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The concept and name of the Washington Consensus were first presented in 1989 by John Williamson, an economist from the Institute for International Economics, an international economic think tank based in Washington, D.C.[2] Williamson used the term to summarize commonly shared themes among policy advice by Washington-based institutions at the time, such as the International Monetary Fund, World Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of countries in Latin America from the economic and financial crises of the 1980s. The consensus as originally stated by Williamson included ten broad sets of relatively specific policy recommendations:[1] Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP; Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; Tax reform, broadening the tax base and adopting moderate marginal tax rates; Interest rates that are market determined and positive (but moderate) in real terms; Competitive exchange rates; Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions; Legal security for property rights. Origins of policy agenda Although Williamson's label of the Washington Consensus draws attention to the role of the Washington-based agencies in promoting the above agenda, a number of authors have stressed that Latin American policy-makers arrived at their own packages of policy reforms primarily based on their own analysis of their countries' situations. Thus, according to Joseph Stanislaw and Daniel Yergin, authors of The Commanding Heights, the policy prescriptions described in the Washington Consensus were "developed in Latin America, by Latin Americans, in response to what was happening both within and outside the region."[3] Joseph Stiglitz has written that "the Washington Consensus policies were designed to respond to the very real problems in Latin America and made considerable sense" (though Stiglitz has at times been an outspoken critic of IMF policies as applied to developing nations).[4] In view of the implication conveyed by the term Washington Consensus that the policies were largely external in origin, Stanislaw and Yergin report that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label."[5] A 2010 paper by Nancy Birdsall, Augusto de la Torre, and Felipe Valencia Caicedo likewise suggests that the policies in the original consensus were largely a creation of Latin American politicians and technocrats, with Williamson's role having been to gather the ten points in one place for the first time, rather than to "create" the package of policies.[6] In Williamson's own words from 2002: It is difficult even for the creator of the term to deny that the phrase "Washington Consensus" is a damaged brand name (Naím 2002). Audiences the world over seem to believe that this signifies a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery. There are people who cannot utter the term without foaming at the mouth. My own view is of course quite different. The basic ideas that I attempted to summarize in the Washington Consensus have continued to gain wider acceptance over the past decade, to the point where Lula has had to endorse most of them in order to be electable. For the most part they are motherhood and apple pie, which is why they commanded a consensus.[7] Broad sense Williamson recognizes that the term has commonly been used with a different meaning from his original prescription; he opposes the alternative use of the term, which became common after his initial formulation, to cover a broader market fundamentalism (or neoliberal) agenda.[8] I of course never intended my term to imply policies like capital account liberalization (...I quite consciously excluded that), monetarism, supply-side economics, or a minimal state (getting the state out of welfare provision and income redistribution), which I think of as the quintessentially neoliberal ideas. If that is how the term is interpreted, then we can all enjoy its wake, although let us at least have the decency to recognize that these ideas have rarely dominated thought in Washington and certainly never commanded a consensus there or anywhere much else...[7] More specifically, Williamson argues that the first three of his ten prescriptions are uncontroversial in the economic community, while recognizing that the others have evoked some controversy. He argues that one of the least controversial prescriptions, the redirection of spending to infrastructure, health care, and education, has often been neglected. He also argues that, while the prescriptions were focused on reducing certain functions of government (e.g., as an owner of productive enterprises), they would also strengthen government's ability to undertake other actions such as supporting education and health. Williamson says that he does not endorse market fundamentalism, and believes that the Consensus prescriptions, if implemented correctly, would benefit the poor.[9] In a book edited with Pedro-Pablo Kuczynski in 2003, Williamson laid out an expanded reform agenda, emphasizing crisis-proofing of economies, "second-generation" reforms, and policies addressing inequality and social issues (Kuczynski and Williamson, 2003). As noted, in spite of Williamson's reservations, the term Washington Consensus has been used more broadly to describe the general shift towards free market policies that followed the displacement of Keynesianism in the 1970s. In this broad sense the Washington Consensus is sometimes considered to have begun at about 1980.