapter 8, we discussed the developmental
implications of involvement (or non-involvement) in GPNs for people and busi-
nesses in local economies using the criterion of various types of upgrading. Of these,
social upgrading relates specifically to work and labour standards. This includes a

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MAKING THE WORLD A BETTER PLACE 359

whole spectrum of social, economic and ethical issues, including pay, work condi-
tions, occupational health and safety, and human rights. Questions of CSR, there-
fore, are intrinsically involved in the operation of GPNs.16 We examine some specific
examples in the cases of agro-food (Chapter 13) and clothing (Chapter 14).

The primary mechanism for attempting to ensure social upgrading in GPNs is
the code of conduct. Such codes have proliferated to the extent that they often over-
lap in highly confusing ways. In 2006, for example, it was estimated that there
were around 10,000 different codes of labour practice.17 Two-thirds of the 100
largest firms in the world operated a code of conduct by the early 2000s.18 A
major reason for such proliferation is the increased geographical extent and
organizational complexity of GPNs:

Codifications are triggered by intrinsic motivations … [including] …
the greater strategic need to coordinate and control the firm’s activities
spread over a large number of countries and constituencies … This is
often the area of ‘internal codes of conduct’ or ‘codes of ethics’. The
strategic need for the formulation and implementation of external
codes of conduct as a coordination mechanism becomes bigger when
firms engage in sourcing out activities to dependent affiliates (off-
shoring) or to independent suppliers (outsourcing) in developing
countries, where the governance quality is often relatively low and the
cultural and institutional distance … is relatively high. A large number
of (procurement) codes thus addresses supply chain issues such as
human rights, labour standards or the right to association … In this
case firms have an incentive not only to formulate codes of conduct,

Pro/interactive

Corporate societal

responsibility

‘Interactive duty’

In/outside–in/out

‘Doing the right
things right’

‘Doing well by
doing good’

Medium-term profitability
and sustainability

Active

Corporate social
responsibility

‘Positive duty’
or virtue based

Inside–out

‘Doing the right things’

‘Doing good’

Long-term profitability

Corporate self-
responsibility

Inactive

‘Utilitarian’
legal compliance

Profit maximization

Inside–in

‘Doing things right’

‘Doing well’

Narrow

(internal) CSR

Economic

(wealth-oriented)

Broad

(external) CSR

Social

(welfare-oriented)

Scope

Nature of responsibility

Reactive

Corporate social
responsiveness

‘Negative duty’

Outside–in

‘Don’t do things wrong’

‘Doing well and
doing good’

Quarterly profits and
market capitalization

Figure 11.1 Differing approaches to CSR

Source: based on van Tulder with van der Zwart, 2006: Table 8.1; van Tulder et al.,
2009: Table I

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY360

but also to implement them. Extrinsic motivations for [TNCs] are
gaining in importance as well: the risk of reputation damage triggered
by critical NGOs precipitates [TNCs] to formulate international
codes of conduct or principles of ‘corporate citizenship’.19

Figure 11.2 sets out the different kinds of CSR supplier strategy associated with
the four types of CSR discussed above (see Figure 11.1). The upper part of Figure
11.2 sets out the variations in supply chain relationships between different CSR
positions; the lower part shows how codes of conduct strategy may vary. The codes
are classified along two dimensions:20

•• Specificity includes ‘how many issues it covers, how focused it is, the extent to
which it refers to international standards and guidelines, and to what extent
aspects of the code are measured’ (p. 402).

•• Compliance ‘is generally enhanced by clear monitoring systems in place, com-
bined with a more independent position of the monitoring agency and the
possibility of these organizations to formulate and implement sanctions’ (p. 402).

Corporate self-
responsibility

Inactive Reactive Active Pro/interactive

Corporate social
responsiveness
Corporate social
responsibility
Corporate societal
responsibility

Price only.
Strong competition for
customers.
Active use of power
position in chain.
Suppliers responsible
for labour conditions.

Price and quality.
Suppliers responsible
for labour conditions.

Fair prices and high
quality.
Suppliers selected on
basis of approach to
e.g. labour conditions.

Joint responsibilities.
Prices and quality
set together.
Definition of fair wages
and labour conditions
based on consultation
and strategic dialogues.

CSR only if not too
costly and does not
mean higher
purchasing prices.

Cost, control, risk
aversion.

Below 5% CSR of
purchases.

Buy

Global

Internal Specific supplier General supplier Joint/dialogues

Low Medium/high Medium/low High

Low Medium/low Medium/high High

Low Medium/low Medium/high High

Cost, control, quality.

Below 25% CSR of
purchases.

Make or buy

Global

Control and quality.

Target of 25–60%
CSR of purchases.

Make

Regional

Co-development
and quality.

Target of 60–100%
CSR of purchases.

Cooperate

Local

CSR only if needed
and/or available and
does not mean higher
purchasing prices.

Upgrading according
to own standards.

Upgrading according
to joint and/or open
standards.

Chain

liability

Chain
responsibility

Type of code

Specificity

Compliance

Implementation

Supply chain relationships

Codes of conduct strategy

Figure 11.2 Types of CSR strategy towards suppliers

Source: based on van Tulder et al., 2009: Table II; van Tulder, 2009: Table 4

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MAKING THE WORLD A BETTER PLACE 361

Firms positioned at the left-hand side of Figure 11.2 tend to opt (if they do so at
all) for internal corporate codes or for codes drawn up in collaboration with other
firms without prior dialogue with non-firm stakeholders. On the other hand,
firms positioned towards the right-hand side of Figure 11.2 tend to participate in
more open agreements with non-firm stakeholders. The pressure from GCSOs
is to move as many firms as possible to that more open, cooperative position.
Much will clearly depend upon the relative bargaining power of the participants as
well as the ‘social conscience’ of firms. There has certainly been some movement.
Even among the hard-line business-is-business community there is now a consid-
erable (albeit often reluctant) recognition that companies do have broader social
responsibilities.

Hence, there has been a rush to formulate corporate responsibility statements.
Some of this may well be altruistic, in other cases mere self-interest. However, it
is difficult to avoid the conclusion that a major catalyst for CSR has been the
increasing pressure on TNCs to recognize their social responsibilities and to con-
form to acceptable ethical standards.21 For example, there is no doubt that such
pressures led to such leading companies as Apple and Nike to publish a list of their
global suppliers in their CSR reports. This was an unprecedented step for compa-
nies which had always been highly secretive about their supply networks.

Types of code of conduct
There are four major types of code of conduct:

•• Codes devised by individual TNCs, or groups of TNCs, with no involvement
of other stakeholders. Example: the Global Social Compliance Programme
established by Wal-Mart, Tesco, Carrefour and Metro.

•• Codes drawn up by coalitions of interest groups in specific industries, such as
clothing.22 Example: the Global Alliance for Workers and Communities
involving Nike, and Gap, together with the World Bank and the International
Youth Foundation.

•• Codes formulated by TNCs in association with some of their stakeholders.
Examples: Global Framework Agreements (GFAs) between a TNC and a
global labour union federation;23 the UK Ethical Trading Initiative (ETI), an
alliance of companies, NGOs and labour unions.24

•• Codes established by international NGOs. Example: the UN Global
Compact,25 which is based upon the ILO Declaration of Fundamental
Principles and Rights to Work. Figure 11.3 sets out its 10 principles.

All such codes are, of course, the outcome of complex bargaining processes:

They need to be understood as part of a contradictory process, involv-
ing collaboration and conflict between commercial and civil society
actors, in which inherent tensions play out.26

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY362

TNCs clearly have an interest in being seen as having a positive relationship with
GCSOs, not least because it provides a ‘seal of approval’. GCSOs need to find ways of
increasing their influence on TNC decision making. But there are problems for both
of them in too cosy a relationship. In the final analysis, they have very different aims
and objectives. But that need not mean that such collaboration is not worth pursuing.

How effective are codes of conduct?
Are such codes mainly a cosmetic exercise? How fully are they implemented? How
are they monitored? These are the questions commonly posed by critics, to which
there are no unambiguous answers. Inevitably, there is a good deal of scepticism
about voluntary codes, whether at the individual firm or collective level. This is not
only because they are ‘voluntary’, but also because they are rather marginal in their
scope and effect. Without some degree of compulsion – and the monitoring of
compliance – there is always the danger that such codes will amount to little more
than a gesture or that companies will be able to influence how the process works.

In one sense, of course, anything that contributes to better conditions for peo-
ple and communities should be welcomed:

Whilst in themselves codes of labour practice are limited, they do have
a role in wider strategies to promote economic and social rights of
vulnerable workers. But they are not sufficient (nor have they aimed)
to achieve more sustainable systems of global production that address
inherent inequalities and poverty … The issue, therefore, is whether
and how codes contribute to a wider process that promotes the rights
of the most vulnerable workers.27

Human rights

Labour standards

Environment

Anti-corruption

Principle

1:

Principle

3:

Principle

7:

Principle 10:

Principle

8:

Principle 9:

Principle

2:

Principle

4:

Principle

5:

Principle

6:

Support and respect the protection of international human rights within their sphere of influence.

The freedom of association and the effective recognition of the right to collective bargaining.

Support a precautionary approach to environmental challenges.

Work against all forms of corruption, including extortion and bribery.

Undertake initiatives to promote greater environmental responsibility.

Encourage the development and diffusion of environmentally friendly technologies.

Make sure their own corporations are not complicit in human rights abuses.

The elimination of all forms of forced and compulsory labour.

The effective abolition of child labour.

The elimination of discrimination in respect of employment and occupation.

Figure 11.3 Principles of the UN Global Compact

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MAKING THE WORLD A BETTER PLACE 363

Very often, the impacts are mixed. For example, a study of the effects of the Ethical
Trading Initiative (ETI) reached the following conclusions:

ETI company codes have had a positive impact in relation to certain
code principles, particularly health and safety, documented minimum
(not living) wages and employment benefits. Company codes were
found to have had little or no impact on other code principles, par-
ticularly freedom to join an independent trade union, collective bar-
gaining and discrimination … In general, permanent and regular
workers were found to have fared better from company codes of
labour practice … [However] … whilst there had been positive
impacts on regular workers, codes of labour practice were failing to
reach more vulnerable casual, migrant and contract workers, many of
whom were women.28

A detailed analysis of GFAs involving firms from the USA, Europe and
Japan identified two important factors in how such codes of conduct tend to be
implemented:29

•• The extent to which the various stakeholders participate in a code’s formula-
tion. This tends to affect the likelihood of different levels of implementation
and compliance, the nature of the codes themselves and the degree of com-
promise involved.

•• A country of origin effect: ‘All Japanese firms scored low on both specificity and
compliance, indicating inactive codes, whereas the only examples of high speci-
ficity and compliance, i.e. active codes, could be found with European firms …
The US companies fall somewhere in between and generally represent the re-
active CSR strategy. The difference in approach between US and European
companies is particularly remarkable, but could be largely explained by the big-
ger involvement of stakeholders. The implementation likelihood of almost all
European codes is higher than that of their American or Japanese counterparts.’30

Codes of conduct, therefore, are useful mechanisms in the progress to greater CSR.
They are clearly better than nothing. But they are insufficient, not least because
they are partial in terms of both their coverage and their essentially voluntary
nature.

STATES AND ISSUES OF GLOBAL GOVERNANCE

Global–national tensions
The world’s economy is global; its politics are national. This, in a nut-
shell, is the dilemma of global governance.31

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY364

While the world has become much more highly integrated economi-
cally, the mechanisms for managing the system in a stable, sustainable
way have lagged behind.32

Virtually the entire world economy is now a global capitalist market economy although,
as we saw in Chapter 6, there are several variants. The collapse of the state social-
ist systems at the end of the 1980s and the headlong rush to embrace the market,
together with the more controlled opening up of the Chinese economy after
1979, created a very different global system from the one which emerged after
the Second World War. The massive flows of goods, services and, especially, finance
in its increasingly bewildering variety created a world whose rules of governance
have not kept pace with such changes.

In Chapter 3 (see Figure 3.2), we noted the ‘thickening web’ of public and
private institutions that make up the institutional macro-structures of the global
economy. Now we focus on the core institutions, a mixture of bodies established
in different circumstances, and at different times, in the seven decades since the
end of the Second World War. They consist of widely differing memberships
(Figure 11.4), with widely different methods of reaching agreement. Many of
them – especially those set up in the immediate aftermath of the war, like the IMF
and the World Bank – have power structures and sets of rules that were put in
place in a very different world. Essentially, they reflect the prevailing dominance
of the Western nations, most notably the USA and the bigger European nations.
Since then, of course, while the world has changed dramatically the global institu-
tions have seriously lagged behind this new reality. The various ‘G groups’, espe-
cially the G7 and G8, are totally unrepresentative of today’s world. Only very
recently has the voice of some of the growing developing countries been accom-
modated through the emergence of the G20. The significance of the G20 lies in
its much wider membership, especially the involvement of developing countries.

These global governance institutions reflect intricate bargaining, based upon
asymmetrical power configurations within and between member institutions, in

W TO
International

standards
organizations

UN IMF
World
Bank

EU

G8

G20

G7

Russia Germany

Brazil

Turkey

Italy

Argentina

Saudi Arabia

UK

South Africa

France

India

Mexico

US

Indonesia

South Korea

Canada

Australia

China

Japan

Figure 11.4 The core of global governance institutions

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MAKING THE WORLD A BETTER PLACE 365

which the exercise of ‘soft’ power predominates.33 Such bargaining involves very
much more than just states. It is a

multi-actor process among NGOs, states, firms, and international organ-
izations. Indeed, even states may be represented by multiple authorities,
such as departments of environment and state, with conflicting interests
… Organizations representing labor, environmentalists, scientists and
other elements of civil society have been particularly active in negotia-
tions over environmental regimes … Even when not seated directly at
the negotiating table, activist groups have exerted considerable influence
through street demonstrations and through the disseminations of infor-
mation … Thus firms and governments exert less control over the bar-
gaining process, and bargain outcomes are more uncertain.34

In what follows, we focus specifically on the global scale of governance and regula-
tion in four of the most important and most contentious areas:

•• international finance
•• international trade
•• TNCs
•• the environment.

Regulating the global financial system

The established ‘architecture’ of the global financial system
The regulatory ‘architecture’ of the modern global financial system came into
being formally at an international conference at Bretton Woods, New Hampshire,
in 1944. Two international financial institutions were created: the International
Monetary Fund (IMF) and the International Bank for Reconstruction and Development
(later renamed the World Bank). The IMF’s primary purpose was to encourage
international monetary cooperation between nations through a set of rules for
world payments and currencies. Each member nation contributes to the fund (a
quota) and voting rights are proportional to the size of a nation’s quota. A major
function of the IMF has been to aid member states in temporary balance of pay-
ments difficulties. A country can obtain foreign exchange from the IMF in return
for its own currency, which is deposited with the IMF. A condition of such aid
is IMF supervision or advice on the necessary corrective policies – the condi-
tionality requirement. The World Bank’s role is to facilitate development through
capital investment. Its initial focus was Europe in the immediate post-war period.
Subsequently, its attention shifted to the developing economies.

