What Is the Washington Consensus and How Successful Has It Been - Example

What is the Washington Consensus and how successful (on both its and its critics’ terms) has it been? What form do you think a post-Washington Consensus could/should take? Table of contents Introduction The Washington Consensus refers to a development strategy comprising ten economic recommendations that advocate free trade, open economies, and minimum involvement of the state in an economy. The formulators of the policy reforms contained in the Washington Consensus believed that such reforms were a necessary component of changes that countries needed to adopt in order to increase their economic growth. Therefore to some extent, the ten policy recommendations were necessary in helping revive the economies of the Latin American countries, which had been ravaged by a debt crisis in the 1980s. The success of the Washington Consensus can be assessed based on how appropriate the policy recommendations were for Latin American countries and other countries in general. The weaknesses of the policy recommendations in the Washington Consensus can also be evaluated in regard to the reality on the ground, i.e. how other countries have fared with or without the guidelines in the Washington Consensus. This essay will therefore evaluate the successes and failures of the Washington Consensus by analysing trends of development in different countries before and after the ten-point proposal was made. This will be achieved by analysing the contents of the ten policy recommendations and how they have been perceived by supporters as well as critics of the Washington Consensus. The essay will also present a view on the form that a post-Washington Consensus could or should take. The Washington Consensus and what it entails The concept “Washington Consensus” was conceived in 1989. This occurred in a background paper that was written by economist John Williamson for a conference convened to assess the extent to which existing ideas for development economics that had guided economic policy in Latin America since the 1950s were being disregarded by the ideas that had long been recognised as relevant within the Organisation for Economic Co-operation and Development (OECD) (Williamson 2004, 1). According to Derwich (2009, 155), the origin of the Washington Consensus lies in the debt crisis that had affected the Latin American nations in the 1980s. The economies of these countries had been based on approaches such as strong protectionism, import substitution, living on borrowed money and not accounting for expenditure, and, as a result, these economies were on the verge of collapse. To deal with the situation, there was need to adopt new economic approaches promoted by international financial organisations, particularly the International Monetary Fund (IMF).It was then that John Williamson, working for the Institute for International Economics, a Washington-based economic think tank, came with the reform proposal that was coined the “Washington Consensus”. The proposal, which is a set of new neoliberal changes that were aimed at helping Latin American nations to recover from the crisis that they were in, were accepted by many governments in the region (Derwich 2009, 155). The 10 policy guidelines of the Washington Consensus are as follows. The first point was fiscal discipline – which implied that countries were required to have guidelines for reducing budget deficits (World Health Organisation (WHO) 2016). This point was made in relation to the fact that many countries had run into large budget deficits that resulted into crises in balance of payments as well as high levels of inflation that adversely affected the poor people (Williamson 2004, 1). The second point was the need to rethink priorities relating to public expenditure (WHO 2016). It was suggested that expenditure be done in a way that prioritises growth and the needs of the poor. Hence, there was need to avoid things like non-merit subsidies and focusing on issues such as basic education and health and infrastructure (Williamson 2004, 1).The third point in the Washington Consensus was tax reform. This guideline suggested the need to broaden the tax base and reduce marginal tax rates (WHO 2016; Williamson 2004, 1). As noted by WHO (2016) and Williamson (2004, 1), the fourth recommendation focused on the need to liberalise interest rates. Under this proposal, it was recommended that interest rates be determined by the conditions of the market (WHO). The fifth point focused on exchange rates, suggesting the need to have competitive exchange rate regimes. Ideally, it was suggested that exchange rates needed to be managed in order to spur growth in other sectors apart from the traditional exports (WHO). The sixth point looked at liberalising trade. That is, this point was about the need to remove or reduce barriers or restrictions on the free exchange of goods and services