[10][11] Many commentators see the consensus, especially if interpreted in the broader sense of the term, as having been at its strongest during the 1990s. Some have argued that the consensus in this sense ended at the turn of the century, or at least that it became less influential after about the year 2000.[6][12] More commonly, commentators have suggested that the Consensus in its broader sense survived until the time of the 2008–2009 global financial crisis.[11] Following the strong intervention undertaken by governments in response to market failures, a number of journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was dead.[13][14] These included former British Prime Minister Gordon Brown, who following the 2009 G-20 London summit, declared "the old Washington Consensus is over".[15] Williamson was asked by The Washington Post in April 2009 whether he agreed with Gordon Brown that the Washington Consensus was dead. He responded: It depends on what one means by the Washington Consensus. If one means the ten points that I tried to outline, then clearly it's not right. If one uses the interpretation that a number of people—including Joe Stiglitz, most prominently—have foisted on it, that it is a neoliberal tract, then I think it is right.[16] After the 2010 G-20 Seoul summit announced that it had achieved agreement on a Seoul Development Consensus, the Financial Times editorialized that "Its pragmatic and pluralistic view of development is appealing enough. But the document will do little more than drive another nail into the coffin of a long-deceased Washington consensus."[17] Context Many countries have endeavored to implement varying components of the reform packages, with implementation sometimes imposed as a condition for receiving loans from the IMF and World Bank.[10] The results of these reforms are much debated. Some critics focus on claims that the reforms led to destabilization.[18] Some critics have also blamed the Washington Consensus for particular economic crises such as the Argentine economic crisis (1999–2002), and for exacerbating Latin America's economic inequalities. Criticism of the Washington Consensus has often been dismissed as socialism and/or anti-globalism. While these philosophies do criticize these policies, general criticism of the economics of the consensus is now more widely established, such as that outlined by US scholar Dani Rodrik, Professor of International Political Economy at Harvard University, in his paper Goodbye Washington Consensus, Hello Washington Confusion?.[19] The institutions that formed the consensus started softening their insistence on these policies in the 2000s largely due to political pressures surrounding globalization, but any reference of these ideas as a consensus essentially ended in the wake of the 2008 global financial crisis, as market fundamentalism lost favour. Though, it should be noted, that most of the core specific policies are still generally regarded favourably, but the policies have come to be viewed as not preventing nor alleviating acute economic crises. This is perhaps most notable in the work of the IMF with South Korea to create a new sort of intervention program to the one that South Korea was forced to accept during the Asian Financial Crisis of the late 1990s. That intervention, which was heavily grounded in the Washington Consensus, was hailed at the time for stopping the "Asian Contagion" but eventually the program came to be seen more skeptically. Williamson himself has summarized the overall results on growth, employment and poverty reduction in many countries as "disappointing, to say the least". He attributes this limited impact to three factors: (a) the Consensus per se placed no special emphasis on mechanisms for avoiding economic crises, which have proved very damaging; (b) the reforms—both those listed in his article and, a fortiori, those actually implemented—were incomplete; and (c) the reforms cited were insufficiently ambitious with respect to targeting improvements in income distribution, and need to be complemented by stronger efforts in this direction. Rather than an argument for abandoning the original ten prescriptions, though, Williamson concludes that they are "motherhood and apple pie" and "not worth debating".[7] Both Williamson and other analysts have pointed to longer term improvements in economic performance in a number of countries that have adopted the relevant policy changes consistently, such as Chile (below). As Williamson himself has pointed out, the term has come to be used in a broader sense to its original intention, as a synonym for market fundamentalism or neo-liberalism. In this broader sense, Williamson states, it has been criticized by people such as George Soros and Nobel Laureate Joseph E. Stiglitz.[9] The Washington Consensus is also criticized by others such as some Latin American politicians and heterodox economists such as Erik Reinert.[20] The term has become associated with neoliberal policies in general and drawn into the broader debate over the expanding role of the free market, constraints upon the state, and the influence of the United States, and globalization more broadly, on countries' national sovereignty. "Stabilize, privatize, and liberalize" became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled.[19] —Dani Rodrik, Professor of International Political Economy, Harvard University in JEL'Dec'06 While opinion varies among economists, Rodrik pointed out what he claimed was a factual paradox: while China and India increased their economies' reliance on free market forces to a limited extent, their general economic policies remained the exact opposite to the Washington Consensus' main recommendations. Both had high levels of protectionism, no privatization, extensive industrial policies planning, and lax fiscal and financial policies through the 1990s. Had they been dismal failures they would have presented strong evidence in support of the recommended Washington Consensus policies. However they turned out to be successes.[21] According to Rodrik: "While the lessons drawn by proponents and skeptics differ, it is fair to say that nobody really believes in the Washington Consensus anymore. The question now is not whether the Washington Consensus is dead or alive; it is what will replace it".[19] Rodrik's account of Chinese or Indian policies during the period is not universally accepted. Among other things those policies involved major turns in the direction of greater reliance upon market forces, both domestically and internationally.[22] In a book edited with Pedro Pablo Kuczynski in 2003, John Williamson laid out an expanded reform agenda, emphasizing crisis-proofing of economies, "second-generation" reforms, and policies addressing inequality and social issues. Macroeconomic adjustment The widespread adoption by governments of the Washington Consensus was to a large degree a reaction to the macroeconomic crisis that hit much of Latin America, and some other developing regions, during the 1980s. The crisis had multiple origins: the drastic rise in the price of imported oil following the emergence of OPEC, mounting levels of external debt, the rise in US (and hence international) interest rates, and—consequent to the foregoing problems—loss of access to additional foreign credit. The import-substitution policies that had been pursued by many developing country governments in Latin America and elsewhere for several decades had left their economies ill-equipped to expand exports at all quickly to pay for the additional cost of imported oil (by contrast, many countries in East Asia, which had followed more export-oriented strategies, found it comparatively easy to expand exports still further, and as such managed to accommodate the external shocks with much less economic and social disruption). Unable either to expand external borrowing further or to ramp up export earnings easily, many Latin American countries faced no obvious sustainable alternatives to reducing overall domestic demand via greater fiscal discipline, while in parallel adopting policies to reduce protectionism and increase their economies' export orientation.[23] Trade liberalization The Washington Consensus, as framed by Williamson, envisaged a largely unilateral process of trade reform, by which countries would lower their non-tariff (especially) and tariff barriers to imports. Many countries, including the majority of those in Latin America, have indeed undertaken significant unilateral trade liberalization over subsequent years, opening their economies to greater import competition while simultaneously increasing the share of exports in their GDP (in parallel, Latin America's share in global trade has also increased). A separate agenda—only tangentially related to the Washington Consensus as framed by Williamson—concerns various programs for multilateral trade liberalization, whether at the global (WTO) or regional level, including the North American Free Trade Agreement (NAFTA) and DR-CAFTA agreements. Criticism Most criticism has been focused on trade liberalization and the elimination of subsidies, and criticism has been particularly strident in the agriculture sector. In nations with substantial natural resources, though, criticism has tended to focus on privatization of industries exploiting these resources. As of 2010, several Latin American countries were led by socialist or other left wing governments, some of which—including Argentina and Venezuela—have campaigned for (and to some degree adopted) policies contrary to the Washington Consensus policies. Other Latin American countries with governments of the left, including Brazil, Chile and Peru, in practice adopted the bulk of the policies included in Williamson's list, even though they criticized the market fundamentalism that these are often associated with. Also critical of the policies as actually promoted by the IMF have been some US economists, such as Joseph Stiglitz and Dani Rodrik, who have challenged what are sometimes described as the 'fundamentalist' policies of the IMF and the US Treasury for what Stiglitz calls a 'one size fits all' treatment of individual economies. According to Stiglitz the treatment suggested by the IMF is too simple: one dose, and fast—stabilize, liberalize and privatize, without prioritizing or watching for side effects.