The primary objective of Bretton Woods was to stabilize and regulate interna-
tional financial transactions between nations on the basis of fixed currency exchange

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY366

rates, in which the US dollar played the central role. In this way it was hoped to
provide the necessary financial ‘lubricant’ for a reconstructed world economy.
However, through a whole series of developments, the relatively stable basis of the
Bretton Woods system was progressively undermined, particularly after the early
1970s. In effect, a state-led system was transformed into a market-led system.35

What we do not have, therefore, is a comprehensive and integrated global sys-
tem of governance of the financial system. Instead, there are various areas of regu-
lation performed by different bodies, each of which is nationally, rather than
globally, based. For example:

•• The ‘G’ groups (e.g. G7, G8 and, recently, G20) take an overall view of the
monetary, fiscal and exchange rate relationships between themselves. The ‘G’
groups have no real institutional base; they are informal arrangements struc-
tured around periodic summits of national leaders.

•• The international payments system is operated through the national central
banks rather than through an international central bank.

•• The supervision of financial institutions is carried out through the Bank for
International Settlements (BIS), established in 1975. The Basel II Accord (cur-
rently being replaced by Basel III) sets out standards of banking supervision but
their implementation is down to national governments, and not all govern-
ments follow these standards.

Within such a lightly regulated financial system, developing countries are particu-
larly vulnerable to the volatilities of global capital flows. Indeed, one of the major
weaknesses of the various reforms to the global financial architecture following
the breakdown of the Bretton Woods system was that they maintained a separation
between the problems facing developed countries and those facing developing
countries, instead of seeing them as inextricably linked. In fact, the IMF/World
Bank’s conditionality ‘medicine’ often made the patient worse rather than better.
By imposing massive financial stringency on countries in difficulty – including
raising domestic interest rates, insisting on increased openness of the domestic
economy, reducing social spending, and the like – it became extremely difficult for
countries to help themselves out of difficulty:

Conditionality, at least in the manner and extent to which it has been
used by the IMF, is a bad idea; there is little evidence that it leads to
improved economic policy, but it does have adverse political effects
because countries resent having conditions imposed on them … In
some cases it even reduced the likelihood of repayment.36

In the absence of a more coordinated and institutionalized system, the global financial
system could easily spiral out of control. Indeed, this is what appeared to be happening
following the East Asian financial crisis of 1997, with its subsequent spillover effects

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MAKING THE WORLD A BETTER PLACE 367

on countries like Russia and Brazil. There was particular concern over the volatile
nature of global capital flows in terms of their impact on both the financial system
itself and the individual countries and their populations most seriously affected by
unpredictable flows of ‘hot money’. To many observers, especially in the West, the
causes of the 1997 East Asian crisis lay in structures and practices inside the affected
countries (including so-called ‘crony capitalism’). The remedy was obvious: apply
the usual ‘Washington Consensus’ formula in which all answers lie in the unfettered
operation of markets and in the conditionality applied to financial assistance. In fact,
the major (though not the only) cause of the East Asian crisis was to be found in flows
of speculative capital into (and then out of) the region. It also transpired that corrupt
financial practices were by no means unique to East Asia. The collapse of two massive
US companies, LTCM and Enron, in 2000–1, demonstrated this in graphic terms.

Not surprisingly, there were calls for a new, or reformed, financial architecture to
ensure that a similar crisis could not recur. In fact, very little happened. It was back
to business as usual and the further headlong growth and diversification of finan-
cial markets and esoteric financial products (see Figure 16.5). From a broad devel-
opmental viewpoint, the problem still remained that

the global financial market is heavily dominated by financial interests
in the industrialized countries. The governments of these countries,
especially the economically strongest, determine the rules governing
the market through their influence on the IFIs [International Financial
Institutions]. These latter institutions in turn exercise great leverage
over the macroeconomic and financial policies of developing countries.
At the same time, the banks and financial houses from these same
countries enjoy tremendous market power within the global financial
system. The system is also characterized by severe market failures and is
unstable. The upshot of all this is that most of the risks and the negative
consequences of financial instability have been borne by the middle-
income countries, currently the weakest players in the system.37

Ten years after the East Asian crisis, the much bigger – and potentially catastrophic –
financial crisis of 2008 erupted. This time it could not be argued that the causes lay
in ‘inefficient’ or ‘corrupt’ markets in developing countries. The origins of the much
bigger 2008 financial crisis lay in the very heart of the ‘Washington Consensus’.
The much lauded, solely market-driven, financial system did not work. This time,
it has to be fixed or, rather, replaced. The discrediting of the existing, very lightly
regulated, financial system means that, this time, new solutions have to be found.

Towards a new global financial architecture?
It is too early to say what kind of new financial architecture will emerge or how
stable it will be. What we can say is that the immediate response of national gov-
ernments to the 2008 crisis was quite impressive, in the sense that total financial

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY368

meltdown was avoided. All governments implemented short-term rescue packages
for their own financial sectors. But what about the bigger – global – picture?

Potentially, the most important development has been the emergence of the
G20 as the central focus of attempts to build a reformed global financial system.
The G20 was created in 1999 in the aftermath of the East Asian crisis but it was
not until 2007 that it came to real prominence when the G20 finance ministers
agreed to pump liquidity into financial markets at the beginning of the global
financial crisis. In subsequent meetings in 2008 and 2009, the G20 was at the
centre of initiatives to deal with the crisis. At its London summit in April 2009,
$500 billion was committed to refinance the IMF; at the Pittsburgh summit in
September 2009, the national leaders agreed to expand the G20’s role, placing it
at the centre of international economic policy making. Figure 11.5 outlines the
major aspects of the G20’s proposed global financial reform programme.

Financial
regulation

Implement higher global standards consistently to ensure a level playing field and
avoid fragmentation of markets, protectionism and regulatory arbitrage.

Establish
Financial Stability
Board (FSB)

Includes all G20 countries, plus Spain and the EC with strengthened mandate to
promote financial stability, enhance openness and transparency of the financial sector,
implement international financial standards.

International
cooperation

Collaborate with IMF to conduct early warning exercises of potential macroeconomic
and financial risks.
Home authorities of each major financial institution should ensure that the group of
authorities with a common interest in that financial institution meets at least
annually.
Systemically important financial firms should develop internationally-consistent
firm-specific contingency and resolution plans.
Establish supervisory colleges for significant cross-border firms.
Advanced economies, the IMF and other international organizations should provide
capacity-building programmes for emerging market economies and developing
countries on the formulation and implementation of new major regulations,
consistent with international standards.

Prudential
regulation

Raise the quality, consistency and transparency of the Tier 1 capital base.
Require banks to build buffers of resources in good times that they can draw on
when conditions deteriorate.
Level of capital in the banking system to be raised relative to pre-crisis levels.
All major G20 countries to adopt the Basel II capital framework.
Financial institutions should provide enhanced risk disclosures in all their reporting.

Compensation Align compensation with long-term value-creation, not excessive risk-taking by
(i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of
variable compensation to be deferred, tied to performance and subject to appropriate
clawback; (iii) making firms’ compensation policies transparent through disclosure
requirements; (iv) ensure compensation committees can act independently.

Area Purpose

Figure 11.5 Examples of measures proposed by the G20 to reform the global
financial system

Source: based on Progress Report on the Actions to Promote Financial Regulatory Reform,
www.g20.org

How far have these, and other, reforms progressed? The report by the G20
Financial Stability Board (FSB) in late 2013 showed that some progress has been
made but that there is still a long way to go.38 Among areas where reform is
urgently needed are the following:

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MAKING THE WORLD A BETTER PLACE 369

•• A restriction on the overall size of banks, in particular ending the ‘too big to
fail’ situation in which taxpayers have to pick up the bill for failure.

•• Separating the ‘utility’ and ‘casino’ functions of banks to prevent cross-contam-
ination from the risky speculative activities (like hedge and private equity
funds) to those activities needed to finance the ‘real’ economy. This harks back,
at least in spirit, to the US Glass–Steagall Act of 1933 (see Chapter 16).

•• Limiting the size of bonuses paid to bankers. There has been universal condem-
nation of the obscene sums derived from those financial activities described as
‘socially useless’ by the chair of the UK’s Financial Services Authority.

•• Dealing with the risks posed by ‘shadow banking’: institutions which perform
some of the roles traditionally performed by banks, but are outside regulatory
control.

There are, of course, many other possibilities for reform. One is the imposition of
a small tax on every financial transaction: the so-called ‘Tobin tax’, first proposed
by James Tobin in the 1970s, with the aim of ‘throwing some sand in the wheels
of cross-border financial transactions’. The idea was to discourage excessive flows
of ‘hot’ money: short-term capital flows which can so easily destabilize financial
systems, especially of weaker countries. In its present form it is seen as a way of
raising capital for broader developmental purposes:

A small global tax on financial transactions (say on the order of one
tenth of 1 per cent) would generate tens of billions of dollars to
address global challenges such as climate change or health pandemics
at little economic cost.39

Of course, substantial reform of the global financial system can only happen with
the consent of states themselves. One of the lessons of the post-2008 crisis is that,
once the immediate crisis seems to have passed (it has not), then the tendency to
adopt parochial positions tends to return. Narrow, short-term national political
agendas too often prevail over longer-term global needs.

Regulating international trade

The evolution of world trade regulations
Compared with the international financial system, the governance of interna-
tional trade is much clearer (though just as controversial).40 In 1947, the General
Agreement on Tariffs and Trade (GATT) was established as the third international
institution formed in the aftermath of the Second World War, along with the IMF
and the World Bank – completing what some have called the ‘unholy trinity.’41
Establishment of the GATT reflected the view that the ‘beggar-my-neighbour’
protectionist policies of the 1930s should not be allowed to recur. The objective

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY370

was to be ‘free’ trade based upon the principle of comparative advantage, first intro-
duced by David Ricardo in 1817. This states that a country (or any geographical
area) should specialize in producing and exporting those products in which it has a
comparative or relative cost advantage compared with other countries and should
import those goods in which it has a comparative disadvantage. Out of such spe-
cialization, it is argued, will accrue greater benefit for all.

Whether or not there is such a thing as ‘free’ trade is highly debatable. In order
to work, it needs some degree of equality between trading partners and this, as we
have seen, at the global scale simply does not exist. The purpose of the GATT was
to create a set of multilateral rules to facilitate free trade through the reduction of
tariff barriers and other types of trade discrimination. The GATT was eventually
replaced by the WTO in 1995, an institutional change which greatly broadened
the remit of the trade regulator. Today, there are 159 member states in the WTO
(Russia having joined in 2012) and around 97 per cent of world trade is covered
by the WTO framework. Figure 11.6 traces its evolution.

W TOGAT T

Length of round

0 0

10 40

20 80

A
v

e
ra

g
e

ta
ri

ff
(p

e
r

c
e

n
t)

N
u

m
b

e
r

o
f

m
e

m
b

e
rs

30 120

40 160

1940 1950 1960 1970 1980 1990 2000 2010

Geneva

Annecy Geneva Kennedy

Torquay Dillon Tokyo Uruguay Doha

‘Bali package’

Tariffs

Tariffs Tariffs Tariffs
Anti-dumping

measures

Tariffs Tariffs Tariffs
Non-tariff

barriers (NTBs)
Specific ‘framework’

agreements

Tariffs
NTBs
Agriculture, textiles, clothing
Services (GATS)
Intellectual property (TRIPs)
Trade-related investment (TRIMs)
Creation of WTO

“Development
round”

(1947–48)

(1949) (1955–56) (1963–67)

(1950–51) (1960 61)� (1973–79) (1986–94) (2001–)

(2013)

Figure 11.6 Evolution of the international trade regulatory framework: from the
GATT to the WTO

Since 1947 there have been nine ‘rounds’ of multilateral trade negotiations,
including the current Doha Round, initiated in 2001 and still not completed. Prior

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MAKING THE WORLD A BETTER PLACE 371

to the mid-1960s, the GATT was mostly concerned with trade of manufactures
between developed nations. As a result, widespread dissatisfaction emerged among
developing countries. A particularly sensitive issue was the lack of access of develop-
ing country exports to developed country markets. Pressure led, in 1965, to the
adoption within the GATT of a generalized system of preferences (GSP) under
which exports of manufactured and semi-manufactured goods from developing
countries were granted preferential access to developed country markets. In fact,
there were a number of exclusions from the GSP, of which one of the most impor-
tant was textiles and clothing (separately regulated under the MFA: see Chapter 14).

As Figure 11.6 shows, the first seven GATT rounds were both quite brief and also
very limited in scope. It was the Uruguay Round, started in 1986 and eventually
concluded in 1994, which constituted the most ambitious and wide ranging of all
the GATT rounds to that point. For the first time, several additional trade issues were
addressed. Notably, agriculture, textiles and clothing were brought into the GATT,
and special agreements were concluded in services (GATS – the General Agreement
on Trade in Services), intellectual property (TRIPS – Trade-Related Aspects of
Intellectual Property Rights), and investment (TRIMS – Trade-Related Investment
Measures). There was a further large reduction in overall tariff levels. The major
organizational change was the creation of a new world trade organization.

The WTO, like the GATT, constitutes a rule-oriented approach to multilateral
trade cooperation:

Rule-oriented approaches focus not on outcomes, but on the rules of
the game, and involve agreements on the level of trade barriers that
are permitted as well as attempts to establish the general conditions of
competition facing foreign producers in export markets.42

The fundamental basis is that of non-discrimination, based upon two provisions:

•• The most-favoured nation (MFN) principle states that a trade concession negoti-
ated between two countries must also apply to all other countries; all must be
treated in the same way. The MFN principle is ‘one of the pillars of the GATT’
and ‘applies unconditionally, the only major exception being if a subset of
Members form a free-trade area or a customs union or grant preferential access
to developing countries’.43

•• The national treatment rule requires that imported foreign goods are treated in
the same way as domestic goods.

Battles within the WTO
The WTO continues to be widely criticised from many directions and from
interest groups in both developed and developing countries.44 For example, uni-
lateralist groups within the USA tend to regard the WTO as a basic infringe-
ment of the country’s national sovereignty. Among developing countries there

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY372

is resentment over what is regarded as the bullying and unfair behaviour of the
powerful industrialized countries. To the anti-globalization protestors, the WTO
is regarded as an undemocratic institution acting primarily in the interests of
global corporations.

In one sense, in fact, the WTO is a far more democratic organization than the
IMF. Whereas in the IMF the voting system is ‘weighted’, so that the more power-
ful states have a greater share of the vote, in the WTO each of the 159 member
states has an equal vote. However, the position is not as straightforward as it seems.
Decisions in the WTO are arrived at through negotiation in formal and informal
meetings and through consensus, rather than by vote. Such processes depend
heavily on the resources available to countries to lobby and exert influence:

Most small delegations from developing countries do not have the
appropriate resources either in Geneva or at home to service the
increasingly frequent, complex, and resource-intensive negotiation
process at the WTO …

However, knowledge and resources are not enough for all countries to
be effective in WTO negotiations. An important reality is that the WTO
rules do not entirely remove the inequality in the power of nations. It remains the
case that countries with big markets have a greater ability than countries with small
markets to secure market access and to deter actions against their exporters.45

Two especially important sources of tension within the WTO relate to labour
standards and the environment. How far do international differences in labour
standards and regulations (such as the use of child labour, poor health and safety
conditions, repression of labour unions and workers’ rights) and in environmen-
tal standards and regulations (such as industrial pollution, the unsafe use of toxic
materials in production processes) distort the trading system and create unfair
advantages?