between countries. The seventh point was promoting foreign direct investment by reducing barriers to FDI. The eighth point focused on privatisation, whereby it was required that state-owned businesses be privatised. The ninth requirement was regulation, which would involve abolishing regulations that restrict entry or exit of new companies into or out of the market or limit fair competition (with the exception of areas such as finance, environment and security). The tenth issue was to secure property rights without necessarily having to impose high costs and ensuring that such rights are available to the informal sector (WHO 2016; Woo 2004, 10). Overall, the policy reforms that were contained in the Washington Consensus can be summarised as encompassing fiscal discipline, restriction on public expenditure, tax reforms, liberalisation of interest rates, having an exchange rate that is arrived at in a competitive manner, liberalisation of trade, liberalisation of FDI, privatisation, deregulation of markets, and strengthening of property rights. Successes and failures of the Washington Consensus According to Queirolo (2008, 121), many scholars who have carried out an analysis of the failure or success of the Washington Consensus agree that while some proposals in the framework achieved some success, the anticipated results of economic growth were largely not achieved. The successes and failures of the Washington Consensus are thus discussed next. Successes One of the key successes of the proposal in the Washington Consensus is related to the concept of having a free market. It can be seen that many aspects of the Washington Consensus, such as deregulation of markets, liberalisation of trade, liberalisation of FDI, liberalisation of interest rates and privatisation focused on having an economic environment in which market forces, rather than the government, determine what happens in the market. That is, the Washington Consensus basically advocated a reduced role of the state in the economy – or a free market. Evidence that reduced state intervention in the economy led to increased economic growth can be seen when one looks at a number of developing countries. To start with, liberals have pointed out that the achievements made by the Asian Tigers (Singapore Taiwan, Hong Kong and South Korea) are proof that a free market strategy – both locally and internationally – is most favourable (D'Anieri 2011, 239). D'Anieri (2011, 239) also argues that the success of the Asian Tigers is seen as a classic confirmation that even poor nations stand to benefit when they pursue the laws of market economics and comparative advantage. It is also argued that Ghana achieved economic growth and development because of the economic reforms that were implemented based on the Washington Consensus (Fosu 2013, 6). According to Fosu (2013, 6), because of reforms that were based on the Washington Consensus, “Ghana’s economic fortunes very much turned around, with the country experiencing continuous growth and considerable improvement in human development”. Within the Latin American region, Argentina is touted as one country that experienced growth due to implementation of the proposals in the Washington Consensus (de Paula 2011, 29; Freeman 2014, 289). Freeman (2014, 289) points out that during the 1990s, Argentina became an exemplar of countries that were enjoying progress due to “Washington Consensus-style globalisation”. Specifically, based on the Fraser Institute index of economic freedom, Argentina’s ranking rose to 32 in 2000 from 97 in 1985, and this was one of the largest improvements ever in the index. The changes that Argentina had implemented included pegging its currency (peso) to the USA dollar, regulating markets, privatising industries, and lowering taxes on the rich people, among other changes (Freeman 2014, 289). Failures/criticisms of the Washington Consensus Despite the aforementioned successes, some critics argue that the successes were not long-lasting or cannot be entirely attributed to the implementation of the proposals in the Washington Consensus. For instance, de Paula (2011, 29) notes that even though Argentina was regarded by the IMF in the 1990s as an exemplar of the effectiveness of the Washington Consensus framework, the reality was that it was an enormous failure. As well, even though it is argued that reduced government intervention led to the success of the Asian Tigers, the success achieved cannot be wholly credited to reforms that were based on the Washington Consensus (Boafo-Arthur 2007, 10). Citing Joseph Stiglitz, a renowned economist, Boafo-Arthur (2007, 10) points out that even though the East Asian nations reduced the role of the government in the economy, they still appreciated the role that the government played. It is argued that the East Asian countries ensured that the government played its role in dealing with the dynamic interplay of markets as well as other