[24] The reforms did not always work out the way they were intended. While growth generally improved across much of Latin America, it was in most countries less than the reformers had originally hoped for (and the "transition crisis", as noted above deeper and more sustained than hoped for in some of the former socialist economies). Success stories in Sub-Saharan Africa during the 1990s were relatively few and far in between, and market-oriented reforms by themselves offered no formula to deal with the growing public health emergency in which the continent became embroiled. The critics, meanwhile, argue that the disappointing outcomes have vindicated their concerns about the inappropriateness of the standard reform agenda.[25] —Professor Dani Rodrik, Harvard University The critique laid out in the World Bank's study Economic Growth in the 1990s: Learning from a Decade of Reform (2005) [26] shows how far discussion has come from the original ideas of the Washington Consensus. Gobind Nankani, a former vice-president for Africa at the World Bank, wrote in the preface: "there is no unique universal set of rules.... [W]e need to get away from formulae and the search for elusive 'best practices'...." (p. xiii). The World Bank's new emphasis is on the need for humility, for policy diversity, for selective and modest reforms, and for experimentation.[27] The World Bank's report Learning from Reform shows some of the developments of the 1990s. There was a deep and prolonged collapse in output in some (though by no means all) countries making the transition from communism to market economies (many of the Central and East European countries, by contrast, made the adjustment relatively rapidly). More than a decade into the transition, some of the former communist countries, especially parts of the former Soviet Union, had still not caught up to their 1990 levels of output. Many Sub-Saharan African's economies failed to take off during the 1990s, in spite of efforts at policy reform, changes in the political and external environments, and continued heavy influx of foreign aid. Uganda, Tanzania, and Mozambique were among countries that showed some success, but they remained fragile. There were several successive and painful financial crises in Latin America, East Asia, Russia, and Turkey. The Latin American recovery in the first half of the 1990s was interrupted by crises later in the decade. There was less growth in per capita GDP in Latin America than in the period of rapid post-War expansion and opening in the world economy, 1950-80. Argentina, described by some as "the poster boy of the Latin American economic revolution",[28] came crashing down in 2002.[27][28] Among other results of the recent global financial crisis has been a strengthening of belief in the importance of local development models as more suitable than programmatic approaches. Some elements of this school of thought were summarized in the idea of a "Beijing Consensus" which suggested that nations needed to find their own paths to development and reform. Anti-globalization movement Many critics of trade liberalization, such as Noam Chomsky, Tariq Ali, Susan George, and Naomi Klein, see the Washington Consensus as a way to open the labor market of underdeveloped economies to exploitation by companies from more developed economies. The prescribed reductions in tariffs and other trade barriers allow the free movement of goods across borders according to market forces, but labor is not permitted to move freely due to the requirements of a visa or a work permit. This creates an economic climate where goods are manufactured using cheap labor in underdeveloped economies and then exported to rich First World economies for sale at what the critics argue are huge markups, with the balance of the markup said to accrue to large multinational corporations. The criticism is that workers in the Third World economy nevertheless remain poor, as any pay raises they may have received over what they made before trade liberalization are said to be offset by inflation, whereas workers in the First World country become unemployed, while the wealthy owners of the multinational grow even more wealthy. Anti-globalism critics further claim that First World countries impose what the critics describe as the consensus's neoliberal policies on economically vulnerable countries through organizations such as the World Bank and the International Monetary Fund and by political pressure and bribery. They argue that the Washington Consensus has not, in fact, led to any great economic boom in Latin America, but rather to severe economic crises and the accumulation of crippling external debts that render the target country beholden to the First World. Many of the policy prescriptions (e.g., the privatization of state industries, tax reform, and deregulation) are criticized as mechanisms for ensuring the development of a small, wealthy, indigenous elite in the Third World who will rise to political power and also have a vested interest in maintaining the local status quo of labor exploitation. Some specific factual premises of the critique as phrased above (especially on the macroeconomic side) are not accepted by defenders, or indeed all critics, of the Washington Consensus. To take a few examples,[29] inflation in many developing countries is now at its lowest levels for many decades (low single figures for very much of Latin America). Workers in