People have recently criticized the so called "Washington Consensus" arguing that it has proved to be a failure at least in Latin America. You and Dani Rodrick among others have recently contributed to another consensus, the "Barcelona Consensus". Could you please explain to us the main differences between the two?

Olivier Blanchard: (The original Washington Consensus was a set of propositions written by John Williamson, summarizing what he saw as the consensus among policy makers and economists at the time. If you look at the set of propositions, I am sure you will agree with most of them: You have to have fiscal control; low inflation is probably better than high inflation; and so on. What people and the press started to refer later on to as the Washington Consensus was something very different: Free markets all the way, reduce the role of the state, etc. So you always have the issue of which version you talking about. The Washington Consensus as John Williamson wrote it down is perfectly fine, but the better known caricature is unacceptable. Our purpose in writing the Barcelona consensus was largely to restate the original Williamson version of the Washington consensus (John Williamson signed the Barcelona consensus as well), and extend it to take into account what we have learned over the past two decades, from the implications of sudden stops for the way we think about capital flows, to the painful transitional effects of many reforms, to the realization that, when it comes to putting in place or reforming institutions, one size (of institutions) does not fit all.

W.P: Talking about institutions, what is your opinion of the work of Acemoglu, Robinson and Johnson. They have put a lot of emphasis on institutions as the ultimate cause of development. What practical implications do you think this view has? Some people, in particular in policy environments, argue that it is a pessimistic view of development. What are the positive and normative implications of this view?

O.B: I can't think of the work of any of my colleagues as anything else than brilliant... On a more serious note: I think it is indeed very important work.

The first step is to note that differences in income per capita across countries come mostly from differences in productivity levels. At the same time, it is a fact that most of the countries have access to most of the world technology. This suggests that the source of difference in productivity levels must be differences in institutions. Institutions determine what technology can be used, and how efficiently it is used.

The second step is then to ask why institutions are the way they are. Let me state two extreme views here. One is the predetermination view: Something happened in the 1500s or some other century, when the country was invaded by the wrong guys. Call this the original sin theory. The second is that, in fact institutions are very much the result from accidents of nature and history, the history of labor relations, etc. and there is no predetermination... .