externalities, but the Washington Consensus recommendations did not view things in this context (Boafo-Arthur 2007, 10). Overall, as noted by de Paula (2011, 29), the Washington Consensus was criticised for a number of reasons. The first one is that domestic financial liberalisation resulted in crises in the banking sectors of various countries. For instance, after performing well between 1989 and 1994, the banking industry experienced crises in countries such as Argentina, Brazil, Mexico, Peru, Ecuador, Columbia and Chile (Kuczynski 2003, 105). Another reason why the Washington Consensus was criticised is that openness of capital accounts spurred recurrent speculation regarding domestic currency as well as currency crises, in spite of economic fundamentals being satisfactory, and this led to adverse consequences on real variables such as employment and output. Also, it is noted that as a result of implementing privatisation as recommended in the Washington Consensus, there was failure of firms in some countries since privatisation was not followed by effective policies to promote competition. As well, paying too much attention on controlling inflation was in some situations detrimental to growth (de Paula 2011, 29). Joseph Stiglitz also criticised the Washington Consensus based on a number of issues, as noted by Boafo-Arthur (2007, 10). The first point, and which has already been noted above, is that the proposals undermined the state’s role in the market, which was not only erroneous but also conflicted with the growth path that was pursued by the Asian Tigers. The second point is that the policy conditions that were imposed on developing nations by the Washington Consensus had a very narrow focus and emphasised liberalisation of prices of agricultural commodities without sufficient consideration of the issues required to enhance agricultural production, for instance infrastructure and availability of credit. Another point is that the reforms in the financial sector were mainly focused on liberalising interest rates in small and rudimentary markets, which led to long periods of extremely high interest rates with no credit available. As well, failure to pay attention to the factors that had led to volatility in the market, such as liberalisation of the capital market, led to further financial crises. Additionally, the Washington Consensus had a preconceived notion that governments were the problem and the market was the solution (Boafo-Arthur 2007, 10). This led to the recommendation of the policies with a “one-size-fits-all mindset”, meaning that the proposal could fit all countries, yet in reality, the policies could be suitable for only a few countries (Buckely 2011, 74). The form that a post-Washington Consensus could/should take The weaknesses of the proposals in the Washington Consensus call for reforms that can ensure practical and sustained growth of countries. The set of reforms needs to be able to deal with the problems that the Washington Consensus could not address. As early as the 2000s, challenges emanating from the Washington Consensus led to a rethink of the proposals in that framework. As a result, there has been renewed interest in governance and reduction of poverty. The success of the East Asian nations has provided the need to rethink the role of the state in the economy. In particular, focus is on having institutions and the need to enhance the performance of the state as a necessary component of market-oriented reforms (Öniş and Şenses 2003, 13; Saad-Filho 2010, 7). A post-Washington Consensus needs to take a form that addresses some of the criticisms of the Washington Consensus, especially those by economists such as Stiglitz. To start with, the consensus needs to be arrived at after an analysis of a number of issues that affect different developing countries, rather merely looking at the current state of developed countries and thinking that developing countries can pursue such strategies to succeed. In short, the consensus should not be reached merely within the confines of Washington (Stiglitz 2008). Secondly, it should be noted that one-size-fits-all reforms are likely to fail (Stiglitz 2008). A policy may work in one country but not in another. Therefore, a post-Washington Consensus should be one that encourages countries to consider their own unique situations, just as the East Asian countries did, such as ensuring that the state plays its role in the economy, even though on a reduced level. For instance, states should play a proper regulatory role of regulating the financial system through mechanisms such as mobilising capital, reassuring depositors regarding the banking system, and enhancing allocations for investment (Öniş and Şenses 2003, 13). In addition, the state should provide support for education in order to supply qualified personnel, as envisaged in the original Washington Consensus. As well, states need to ensure that there is