4.23 - Policies to Promote Growth
Market-based policies and the Washington Consensus
Market-based supply-side policies rest on the principle that markets are the most effective mechanism for growth and development.
The Washington Consensus
The Washington Consensus refers to a set of free-market policies supported by the International Monetary Fund (IMF) and the World Bank since the late 1980s.
Key elements include:
- Trade liberalisation - The reduction, or complete removal of protectionist measures that prevent free trade.
- Privatisation - The transfer or sale of state owned assets (typically firms but also airports, harbours and so on) to the private sector.
- Deregulation - The process of dismantling or relaxing inappropriate rules, restrictions and laws in the operation of firms or markets.
Benefits and limitations of market approaches
Market-based policies aim to stimulate economic activity by using market forces, but they come with both advantages and drawbacks, particularly in developing economies. The table below sets the benefits of each of the three Washington Consensus policies against its limitations.
| Policy | Benefits | Limitations |
|---|---|---|
| Trade liberalisation | Expanded exports, greater export revenue, job creation, and rural development | Many developing countries lack skills and technology and focus primarily on raw materials, so a country reliant on agricultural exports may still have low export shares despite liberalisation |
| Privatisation | The profit motive pushes privatised firms to cut costs and reduce inefficiency | May lead to unemployment and to monopolistic pricing |
| Deregulation | Lower production costs, and so higher output levels | Special interest groups can undermine the benefits |
Labour market reforms sit alongside these three, and can increase flexibility, decrease costs, and potentially increase investment.
One limitation applies to all of these policies at once: they are effective only in the long term, so none of them is a remedy for a short-term problem.
Interventionist policies and redistribution
Interventionist policies aim to improve market functioning and reduce inequality through government action and regulation.
Key features of interventionist policies
- Regulatory interventions - Appropriate environmental and safety regulations can promote social objectives when markets fail.
- Redistribution strategies - Policies are designed to shift resources from wealthier to poorer groups, helping to narrow income gaps.
Methods of redistribution
- Progressive taxation - Redistributes income from higher to lower earners.
- Transfer payments - Can reduce inequality when properly implemented.
- Minimum wages - Can support incomes of low-skilled workers, like those in manufacturing industries.
Challenges of interventionist policies
While interventionist approaches can promote fairness and stability, they face several obstacles that may limit their effectiveness, especially in resource-constrained environments.
Main challenges
- Ineffective taxation systems - Many developing countries struggle with tax collection and administration.
- Limited government budgets - Constrain the scope and scale of interventionist programmes.
- Dependency risks - Excessive reliance on government support may reduce incentives for self-sufficiency.
- Entrenched inequality - High and rising inequality is itself a major barrier to growth and development, which is why redistribution matters even where it is hard to deliver.
Long-term solutions - Human capital and poverty
Long-term solutions focus on improving human capital through strategic investments in education, healthcare, and infrastructure.
Human capital investments
- Education improvements - Better education access and quality enhance skills and productivity.
- Healthcare enhancements - Improved healthcare facilities and access boost worker productivity and life expectancy.
- Infrastructure for basic needs - Enhanced sanitation and clean water infrastructure support health and economic activity.
The role of poverty reduction in development
Poverty reduction depends on both income growth and distribution. Sustainable development is achieved through economic growth accompanied by narrowing income inequality, creating a more equitable society where benefits reach all segments of the population.