some factories created by foreign investment are found typically to receive higher wages and better working conditions than exist in many of their own countries' domestically-owned workplaces. Economic growth in much of Latin America in the last few years has been at historically high rates, and debt levels, relative to the size of these economies, are on average significantly lower than they were several years ago. Despite these macroeconomic advances, poverty and inequality remain at high levels in Latin America. About one of every three people — 165 million in total — still live on less than $2 a day. Roughly a third of the population has no access to electricity or basic sanitation, and an estimated 10 million children suffer from malnutrition. These problems are not, however, new: Latin America was the most economically unequal region in the world in 1950, and has continued to be so ever since, during periods both of state-directed import-substitution and (subsequently) of market-oriented liberalization.[30] Some socialist political leaders in Latin America are vocal and well-known critics of the Washington Consensus, such as the late Venezuelan President Hugo Chávez, Cuban ex-President Fidel Castro, Bolivian President Evo Morales, and Rafael Correa, President of Ecuador. In Argentina, too, the recent Justicialist Party government of Néstor Kirchner and his spouse who succeeded him undertook policy measures which represented a repudiation of at least some Consensus policies (see Continuing Controversy below). With the exception of Castro, these leaders have maintained and expanded some successful policies commonly associated with the Washington Consensus, such as macroeconomic stability and property rights protection. But many have also proposed and implemented policies directly opposed to the Washington Consensus: under Chavez, for example, Venezuela partially nationalized the state-run oil company, Petróleos de Venezuela S.A (PdVSA), and with the help of the company's assets developed several social programs to help the country's poor. These programs have been credited with the dramatic improvement in quality of life during Chavez's presidency: the poverty rate dropped from 48.6% in 2002 to 29.5% in 2011, while access to education and healthcare was significantly increased.[31] Others on the Latin American left take a different approach. Governments led by the Socialist Party of Chile, by Alan García in Peru, by Tabaré Vázquez in Uruguay, and by Luiz Inácio Lula da Silva in Brazil, have in practise maintained a high degree of continuity with the economic policies described under the Washington Consensus (debt-paying, protection to foreign investment, financial reforms, etc.). But governments of this type have simultaneously sought to supplement these policies by measures directly targeted at improving productivity and helping the poor, such as education reforms and subsidies to poor families conditioned on their children staying in school. The term Washington Consensus was coined in 1989 by English economist John Williamson to refer to a set of 10 relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.–based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department.[1] The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy. Subsequent to Williamson's minting of the phrase, and despite his emphatic opposition, the term Washington Consensus has come to be used fairly widely in a second, broader sense, to refer to a more general orientation towards a strongly market-based approach (sometimes described as market fundamentalism or neoliberalism). In emphasizing the magnitude of the difference between the two alternative definitions, Williamson himself has argued (see "Origins of Policy Agenda" and "Broad Sense" below) that his ten original, narrowly-defined prescriptions have largely acquired the status of "motherhood and apple pie" (i.e., are broadly taken for granted), whereas the subsequent broader definition, representing a form of neoliberal manifesto, "never enjoyed a consensus [in Washington] or anywhere much else" and can by now reasonably be said to be dead. Discussion of the Washington Consensus has long been contentious. Partly this reflects a lack of agreement over what is meant by the term, in face of the contrast between the broader and narrower definitions outlined above. But there are also substantive differences involved over the merits and consequences of the various policy prescriptions involved. Some of the critics discussed in this article take issue, for example, with the original Consensus's emphasis on the opening of developing countries to global markets, and/or with what they see as an excessive focus on strengthening the influence of domestic market forces, arguably at the expense of key functions of the state. For other commentators reviewed below, the point at issue is less what is included in the Consensus than what is missing, including such areas as institution-building and targeted efforts to improve opportunities for the weakest in society. Despite these areas of controversy, a great many writers and development institutions would by now accept the more general proposition that strategies need to be tailored to the specific circumstances of individual countries. |
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