Beyond the Washington Consensus: Balancing Supply-Side Reforms with Inclusive Development
[Synopsis: Supply-side economics has played a significant role in the Global South, contributing to economic growth and uneven benefits. To build on this foundation, a more comprehensive strategy is necessary, one that leverages market dynamics and incentives while prioritising broad-based development, poverty reduction, and long-term productivity growth. By implementing the right balance of policies, countries in the Global South can work towards achieving a more inclusive and sustainable development path.]
- Center of Geoeconomics for the Global South (COGGS)
Supply-side economics has been embraced by many countries in the Global South, often as part of structural adjustment programs. Over the past few decades, supply-side economics has played an important role in driving economic policy in the Global South. It prioritises high economic growth rates and increased productivity through policies that encourage production, investment, and innovation. These measures generally involve lowering tax rates, deregulating industries, privatising state-owned concerns, liberalising trade and making economies attractive to foreign investors (Bauer, 2000). The premise is that improving the business environment and incentives on the supply side will enable economies to increase their productive capacity and efficiency, hence leading to sustained growth and development.
Many countries in the Global South have adopted supply-side economics under structural adjustment programs imposed by international finance institutions such as the International Monetary Fund (IMF) and the World Bank. Latin American nations like Chile, Mexico, and Brazil have undertaken extensive market reforms and liberalisation since the 1980s (Williamson, 1990). For example, Chile was famous for its aggressive, free-market policies guided by economists referred to as “Chicago Boys,” which earned it rapid economic growth, averaging seven per cent per annum between 1985 and 1997 (Kurtz, 2001).
In Asia, India underwent significant economic reforms in 1991 that opened up its economy to global trade and investment, deregulated sectors of industry and reduced government intervention. These changes have unleashed entrepreneurial potential, with an average GDP growth rate of around seven per cent since the mid-1990s(Ahluwalia, 2002). Supply-side policies used in China’s economic miracle include the creation of special economic zones (SEZs) and agricultural liberalisation, among other massive infrastructure projects. During this period, China registered an average annual GDP rate of ten per cent (Morrison, 2014).
Nonetheless, the supply-side economics effect has been mixed within Global Southern Countries. Some have experienced significant economic growth and poverty reduction but usually uneven gains. Nonetheless, the benefits of this growth tend to be enjoyed by urban elites and capitalists while large segments of the population remain impoverished. Income inequality has risen in many countries that are implementing supply-side policies. For instance, despite achieving impressive economic growth, China’s income inequality, measured by the Gini coefficient, increased from 0.30 in 1980 to 0.55 in 2012 (World Bank 2014). In 2022, China scored (0.467) points, representing a drop from the previous year’s score (Textor, 2024).
Many stakeholders argue that focusing on foreign investment and export-led growth makes countries more susceptible to global economic shocks. Most economies within Global South were badly affected by the financial crisis experienced between2006-2008; for example, Mexican GDP contracted by 6.5% in 2009 (Villarreal2011). This is because, so far, these strategies have not resulted in enough jobs needed with the increasing working population in the developing world. However, India is an example where sufficient employment opportunities have not been created since its economy took the liberalisation path, with the labour force participation rate declining from 58%in 2004 to53%by2013(Mehrotra et al.,2014). In urban areas, for instance, with respect to India, it was expected that by 2023, the labor force participation rate is expected to increase to 50.4 percent (Rathore M.,2024). Supply-side economics has been criticised for not recognising the significance of internal markets and human capital formation. Stiglitz (2002) noted that wage repression and insufficient investments in health and education could improve immediate competitiveness but hamper long-term productivity and innovation. Barro’s (2001) study showed that human capital, measured by years of schooling and health indicators, is an important determinant of economic growth over a long period.
To achieve more inclusive and sustainable development, countries in the Global South may need to adopt a more balanced approach that combines supply-side reforms with demand-side policies and investment in human capital. Inequalities can be reduced through progressive taxation and social safety nets, thereby expanding domestic markets. Industrial policy, coupled with government support for research and development, facilitates innovations that lead to the upgrading of technological know-how. An effective way would be to invest in a quality education system and good health facilities for a skilled base workforce that would move up the value chain required for the nation to develop further.
References:
Ahluwalia, M. S. (2002). Economic Reforms in India Since 1991: Has Gradualism Worked? Journal of Economic Perspectives, 16(3), 67-88.
Barro, R. J. (2001). Human Capital and Growth. American Economic Review, 91(2), 12–17.
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Kurtz, M. J. (2001). State Developmentalism Without a Developmental State: The Public Foundations of the “Free Market Miracle” in Chile. Latin American Politics and Society, 43(2), 1–25.
Mehrotra, S., Gandhi, A., & Sahoo, B. K. (2014). Is India’s Long-Term Trend of Low-Quality Employment Growth Reversing? Economic & Political Weekly, 49(7), 83-91.
Morrison, W. M. (2014). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. Congressional Research Service.
Rathore, M. (2024). Rate of labor participation across India 2023
Stiglitz, J. E. (2002). Globalisation and Its Discontents. W. W. Norton & Company.
Textor, C. (2024). Gini index: inequality of income distribution in China 2012-2022
Villarreal, M. A. (2010). The Mexican Economy After the Global Financial Crisis. Congressional Research Service.
Williamson, J. (1990). What Washington Means by Policy Reform. In J. Williamson (Ed.), Latin American Adjustment: How Much Has Happened? (pp. 7–20). Institute for International Economics.
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