Washington Consensus

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The Washington Consensus is a phrase initially coined in the early 1990s to describe a relatively specific set of ten macroeconomic policy prescriptions that were considered by the phrase's originator to constitute a "standard" reform package promoted for crisis-wracked countries by Washington-based institutions such as the International Monetary Fund, World Bank and U.S. Treasury Department.

Subsequently, the term acquired a second, broader connotation, being widely applied, generally in a pejorative sense, to describe a less-precisely stipulated gamut of policies stated to be promulgated by so-called neoliberal economists (again, a term most often applied pejoratively) as a formula for promoting economic growth in many parts of Latin America and other parts of the world. In this sense, it is argued that the Washington Consensus policies propose to introduce various free market oriented economic reforms which are theoretically designed to make the targeted nation's gross domestic product more like that of First World countries such as the United States.

The Washington Consensus is the target of sharp criticism by individuals and groups who argue that it is a way to open up less developed Latin American countries to investments from large multinational corporations and their wealthy owners in advanced First World economies. As of 2006, several Latin American countries are led by socialist governments, some of which openly oppose the Washington Consensus. Critics frequently cite the Argentine economic crisis of 1999-2002 as the case in point of why the Washington Consensus policies are flawed, as they argue that Argentina had previously implemented most of the Washington Consensus policies as directed.

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[edit] History

The concept and name of the Washington Consensus were first presented in 1990 by John Williamson, an economist from the Institute for International Economics, an international economic think tank based in Washington, D.C.. [1] Williamson used the term to summarize the 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 Latin America from the financial crises of the 1980s. However, Williamson rejects subsequent use of the term to cover a more general neoliberal agenda [2].

In 1992, conservative writer Michael Novak called the model "democratic capitalism". According to Joseph Stanislaw and Daniel Yergin, authors of The Commanding Heights the term “Washington Consensus” was developed "in Latin America, by Latin Americans, in response to what was happening both within and outside the region." They argue that the "Washington Consensus" was a conspiracy theory developed to shift blame from their own governments' failures to market failures. They also state that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label" (The Commanding Heights: Battle for the World Economy, pg. 237).

[edit] List of Reforms

The consensus included reforms that should be undertaken from 1990 (these reforms were also summarized by the World Bank in its year 2000 Poverty Report):

[edit] Macroeconomic adjustment

The widespread acceptance of Washington Consensus was a reaction to the macroeconomic crisis that hit much of Latin America during the 1980s. Due to economic stagnation and loss of access to foreign credit, many governments could no longer sustain high levels of public spending without igniting hyperinflation.

[edit] Trade liberalization

In the early 1990s, U.S. President George H. W. Bush began to draw up a U.S.-Mexican-Canadian free-trade proposal that came to be known as the North American Free Trade Agreement (NAFTA.) NAFTA was later signed into law by Bush's successor, President Bill Clinton, and the three North American countries agreed to gradually phase out or sharply reduce tariffs on foreign goods, a policy perfectly in line with the ideals of the Consensus. Current President George W. Bush continues to support NAFTA, and his administration negotiated a similar agreement known as the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) with the Dominican Republic and Central America, which was approved by Congress in 2005.

Proponents of NAFTA and DR-CAFTA claim that they promote economic growth in countries and are a boon to U.S. consumers, providing them with less-expensive foreign goods. Critics from the political left and right accuse the agreements of crippling the working class of the United States by promoting the relocation of production to cheaper labor markets in Mexico, and allege that such shifts have resulted in the exploitation of Mexican laborers.

While a Democratic president, Bill Clinton, signed NAFTA and a Republican president, George W. Bush, signed CAFTA, the United States Congress's subsequent support of these agreements has been more partisan. Most Republicans favor the agreements and most Democrats oppose the agreements.

[edit] Criticisms of the Washington Consensus policies

[edit] Anti-Globalization Movement

Many critics of trade liberalization, such as Noam Chomsky 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 tough visa laws. 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 a huge markup, with the balance of the markup typically going 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 offset by inflation, whereas workers in the First World country become unemployed, while the wealthy owners of the multinational grow even more wealthy.