Several countries, led primarily by the USA but also including some European
countries, have attempted to incorporate the issue of labour standards into the
WTO. The attempt has failed, partly because not all industrialized countries sup-
port it, but also because developing countries are vehemently opposed. The argu-
ment of those opposed to its inclusion within the WTO’s remit is that labour
standards are the responsibility of the ILO. Indeed, all members of the ILO have
agreed to a set of core principles. The counter-argument is that the ILO lacks any
powers of enforcement. It is also notable that the USA, despite its current position
on including labour standards in trade agreements, has not signed up to several of
the ILO’s core labour conventions, arguing that they do not comply with US law.

Similar questions apply to the relationship between trade regulations and
the environment. To what extent should variations in environmental standards be
incorporated into international trade regulations? At one level, the problem is
exactly the same as that of labour standards. If a country allows lax environmental

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MAKING THE WORLD A BETTER PLACE 373

standards, it is argued, then it should not be able to use what is, in effect, a subsidy
on firms located there to be able to sell its products more cheaply on the inter-
national market. The question then becomes one of whether the solution lies in
using international trade regulations or in some other forms of regulation.

These labour and environmental questions posed by some developed countries
arose in the aftermath of the Uruguay Round in the mid-1990s. But three-
quarters of the WTO’s membership consists of developing countries. They face, as
we have seen in Chapter 10, immense economic and social problems. The
Uruguay Round helped them in some respects but created major difficulties in
others. In particular,

of the three big agreements coming out of the Uruguay Round – on
investment measures (TRIMS), trade in services (GATS), and intel-
lectual property rights (TRIPS) – the first two limit the authority of
developing country governments to constrain the choices of compa-
nies operating in their territory, while the third requires the govern-
ments to enforce rigorous property rights of foreign (generally
Western) firms. Together, the agreements make comprehensively ille-
gal many of the industrial policy instruments used in the successful
East Asian developers to nurture their own industrial and technologi-
cal capacities.46

In November 1999, a WTO meeting was held in Seattle to try to initiate a new
round of trade negotiations. The meeting failed, not so much because of the anti-
WTO/anti-globalization protests, but, as the UN Secretary-General, Kofi Annan,
argued, because it failed to initiate a

‘development round’ that would at last deliver to the developing
countries the benefits they have so often been promised from free
trade, instead … [we] … saw governments – particularly those of the
world’s leading economic powers – unable to agree on their priorities.
As a result, no round was launched at all.47

It was not until the end of 2001 that a new global trade round was announced
at Doha in Qatar, with the official title of the ‘Doha Development Agenda’,
to be concluded by 2004. It has effectively failed. The Doha Round has been
possibly even more acrimonious than the Uruguay Round.48 Deadlines have
been missed with (un)impressive regularity. A ‘make or break’ Ministerial
Meeting at Cancún in 2003 collapsed without producing any significant
results. Subsequent meetings in Hong Kong (2005) and Geneva (2006, 2008)
made very little progress.

The G20 has committed ‘to reaching an ambitious and balanced conclusion to
the Doha Development Round’ noting that it is ‘urgently needed’. But whether
such rhetoric will make a difference is far from clear. The G20 also reaffirmed its

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY374

commitment not to raise new barriers to trade. However, 17 of the 20 G20 members
introduced some kind of trade protectionist measure in 2008–9.49 A further compli-
cation is the resurgence of regional and bilateral trade negotiations outside the WTO,
such as the proposed Transatlantic Trade and Investment Partnership and the Trans-
Pacific Partnership (see Chapter 6). These call into question the willingness of some
leading states to participate in the multilateral framework that is the WTO.

In late 2013, at a WTO meeting in Bali, an agreement was reached claiming to
be ‘worth’ $1 trillion in global benefits. This is to be achieved primarily through
‘trade facilitation’: simplifying cross-border procedures to reduce costs and delays.
There is also agreement to ‘give improved terms of trade to the poorest countries,
and offer developing countries leeway to bypass the normal rules on farm subsi-
dies to feed the poor’.50 In fact, the so-called ‘Bali package’ in no way completes
the Doha Round; it is more symbolic than substantive (‘Doha lite’ it has been
called). The need for a comprehensive trade and development agreement remains
as urgent as ever.

Regulating TNCs

International guidelines and multilateral agreements
In the case of FDI and TNCs there is no international body comparable to the
WTO, although the Uruguay Round included a set of trade-related investment meas-
ures (TRIMS). Within this framework, some of the industrialized countries, led by
the USA, wish to prohibit or restrict a number of the measures listed in Figure
6.9, notably local content rules, export performance requirements, and the like.
TRIMS’ advocates argue that such measures restrict or distort trade. Its opponents
see such measures as essential elements of their economic development strate-
gies. They, in turn, wish to see a tightening of the regulations against the restric-
tive business practices of TNCs. Similarly, organized labour groups are generally
opposed to measures that they feel will increase the ability of TNCs to affect
workers’ interests or to switch their operations from country to country.

In fact, there is a lengthy history of attempts to introduce an international
framework relating to FDI and TNCs (apart from those agreed bilaterally or
within the context of regional trade blocs):51

•• OECD Guidelines for Multinational Enterprises (first introduced in 1976).
•• ILO Tripartite Declaration of Principles Concerning Multinational Enterprises

and Social Policy (1977).
•• UN Code of Conduct for Transnational Corporations (initiated in 1982, aban-

doned in 1992).
•• OECD Multilateral Agreement on Investment (MAI). The most recent

attempt launched in the mid-1990s. Its main provisions were:

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MAKING THE WORLD A BETTER PLACE 375

� Countries were to open up all sectors of the economy to foreign invest-
ment or ownership (the ability to exempt key sectors in the national
interest was to be removed).

� Foreign firms were to be treated in exactly the same manner as domestic
firms.

� Performance requirements (e.g. local content requirements) were to be
removed.

� Capital movements (including profits) were to be unrestricted.
� A dispute resolution process would enable foreign firms to be able to sue

governments for damages if they felt that local rules violated MAI rules.
� All states were to comply with the MAI.

Not surprisingly, the MAI generated a huge amount of opposition and was even-
tually blocked. Opposition was drawn from a very broad spectrum indeed, across
both developed and developing countries:

The choice of the OECD as the venue for the negotiations was a seri-
ous mistake because the OECD is a rich-country club and many LDCs
were excluded from the discussions; why would LDCs accept an agree-
ment that they had no part in formulating and that protected the inter-
ests of [T]NCs? Even many OECD countries objected to rules that
would harm their own interests … Labor and environmentalists
objected that MAI would give [T]NCs license to disregard workers’
interests and pollute the environment. Many critics charged that no
protection was provided against the evils committed by [T]NCs. Even
official American enthusiasm cooled when people realized that the MAI
dispute mechanism could be used against the US and its [T]NCs.52

The major dilemma in any attempt to establish a global regulatory framework for
FDI and TNCs is the sharp conflict of interest inherent in the process involving
TNCs, states, labour groups and CSOs. Should the focus be on regulating the
conduct of TNCs (the viewpoint of most developing countries, some developed
countries, labour and environmental groups) or should it be concerned with the
protection of TNCs’ interests? Both TRIMS and the aborted MAI were stacked in
favour of TNCs.

Dealing with problems of tax avoidance
Today, as we saw in Chapter 7, there is particular concern over tax avoidance by
TNCs, especially through the practices of transfer pricing and establishing shell
operations in lower-tax countries. Through such means, TNCs are able to manipu-
late their international tax liabilities and, hence, to deprive states (and their taxpay-
ers) of legitimate revenue (see Figures 7.5 and 7.6). As a result, a variety of possible
tax reforms have been put forward. One proposal is for a system of unitary taxation:

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY376

Unitary taxation … does not allow the TNC to be taxed as if it were
a collection of separate entities in different jurisdictions, but instead
treats a TNC engaged in a unified business as a single entity, requiring
it to submit a single set of worldwide consolidated accounts in each
country where it has a business presence, then apportioning the over-
all global profit to the various countries according to a weighted
formula reflecting its genuine economic presence in each country.
Each country involved sees the combined report and can then tax its
portion of the global profits at its own rate.53

However, the kind of international regulatory framework needed for such reforms
certainly does not exist at present. But pressure is certainly building. Within the
EU, for example, the European Commission is investigating the tax arrangements
of countries such as Ireland, Luxembourg and the Netherlands. More broadly, the
Commission is aiming to deal with so-called ‘hybrid tax schemes’ which exploit
‘mismatches between different countries’ tax systems that allow companies to
minimise tax using hybrid instruments such as convertible preference shares or
profit participating loans, which are treated as equity in some countries and debt
in others’.54

But there is still a long way to go before a coherent international regulatory
system is in place. In response to a request from the G20, the OECD in 2013
proposed a series of measures to address some of the most egregious interna-
tional tax avoidance practices: for example, those relating to transfer pricing, the
digital economy, rules on foreign-controlled companies, including the issue of
‘permanent establishment status’ (whereby companies claim non-residentiary
status for their operations). The OECD’s 15-point ‘action plan’55 aims to ‘give
governments the domestic and international instruments to prevent corpora-
tions from paying little or no taxes’. As such, it at least represents a potential step
towards dealing with the very serious problems arising from the tax avoidance
practices of TNCs.

There is clearly an urgent need to deal with the problem of offshore financial
centres (OFCs), which operate as tax havens (not only for TNCs but also for very
wealthy individuals). They attract investors through their low tax levels and ‘light’
regulatory regimes.56 For example, although hundreds of banks are apparently
located in countries such as the Cayman Islands, only a few actually have a phys-
ical presence there. Most are little more than ‘a brass or plastic name plate in the
lobby of another bank, as a folder in a filing cabinet or an entry in a computer
system’.57 Similarly, although there were roughly 300,000 companies registered in
the Virgin Islands in the early 2000s, ‘only 9,000 of them show any signs of activ-
ity locally’:58 ‘The Netherlands has about 23,000 “letterbox companies”, managed
by 176 licensed trust firms … [which] attract huge flows of money through
the Netherlands, making €8tn worth of transactions in 2011–13 times its gross
domestic product.’59

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MAKING THE WORLD A BETTER PLACE 377

Figure 11.7 shows the geographical distribution of offshore financial centres.
Each tends to fill a specific niche which it exploits in competition with other
centres in the same geographical cluster and with similar niche centres elsewhere
in the world. Much of their growth occurred in the 1970s, in places that were
already operating as tax havens, to act as banks’ ‘booking centres’ for their eurocur-
rency transactions:

By operating offshore booking centres international banks could act
free of reserve requirements and other regulations. Offshore branches
could also be used as profit centres (from which profits may be repat-
riated at the most suitable moment for tax minimization) and as bases
from which to serve the needs of multinational corporate clients.60

The location of these offshore centres, and especially their geographical clustering,
is partly determined by time zones and the need for 24-hour financial trading.

There is now an intensifying international drive to crack down on offshore tax
havens. Such action was initiated by the OECD but has been followed by specific
actions by the USA, UK and other European governments.61 For example:

•• In 2013, the UK made an agreement with 10 British protectorate territories,
including Bermuda, the British Virgin Islands, the Cayman Islands, Jersey,
Guernsey and the Isle of Man to establish a register of the owners of founda-
tions, trusts and shell firms in their jurisdictions.

•• In 2010, the USA introduced a new law – the Foreign Accounts Tax Compliance
Act – to force foreign bank accounts to declare assets held by US citizens.

Vanuatu

US Virgin Is.
Turks & Caicos Is.

Switzerland

Singapore

Seychelles

San Marino

Samoa
St. Vincent &
the Grenadines

St. LuciaSt. Kitts
& Nevis

Panama

Niue

Netherlands
Antilles

Nauru

Montserrat

Monaco

Mauritius

Marshall Is.
Malta Macao

Liechtenstein

Liberia

Lebanon

Jersey

Isle of Man

Hong Kong

Guernsey, Sark & Alderney

Grenada

Gibraltar

Dominica

Cyprus

Cook Is.

Cayman Is.

British Virgin Is.

Bermuda

Belize

Barbados

Bahrain
Bahamas

Aruba
Antigua

Anguilla

Andorra

0 33 66 9912 12
Hours difference from Greenwich Mean Time

Figure 11.7 The geography of offshore financial centres

Source: based on OECD data

11_Dicken-7E_Ch-11.indd 377 19/11/2014 10:46:34 AM

PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY378

•• The Dutch government announced its intention ‘to crack down on the use of
so-called “letterbox companies”, which do no real business in the country and
exist largely for tax purposes’.62

•• The EU is ‘to create one of the toughest tax transparency regimes in the world
by passing a Savings Tax Law by the end of the year’.

These initiatives reflect the fact that astronomical tax losses are being incurred
as firms and individuals hide their profits offshore. The EU Tax Commissioner
claimed that the scale of the problem involves about €1 trillion.

But it is not only developed countries that are affected by offshore tax havens.
Oxfam estimated that developing countries are losing out on annual income of
up to $124 billion because more than $6 trillion of developing country wealth is
held in offshore accounts.63 The Tax Justice Network claims that ‘in tax revenue
alone, at least $100billion was lost from developing countries through insufficient
international tax policies’.64

Burning issues: global environmental regulation
As we saw in Chapter 9, the processes of production, distribution and consump-
tion, articulated within and through GPNs, have the potential to create enormous
and long-lasting environmental damage. And yet, compared with finance and trade
regulation, there were few systematic attempts to build an appropriate global regu-
latory structure for the environment until the late 1980s.65 Today, of course, envi-
ronmental issues, and especially climate change, have become one of the (literally)
hottest and most contentious policy issues of all – a veritable minefield, politically,
economically and scientifically.

The evolution of climate change initiatives
From the outset, the UN has been at the centre of global climate change initiatives,
beginning with its decision in 1968 to convene the 1972 Stockholm Conference
on the Human Environment. This stimulated the setting up of national environ-
mental agencies in most developed, and some developing, countries.66

In 1988, the UN established what was to become the scientific core of its envi-
ronmental programme: the Intergovernmental Panel on Climate Change (IPCC).
The first IPCC Assessment Report was published in 1990 and this formed the
basis of the first comprehensive policy on climate change: the 1992 Framework
Convention on Climate Change (FCCC). A key objective of the FCCC was to
achieve

the stabilization of greenhouse gas concentrations in the atmosphere
at a level that would prevent dangerous anthropogenic interference
with the climate system.67

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MAKING THE WORLD A BETTER PLACE 379

The FCCC was based upon voluntary reduction of carbon dioxide levels: it merely
‘encouraged industrialized countries to stabilize GHG emissions’.

Its (not surprising) lack of success led, in 1997, to the drafting of the Kyoto Protocol.
In contrast to the FCCC, Kyoto incorporated binding emission targets over the period
2008–12 for 37 developed countries, based on 1990 levels. The Protocol came into
force in 2005; 184 countries (excluding, most significantly, the USA) were signatories.
After the Kyoto Protocol was finally ratified, there was much argument among the
signatories and, with the USA, over the details of climate change regulation. In
December 2005, the UN Conference in Montreal agreed the following measures:

•• To strengthen the ‘clean development mechanism’, which allows developed
countries to invest in sustainable development projects in developing countries
while earning emission allowances.

•• To launch the ‘Joint Implementation’ mechanism, which allows developed
countries to invest in other developed countries, especially the transition
economies of Eastern Europe. In doing so they can earn carbon allowances,
which can be used to meet their emission reduction commitments.

•• To implement the ‘compliance regime’ which ensures that countries have clear
accountability for meeting their emission reduction targets.

Where are we now?
The Kyoto commitments were time limited (2012). A new agreement was to be
negotiated and signed at the UN Conference on Climate Change at Copenhagen
in December 2009.

