Question

How does the Washington Consensus differ from the Santiago Consensus? What economic benefits might a developing country gain by reducing corruption? Discuss only economic benefits and provide examples from specific developing countries.

Answer 1

Answer1

THE WASHINGTON CONSENSUS

Fiscal Discipline

Budget deficits, properly measured to include local government and state-owned enterprises should be small enough to be financed without resort to inflation. This usually implies a primary surplus (before taking account of funds from the budget to service interest on the national debt) of several percent of GDP and an operational deficit of no more than 2 percent of GDP.

Public Expenditure Priorities

Expenditure should be diverted away from politically sensitive areas (notably subsidies, defence and administration) that tend to earn low or negative rates of return towards fields with high rates of return and the potential to improve income distribution, especially on health, education and infrastructure.

Tax Reform

The tax base should be broadened, notably to include assets held overseas, and marginal tax rates reduced. The aim is to sharpen incentives (lower marginal tax rates will allow the worker to keep more of increments in income), improve horizontal equity (workers with similar incomes pay similar tax bills) without sacrificing progressivity (the higher your income, the more tax you pay).

Financial liberalisation

The ultimate goal is interest rates set by the market, not by the state, but this is not possible in countries where confidence in financial institutions is low. An interim goal would be the abolition of preferential interest rates for preferential borrowers.

Exchange rates

Countries should have a unified exchange rate (and abandon the practice of separate rates for separate countries or even deals) set at a sufficiently competitive level to encourage non-traditional exports.

Trade liberalisation

Quotas should be replaced by tariffs, and these should be progressively lowered to a maximum of 20 percent.

Foreign direct investment

Barriers impeding foreign firms should be dismantled; foreign and domestic firms should be allowed to compete on equal terms.

Privatisation

State-owned enterprises should be privatised.

De-regulation

Governments should abolish regulations that restrict competition, and ensure that all regulations are justified by safety, environmental protection or prudential supervision of the financial sector.

Property rights

Governments should provide secure property rights without excessive costs.

The Santiago Consensus

Development must be market-based but there are large market failures that cannot be ignored.

Government should not be in the business of direct production, as a general rule

But, there is a broad, eclectic role for government in:

·         Providing a stable macroeconomic environment

·         Providing infrastructure, though in fewer sectors than in the past

· Public health

· Education and training

·         Technology transfer and (for advanced LDCs) the beginnings of original R&D

·         Ensuring environmentally sustainable development and ecological protection

·         Helping the private sector to overcome co-ordination failures

·         Ensuring that the poorest share the benefits of growth and acting to reduce inequality

·         Continued if moderate regulation and support in financial services sectors

·         Provision of fundamental public goods (especially law

Answer 2

High quality for Low Prices

Corruption in the way deals are made, contracts are awarded, or economic operations are carried out, leads to monopolies or oligopolies in the economy. Those business owners who can use their connections or money to bribe government officials can manipulate policies and market mechanisms to ensure they are the sole provider of goods or services in the market. While in absence of corruption , it can have High quality for Low Prices.

Efficiently Allocated Resources

In best practice, companies choose their suppliers via tender processes (requests for tender or requests for proposal), which serve as mechanisms to enable the selection of suppliers offering the best combination of price and quality. This ensures the efficient allocation of resources. In corrupted economies, the companies that otherwise would not be qualified to win the tenders are often awarded projects as a result of unfair or illegal tenders (e.g. tenders that involve kickbacks).While in absence of corruption it can have  Efficiently Allocated Resources.

Even Distribution of Wealth

Corrupted economies are characterized by a disproportionately small middle class and significant divergence between the living standards of the upper class and lower class. Because most of the country's capital is aggregated in the hands of oligarchs or persons who back corrupted public officials, most of the created wealth also flows to these individuals.

In a corrupt economy, small businesses are not widely spread and are usually discouraged because they face unfair competition and illegal pressures by large companies that are connected with government officials. Certain industries are more prone to corruption than others, making small businesses in these sectors even more vulnerable to unethical business practices. While in absence of corruption , it can have Even Distribution of Wealth.

High Stimulus for Innovation

Because little confidence can be placed in the legal system of corrupted economies in which legal judgments can be rigged, potential innovators cannot be certain their invention will be protected by patents and not copied by those who know they can get away with it by bribing the authorities. There is thus a disincentive for innovation, and as a result, emerging countries are usually the importers of technology because such technology is not created within their own societies.  While in absence of corruption , it can have High Stimulus for Innovation