Reforming Economic Reform

Economists have been more influential over the last 15 years than at probably any other time in history. The policies of central planning, dirigisme , and import substitution, which many newly independent countries adopted in the 1950's and 1960's, could be labeled as the ideas of communists, Fabian socialists, and nationalists, not trained economists. The policies of deregulation, privatization, and trade liberalization (the so-called Washington Consensus) that countries adopted in the 1980's, supposedly marked the victory of professional economists over populist politicians.

The paradox is that this was no victory for economics. Indeed, the last two decades have proved dismal for the practice of the "dismal science." With few exceptions, countries in which the US-educated economic technocracy gained the upper hand performed worse than they did prior to the 1980's.

Latin America's stalled and stagnant economies, which embraced the Washington Consensus more than most, stand out as exhibit "A." The biggest development successes in recent years have been in places like China and Vietnam, where Western economic ideas, to the extent that they were considered at all, lost out to more practically oriented policymakers.

The puzzle is not "why did economics fail us?" but "why were economists so overconfident?" After all, much of the Washington Consensus cannot be deduced from proper economic analysis. Any graduate student in economics knows that deregulation, privatization, and trade liberalization cannot be expected to produce economic benefits without a long list of unlikely conditions being satisfied.