Climate scientists believe that if global temperatures were to rise by more than
2°C above pre-industrial levels then climate change would become irreversible. To
meet such a criterion, a number of specific, but highly variable, targets have been
proposed, including the following:

•• Developed countries to halve global CO2 emissions, compared with 1990
levels, by 2050. This has the support of developed countries in general, while
the G8 promised to cut their own emissions by 80 per cent.

•• The EU promised to cut its emissions by 20 per cent by 2020 compared with
1990 levels and to increase this to 30 per cent if other countries also commit.

•• The USA promised to reduce its emissions by 17 per cent by 2020, compared
with 2005 levels.

•• Japan promised to reduce its emissions by 25 per cent by 2020.
•• China promised to reduce the growth in its CO2 output by 40–45 per cent by 2020.

The most intractable problem is the extent to which developing countries should
be expected to adopt measures that could prevent their future economic devel-
opment. Since most of the ‘stock’ of CO2 in the atmosphere was produced his-
torically by developed countries then, it is argued, developing countries should be
given preferential treatment. On the other hand, the developed country argument

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY380

is that most of the growth in emissions in the future will be in developing coun-
tries, especially China, India and Brazil.

Given the 2°C ‘bottom line’, the major goals of the Copenhagen meeting were
to reach agreement on the following issues and to embed them into a binding
UN treaty with precise numbers and a timescale: developed countries to cut their
CO2 emissions; developing countries to curb their emissions; provision by devel-
oped countries of financial and technological assistance to developing countries
to enable them to achieve their emission targets. On every issue, of course, views
differed widely between different interest groups: developed and developing
countries, environmental groups and other GCSOs, and business firms.

Despite all the pre-meeting hype – and all the dire warnings – no binding
agreement was reached. At the last minute, and after highly acrimonious negotia-
tions, an ‘Accord’ was reached, based primarily on a deal put together by a small
group of countries: the USA, Brazil, China, India and South Africa. The most
striking aspect of the Copenhagen Accord was its vagueness. The only numbers
related to the commitment of financial assistance to developing countries.

Since Copenhagen, discussions have continued at annual UN Climate Change
Conferences in Cancún (2010), Durban (2011), Doha (2012) and Warsaw (2013). The
Warsaw meeting agreed that countries must set out their ‘national contributions’ to
greenhouse gas emissions in time for the 2015 Climate Change Summit in Paris. The
major scientific input for these meetings is the IPCC’s Fifth Assessment Report
(2013), which reaffirms the human influence on global warming and that ‘limiting
climate change will require substantial and sustained reductions of greenhouse gas
emissions’.68 However, the big issue, as always, is not the science but the politics.

A BETTER WORLD?

The future shape of the global economy is far from clear. Although the chances
are that globalizing processes will continue to operate and that the world will
continue to become increasingly interconnected, there is a huge amount of uncer-
tainty. We should certainly not simply extrapolate from past trends. However, the
key question is not so much what the world might be like in the future, but what
it should be like. Most of all, then, we need to think about the kind of world we,
and our children, would want to live in. There are choices to be made. What might
these be? After all, globalization is not a force of nature; it is a social process.69 What
are the choices? In theory they are infinite; in practice they are not.

Alternative economies?
In thinking about alternative futures in the context of globalization debates, there
is a depressing tendency towards polarization of positions of the kind we identified

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MAKING THE WORLD A BETTER PLACE 381

in Chapter 1. The gung-ho, neo-liberal hyper-globalizers see the solution in yet
more openness of markets, unfettered flows of goods, services and capital. In other
words, much, much more of the same. The anti-globalizers argue for exactly the
opposite. Whereas the first strategy would almost certainly create a world of even
greater inequality (as well as environmental damage) the second embodies the
dangers of reverting to a set of medieval subsistence economies.

The diametrical opposition of these two positions can be illustrated by their
polarized attitudes towards trade. To the hyper-globalizers, it is a central tenet
that trade should be allowed to flourish without hindrance. The anti-globaliz-
ers’ position is that the pursuit of ever-increasing international trade – which
is clearly encouraged by a free trade regime like the WTO – should be totally
abandoned, not merely regulated. The argument is basically that sustainable
development is incompatible with the pursuit of further economic growth. An
economic system based upon very high levels of geographical specialization
inevitably depends upon, and generates, ever-increasing trade in materials and
products.

A central criticism is that the energy costs of transporting materials and goods
across the world are not taken into account in setting the prices of traded goods
and that, in effect, trade is being massively subsidized at a huge short-term and
long-term environmental cost. But by no means all environmentalists agree with
this kind of viewpoint. As David Pearce argues, ‘unquestionably, there are environ-
mental problems inherent in the existing trading system … [but] there is also
extensive confusion in the environmentalist critique of free trade’.70 There are, in
fact, very different ‘shades of green’, ranging from the position that human inge-
nuity and new technologies will find the solutions without necessitating a change
in lifestyles (the Panglossian view) through to the ‘deep green’ arguments that only
a return to a totally different, small-scale, highly-localized mode of existence will
suffice. But such a path, rather than improving the position for the poor in the
world economy, ‘would condemn the vast majority of people to a miserable future,
at best on the margins of the bare minimum of physical existence’.71 It is not a
socially acceptable policy:

The alternative to an economic system that involves trade is not
bucolic simplicity and hardy self-sufficiency, but extreme poverty.
South Korea has plenty of problems, but not nearly so many as its
neighbour to the north.72

But this emphatically does not mean that ‘local’ economies are irrelevant. On the con-
trary. There exists a wide diversity of economies73 offering different kinds of possi-
bilities and which occupy different positions in relation to the larger global economy.
Many of these are, essentially, ‘community economies’. Figure 11.8 summarizes the
main ways in which such economies differ from the ‘mainstream’ economy: ‘In some
cases, these communities are geographically confined to the “local”, whilst in others

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY382

they span the “global”.’74 The fair-trade networks discussed in Chapter 13 are exam-
ples of the latter. The Mondragón Cooperative Corporation is an example of a com-
plex of cooperatives spread across 14 countries but grounded in the Basque region
of Spain and organized on worker-owned principles. The LETS (Local Exchange
Trading System) uses local ‘currencies’ to facilitate the exchange of services and
self-produced or self-earned goods within a network of members in a local commu-
nity.75 A micro-finance scheme, which began as a local initiative in Bangladesh in the
1970s, subsequently spread across many other countries and has been a huge con-
tributor to poverty reduction.76 None of these initiatives are without their problems.
For example, in late 2013, the Mondragón Cooperative cast adrift its Fagor domestic
appliances member, which employed almost 6000 workers.77

The diversity of alternative economies is growing and offers significant possibilities
for creating fulfilling and fair communities and, more generally, for reconsidering
globalization as a transformable social process and not a force of nature. But they are,
by definition, mostly small in scale and often highly local in scope. They raise impor-
tant issues of how such economies connect into the bigger picture (unless they decide
to opt out). And it is the ‘bigger picture’ that still demands our primary attention.

Place-attached

Diversified

Multiple

Small scale

Cooperative

Decentred

Culturally distinctive

Socially embedded

Local ownership

Dispersed

Autonomous

Oriented to local market

Values long-term investment

Vitality oriented

Recirculates value locally

Community owned

Community led

Community controlled

Communal appropriation and distribution of surplus

Environmentally sustainable

Whole

Ethical

Harmonious

Locally self-reliant

Aspatial/global

Specialized

Singular

Large scale

Competitive

Centred

Acultural

Socially disembedded

Non-local ownership

Agglomerative

Integrated

Export-oriented

Privileges short-term return

Growth oriented

Outflow of extracted value

Privately owned

Management led

Controlled by private board

Private appropriation and distribution of surplus

Environmentally unsustainable

Fragmented

Amoral

Crisis-ridden

Participates in a spatial division of labour

Community economyMainstream economy

Figure 11.8 Contrasting characteristics of mainstream and community economies

Source: based on Gibson-Graham, 2006: Figure 23

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MAKING THE WORLD A BETTER PLACE 383

To be ‘globalized’ or not to be ‘globalized’: that is the
question

The main losers in today’s very unequal world are not those who are too
much exposed to globalization. They are those who have been left out.78

Is the problem actually globalization or not-globalization? Is the dif-
ficulty being part of the system or not being part of it? How can
globalization be the source of problems for those excluded from it?79

It is abundantly clear that the position of many of the world’s poorest countries
is highly marginal in terms of the global economy. The usual prescription of the
IMF/World Bank ‘doctors’ is that they should open their economies more, for
example by positively encouraging exports and by liberalizing their regulatory
structures:

For policymakers around the world, the appeal of opening up to global
markets is based on a simple but powerful promise: international eco-
nomic integration will improve economic performance … The trouble
is … that there is no convincing evidence that openness, in the sense of low
barriers to trade and capital flows, systematically produces these consequences. In
practice, the links between openness and economic growth tend to be weak and
contingent on the presence of complementary policies and institutions.80

‘Openness’ will only work if the playing field is relatively level – which, clearly, it is
not. And it also has to work both ways – which, clearly, it does not. Tariffs imposed
by developed countries on imports of many developing country products remain
very high. It is common for tariffs to increase with the degree of processing (so-
called tariff escalation), so that higher-value products from developing countries
are discriminated against. At the same time, agricultural subsidies make imports
from developing countries uncompetitive. In other words, the odds are stacked
against them:81

The human costs of unfair trade are immense. If Africa, South Asia,
and Latin America were each to increase their share of world exports
by one per cent, the resulting gains in income could lift 128 million
people out of poverty … When developing countries export to rich-
country markets, they face tariff barriers that are four times higher
than those encountered by rich countries. Those barriers cost them
$100bn a year – twice as much as they receive in aid.82

However, simply opening up a developing economy will almost certainly lead to
further disaster. There is the danger of local businesses being wiped out by more

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY384

efficient foreign competition before they can get a toehold in the wider world.
Hence a prerequisite for positive and beneficial engagement with the global econ-
omy is the development of robust internal structures: ‘the development of a national
economy is more about internal integration than about external integration’.83

Eradicating extreme poverty: the UN Millennium
Development Project
Poverty is the major problem in many parts of the world. For many years, aid
programmes have been devised to help alleviate its major manifestations but such
aid has generally fallen far below needs. In 2002, a meeting of heads of state in
New York adopted the UN Millennium Declaration. Its aim was nothing less than
the eradication of extreme poverty by 2015, as part of a broad and comprehensive
development programme. The precise goals and targets of the UN project are set
out in Figure 11.9. They are, indeed, extremely ambitious – especially in light of
the 2008 global financial crisis. The right-hand column of Figure 11.9 shows some
of the progress reported by the UN in 2013. Its conclusion was that while ‘pro-
gress can be reported in most areas, despite the impact of the global economic and
financial crisis … progress in many areas is far from sufficient’.84

Goals, aspirations and collective will

Society is faced with a profound dilemma. To resist growth is to risk
economic and social collapse. To pursue it relentlessly is to endanger
the ecosystems on which we depend for long-term survival.85

The major global challenge is to meet the material needs of the world community
as a whole in ways that reduce, rather than increase, inequality and which do so
without destroying the environment. That, of course, is far easier said than done. It
requires the involvement of all the major actors – business firms, states, international
institutions, CSOs – in establishing mechanisms to capture the benefits of globaliza-
tion for the majority and not just for the powerful minority. To some, this can only
be achieved by an overarching global system of governance: in effect, a world dem-
ocratic government. But, as Dani Rodrik argues, there is an irresolvable political
trilemma, between democracy, national determination and economic globalization:

Even though it is possible to advance both democracy and globalization,
the trilemma suggests this requires the creation of a global political com-
munity that is vastly more ambitious than anything we have seen to date
or are likely to experience soon. It would call for global rulemaking by
democracy supported by accountability mechanisms that go far beyond
what we have at present. Democratic global governance of this sort is a

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MAKING THE WORLD A BETTER PLACE 385

chimera. There are too many differences among nation states … for
their needs and preferences to be accommodated within common rules
and institutions … A thin layer of international rules that leaves substan-
tial room for manoeuvre by national governments … can address glo-
balization’s ills while preserving its substantial economic benefits. We
need smart globalization, not maximum globalization.86

1:
2:
3:
4:
5:
6:
7:
8:

Eradicate
extreme poverty
and hunger

Achieve universal
primary education

Promote gender
equality and
empower women

Reduce child
mortality

Improve
maternal health

Combat HIV/AIDS,
malaria and other
diseases

Ensure
environmental
sustainability

Develop a global
partnership for
development

Goal Target Progress by 2013

Halve, between 1990 and 2015, the proportion of
people whose income is less than $1 a day.
Achieve full and productive employment and decent
work for all, including women and young people.
Halve, between 1990 and 2015, the proportion of
people who suffer from hunger.

Proportion of people in extreme poverty
halved at global level by 2010.

Hunger reduction target within reach,
but 1 in 8 people remain chronically
undernourished.

1:
2:
3:
1:
3:

1: 1:

1:
1: 1:
1:
2:
1:
1:
2:
3:
2:
3:
1:
2:
3:
4:
3:
4:
1:
2:

3:
4:

5:

Address the special needs of least developed
countries, landlocked countries and small island
developing states.
Develop further an open, rule-based, predictable,
non-discriminatory trading and financial system.
Deal comprehensively with developing countries’ debt.
In cooperation with pharmaceutical companies,
provide access to affordable essential drugs in
developing countries.
In cooperation with the private sector, make available
benefits of new technologies, especially information
and communications.

Integrate the principles of sustainable development
into country policies and programmes and reverse
the loss of environmental resources.
Reduce biodiversity loss, achieving, by 2010, a
significant reduction in the rate of loss.
Halve, by 2015, the proportion of the population
without sustainable access to safe drinking water
and basic sanitation.
By 2020, to have achieved a significant improvement
in the lives of at least 100 million slum dwellers.

The drinking water target reached by 2010,
insufficient improvements in sanitation.

Proportion of slum dwellers in cities of
developing world is declining. The 100
million MDG target of improved water
resources, sanitation facilities, durable
housing/sufficient living space exceeded
by 2010.

Have halted by 2015 and begun to reverse the spread
of HIV/AIDS.
Achieve, by 2010, universal access to treatment for
HIV/AIDS for all those who need it.
Have halted by 2015 and begun to reverse the
incidence of malaria and other major diseases.

Target of universal access to antiretroviral
therapy by 2010 missed, but reachable
by 2015.

Remarkable gains made in fight against
malaria and tuberculosis.

Reduce by two-thirds, between 1990 and 2015,
the under-five mortality rate.

Despite large reduction in under-five
mortality rate, more rapid progress needed
to meet the 2015 target. Increasingly, child
deaths are concentrated in poorest regions
and in first month of life.

Reduce by three-quarters the maternal mortality
ratio.
Achieve universal access to reproductive health.

Despite considerable reduction in maternal
mortality, meeting the three-quarters target
needs accelerated intervention and stronger
political backing for women and children.

Ensure that, by 2015, children everywhere, boys and
girls alike, will be able to complete a full course of
primary schooling.

Target of universal primary education by
2015 unlikely to be met.

Eliminate gender disparity in primary and secondary
education, preferably by 2005, and in all levels of
education no later than 2015.

