27 and equitable growth. The Consensus simply had too narrow an understanding of what matters for economic growth and development.

Trying to assemble a comprehensive list of important reform areas left out by the Consensus is a rather futile exercise—for the components chosen for inclusion are not independent of the perspective adopted and the preferences of the researcher—and one that in any case lies beyond the scope of this paper. In what follows, therefore, we illustrate this view using as guidance key flagship reports published by multilateral development agencies (World Bank, IDB, ECLAC and CAF) since the second half of the 1990s. Using headline publications from some of the institutions that supported (and at times actively championed) the Consensus during the 1990s helps to highlight the growing acceptance of this third view.

Among the many reform areas left out by the Washington Consensus are: (a) volatility; (b) institutions; (c) knowledge and technological innovation; and (d) equity.<sup>37</sup> What these areas have in common is the presence of significant market failures (due to externalities, coordination problems and imperfect information) which markets themselves cannot repair and that thus require active policy. They were not seen as part of Consensus-style reform agenda basically because the Consensus relied on well-functioning markets to solve the relevant development challenges and viewed any state interference in the economy with suspicion. Successful reformers, like Chile, also implemented important reforms in these other areas, thus supplementing the Washington Consensus.

Consider first _volatility_ . By focusing on the first moment—the average or expected value of reform effects—Washington Consensus-style policies ignored the crucial relevance of the second moment—the variance of such effects. The fact is that volatility has an independent, first-order impact on economic development. This argument was forcibly put forward in the 1995 annual report of the IDB _Overcoming Volatility_ . It discussed Latin America’s proneness to volatility, driven by a high incidence of external shocks whose effects are magnified by shallow financial markets and inconsistent macro policies. Volatility is estimated to have reduced the region’s historical growth rate by one percentage point, with particularly strong negative impacts on investment in infrastructure and human capital, and especially detrimental impacts on poverty and inequality. To overcome volatility, reforms need to put a premium on export diversification, financial market deepening and stable macroeconomic, particularly fiscal, policy.<sup>38</sup>

> 37 A key area that was completely ignored by the Washington Consensus and yet is not in this list is environmental sustainability, particularly climate change.  This topic is not developed here because it is as much about global as well as domestic policy.  The topic was until recently relegated to sector experts but Nicholas Stern (2008) decidedly brought climate change to the core of development policy thinking, arguing that greenhouse gas emissions represent the biggest market failure the world has seen.  That climate change has been finally mainstreamed into Latin American development policy thinking is illustrated by the 2009 flagship report of the Latin American Region of the World Bank entitled _Low Carbon, High Growth: Latin American Reponses to Climate_ Change.  For a global perspective, see the 2010 World Development Report _Development and Climate Change._

> 38 Follow-up articles to this report, which expand on the analysis and conclusions, include Gavin and Hausman (1996) and Gavin et al. (1996).  They highlight the interplay of volatility with the region’s precarious access to international financial markets and fiscal pro-cyclicality and propose as additional solutions regional integration and collective risk hedging.  In a similar vein, Caballero (2001) proposes a simple organizing framework to study shocks, volatility, and crises in the context of weak international financial integration and underdeveloped domestic