Anti-globalization critics further argue that First World countries predatorily impose the consensus' 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 reforms (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.

Socialist political leaders in Latin America such as Venezuelan President Hugo Chávez, Cuban President Fidel Castro, Bolivian President Evo Morales, and Brazilian President Luiz Inácio Lula da Silva are vocal and well-known critics of the Washington Consensus. Lula inherited an economy closely aligned to the principles of the Washington Consensus, and his socialist reforms have been gradual so as not to cause economic disruption. Cuba is a Communist planned economy and Venezuela implements Chávez's own brand of market socialism, powered by Venezuela's large oil reserves. In Argentina, the political will to continue implementation of the Consensus has largely evaporated since the economic collapse, which many people there blame on the Consensus' neoliberal policies (see below).

[edit] Neo-Keynesian criticisms

Neo-Keynesian and post-Keynesian critics of the Consensus argue that the underlining policies were incorrectly laid down and are too rigid to be able to succeed. For example, flexible labor laws were supposed to create new jobs, but economic evidence from Latin America draws no such conclusion. In addition, they do not take into account economic and cultural differences between countries. Critics also point out that, should this set of policies work, it must be implemented during a period of rapid economic growth and not – as often is the case – during an economic crisis.

The Washington Consensus is widely held by many economists to be a 'suicidal policy' if implemented when an economy is weak. Moises Naim, chief editor of Foreign Policy, states that there was no 'consensus' in the first place, since there are major differences between economists over what is the 'correct economic policy', hence the idea of there being a consensus was also flawed. In 2004, Joshua Cooper Ramo, a partner at Kissinger Associates, proposed the idea of a so called Beijing Consensus that represented an alternative, more flexible approach to financial reform.

[edit] The case of Argentina

The Argentine economic crisis of 1999-2002 is often held out as a recent example of the economic devastation said to have been wrought by application of the Washington Consensus. Argentina's Deputy Foreign Minister Jorge Taiana, in an interview with the state news agency Télam on August 16, 2005, attacked the Washington Consensus. There never was a real consensus for such policies, he said, and today "a good number of governments of the hemisphere are reviewing the assumptions with which they applied those policies in the 1990s," adding that governments are looking for a development model to guarantee productive employment and the generation of real wealth. [3]

There have also been reports of major discrepancies between the Washington Consensus and the policies themselves. For example, the Washington Consensus stated a need for investment in education, but the policies pursued by the International Monetary Fund have sometimes led countries to cut back public spending on social programs, including in such areas as primary education.

[edit] Current progress

Most Latin American countries continue to struggle with high poverty, unemployment, and underemployment. Chile has been offered as an example of a Consensus success story, and countries such as El Salvador and Uruguay have shown some positive signs of economic development. However, Joseph Stiglitz has argued that the Chilean success story owes a lot to state ownership of key industries, particularly its copper industry, and currency interventions stabilizing capital flows.

[edit] Countries that have implemented market reforms following Washington Consensus

[edit] Countries with governments opposed to Washington Consensus

Note: incomplete list.

Note, however, that not all analysts would agree that all countries can be assigned objectively to lists of this kind. Countries' actual policy actions often differ from their rhetoric, many countries are in a "gray" zone, and a case could be made for challenging and/or reversing many of the above classifications.

[edit] Mainstream Economists' view

Many mainstream economists would argue that what was wrong with the Washington Consensus as originally formulated by Williamson had less to do with what was included than with what was missing (see, e.g., Birdsall and de la Torre, below). In this view, it is notable that countries such as Brazil, Chile and Uruguay, now governed by parties of the left, have – whatever their rhetoric – not in practice abandoned most of the elements of the Consensus. Countries that have achieved macroeconomic stability through fiscal and monetary discipline have been loath to abandon it: Brazil's President Lula, the leader of the Workers' Party, is explicit that the defeat of hyperinflation was the most important positive contribution of recent years to the welfare of the country's poor. Nor have these countries reversed their more open orientation to global trade and international investment in favor of a return to the inward-looking policies of autarchy pursued between the 1950s and 1980s, seen by many economists as contributing to the massive debt crises of the early 1980s.