Figure 11.9 The UN Millennium Development Goals

Source: based on material in www.un.org/millenniumgoals; UN, 2013: pp. 4–5

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY386

Nevertheless, even this would require a high level of international cooperation
between nation-states. Leaving ‘substantial room for manoeuvre’ must not involve
facilitating ‘beggar-my-neighbour’ policies. Certainly, any system must be built on
world trading and financial systems that are equitable and reflect the new realities of
the changing global economic map. This must involve reform of such institutions as
the WTO, the World Bank and the IMF or, alternatively, their replacement by more
effective, and more widely accountable, institutions. Pressure for reform has come
from a number of directions. Not the least of these has been the newly institutional-
ized self-awareness of the so-called BRICs. In 2012, the heads of state of the BRIC
countries (including South Africa) urged the need for faster reform of the IMF
and ‘threatened to withhold additional financing requested by the International
Monetary Fund to fight the European sovereign debt crisis unless they gained
greater voting power at the fund’.87 In July 2014, the BRIC leaders established a
$100bn New Development Bank (NDB) aimed at redressing some of the obsta-
cles created for developing countries by the established international organizations,
notably the World Bank and the IMF. The NDB will have two major foci: (1) fund-
ing infrastructural projects; (2) helping members facing sudden foreign capital flight
through establishing a Contingency Reserve Arrangement (CRA). The NDB will
be headquartered in Shanghai and is planned to be in operation in 2016.

More broadly, the emergence of the G20 is undoubtedly a step in the right direc-
tion, but it is little more than that so far. The G20 has not, to date, delivered on the
early promise of the major initiatives taken in 2009 to address the global financial
crisis (see Figure 11.5). Much, much more needs to be done. As we have seen, the
exercise of developed country power through the various kinds of conditionality and
trade-opening requirements imposed on poorer countries has seriously negative
results. Without doubt, trade is one of the most effective ways of enhancing material
well-being, but it has to be based upon a genuinely fairer basis than at present. The
poorer countries must be allowed to open up their markets in a manner, and at a pace,
appropriate to their needs and conditions. After all, that is precisely what the USA
and European countries did during their early phases of industrialization and as did
Japan and the East Asian NIEs at a later date. At the same time, developed countries
must operate a fairer system of access to their own markets for poor countries.

Of course, this will cause problems for some people and communities in devel-
oped countries and these must not be underestimated. As we saw in Chapter 10,
there are, indeed, many losers in the otherwise affluent economies. Will the popu-
lations of the rich countries be prepared to make some sacrifices for the greater
global good? The signs are not very promising. Even at the best of times, it is dif-
ficult to persuade people to look beyond their own needs and wants. And these are
emphatically not the best of times. The chaos wrought by the near collapse of the
financial system in 2008, and the debt burdens piling up to deal with its aftermath,
have increased general feelings of insecurity. For example, there has undoubtedly
been an increase in the opposition of developed country populations to trade
and to foreign immigration. At one stage, it seemed that ‘less-educated, lower-
income workers are much more likely to oppose policies aimed at freer trade and

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MAKING THE WORLD A BETTER PLACE 387

immigration’.88 However, this is changing as more highly educated workers are
increasingly affected.

People whose lives are devastated by ‘globalization’ – especially through loss of
their livelihood – must be assisted effectively and sensitively, whether through finan-
cial assistance or education and retraining. Governments must design and implement
appropriate adjustment policies for such groups if trade policies helpful to develop-
ing countries are to be acceptable politically. Equally, governments of developing
countries must engage in their own internal reforms: to strengthen domestic institu-
tions, enhance civil society, increase political participation, remove corruption, raise
the quality of education, and reduce internal social polarization. Although difficult,
such policies are not impossible if the social and political will is there.

However, even increased material affluence does not necessarily make people
‘happier’ in proportion to their increased wealth.89 Research by the ILO90 suggests
that it is ‘economic security’, rather than wealth, that ‘promotes happiness’:

The global distribution of economic security does not correspond to
the global distribution of income … South and South East Asia have
greater shares of economic security than their share of the world’s
income … By contrast, Latin American countries provide their citi-
zens with much less economic security than could be expected from
their relative income levels … income security is a major determinant
of other forms of labour-related security … [and] … income inequal-
ity worsens economic security in several ways … highly unequal societies
are unlikely to achieve much by way of economic security or decent work.91

As we saw in Chapter 10, the trend in many countries has been for inequality to
be widening, rather than narrowing.

There is a more general argument: that ‘prosperity’ needs to be defined in broader
terms than just ‘gross domestic product’; that ‘well-being’ is about more than just
material affluence. A number of proposals to measure well-being have emerged,
beginning with the rather exotic case of the Kingdom of Bhutan, which introduced
the concept of GNH (Gross National Happiness) in the 1970s. A French govern-
ment commission proposed that the components that go into the measurement of
GDP need to be broadened to incorporate a whole range of other measures, such
as health, education, security, social connectedness, environmental sustainability.92 A
rather more subjective set of measures proposed for national accounts focuses on
two dimensions: personal well-being and social well-being.93 Whether or not such
well-being measures will replace or supplement the conventional measures like
GDP is hard to say. But the fact that we must define growth/prosperity/well-being
in more meaningful terms is incontrovertible if we are to build a better world.

A moral imperative
The problems facing us are both practical and moral. In practical terms, the continued
existence across the world of vast numbers of people who are impoverished – but

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PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY388

who can see the manifestations of immense wealth either at first hand or through the
electronic media – poses a serious threat to social and political stability. But the moral
argument is, I believe, more powerful. It is utterly repellent that so many people live in
such abject poverty and deprivation (wherever they may be) while, at the same time,
others live in immense luxury. This is not an argument for levelling down but for rais-
ing up. The means for doing this are there. What matters is the will to do it – the real
acceptance of, to use David Smith’s words,

the imperative of developing more caring relations with others, espe-
cially those most vulnerable, whoever and wherever they are, within a
more egalitarian and environmentally sustainable way of life in which
some of the traditional strengths of community can be realised and
spatially extended.94

We all have a responsibility to ensure that the contours of the global economic
map in the twenty-first century are not as steep as those of the twentieth century.
We all have a responsibility to treat others as equals. In a global context, this means
being sensitive to the immense diversity that exists, to the world as a mosaic of
people equally deserving of ‘the good life’.

This also means, in my view, the need to question what Michael Sandel terms
‘the moral limits of markets’:

We need to rethink the role that markets should play in our society …
without quite realizing it, without ever deciding to do so, we drifted from
having a market economy to being a market society. The difference is this:
A market economy is a tool – a valuable and effective tool – for organ-
izing productive activity. A market society is a way of life in which mar-
ket values seep into every aspect of human endeavour. It’s a place where
social relations are made over in the image of the market … sometimes,
market values crowd out nonmarket norms worth caring about.95

As Erica Schoenberger argues:

We need to come up with a different way of producing choices from
relying entirely on the blind forces of the market. We need a way of
making big decisions about how things work that is not absolutely
beholden to the drive for profits and does not hold private property
absolutely sacrosanct. Profits and property are not evil. But if they are
the only basis for making decisions about how we live on earth, then
we cannot change our trajectory.96

Paradoxically, the 2008 global financial crisis seemed to offer a real opportunity
for change. For the first time in several decades, both the economic inefficiencies

11_Dicken-7E_Ch-11.indd 388 19/11/2014 10:46:35 AM

MAKING THE WORLD A BETTER PLACE 389

and the social limitations of free, unregulated markets were exposed for all to see.
In particular, an economic system based so heavily on financial speculation is, in
any social and moral sense, dysfunctional. It has failed. The opportunity must be
taken to build a new system to redress the imbalance that has developed between
states and markets, between people and institutions and between the immensely
wealthy and the rest. Such a project is global in both scale and scope, hence the
need for coordinated international policy initiatives rather than individual national
measures that would lead to destructive competition rather than collaboration. At
the height of the crisis in 2008–9, it seemed that such a rebuilding might, indeed,
be on the agenda. But subsequently, as the worst has seemed to some to be over
(or is it?), there is a real danger of going ‘back to the future’. It would be a tragedy,
in every sense, if that were to happen. We can – we must – do better.

NOTES

1 Voltaire (1947: 8).
2 Micklethwait and Wooldridge (2000: ix).
3 Oxford Martin Commission for Future Generations (2013: 9).
4 BBC World Service (2008).
5 ILO (2004b: 12–23).
6 Oxford Martin Commission for Future Generations (2013: 9).
7 Burgoon (2009: 148).
8 Schoenberger (2014: xx).
9 See Lee (2007), Lee and Smith (2004), Sandel (2012), Singer (2004), Smith (2000).
10 Harvey (2011: chapter 8).
11 Taylor et al. (2002: 15–16).
12 Beck (2005: 238).
13 Scherer et al. (2014) explore the increasingly complex social and political issues facing

business firms.
14 Van Tulder with van der Zwart (2006: Parts II and III) provide a comprehensive

analysis of international corporate social responsibility (ICSR).
15 Van Tulder with van der Zwart (2006: 143–5).
16 Barrientos (2008), Hughes et al. (2008), van Tulder (2009), van Tulder et al. (2009),

Barrientos (2008), Hughes et al. (2008).
17 Barrientos (2008: 979).
18 Van Tulder et al. (2009: 399).
19 Van Tulder (2009: 10).
20 Van Tulder et al. (2009: 402).
21 Gereffi et al. (2001).
22 See Chapter 14.
23 Cumbers et al. (2008: 380–4), van Tulder et al. (2009).
24 Barrientos (2008), Hughes et al. (2008).
25 See Moran (2011), Rasche (2009).

11_Dicken-7E_Ch-11.indd 389 19/11/2014 10:46:35 AM

PART THREE WINNING AND LOSING IN THE GLOBAL ECONOMY390

26 Barrientos (2008: 978).
27 Barrientos (2008: 978).
28 Barrientos (2008: 980).
29 Van Tulder et al. (2009).
30 Van Tulder et al. (2009: 408). See also Maignan and Ralston (2002).
31 Wolf (2007).
32 Commission on Global Governance (1995: 135–6).
33 Gritsch (2005).
34 Levy and Prakash (2003: 143, 144).
35 Hirst et al. (2009).
36 Stiglitz (2002: 44).
37 ILO (2004b: 88, 89).
38 Letter from the Chairman of the FSB to G20 leaders (5 September 2013).
39 Rodrik (2011: 264).
40 See Deese (2008), Hoekman and Kostecki (1995), Peet et al. (2003: chapter 5),

Sampson (2001).
41 Peet et al. (2003).
42 Hoekman and Kostecki (1995: 24).
43 Hoekman and Kostecki (1995: 26).
44 See, for example, Deese (2008), Peet et al. (2003: chapter 5), Singer (2004: chapter 3).
45 Sampson (2001: 7–8; emphasis added).
46 Wade (2003: 621).
47 Quoted in Sampson (2001: 19).
48 Stiglitz and Charlton (2005) present a detailed critique of the Doha Round and show

how ‘fair’ trade and development can go together.
49 Gamberoni and Newfarmer (2009).
50 Guardian (7 December 2013).
51 See Braithwaite and Drahos (2000: chapter 10), Gilpin (2000: chapter 6), Kolk and

van Tulder (2005).
52 Gilpin (2000: 184–5).
53 Picciotto (2012: 1).
54 Financial Times (26 November 2013).
55 OECD (2013).
56 Eatwell and Taylor (2000: 189). See also Palan (2003), Roberts (1994).
57 Roberts (1994: 92).
58 Financial Times (7 December 2001).
59 Financial Times (29 April 2013).
60 Roberts (1994: 99).
61 ‘EU tax havens under pressure as leaks go public’, euobserver.com (17 June 2013).
62 Financial Times (12 September 2013).
63 The Guardian (14 March 2009).
64 Tax Justice Network (19 September 2013).
65 See Braithwaite and Drahos (2000: chapter 12), Pearce (1995).
66 Braithwaite and Drahos (2000: 257).
67 Quoted in Pearce (1995: 149).
68 IPCC Fifth Assessment Report, Approved Summary for Policymakers (2013: SPM-14).

11_Dicken-7E_Ch-11.indd 390 19/11/2014 10:46:35 AM

MAKING THE WORLD A BETTER PLACE 391

69 Massey (2000: 24).
70 Pearce (1995: 74).
71 Hudson (2001: 315).
72 Elliott (2002). See also Elliott (2000).
73 Gibson-Graham (2006).
74 Gibson-Graham (2006: 80).
75 Lee (1996).
76 Hulme and Arun (2009).
77 Financial Times (10 December 2013).
78 Kofi Annan, UN Secretary-General, Speech to UNCTAD Meeting in Bangkok,

2000.
79 Mittelman (2000: 241).
80 Rodrik (1999: 136–7; emphasis added).
81 See UNCTAD (2002).
82 Oxfam (2002: 1).
83 Wade (2003: 635).
84 UN (2013: 4).
85 Jackson (2009: 187).
86 Rodrik (2011: xix; emphasis added).
87 Financial Times (30 March 2012).
88 Scheve and Slaughter (2001: 87).
89 Jackson (2009), James (2007), Layard (2005), Oswald (1997), Wilkinson and Pickett

(2009).
90 ILO (2004a). See also Scheve and Slaughter (2004).
91 ILO press release, www.ilo.org.
92 Stiglitz and Fitoussi (2009).
93 New Economics Foundation (2009).
94 Smith (2000: 208).
95 Sandel (2012: 7, 10–11, 113).
96 Schoenberger (2014: xxx).

Want to know more about this chapter? Visit the companion website at
www.guilford.com/dickenGS7 for free access to author videos, suggested
reading and practice questions to further enhance your study.

11_Dicken-7E_Ch-11.indd 391 19/11/2014 10:46:35 AM

The Rise and Fall of the Washington Consensus as a

Paradigm for Developing Countries

CHARLES GORE *
United Nations Conference on Trade and Development, Geneva, Switzerland

Summary. Ð The introduction of the Washington Consensus involved not simply a swing from
state-led to market-oriented policies, but also a shift in the ways in which development problems
were framed and in the types of explanation through which policies were justi®ed. Key changes
were the partial globalization of development policy analysis, and a shift from historicism to
ahistorical performance assessment. The main challenge to this approach is a latent Southern
Consensus, which is apparent in the convergence between East Asian developmentalism and Latin
American neostructuralism. The demise of the Washington Consensus is inevitable because its
methodology and ideology are in contradiction. Ó 2000 Elsevier Science Ltd. All rights reserved.

Key words Ð development theory, development policies, World Bank/IMF policies

1. INTRODUCTION

Developing countries is an international
practice. The essence of this practice is the
mobilization and allocation of resources, and
the design of institutions, to transform national
economies and societies, in an orderly way,
from a state and status of being less developed
to one of being more developed. The agencies
engaged in this practice include national
governments of less-developed countries, which
have adopted “development” as a purpose to
which State power is put, and governments of
richer countries, which disburse o�cial devel-
opment aid to support and in¯uence this
process; a variety of non-governmental orga-
nizations concerned to animate and channel
popular concerns; and international intergov-
ernmental organizations, such as the organs of
the United Nations and the World Bank, many
of which have been expressly set up to resolve
various development problems. Often it is the
last group who have acted as the avant-garde of
development practice. It is because of their
activities, as well as the widespread tendency of
governments to copy successful practice else-
where, that it is appropriate to describe devel-
oping countries as an international practice.
But it is by no means global in scope. Indeed
the practice of developing countries is only
done in a particular set of countriesÐthose
which in the 1950s and 1960s were generally

called “underdeveloped” or “less developed”
countries, but which now generally identify
themselves, and are identi®ed by others, as
“developing countries.”

