The Washington Consensus and Beyond

This is a summary of an article written by John Williamson – the man who coined the term the Washington Consensus. He argues that the term refers to sound economic policy advice and has been misused by wider critics of neo-liberal policy. He then outlines an updated blueprint for economic development. There is a focus on Latin America, a continent that reformed but did not gain the expected growth rates promised in the early 90’s.

  • The term emerged in 1989 when Latin American state leaders agreed to jointly liberalise their economies in an attempt to achieve economic growth.
  • The term is used by critics of the ideology to describe near universal spread of the neo-liberal ideas.
  • The author, attending a meeting of 10 Latin American leaders agreeing on their future economic policy, agreed on a list of policies that the majority inWashingtonwould support. Hence the term.
  • Ignoring the strong neo-liberal agenda that represents much of the IMF or US Treasury, how has Latin America managed under this arrangement?

This was the Washington Consensus:

  1. Fiscal discipline
  2. Reordering public expenditure priorities
  3. Tax reform
  4. Liberalising interest rates
  5. A competitive exchange rate
  6. Trade liberalisation
  7. Liberalisation of inward foreign investment
  8. Privatisation
  9. Deregulation
  10. Property rights
  • Controversial term from the start – another suggestion was ‘universal convergence’
  • In Latin America, some were proud of the term (the US were winners of  the Cold War), others resented that it suggested Washington had chosen the policy and it hadn’t been out of self-interest.
  • Ideological agenda asserted to be neo-liberal. Broad agreement on privatisation, macro-economic discipline etc.
  • However, Williamson did not see consensus on free capital movements, monetarism, minimal tax rates or the minimal state no responsibility for correcting income distribution or internalising externalities.
  • The term is used to describe the neo-liberal agenda of Reagan/Thatcher/Bush/Blair etc. This allows critics to stand against this policy without actually disagreeing with anything much written in 1990.
  • Is it right to blame the Washington Consensus for disappointing economic outcomes like repeated crises, low growth and the continuation of poverty?
  • East Asia maybe, Argentina (poster-boy of Washington at one point), however did not suffer it’s crisis due privatisation or import liberalisation. It arose through the pegging of the peso to the dollar and over-expenditure whilst in the US’s good books. Since fiscal discipline and competitive exchange rates were part of the consensus, it is rich to blame it for the crisis.

The Next Stage of Reform

  • However, the Washington Consensus has failed for many Latin American states who have pursued such policies. The Institute for International Economics decided to gather mostly Latin American economists to offer guidance on all aspects of economic policy.
  • The results are published in After the Washington Consensus: Restarting Growth and Reform in Latin America.
  • This is a summary of the findings, grouped into 4 key areas.

1. Crisis Proofing

  • Crises have crippled Latin America. It is an area of high priority e.g. crises in Mexico, Argentina, Brazil, Ecuadorthat have reduced growth and increased poverty.
  • Policies to ensure stabilisation: achieve budget surpluses in prosperous times, monetary policy targeted on inflation, the adoption of a sufficiently flexible exchange rate to remain competitive & ensuring sub-national government is subject to stringent budgetary control.
  • India: historically stable with high domestic savings and not overly reliant on primary commodities. It is however running an extremely high public debt.
  • Indiahas many institutional and historical advantages that make it possible to run a much higher public debt than in Latin America, but this does not reduce the seriousness of the issue.

2. First Generation Reforms

  • Countries need a faster growth rate than they would receive from crisis-proofing – they need to build on previous reforms.
  • The failure to increase labour market flexibility has been a key factor.
  • This has particularly damaged those looking to move out of the informal economy.
  • This can be done without diverging from the hard-won benefits of organised labour e.g. improvements in labour market information, skill certification and occupational training systems, each would improve labour productivity.
  • Free trade has been another area where policies need to be built on. Latin America needs a Free Trade Area of the Americas.
  • Privatisation too needs to be contined. It has proved particularly unpopular with the general public but when privatised industries are subject to stringent competition or regulation, it is of great benefit to an economy.

3. Second Generation Reforms

  • It is a mistake to assume growth will occur with improved and extended Washington Consensus reforms. The 1990’s in development economics was dominated by the importance of institutional arrangements in a fully functioning economy.
  • This will involve political confrontation with some of society’s most potent and heavily entrenched interest groups in Latin America, e.g. the corrupt judiciary & politicised public school teachers.
  • The introduction of Industrial policy is a mistake.
  • The state has a key role in providing decent infrastructure, a stable and predictable macroeconomic, legal and political environment, as well as a strong human resource base.
  • Research and innovation is an area in whichLatin Americahas lagged behind.
  • There are two crucial economic areas: modernising the institutional infrastructure of the market economy and the financial sector.
  • Institutional reforms need to be even more country-specific than economic ones.

 4. Income Distribution and the Social Agenda

  • Latin American nations are notorious for their income inequality.
  • Arthur Okun described the trade-off between level of income and its equitable distribution as ‘big trade-off’ (1975)
  • Birdsall and de la Torre (2001) offered a list of 10 reforms that improve equity without effecting growth – these are mostly sensible.
  • Typical instrument – progressive taxation.
  • Unfortunately recent tax reforms in Latin America have seen a shift in the burden from income taxes (generally mildly progressive) to consumption taxes (regressive).
  • Attempts to collect more direct taxation should occur in: the development of property taxation as a major revenue source, elimination of tax loopholes & improved tax collection (especially on income earned from capital abroad).
  • Any increase in tax revenue should be devoted to basic social services. This should be of universal benefit to the population – it is success with middle classes that ensure political sustainability.
  • The fundamental rule of the market economy is that people exchange things if value with one another – the problem is that the poor own no assets and have nothing to offer in return.
  • Therefore offer the poor mechanisms through which they can obtain assets: education, provision of property rights to the informal economy & allow Hernandode Soto’s ‘mystery of capital’ to be unlocked, land reform (e.g. Brazil) and micro-credit schemes.
  • Mechanisms such as these are becoming increasingly viable because of Latin America’s strong civil society.

Concluding comments:

  • Anyone looking for a new paradigm for economic development will be disappointed.
  • The view of the authors of the book is that past alternatives have failed and the anti-globalisation movement has failed to come up with a coherent agenda.
  • Latin America needs more reforms, as discusses in the blueprint above, not less.