15 Syntetic Control
Testing Washington Consensus
A true assessment of the Washington Consensus, however, requires a sharply formed counterfactual: Did countries that embraced policy reforms do better than those that either chose not to reform or chose a different path? Having a well-defined counterfactual is a necessary part of any ex post evaluation of a particular policy regime.
In a recent article in the Journal of Comparative Economics, “The Washington Consensus Works: Causal Effects of Reform, 1970-2015,” Kevin Grier and Robin Grier find that countries undertaking sustained economic reform had a 16 percent higher real per capita GDP after 10 years, compared to other countries.
Another recent paper, by Marco Marrazzo and Alessio Terzi, Structural Reform Waves and Economic Growth, finds that the benefits of structural reform are smaller (6 percent of GDP compared to a counterfactual) and appear after five years
Both papers explicitly consider a counterfactual. Grier and Grier compare countries undergoing large and sustained increases in an index of economic freedom (as well as those with large and sustained decreases) to countries undertaking few or no changes in policy stance. Marrazzo and Terzi use synthetic control methods to compare the growth trajectories of reforming and very similar non-reforming countries.
An alternative approach would be to consider the antithesis of Washington Consensus–type policies, such as those associated with economic populism.[5] Such policies include economic nationalism (trade and investment protectionism), large expansions in fiscal deficit spending, and greater state control over industry. An October 2020 study by Manuel Funke, Moritz Schularick, and Christoph Trebesch on “Populist Leaders and the Economy” finds a huge economic cost to populist policies. Looking at the record of 50 populist leaders over the period 1900–2018, they find that real GDP per capita is 10 percent lower after 15 years compared to a plausible non-populist leader counterfactual. They also find that inequality fails to decline under populist rule.
Similarly, in “The Economic Consequences of Durable Left-Populist Regimes in Latin America,” published in the September 2020 issue of the Journal of Economic Behavior and Organization, Samuel Absher, Kevin Grier, and Robin Grier find that left-wing populism made Venezuela, Nicaragua, and Bolivia 20 percent poorer relative to a plausible counterfactual. These countries did not experience reduced inequality or improved health outcomes that might have justified such a large sacrifice of income.
Peterson Inst: Populism Wash Consensus