This paper discusses trends in the body of
knowledge which guides and justi®es the prac-
tice of development. It examines, in particular,
the ideas propagated by international develop-
ment agencies, and focuses on the shift in
thinking which occurred in the 1980s with the
introduction and widespread adoption of an
approach to the practice of developing coun-
tries known as the “Washington Consensus.”
In broad terms, this approach recommends that
governments should reform their policies and,
in particular: (a) pursue macroeconomic
stability by controlling in¯ation and reducing
®scal de®cits; (b) open their economies to the
rest of the world through trade and capital
account liberalization; and (c) liberalize

World Development Vol. 28, No. 5, pp.

789

±804, 2000
Ó 2000 Elsevier Science Ltd. All rights reserved

Printed in Great Britain
0305-750X/00/$ – see front matter

PII: S0305-750X(99)00160-6
www.elsevier.com/locate/worlddev

* This paper is an extended version of comments made
at the Berlin-Brandenburgische Akademie der Wissens-

chaften Conference on “Paradigms of Social Change”

held in Berlin on September 3±5, 1998. I would like to

thank John Toye, Gabrielle K�ohler, Richard Kozul-

Wright and two anonymous referees for critical com-

ments on an earlier draft. The arguments and interpre-

tations are those of the author. The views expressed do

not necessarily re¯ect those of UNCTAD. Final revision

accepted: 17 October 1999.

789

domestic product and factor markets through
privatization and deregulation. Propagated
through the stabilization and structural
adjustment policies of the International
Monetary Fund (IMF) and World Bank, this
has been the dominant approach to develop-
ment from the early 1980s to the present. The
paper examines the introduction of the Wash-
ington Consensus as a paradigm shift, and
assesses the con®guration of development
thinking in the 1990s and pressures for a
further paradigm shift, particularly in the light
of the East Asian ®nancial crisis and recent
attempts to construct a “post-Washington
Consensus.”

The paradigmatic nature of the Washington
Consensus is most clearly evident in the work
of John Williamson (1990,1993,1997), who
coined the name and also set out a speci®c
formulation of the approach at the end of the
1980s. This formulation was founded on an
attempt to summarize, with particular reference
to policy reform in Latin America, “the
conventional wisdom of the day among the
economically in¯uential bits of Washington,
meaning US government and the international
®nancial institutions” (Williamson, 1993, p.
1329). Williamson never explicitly identi®es the
Washington Consensus as a paradigm. But the
way he describes the approach conforms in
many respects with Thomas KuhnÕs notion of
one.

1
Thus, he argued that the Washington

Consensus is a “universal convergence,” and
that it constitutes “the common core of wisdom
embraced by all serious economists” (William-
son, 1993, p. 1334). He codi®ed the approach as
a set of 10 axiomatic generalizations which,
given certain values, are generally shared by
scholars and practitioners concerned with
economic growth in developing countries; and
he listed remaining analytical problems on
which normal economic science needs to focus.
Finally, he dismissed those who challenged the
consensus view as “cranks” (p. 1330). As he put
it,

[T]he superior economic performance of countries
that establish and maintain outward-oriented market
economies subject to macro-economic discipline is
essentially a positive question. The proof may not be
quite as conclusive as the proof that the Earth is not
¯at, but it is su�ciently well established as to give
sensible people better things to do with their time than
to challenge its veracity (p. 1330).

The structure of the revolution in thinking
which occurred with the introduction of

Washington Consensus policies is usually seen
as a shift from state-led dirigisme to market-
oriented policies. Such a switch undoubtedly
occurred. But it is not a su�cient description of
the nature of the change as a paradigm shift. As
Kuhn shows, when paradigms change, there are
usually signi®cant changes in the “methods,
problem-®eld, and standards of solution”
which are accepted by a community of practi-
tioners (Kuhn, 1970, p. 103). As a consequence,
“the proponents of competing paradigms
practice their trades in di�erent worlds…[they]
see di�erent things when they look from the
same point in the same direction” (p. 150). In
examining the introduction of the Washington
Consensus as a paradigm shift, what matters is
not simply the substantive di�erences with
earlier approaches, but also the nature of the
change in the disciplinary matrix and world-
view.

Here it will be argued that together with the
swing to market-oriented policies, there was a
deeper shift in the way development problems
were framed and in the types of explanation
through which development policies were
justi®ed. This involved changes in the spatial
and temporal frame of reference of develop-
ment policy analysis. In brief, these changes
were: the partial globalization of development
policy analysis; and a shift from historicism to
ahistorical performance assessment.

2. THE PARTIAL GLOBALIZATION OF
DEVELOPMENT POLICY ANALYSIS

Specifying development policy problems
involves both explanations of development
trends and normative judgements about how
the world should be. For each of these activi-
ties, an important decision which must be made
is deciding the policy frame, i.e. what elements
should be included when viewing a problem
and what elements excluded.

2
The framing of

policy issues has various aspects but one which
critically a�ects the practice of developing
countries is whether policy problems are seen
within a global or national frame of reference.
Explanations and normative judgements can
each be elaborated within a national or global
frame of reference, and so the thinking which
underpins the practice of developing countries
can be wholly national, wholly global, or some
combination of both (Figure 1). The full
globalization of development policy analysis
will be understood here to mean a shift from a

WORLD DEVELOPMENT790

national to a global frame of reference both for
explanations and normative evaluations.

Before the propagation of the Washington
Consensus in the 1980s, mainstream explana-
tions of the development process and evaluative
judgements of the goals of development were
both conducted within a national frame of
reference. First, economic and social trends
within countries were explained, in the main-
stream, on the basis of conditions within the
countries themselves, i.e. as a result of national
factors. Particular external relations might be
necessary to start the process, or to close “gaps”
which threatened its breakdown. But the key
ingredients of a successful development process
were usually identi®ed through analyses of
sequences of change within already industrial-
ized countries, which were then applied in less
developed countries without any reference to
their di�erent external situation. Second,
development policies were geared toward the
achievement of national objectives. This orien-
tation was often simply taken for granted in
development policy analysis. But it was also
in¯uenced, more or less strongly, by political
and economic nationalism. According to John-
son (1967), key features of economic policy in
new StatesÐnamely, the desire for greater self-
su�ciency and early industrialization, the pref-
erence for economic planning and public
control, and hostility to foreign investmentÐ
can all be traced to the mutual supporting rela-
tions between nationalism, aid policy, and ideas
about the development problem formed in the
1930s. Those ideas became part of a common
understanding and language of national and
international policymakers after WWII.

There were, of course, major controversies
both over the meaning of development and the
means of achieving it. In the 1950s and 1960s
there were debates about development strategy
(for example, balanced or unbalanced growth),
the nature of dualistic development processes,
and the role of human capital. Moreover, in the
1970s the earlier focus on economic growth
with structural change was strongly challenged
by those who pointed to the need to focus on
social objectives, notably income distribution,
poverty, employment and basic needs satisfac-
tion.

3
But these disputes actually served to

reinforce the normative and explanatory frames
of development policy analysis as being
national. Whatever objectives were taken to be
central, national objectives were the focal
concern. Moreover the development strategy
debates essentially examined the articulation
and sequencing of internal (national) ingredi-
ents which could facilitate or accelerate the
national development process.

An important countercurrent to mainstream
development policy analysis before the 1980s
came from structuralist and dependency theo-
ries elaborated in Latin America (see Kay,
1989). Like the dominant approach the
normative concern of these theories was
national, and indeed strongly informed by
nationalist concerns. But their analytical
perspective was global in scope and this
underpinned their critiques of mainstream
thinking. Both structuralist and dependency
theorists emphasized the importance of center-
periphery relations as determining or condi-
tioning the national development process. But
some strands within dependency theory,

Figure 1. Four main combinations of explanatory and normative framework in development policy analysis.

RISE AND FALL OF THE WASHINGTON CONSENSUS 791

instead of indicating how national development
was a�ected by the articulation between inter-
nal and external factors, simply put forward an
antithesis to the mainstream approach, arguing
that external factors were the only ones that
mattered, and then deduced that by delinking
from the world economy, an “authentic”
development process, solely founded on inter-
nal factors, could be made to occur.

In the late 1970s and early 1980s, the growth
rate of most developing countries, with the
notable exception of some countries in East
Asia, collapsed. The economic crises which
beset most developing countries lent weight to
arguments that mainstream development prac-
tice had failed. But at the same time the East
Asian success neutralized those versions of
dependency theory which argued that devel-
opment would always be blocked on the
periphery, and also Latin American structu-
ralism, which allegedly was wedded to inward-
oriented import-substitution policies in
contrast to East AsiaÕs alleged outward-orien-
tation. In this situation, arguments which
emphasized the positive role of free markets in
development attracted greater attention. These
ideas had always been an element within
development policy analysis, represented, for
example, by early critiques of protectionism,
such as G. Haberler and H. Myint, Milton
FriedmanÕs support of free enterprise, and P.T.
BauerÕs dissection of mainstream thinking
(Bauer, 1971). The uptake of these ideas was
not strong however until the late 1970s and

early 1980s, when a new approach to develop-
ing countries, which was later labeled the
Washington Consensus, emerged as the main
alternative to national developmentalism.

4

The frame of reference for this new approach
was, like the Latin American countercurrents
of the pre-1980s, partially global and partially
national. But rather than combining normative
economic nationalism with a methodological
internationalism, the Washington Consensus
was its mirror image. It combined normative
economic internationalism with a methodolog-
ically nationalist form of explanation which
attributed what was happening within countries
mainly to national factors and policies
(Figure 2).

In this new approach, the key norms which
played the decisive role in de®ning development
practice were the norms of a liberal interna-
tional economic order (LIEO). In most general
terms, these norms involve a commitment to
free markets, private property and individual
incentives, and a circumscribed role for
government. But they can be speci®ed in
di�erent ways, according to di�erent interpre-
tations of the precise content of the LIEO. For
example, in the early 1980s, laissez-faire liber-
alism was strongly advocated. This entailed
liberalization of both external and domestic
economic relations. But at the start of the
1990s, this extreme market fundamentalism
was softened with the emergence of the so-
called market-friendly approach to develop-
ment (see, notably, World Bank, 1991). This

Figure 2. The con®guration of development policy analysis: 1950±1990.

WORLD DEVELOPMENT792

continued strongly to advocate liberalization of
external trade and capital movements. But, the
scope of domestic economic liberalization was
limited, in particular, by recognizing more fully
the legitimacy of state intervention in cases of
market failure.

These norms were propagated through two
types of persuasive argument: ®rst, arguments
about the intrinsic ethical superiority of
economic liberalism; and second, theoretical
and empirical analyses which demonstrate that
conformity to the norms of a LIEO (variously
de®ned) would lead to better outcomes, not
simply for the world community as a whole, but
also for individual nation-states within it. The
latter, which have served as the principal form
of argument supporting the new approach,
have mainly been articulated on a terrain in
which promoting the national interest has been
narrowly equated with promoting economic
growth and increasing personal economic
welfare. Important developmentalist concerns
such as constructing national unity and realiz-
ing national sovereignty are thus excluded. On
this narrowed ground, attention and publicity
has been given to analyses which show that
national policies which are in con¯ict with the
norms of LIEO, including many elements at the
heart of earlier development practice, such as
protection of infant industries, managed inter-
est rates and selective credit, have been harmful
to national interests, and thus constituted
domestic mismanagement and “irrationalities.”
At the same time, the policies of the East Asian
newly industrializing economies which had
actually achieved rapid and sustained growth
have been described in ways which suggest that
they conformed to the requisite liberal norms.

5

For both con¯icting and conforming policies,
their impact on the e�ciency of resource allo-
cation has been identi®ed as the main mecha-
nism by which domestic policies a�ect
economic growth.

While the normative frame of reference of the
new approach was global in scope, the
explanatory arguments which sought to prove
the instrumental superiority of the LIEO were
characterized by methodological nationalism.
That is to say, in explaining economic trends
within countries, they partitioned in¯uences
into external and internal factors and attributed
most of what was happening to internal
(national) factors and, in particular, to
domestic policy.

6
In making the case for trade

liberalization and export promotion, for
example, conditions of global demand are

generally ignored and, through the “small
country” assumption, it is typically assumed
that foreign markets are always available, and
at prices largely independent of a countryÕs
exports. Empirically, the most common
approach to prove the dynamic bene®ts of
outward-orientation has been crosscountry
regression analyses which establish the statisti-
cal relationships between indicators of national
economic change and a series of national vari-
ables, which include, in particular, indicators of
national policy. The essence of this methodol-
ogy is areal correlation between dependent and
independent variables, to identify the extent to
which variation in the former between a given
set of national territories matches variation in
the latter between the same territories. This can
be done at a certain point in time or for periods
of time (e.g. by using growth rates over 20
years). In either case, speci®c histories are
®ltered out and it is assumed that relationships
which pertained in the past will continue into
the future. Economic trends are necessarily
attributed to the behavior of the national
factors.

In the 1990s, changes in the nature of the
external environment are increasingly being
used to explain why liberalization, coupled with
the right macroeconomic fundamentals,
“works.” Thus it is argued that in an increas-
ingly globalized world economy, in which there
is the globalization of production systems,
increasing reliance on trade and increased
availability of external ®nancial ¯ows, coun-
tries which do not follow Washington
Consensus policies will be especially penalized,
as they will be cut o� and thus excluded from
the intensifying (and implicitly bene®cial)
global ®eld of ¯ows. Concomitantly, those
countries which do follow the right policies will
be rewarded, as they can capture foreign direct
investment which brings technology and
market access, and they can also supplement
national savings with international capital
¯ows, thus reaping the bene®ts of the new
external environment. In this way, the case for
liberalization is rooted in the rhetoric of the
globalization. But the analysis remains meth-
odologically nationalist as it retains the
distinction between external and internal
(national) factors, and still attributes country
trends largely to domestic policy (see, for
example, IMF, 1997; World Bank, 1997).
Globalization is something which is happening
to the external economic environment of
countries; it is outside them.

RISE AND FALL OF THE WASHINGTON CONSENSUS 793

3. THE SHIFT FROM HISTORICISM TO
AHISTORICAL PERFORMANCE

ASSESSMENT

The curious combination of global liberal-
ism

7
and methodological nationalism which

underpins the way in which development is seen
in the new paradigm has been buttressed by a
second key shift which occurred in develop-
ment policy analysis at the end of the 1970s.
This can be characterized as a shift from
historicism to ahistorical performance assess-
ment.

Theorizing on development strategy from the
1950s to the 1970s was historicist in the general
sense that it was founded on an attempt to
understand rhythms, patterns and laws of
development.

8
This understanding was based

on historical analysis of long-term sequences of
economic and social change, which had occur-
red in the past in already-industrialized coun-
tries and which were expected to re-occur,
particularly if the right policy interventions
were made, in “less developed” countries. Such
theorizing most typically understood develop-
ment as a societal and economy-wide transition
from a “traditional” (rural, backward, agri-
cultural) society to a “modern” (urban,
advanced, industrial) society. This process was
seen as a sequence of stages of growth, a
process of modernization, or recurrent patterns
of structural transformation.

9
All countries

were expected to go through such patterns of
development, and development agencies sought
to ensure or accelerate the arrival of a better
future for whole societies through interventions
in these long-term processes of historical
transformation.

