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Domestic Demand-Led Growth: A New Paradigm for Development

By Thomas Palley

May 24, 2002

Abstract: For the last two decades development policy has been guided by the Washington Consensus.2 This approach triumphed in the late 1970s, when it replaced import-substitution which emphasizes development of domestic capacities for domestic use purposes. Now, owing to a decade of economic crises - including Mexico in 1994, East Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina and Turkey in 2001 - the Washington Consensus is under attack. Proclivity to crisis is a real problem, but an even profounder failing of the Washington consensus has been its failure to deliver growth and equitable development. Table 1 shows that world growth has systematically slowed during the period of Washington Consensus dominance, especially in low and middle income countries. World growth in the period 1990 - 96 was slower than the period 1980 - 89, which in turn was slower than the period 1965 - 80. Moreover, not only has growth slowed, but it has also been accompanied by greater inequality within and between countries (Denninger and Squire, 1996; Milanovic, 1999: Lustig and Deutsch,1998). CREDIT INFO: Palley, Tom, "Domestic Demand-Led Growth: A New Paradigm for Development," presented at the Alternatives to Neoliberalism Conference sponsored by the New Rules for Global Finance Coalition, 23-24 May 2002.

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