Both Paul O’Mahoney
Geens link to a piece
by Daniel Brook in Dissent magazine entitled "How Sweden Tweaked the Washington
Consensus". It’s mainly interesting, I think, for confirming Stefan’s prejudice
about leftists and their degree of understanding of economics. Here’s the nut
of the article:
Today the Swedish system is being challenged by a number of economic tendencies
and forces commonly understood under the rubric of "globalization."
… According to this thinking, countries must embrace the "Washington
consensus," the International Monetary Fund-backed policies of free trade,
privatization, and lower taxes and public spending, in order to keep up with
lean, mean developed countries such as the United States and rapidly growing
economies such as China’s.
Although Sweden has modified its economic arrangements, it has kept many features
intact in defiance of the Washington consensus. More than half of GDP goes
to the government as taxes (versus one-third in the United States). The extremely
high level of taxation in Sweden funds a large public sector and an ambitious
The rest of the article is essentially variations on the theme: The Washington
Consensus and the IMF would prescribe lower taxes for Sweden, but the country
has kept them high and is still doing very well, thank you.
Unfortunately, despite putting the Washington Consensus right there in his
headline, Brook seems not to have bothered to look
it up. A few points are worth making.
Firstly, the Washington Consensus was always meant to be a set of prescriptions
for developing, not developed, nations. While all countries might well benefit
from adopting its strictures, developing ones would benefit more. At the heart
of the Washington Consensus is fiscal discipline – this is especially
important for developing countries which can’t borrow at long durations in their
domestic currencies. The result is that they load up on dollar debt, leaving
themselves open to a classic asset-liability mismatch which can go disastrously
wrong. (See Russia and Argentina.)
Secondly, nowhere in the Washington Consensus does it say that public spending
should fall. In fact, given that the Washington Consensus was aimed at developing
countries, it’s almost taken for granted that public spending should rise: such
countries are generally desperately in need of the social and physical infrastructure
(schools, roads, electricity, etc) that is really the role of the state to provide.
In fact, far from asking for "lower taxes and public spending", the
IMF and the adherents of the Washington Consensus generally ask for higher
taxes and public spending. Maybe not an increase to Swedish levels, perhaps,
but a country like Mexico, which collects just 14% of GDP in taxes, is constantly
urged to bring that number substantially higher. There are certainly occasions
where the IMF might target individual taxes which they consider to be invidious
and deleterious to growth prospects – the financial transactions tax in
Brazil is one example. But I would very much doubt that the IMF has ever recommended
that any country seek to decrease the total amount of money that it raises in
tax revenue – quite the contrary.
To be sure, one of the points of the Washington Consensus is tax reform. But
tax reform in the context of development economics (which is what we’re talking
about here) does not mean the same thing as tax reform in the Grover
Norquist sense of the phrase. When a development economist asks for tax
reform, she’s generally asking for:
- More transparency and less complexity in the tax code;
- An end to unfair tax burdens on certain individuals or businesses; and
- A broadening of the tax base, so that as many people pay taxes as possible.
The problem is that when you want to raise taxes, it’s much easier to simply
go along to the state-owned oil company, say, or to a handful of rich businessmen,
and tax them as much as possible, than it is to set up a transparent nationwide
tax-collection system where everybody pays their own fair share. So incentives
are distorted, tax collection remains low, and tax avoidance becomes epidemic.
(See, um, Russia and Argentina.)
Where the Washington Consensus calls for lower marginal tax rates, it really
does not have Sweden in mind. The point is to target tax regimes where the tax
system results in people spending more effort on trying to avoid taxes than
they do on work which actually benefits the economy as a whole. So long as tax
avoidance is not a problem in Sweden, I doubt the IMF much cares what the highest
marginal tax rate is.
It’s worth bearing in mind that the Washington Consensus was developed as one
tool to help bring billions of people out of poverty. Whether it worked or not
can be (and is) debated ad nauseam. But the people who developed it –
chiefly John Williamson, who is nobody’s idea of a right-wing supply-sider –
were trying to help build countries where the benefits of maximised economic
growth were felt by the poor. The "government is bad and the less of it
the better" rhetoric of US conservatives is nowhere to be seen in the Washington
Consensus or in any IMF reports that I’ve seen.
I’m looking forward to the day when left-wingers learn to distinguish between
neoliberalism and US-style tax-cutting conservatism. But judging by this article,
that day is still a long way off.