With the shift to ahistorical performance
assessment, the focal object of enquiry has been
to describe and explain national “performanc-
es” of various types. Not surprisingly but now
taken-for-granted, the key word in the
discourse propagated by international devel-
opment agencies since the start of the 1980s has
been “performance.” Attention has been
particularly paid to economic performance, but
also agricultural performance, industrial
performance, trade performance, ®nancial
performance, ®scal performance, poverty
performance, human development performance
and so on. Using these various standards,
countries have been partitioned into good and
bad performers, and ranked according to their
performance in various new leagues of nations.
Moreover comparative performances have been

explained by reference to national factors and
national policy.

It is according to these performance stan-
dards that past development policies have been
criticized because they do not “work” and
narratives have been constructed about the
e�ectiveness of the Washington Consensus. A
succession of countries which have undertaken
policy reform in the requisite way and achieved
good short-term growth results have also been
identi®ed as, and dubbed, “success stories.”
These stories have acted as exemplars for the
new paradigm, providing not only practical
rules-of-thumb guidance on how policy reform
should be undertaken, but also proof of the
validity of the Washington Consensus.

The transition from historicism to ahistorical
performance assessment started in the 1970s,
and was initially animated by those who sought
to re®ne the de®nition of development by
adding social aspects. E�orts to measure
poverty based on the quality of life and satis-
faction of basic needs were particularly
important in this regard. Michael LiptonÕs
book Why Poor People Stay Poor was a key
text in propagating a performance-oriented
approach. The uptake of the notion of urban
bias, a concept which was forged within debates
about how to achieve redistribution with
growth but which became central to the
neoliberal paradigm, can be attributed to its
performance-based de®nition, and the vitriolic
debates of the late 1970s, particularly with
Byres, can be interpreted as an attempt to
sustain a historicist view (see, for example,
Byres, 1979). In the 1980s, these initial moves
toward performance assessment were over-
taken by, and later incorporated in, the
discourse and practice of structural adjustment.
Adjustment involved improving the perfor-
mance of national economies by increasing the
e�ciency of resource allocation. The central
criterion used to measure performance was
current or recent GDP growth rate, and
macroeconomic stability, indicated by ®scal
and external payments balance and low in¯a-
tion. The dynamics of long-term transforma-
tions of economies and societies slipped from
view and attention was placed on short-term
growth and re-establishing ®nancial balances.

The shift to ahistorical performance assess-
ment can be interpreted as a form of the post-
modernization of development policy analysis.
It re¯ects, in particular, the questioning of
grand narratives of historical transformation
which was central to the appeal of the post-

WORLD DEVELOPMENT794

modern ethos in the 1980s.
10

Before the shift,
development agencies acted as handmaidens of
“progress,” “modernization,” “industrialisa-
tion,” or the emancipation of people from
oppression, exploitation, disease and drudgery.
After it most agencies re-oriented their work to
monitor and seek to improve “performance,”
often through local problem-solving and local
social engineering designed to make economic
and social institutions “work” better. Adjust-
ment also entailed the abandonment of grand
long-term government-directed designs for
whole societies and a shift to decentralized
decision-making, laissez-faire and local social
engineering. But ironically, this shift away from
holism could not be achieved without a holistic
approach. Everything has been made subject to
the rules and discipline of the market. The
vision of the liberation of people and peoples,
which animated development practice in the
1950s and 1960s, has thus been replaced by the
vision of the liberalization of economies. The
goal of structural transformation has been
replaced with the goal of spatial integration.

4. THE CONFIGURATION OF
DEVELOPMENT POLICY ANALYSIS IN

THE 1990S

The collapse of communism in Eastern
Europe and the Soviet Union has served as
con®rmation of arguments which predicted the
impossibility of central planning and reinforced
the apparent superiority of a market-oriented
development approach. Since the late 1980s
however there have developed two important
challenges to the Washington Consensus. The
®rst is the UNDP’s sustainable human devel-
opment (SHD) approach. This approach takes
up some of the themes of the UNICEF critique
of the dominant approach, Adjustment with a
Human Face, originally published in 1987, and
has been elaborated through the annual Human
Development Report, which ®rst appeared in
1990 (UNDP, Various years). The second is a
latent “Southern Consensus,” which is founded
on analyses made from the perspective of
countries undertaking late industrialization and
seeking to catch up with richer countries in the
global economy. This Southern Consensus does
not exist as a political reality. Nor has it, as yet,
been articulated analytically. Its existence is
apparent however in the convergence between
the policy conclusions of Latin American
neostructuralism, initially set out by ECLAC in

1990, and the deeper understanding of East
Asian development models, which is described
in ESCAP (1990), but has been most thor-
oughly reconstructed by UNCTAD in its
annual Trade and Development Report (partic-
ularly 1994, part 2, chapter 1; 1996, part two;
1997, part 2, chapters V and VI; and 1998, part
1, chapter 3).

11

These two challenges to the Washington
Consensus have shaped development thinking
and practice in di�erent ways. Indeed devel-
opment policy analysis is now characterized by
a double dialectic. The clash between the
Washington Consensus and the sustainable
human development approach acts to rein-
force and conserve the key elements of the
current paradigm, and in particular its ahis-
torical approach and its combination of
normative internationalism with methodologi-
cal nationalism, whilst the clash between the
Washington Consensus and ideas within the
two strands of the Southern Consensus serves
to undermine these elements and creates
tensions and pressures for a further paradigm
shift.

The key feature of the sustainable human
development approach which distinguishes it
from the Washington Consensus, is that it
espouses a di�erent set of values. Whereas the
Washington Consensus focuses on the promo-
tion of GDP growth, and has been imple-
mented through a top-down, donor-
conditionality-driven and outside-expert-led,
approach, the sustainable human development
approach argues that the ultimate test of
development practice is that it should improve
the nature of peopleÕs lives, and advocates that
it should be founded on participation and a
more equal partnership between developing
countries and aid donors.

This “people-centered” approach, which
explicitly identi®es itself as an alternative
paradigm (see, for example, ul Haq, 1995, Part
I), has been quite in¯uential. An important
strand of development research in the early
1990s has sought to refute its challenge by
showing that Washington Consensus policies in
fact serve to reduce poverty, increase employ-
ment and can, in themselves, deliver growth
with equity, and that therefore social concerns
are already adequately addressed by the main-
stream approach. But the SHD alternative has
promoted the introduction of poverty reduc-
tion as a key goal of development practice and
increasing attention to possible LIEO-compat-
ible relaxation of Washington Consensus poli-

RISE AND FALL OF THE WASHINGTON CONSENSUS 795

cies in order better to achieve poverty objec-
tives (see World Bank, 1990).

These changes have certainly made the
Washington Consensus more humane. But at
the same time, the SHD approach has had the
e�ect of conserving key features of the world-
view of the dominant paradigm. Although its
di�erent values have emphasized di�erent
indicators and weighting systems, particularly
to capture levels of human development and
poverty, these measures have reinforced a focus
on short-term performance assessment. The
substitution of multidimensional indicators of
poverty for simple income poverty, for exam-
ple, has added greater reality to the description
of deprivation and more leverage for moral
outrage, but at the cost of crippling e�ective
analysis of the dynamics of change. Signi®-
cantly also, the analytical basis of the SHD
approach, which is itself somewhat loose, is
methodologically nationalist. A central focus is
the mismatch between economic growth
performance and social performance and the
ways in which domestic policy can rectify this
mismatch to deliver more social achievements
for any given level of GDP per capita. Even the
apparent di�erence in values between the SHD
approach and the Washington Consensus is less
clear-cut than it appears. This applies whether
human development is speci®ed rigorously, as
in Amartya SenÕs capability approach which
underpins the human development index, or
through a vaguer focus on decentralization and
participation. SenÕs capability concept empha-
sizes freedom of choice which is quite conso-
nant with the liberal perspective.

12
Moreover

the project of making economic and social
institutions work better through decentraliza-
tion and the use of local knowledge, indigenous
management practices and the participation,
not of the masses, but of “local people” and
“small communities,” can be, and has easily
been, fused into a kind of neoliberal popu-
lism.

13

Whereas the SHD approach has made a
moral critique of the Washington Consensus,
the two strands of the Southern Consensus,
Latin American neostructuralism and East
Asian developmentalism, remain focused on
economic growth as the central objective.

14

They o�er however a di�erent economic anal-
ysis of how growth occurs in late industrializing
countries and on this basis propose a di�erent
policy orientation to the dominant paradigm.

From the Southern perspective, national
economic growth involves a process of catch-

ing-up, in which national enterprises build up
production capabilities and international
competitiveness in a range of activities under-
taken in more advanced countries. The struc-
ture of the economy changes as the relative
importance of agriculture and natural resource
exploitation declines while that of manufac-
turing activities increases, and as production
progresses from less to more skill-, technology-,
and capital-intensive activities. At the macro-
level, growth, structural change and productive
upgrading is driven by a rapid pace of capital
accumulation, which depends on increased
domestic savings, investment, and exports,
linked together in a virtuous circle of cumula-
tive causation (ECLAC, 1990, pp. 48±49;
ESCAP, 1990, pp. 13±14, 115, 151; UNCTAD,
1996, pp. 108±112). At the microlevel, this
process is founded on imitation, adaptation
and learning of internationally available tech-
nologies in order to reduce costs, improve
quality, and introduce goods and services not
existing in the country, and the di�usion of best
practices from more advanced to less advanced
enterprises within the country, including from
foreign-owned to locally-owned ®rms (ESCAP,
1990, pp. 15±17 and pp. 92±95; ECLAC, 1990,
pp. 64±71).

An important feature of the Southern
Consensus is that it rejects the idea that growth
with late industrialization can be animated
using a general blueprint. Policy measures have
to be adapted to initial conditions and the
external environment, and change over time as
an economy matures (ECLAC, 1990, pp. 97±
102; UNCTAD, 1996, pp. 133±134; ESCAP,
1990, pp. 21±23, 140±141). It is possible
however, to identify some general policy
orientations which apply in all circum-
stances.

15

First, the process of growth and structural
change is best achieved through the “strategic
integration” of the national economy into the
international economy rather than either de-
linking from the rest of the world or rapid
across-the-board opening up of the economy to
imports and external capital. This means that
the timing, speed and sequencing of opening, in
relation to di�erent types of international ¯ows,
should be decided on the basis of how they
support the national interest in terms of
promoting economic growth and structural
change (Singh, 1994). Multilateral norms are
not disregarded (ECLAC, 1996, p. 86;
UNCTAD, 1996, pp. 156±157). As far as
possible, however, import liberalization should

WORLD DEVELOPMENT796

be gradualÐto enable national enterprises to
build up production capabilities and thus face
external competitionÐand selective. Tari�s
should also be complemented by special
measures to promote exports (ECLAC, 1990,
pp. 103±107; ECLAC, 1995, chapter VI; and
for East Asian policies, UNCTAD, 1994, pp.
58±59). Capital account liberalization should
also be gradual and should be managed, in
coordination with domestic ®nancial develop-
ment, to ensure that capital ¯ows are, as much
as possible, additional to, rather than a
substitute for, domestic resources, that they
support increased investment rather than
consumption, and that they do not undermine
macroeconomic stability (ECLAC, 1995, pp.
285±291; UNCTAD, 1998, pp. 75±76, 101±
106). Inward FDI should support the build-up
of domestic production capabilities and
exports, and this is not automatic but requires
speci®c domestic policies (ESCAP, 1990, p.
132; ECLAC, 1990, p. 45; UNCTAD, 1996, pp.
131±133).

Secondly, growth and structural change is
best promoted through a combination of a
macroeconomic policy and what Latin Ameri-
can neostructuralists describe as a “productive
development policy.” The macroeconomic
policy is growth-oriented. It seeks to reduce
in¯ation and ®scal de®cits, but also aims to
ensure full utilization of production capacity
and encourage the pace of capital formation
(ECLAC, 1996, chapter V; ESCAP, 1990, pp.
17±19). The productive development policy
involves a range of measures, coordinated with
the trade policy, which are designed to improve
the supply capabilities of the economy as a
whole and also speci®c sectors within it, and to
help private enterprise identify and acquire
competitive advantages. These measures are
founded on a dynamic interpretation of the
principle of comparative advantage. In this
forward-looking approach, the opportunities of
current relative cost advantages are exploited to
the full, but e�orts are made at the same time to
promote investment and learning in economic
activities where comparative advantage can
realistically be expected to lie in the immediate
future as the economy develops and as other
late industrializing countries catch up (ESCAP,
1990, pp. 148±149; OECF, 1991; UNCTAD,
1996, pp. 112±123; ECLAC, 1995, pp. 132±135,
159).

Elements of a productive development policy
include: technology policy, ®nancial policy,
human resource development, physical infra-

structure development, and industrial organi-
zation and competition policy (UNCTAD,
1994, pp. 57±69, ECLAC, 1990, pp. 107±148,
ECLAC, 1995, pp. 161±190; ESCAP, 1990,
chapter V, pp. 149±150). These elements can
form part of, but they should not be simply
equated with, a selective industrial policy. They
are directed at improving productivity and
competitiveness in agriculture and natural-re-
source based activities as well as manufacturing
(ESCAP, 1990, pp. 22, 70±75; ECLAC, 1990,
pp. 126±137). They entail a mix of sectorally-
neutral as well as selective policies. Moreover
their main goal is to accelerate the rate of
capital accumulation and learning throughout
the economy.

Third, the successful implementation of these
development policies requires government-
business cooperation within the framework of a
pragmatic developmental State. The policies
are implemented, as far as possible, through
private initiative rather than public ownership,
and through the market mechanism rather than
administrative controls. But government plays
a key role both in animating the “animal spir-
its” of the private sector and harnessing the
aggressive pursuit of pro®ts, which are the
motor of the system, to the realization of the
national interest. This requires the enhance-
ment of state capacities rather than state
minimalism. Policy should be formulated by a
capable and pragmatic economic bureaucracy
which, through various formal and informal
ties with business, develops a common vision of
development objectives and targets, and a
common understanding of how these can best
be achieved (ECLAC, 1990, pp. 94±96; Evans,
1998). But government must ensure that any
support or protection for the private sector is
conditional on investment, export or produc-
tivity targets, and also temporary. Policies
should also focus on overcoming speci®c
problems which impede the achievement of
national development objectives, notably,
missing markets and the lack of an entrepre-
neurial base, imperfections in technology and
capital markets, risks of exporting, and
dynamic complementarities between sectors
which render competitiveness systemic rather
than just dependent on ®rm-level capabilities
(UNCTAD, 1994, pp. 50, 69; ECLAC, 1995,
pp. 152±157; ECLAC, 1996, Box VI.1; JDB/
JERI, 1993, pp. 53±56).

Fourth, distributional dimensions of the
growth process are managed in order to ensure
the legitimacy of the overall growth process.

RISE AND FALL OF THE WASHINGTON CONSENSUS 797

This is primarily achieved through a produc-
tion-oriented approach rather than redistribu-
tive transfers. That is to say, the main bases for
a more equitable and inclusive growth process
are wide asset ownership and the expansion of
productive employment. Important policies in
this regard are: agrarian reform and rural
development policies; high rates of re-invest-
ment of pro®ts and the establishment of pro®t-
related payment systems; support for small and
medium enterprises, particularly through
®nancial policies; and broad-based human
resource development (Campos & Root, 1996;
ECLAC, 1992, pp. 15±27; UNCTAD, 1997, pp.
183±189).

