The Impact of the Financial Crisis on Development Thinking1

In the past two years we have lived through the most serious financial and economic crisis in the lives of practically everyone on this earth today. Not surprisingly, and not inappropriately, it has led to profound attempts to rethink where we stand on a number of issues. The area of development economics so beloved by Max Fry, and to which he devoted much of his professional effort, was certainly not an exception, and this afternoon I shall aim to give you one appraisal of this impact. It is an interesting subject for speculation as to the extent to which Max would have gone along with my views. My recollections of him do not lead to a conviction that he would have bought everything! A major impact of the crisis has been to discredit Western views of development—what I once tried to summarize under the somewhat unhappy term of the “Washington consensus”—and to fortify what has sometimes been referred to (by Westerners rather than the Chinese) as the “Beijing consensus” instead. This Beijing consensus has never been codified in the form of a series of propositions similar to those that I originally termed the Washington consensus, but assuming that it basically means the Chinese way of doing things I shall argue that it would be a mistake for the West to endorse this and abandon the stance that it has now developed. Hence the first theme of this lecture is the contrast between mainstream Western versus Chinese views: which has delivered the goods up to now, what the contrasts are, and which holds more promise for the future. Assuming that we do not propose to abandon received Western views, there is a series of issues that are worth discussing. Should we modify the consensus that has been achieved about the virtues of export-led growth? Do we need to change our views on the limited role of capital flows in promoting development? In the light of the crisis, should we favor and welcome fiscal expansion and abandon former demands for fiscal discipline? Do we regard the international monetary system as ripe for reform, and could its reform help the cause of development? I will also discuss these topics; but I shall leave on one side the impact of the crisis on financial regulation, despite Max Fry’s passionate interest in this topic, as it is too large a subject to be also covered in a one-hour lecture.