Development theory from the 1940s through the 1960s emphasized market failures, discontinuities, irreversibilities, and excessive social inequality. In the 1980s and 1990s the emphasis shifted to economic growth supported by the trinity of stabilization, liberalization, and privatization. But increasing problems of social inequality hamper economic growth and the sustainability of development. It is time, says Solimano, to rethink the development paradigm.
In the 1980s and 1990s, economic growth (material progress) became the main development goal under the policies known as the "Washington Consensus." Earlier concerns about inequalities of income and wealth were replaced by policies emphasizing macroeconomic stabilization (reducing inflation and cutting fiscal deficits) and structural reform (trade liberalization, financial deregulation, privatization, and a shift to a smaller state). But fiscal adjustment and market liberalization alone have not brought stable, equitable development. Inequality of income and wealth, far from declining, seem to have increased in Latin America.
The "Washington Consensus" has supported social policies that rely on targeting, growth-led poverty reduction, and delivery of social services partly through the private sector. Loose ends to this strategy include:
Social policies in developing countries in the past decade have been defined largely in terms of poverty reduction. Solimano argues that income distribution and the reduction of social inequality are valid policy targets on their own. Empirical evidence and theories of endogenous growth emphasize complementarities between social equity and growth. To the extent that social inequality engenders social conflict, invites taxation of physical investments, and induces economic populism, it hampers economic growth. Social policies to promote equitable development should include:
Social safety nets are needed when unemployment, wage cuts, and declining income threaten the poor. Austerity policies without such safety nets as emergency employment programs, food distribution to children, and minimum income support schemes unduly hurt the poor, the vulnerable, and the politically weak, making fiscal retrenchment difficult and socially regressive.
This paper—a product of the Colombia, Ecuador, Venezuela Country Management Unit, Latin America and Caribbean Region—will appear in Andres Solimano, Eduardo Aninat, and Nancy Birdsall, eds., Distributive Justice and Economic Development (University of Michigan Press, 1999, forthcoming). Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Andres Solimano, room I4-051, telephone 202-458-7671, fax 202-676-0720, Internet address asolimano@worldbank.org. (32 pages)
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