In this view, Chile's economic success owes a good deal to its combination of sound macroeconomics and market-oriented reforms (though the country's relatively strong public institutions also deserve credit). Argentina's failure, which critics attribute to adherence to the Washington Consensus, is viewed differently – the country's adoption of an idiosyncratic fixed exchange rate regime ("convertibility") and its failure to achieve effective control over its fiscal accounts both ran counter to the spirit of the Consensus, and paved the way directly to the ultimate macroeconomic collapse. The market-oriented reforms of the early Menem-Cavallo years, meanwhile, soon petered out in the face of domestic political constraints (including Menem's preoccupation with securing re-election).

Many mainstream economists would, however, agree that the Washington Consensus was incomplete, and that countries in Latin America and elsewhere need to move beyond "first generation" macroeconomic and trade reforms to a stronger focus on productivity-boosting reforms and direct programs to support the poor. This includes improving the investment climate and elimination of red tape (especially for smaller firms), strengthening institutions (in areas like justice systems), fighting poverty directly via the types of "conditional cash transfer" programs adopted by countries like Mexico and Brazil, improving primary and secondary education, boosting countries' effectiveness at developing and absorbing technology, and addressing the special needs of historically disadvantaged groups including indigenous peoples and Afro-descendant populations across Latin America.

[edit] See also

[edit] References

[edit] Development of the neoliberal model

  • Accelerated Development in Sub-Saharan Africa: An Agenda for Action, Eliot Berg, coord., (World Bank, 1981).
  • The Spirit of Democratic Capitalism, by Michael Novak (1982).
  • El Otro Sendero (The Other Path), by Hernando de Soto (1986).
  • Toward Renewed Economic Growth in Latin America, by Bela Balassa, Gerardo M. Bueno, Pedro-Pablo Kuczynski, and Mario Henrique (Institute for International Economics, 1986).
  • Latin American Adjustment: How Much Has Happened, edited by John Williamson (Institute for International Economics, 1990).
  • The Macroeconomics of Populism in Latin America, edited by Rudiger Dornbusch and Sebastian Edwards (1991).
  • Global Linkages: Macroeconomic Interdependence and Cooperation in the World Economy, by Jeffrey Sachs and Warwick McKibbin (1991).
  • World Development Report 1991: The Challenge of Development, by Lawrence Summers, Vinod Thomas, et. al. (World Bank, 1991).
  • "Development and the "Washington Consensus"", in World Development Vol 21:1239-1336 by John Williamson (1993).
  • “Recent Lessons of Development,” Lawrence H. Summers & Vinod Thomas (1993).
  • Latin America’s Journey to the Market: From Macroeconomic Shocks to Institutional Therapy, by Moises Naím (1994).
  • Economistas y Politicos: La Política de la Reforma Económica, by Agustín Fallas-Santana (1996).
  • The Crisis of Global Capitalism: Open Society Endangered, by George Soros (1997).
  • Beyond Tradeoffs: Market Reform and Equitable Growth in Latin America, edited by Nancy Birdsall, Carol Graham, and Richard Sabot (Brookings Institution, 1998).
  • The Third Way: Toward a Renewal of Social Democracy, by Anthony Giddens (1998).
  • The Lexus and the Olive Tree: Understanding Globalization, by Thomas Friedman (1999).
  • "Fads and Fashion in Economic Reforms: Washington Consensus or Washington Confusion?", by Moises Naim (IMF, 1999).
  • Washington Contentious: Economic Policies for Social Equity in Latin America, by Nancy Birdsall and Augusto de la Torre (Carnegie Endowment for International Peace and Inter-American Dialogue, 2001)
  • "Did the Washington Consensus Fail?", by John Williamson (Speech at IIE, 2002).
  • After the Washington Consensus, edited by Pedro-Pablo Kuczynski and John Williamson (Institute for International Economics, 2003).

[edit] Analyses and critiques

[edit] External links

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