infrastructure, or support the provision of infrastructure such as roads. This will empower the private sector to participate in activities that foster economic growth. A post-Washington Consensus should also have provisions that help promote equality and reduce poverty, given that such policies contributed to the overall growth of East Asian nations (Öniş and Şenses 2003, 13). Conclusion In conclusion, the Washington Consensus is a development framework containing ten economic proposals that call for liberalisation of trade and economies as well as a reduced role of the state in an economy. The framework was proposed to help achieve growth in developing countries, especially the Latin American countries that had been affected by a debt crisis in the 1980s. Although some of the proposals in the Washington Consensus achieved some success, the framework has largely been criticised for failure to address the problems that affect developing countries. In particular, the proposals sought to undermine the role of the state in the market, imposed conditions on market liberalisation without considering the positions of different countries, failed to address the issues that caused market volatility, and perceived governments as the problem and markets as the solution. A post-Washington Consensus needs to address these problems by rethinking the role of the state as a key player in the economy, especially with regard to regulation and having in place institutions that promote growth. It also needs to ensure that the state is at the heart of development by providing the incentives that the private sector requires to participate in economic activities that spur growth. References Boafo-Arthur, Kwame. 2007. “A decade of liberalism in perspective”. In Ghana: One Decade of the Liberal State, edited by Kwame Boafo-Arthur, 1-20. London: Zed Book Ltd. Buckely, Ross P. 2011. “East Asian Financial integration: A Road Ahead”. In Multilateralism and Regionalism in Global Economic Governance: Trade, Investment and Finance, edited by Junji Nakagawa, 70-81. Routledge: Abingdon, Oxon. D'Anieri, Paul. 2011. International Politics: Power and Purpose in Global Affairs. Boston, MA: Wadsworth. de Paula, Luiz Fernando. 2011. Financial Liberalization and Economic Performance: Brazil at the Crossroads. Routledge: Abingdon, Oxon. Derwich, Karol. 2009. “Washington Consensus: Dead or Alive?”.The United States and the World: From Imitation to Challenge, edited by Andrzej Mania and ŁukaszWordliczek, 155-164. Kraków: Jagiellonian University Press. Fosu, Augustin K. 2013. “Achieving Development Success: Synthesis of Strategies and Lessons from the Developing World”. In Achieving Development Success: Strategies and Lessons from the Developing World, edited by Augustin K. Fosu, 1-24. Oxford: Oxford University Press. Freeman, Richard B. 2014. “What can Latin America Learn from China’s Labour Reforms?”. In Falling Inequality in Latin America: Policy Changes and Lessons, edited by Giovanni Andrea Cornia, 274-294. Oxford: Oxford University Press. Kuczynski, Pedo-Pablo. 2003. “The Financial System”. In After the Washington Consensus: Restarting Growth and Reform in Latin America, edited by Pedo-Pablo Kuczynski and John Williamson, 103-122. Washington, DC: Institute for International Economics. Öniş, Ziya and FikertŞenses. 2003. Rethinking the Emerging Post-Washington Consensus: A Critical Appraisal. ERC Working Paper in Economic 03/09. http://www.erc.metu.edu.tr/menu/series03/0309.pdf Queirolo, Rosario. 2008. “Is the Vote for the Left a Risk or Opportunity for Democracy in Latin America?”. In Challenges to Democracy in Latin America and the Caribbean: Evidence from the Americans Barometer 2006-2007, edited by Mitchell A. Seligson, 119-144. https://books.google.co.ke/books?id=smRTc4syztwC&pg=PA121&dq=successes+of+washington+consensus&hl=en&sa=X&redir_esc=y#v=onepage&q=successes%20of%20washington%20consensus&f=false Saad-Filho, Alfredo. 2010. “Growth, Poverty and Inequality: From Washington Consensus to Inclusive Growth”. DESA Working Paper No. 100. http://www.un.org/esa/desa/papers/2010/wp100_2010.pdf Stiglitz, Joseph E. 2008. “Is there a Post-Washington Consensus?”. In The Washington Consensus Reconsidered: Towards a New Global Governance, edited by Narcis Serra and Joseph E. Stiglitz. Oxford: Oxford University Press. Williamson, John. 2004. “A Short History of the Washington Consensus”. Paper commissioned by Fundación CIDOB for a conference “From the Washington Consensus towards a new Global Governance,” Barcelona, September 24–25, 2004. http://www.iie.com/publications/papers/williamson0904-2.pdf Woo, Wing Thye. 2004. “Serious Inadequacies of the Washington Consensus: Misunderstanding the Poor by the Brightest”. http://faculty.econ.ucdavis.edu/faculty/woo/Woo.Inadequacies%20of%20Washington%20Consensus.pdf World Health Organisation (WHO). 2016. “Washington Consensus”. http://www.who.int/trade/glossary/story094/en/ Read More