Finally, regional integration and cooperation
policies are identi®ed as an important element
of strategic integration (ECLAC, 1990, chapter
VI; ECLAC, 1994, pp. 9±19; ESCAP, 1990, pp.
24±25; UNCTAD, 1996, Part II, chapter 1,
especially pp. 75±79, 92±94). Such policies
should support the goal of increased interna-
tional competitiveness, for example, by
promoting regional production chains, and also
nurture the development of regional markets in
order to reduce demand-side constraints on
growth.

These substantive features of the Southern
Consensus arise because Latin American
neostructuralism and East Asian developmen-
talism are rooted in a totally di�erent world-
view to the Washington Consensus (Figure 3).
This does not reject performance standards as a
guide to policy, but actions are founded on
historical analysis, particularly of long-term
processes of late industrialization in the
periphery of the world economy. A global

analytical perspective is adopted and this has a
realist rather than idealist view of the way in
which market economies work. This recognizes
vulnerabilities associated with integration into
the international economy and also external
constraints due to restrictions in access to
advanced country markets, falling terms of
trade for primary commodities and simple
manufactures, cartelization in global markets,
di�culties in gaining access to technology, and
instabilities of the international ®nancial
system. Finally, the approach is normatively
rooted in a distinctive form of economic
nationalism. This is not ideologically commit-
ted to self-su�ciency or public ownership, nor
hostile to foreign ownership in and of itself. It
does not seek the appearance of catching up,
through either imitating consumption stan-
dards, or setting up showcase industries. It
respects multilateral rules and arrangements,
engaging in their design, negotiation and
interpretation. But its aim is to build interna-
tional competitiveness as part of a long-term
national economic project founded on the
development of national capabilities.

Of the two strands of the Southern Consen-
sus, the challenge from the East Asian devel-
opment models has proved to be most powerful
because these models have, in terms of their
performance and according to the criterion of
economic growth, “worked” spectacularly well.
Since the early 1990s, the major fault line in
development policy analysis has thus been the
discrepancy between the policies which have
been pursued in rapidly growing and industri-
alizing East Asian economies and the policies
advocated by the Washington Consensus.

16

Figure 3. The con®guration of development policy analysis: 1990s and beyond.

WORLD DEVELOPMENT798

Kuhn argues that the questioning of a para-
digm begins when anomalies arise between
paradigmatic expectations and actual events,
and shows that numerous ad hoc modi®cations
typically are made to maintain an old paradigm
before the accumulation of anomalies requires,
and the availability of a superior alternative
paradigm enables, a paradigm shift. With
increasing awareness of the discrepancy
between Washington Consensus recommenda-
tions and East Asian development practices,
such a process has occurred with the Wash-
ington Consensus. The discrepancy has been a
key factor which has impelled the shift in the
Washington Consensus from laissez-faire
liberalization to the market-friendly approach.
But more fundamental change has, at the same
time, been slowed by semantic ambiguities,
particularly centred on the key words “out-
ward-oriented” and “openness” (see Gore,
1996a), and also further work to re-describe the
East Asian experience as being compatible with
the norms of the market-friendly LIEO. The
World BankÕs East Asian Miracle studyÐ
which was prompted by disagreements between
the Japanese government and the World Bank
on speci®c development policy mechanisms and
which Wade (1996) has explicitly dubbed an
exercise in the “art of paradigm mainte-
nance”Ðis a particularly signi®cant example of
the latter (World Bank, 1993).

These re-descriptions have, like earlier char-
acterizations, now been shown to have incon-
sistencies and ambiguities (Amsden, 1994;
Rodrik, 1994). But the debate has taken yet
another turn with the ®nancial crisis in East
Asia, and the apparent fall of the newly
industrializing economies which hitherto had
been claimed on all sides as “legitimating
angels.”

5. THE COMING PARADIGM SHIFT

The ®nancial crisis in East Asia is signi®cant
for the future directions in development
thinking and practice. Economic growth has
fallen dramatically in developing countries and,
just as there was during the crisis of the early
1980s, there is now increasing reason to call
into question the e�ectiveness of dominant
policies. Commentators of every persuasion
have been quick to argue that events con®rm
their analysis. Some of those who support the
Washington Consensus have reversed their
earlier description of East Asian policies as

market-friendly, and identi®ed domestic
mismanagement, in the guise of crony capital-
ism and excessive government intervention, as
responsible for the crisis. On the other side, it is
argued that the crisis is mainly due to specu-
lative ®nancial ¯ows and contagion. But
domestic policy, particularly fast ®nancial
liberalization, is also said to have played a role.
The abandonment of government coordination
of capacity expansion has led to overinvest-
ment, and the lack of government supervision
of the scale of the foreign debts of domestic
companies has precipitated overexposure to
external debt. Finally, the IMF bailout pack-
ages are said to have exacerbated the problem.
At best they are seen as a misdiagnosis; at
worst, an attempt to use the crisis further to
impose in a deeper way LIEO norms on
domestic economic activity.

Although these debates are still playing
themselves out, it is becoming increasingly
unconvincing to attribute the crisis solely to
domestic mismanagement (see, for example,
Chang, Palmer & Whittaker, 1998), or analyt-
ically to separate external and internal factors.
Moreover the Washington Consensus has
cracked in the practical sense that real di�er-
ences of opinion have emerged in Washington,
between the IMF and the World Bank, on the
causes of the crisis and how best to handle it.
One important opinion-leader, Paul Krugman
(1995), has already written the obituary of the
Washington Consensus. After the Mexican
crisis of 1994, he argued that the major mech-
anism through which its policies have worked is
a speculative bubble in emerging markets in
which policy reforms attracted private capital
¯ows, and the attraction of the ¯ows stimulated
policy reforms, and that this bubble had now
burst. In e�ect, he exposed market-friendly
policies as actually being markets-friendly ±
®nancial markets, that is. Similarly, Joseph
Stiglitz (1998a,b) has argued that there is a need
for a “post-Washington Consensus,” a new
paradigm. This should seek to achieve broader
objectivesÐembracing a focus on the living
standards of people and the promotion of
equitable, sustainable and democratic develop-
ment. It should use a wider range of instru-
ments to build markets as well as to correct
market failure, and to foster competition as
well as liberalization and privatization. It
should also adopt limited forms of regulation,
if necessary controlling short-term interna-
tional capital ¯ows. Finally change should not
be imposed from outside but requires owner-

RISE AND FALL OF THE WASHINGTON CONSENSUS 799

ship, participation, partnership and consensus-
building.

It may be too early yet to announce the fall of
the Washington Consensus. Stiglitz’s proposed
new paradigm contains some important shifts
on values, continuing the incorporation of the
goals and implementation style advocated by
SHD, and, perhaps more signi®cantly, it argues
for a return to the notion of a development
strategy, based on a long-term perspective,
respecting historical speci®cities and with a
more holistic approach centred on the trans-
formation of societies. Development should no
longer be a monopoly of economists. But the
proposed post-Washington Consensus consen-
sus can also be interpreted as simply a change
to preserve the old order by making it more
e�ective as well as more humane. In elaborating
the new paradigm, Stiglitz (1998b, p. 34)
explicitly states that a key task is to lessen the
momentum of an expected swing of the
pendulum of opinion against openness. The
proposal retains a strong commitment to the
fundamental principles of a LIEO founded on
open trade regimes, competitive markets and
open societies. But, by de-linking trade and
®nancial liberalization and then analytically
separating short-term from long-term interna-
tional capital ¯ows, it reduces the risk that in
the aftermath of the ®nancial crisis the liberal-
ization of external economic transactions will
be called into question as a whole. Through this
analytical splitting, what previously was prop-
agated as a total package can now be taken to
be a more ¯exible menu of options, and any
possible backlash against liberalization can be
more easily contained.

Whether or not StiglitzÕs courageous inter-
vention is a rupture with the past or the pres-
ervation of the old regime, more profound
change is inevitable. This is because the forced
marriage of global liberalism and method-
ological nationalism, the latter providing the
empirical justi®cation for the internalization in
domestic policy of the prescribed international
norms of the former, is inherently unsustain-
able. The only circumstances under which
methodological nationalism is a completely
coherent approach to explanation is if national
economies are completely isolated and closed
from outside in¯uences. The more that the
norms of a LIEO are adhered to, the more that
national economies become open to outside
in¯uences, the less tenable methodological
nationalism becomes as a form of explanation.
The dominant paradigm is thus unstable. Its

ideology and methodology are in contradic-
tion.

The coming paradigm shift will be driven by
the main “workable” alternative, East Asian
models, politically strengthened through their
convergence with Latin America neostructu-
ralism, and extended to Africa and the least
developed countries. But while this approach
can o�er a more e�ective way of developing
countries than the Washington Consensus, it
does not, as it stands, provide an ideal alter-
native paradigm. This is not because the
current ®nancial crisis has somehow nulli®ed
the development transformation which has
occurred in East AsiaÐthough the crisis
demands closer consideration of the issue of
“development strategy in the age of global
money.”

17
Rather it is because it remains a

moot point whether it is possible to achieve
similar results to those achieved by East Asian
countries in their high-growth period, given the
widespread, simultaneous adoption of past
East Asia-type policies. Moreover, though
exaggerated, some new global rules, particu-
larly concerning technological borrowing and
adaptation, may inhibit the replication of some
of these policies.

In the future, the full globalization of devel-
opment policy analysis seems inevitable (Figure
3). This will entail the explanation of national
development trends in a global context, and
also the elaboration of alternative normative
principles for the international regimes which
constrain and enable national policy choices.
Signs that such a spatial frame shift is now
occurring are evident in diverse and uncon-
nected analytical arenas. These include:
attempts to link international trade theory to
labor market performance (Wood, 1994); the
development of the new economic geography
(Ottavino & Puga, 1998) and sociological
analysis of global production chains (Gere�,
1995); work on global environmental
commons; and the emergence of social exclu-
sion as a concept of deprivation (Gore, 1996b).
The spatial frame shift is likely to be linked to
the re-introduction of a historical perspective,
which is already becoming evident, for exam-
ple, in analyses of the history of globalization
of economic activity (Bairoch, 1993; Bairoch &
Kozul-Wright, 1998; Brenner, 1998). But with
the rejection of grand narratives, bringing
history back in should not presage a return to
the old teleological historicism, but rather
identify alternative situations and possible
development paths, and thereby inform a

WORLD DEVELOPMENT800

pragmatic commitment to progressive change
in favor of present as well as future generations.
The values which will glue together the new
way of seeing the world are, like the methods of
global analysis, as yet unclear. The most likely
prospect is that we shall be blown into the

future facing backward, embracing a form of
embedded communitarian liberalism, which
seeks to reconcile the achievement of national,
regional and global objectives, and to marry
universal values with a respect for diversity. But
this is still waiting to be born.

NOTES

1. That is, a constellation of beliefs, values, techniques

and group commitments shared by members of a given

community, founded in particular on a set of shared

axioms, models and exemplars (see Kuhn, 1970). The term

“paradigm” is used in this sense throughout this paper.

2. For an extended discussion of the importance of

frames in policy analysis, see Sch�on and Rein (1994).

The notion of the frame is also pivotal in Amartya SenÕs
work on development evaluation, though he uses the

term “informational basis” of evaluative judgements

rather than “frame.”

3. For deeper discussion of these debates, and the role

of international development agencies in them, see

Arndt (1987), chapters 3 and 4.

4. This was a complex historical process. As Kuhn

(1970) explains, the timing of paradigm shifts is in¯u-

enced not simply by scienti®c and policy debate, but also

broader political and ideological con®gurations. These

broader changes, which include the election of conser-

vative political leaders in the United Kingdom, United

States and Germany in the late 1970s and early 1980s,

will not be dealt with here. For a subtle account, which

locates changes in development thinking and practice

within a broader counter-revolution against Keynesian

economic policies, see Toye (1993).

5. For these two lines of argument, see various World

Development Reports, particularly World Bank (1983,

1986, 1987). The last, as well as criticizing deviant

policies, is an exemplar of the mobilization of East Asian

experience to support key principles of a LIEO.

6. For an extended discussion of methodological

nationalism, see Gore (1996a).

7. The term “global liberalism” is used here as short-

hand for various types of LIEO, which may or may not

allow a circumscribed role for national government

intervention in market processes.

8. The term “historicism” is used here in the most

general sense given by Popper (1960, p. 3). It does not

imply that planning which aims at arresting, accelerating

or controlling development processes is impossible,

though some historicists would adopt this stronger

position (Popper, 1960, pp. 44±45).

9. Exemplars are Rostow (1960) and Chenery and

Syrquin (1975).

10. Lyotard (1984) sees the main criterion which is

used to legitimate knowledge after the questioning of

the grand narratives as “performativity,” which is

understood as assessment of the performance of

systems in terms of the best input/output relations

(p. 46).

11. Various academic books and articles are associated

with these policy reports. Key elements of Latin Amer-

ican neostructuralism, which developed as a response to

the weaknesses of both neoliberalism and import-

substitution industrialization, are set out in Bitar

(1988), Ffrench-Davies (1988), Sunkel and Zuleta

(1990), Fajnzylber (1990) and Sunkel (1993), and are

surveyed in Kay (1998). A Japanese view of the contrast

between East Asian developmentalism and the Wash-

ington Consensus is set out in OECF (1990), whilst

Okudo (1993) and JDB/JERI (1993) discuss the Japa-

nese approach, focusing on two important policy mech-

anisms which diverge from the tenets of the dominant

approachÐtwo-step loans and policy-based lending.

UNCTADÕs reconstruction of East Asian developmen-
talism, which was elaborated independently of Latin

American neostructuralism, draws on analyses of the

Japanese development experience, particularly Akama-

tsu (1961, 1962) and Shinohara (1982), and key ele-

ments are set out in Aky�uz and Gore (1996) and Aky�uz

(1998).

12. For an outline of this approach see, inter alia, Sen

(1993), and an analysis of the limits of its moral

individualism is made in Gore (1997).

13. For examples of a loose approach to poverty

analysis based on the concept of sustainable human

development, see UNDP (1995a,b); but Banuri et al.

(1994) attempt to give a more rigorous speci®cation of

RISE AND FALL OF THE WASHINGTON CONSENSUS 801

the concept through the notion of social capital. An

interesting recent development has been to link sustain-

able human development to the promotion of human

rights discourse, which some see as an alternative global

ethics to neoliberalism. The increasing incorporation of

the voice of nongovernment organizations (NGOs) into

or alongside UN social deliberations is also a�ecting the

SHD approach. A good discussion of some of the

notions which animate these discussions is Nederveen

Pierterse (1998).

14. It is di�cult to identify an African strand to the

Southern Consensus, but Mkandawire and Soludo

(1999) seek to develop an African alternative to the

Washington Consensus, and UNCTAD (1998, part 2)

has drawn implications of the East Asian development

experience for Africa.

15. There are some divergences between the East Asian

and Latin American approaches. The latter gives more

prominence to environment and democracy, is less

committed to aggressive sectoral targeting (ECLAC,

1996, pp. 70±71; Ocampo, 1999), and has a more re®ned

policy analysis of the process of ®nancial integration

than East Asian developmentalism (ECLAC, 1995, Part

3). But their similarities, and common disagreements

with the Washington Consensus, are more striking.

16. For an interesting alternative interpretation of this

fault line, see Yanagihara (1997) who contrasts an

ingredients approach and a framework approach and

seeks ways of synthesizing them.

17. To paraphrase Yanagihara and Sambommatsu

(1996).

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