Washington Consensus

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The Washington Consensus is a phrase initially coined in 1987-88 by John Williamson to describe a relatively specific set of ten economic policy prescriptions that he considered 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.

The term "Washington consensus" has since acquired a secondary connotation, being used to describe a less-precisely stipulated gamut of policies, broadly associated with expanding the role of market forces and constraining the role of the state, sometimes also described (almost invariably pejoratively) as neo-liberalism.

The Washington Consensus is the target of sharp criticism by some individuals and groups, who argue that it is a way to open up less developed countries to investments from large multinational corporations and their wealthy owners in advanced First World economies, which the critics would view as a negative development. 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 a 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: some economists, by contrast, question how closely Argentina had in fact followed the Consensus policies.

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[edit] History

The concept and name of the Washington Consensus were first presented in 1989 and 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 policy prescriptions described in the “Washington Consensus” were in reality developed "in Latin America, by Latin Americans, in response to what was happening both within and outside the region." It is understood that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label." [1]

[edit] List of Recommendations

The consensus included ten broad sets of recommendations:

[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 the participating countries and are a boon to U.S. consumers, providing them with less-expensive foreign goods. Critics, who include figures coming both from a section of the political left (specifically including allies of the labor union movement and the anti-globalist left, such as Ralph Nader) and from part of the right (especially the nationalist/nativist tradition embodied by Patrick J. Buchanan), 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 in addition resulted in the exploitation of Mexican laborers.

Empirical studies have found the quantitative impact of these trade agreements on the U.S. economy to be far smaller than predicted by either advocates or critics. [2]

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, 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 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 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-globalization critics further argue that First World countries predatorily impose 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,[3] 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 factories created by foreign investment are found typically to receive higher wages and better working conditions than are standard in 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, though, 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.

Some socialist political leaders in Latin America such as Venezuelan President Hugo Chávez, Cuban President Fidel Castro, and Bolivian President Evo Morales, are vocal and well-known critics of the Washington Consensus. 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, too, the current Peronist party government of Nestor Kirchner has undertaken policy measures which represent a repudiation of some Consensus policies (see Continuing Controversy below).

Others on the Latin American left take a different approach. Governments led by the Socialist Party of Chile, by Alan Garcia in Peru, and by Lula in Brazil, have in practise maintained a high degree of continuity with the economic policies described under the Washington Consensus (macro-economic discipline, opening to trade and 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.

[edit] Neo-Keynesian criticisms

Neo-Keynesian and post-Keynesian critics of the Consensus have argued 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 is inconclusive on this point. In addition, some argue that the package of policies does not take into account economic and cultural differences between countries.

Some critics have argued that this set of policies should be implemented, if at all, during a period of rapid economic growth and not – as often is the case – during an economic crisis.

Moises Naim, chief editor of Foreign Policy, has made the argument that there was no 'consensus' in the first place. He argued that there are and have been major differences between economists over what is the 'correct economic policy', hence the idea of there being a consensus was also flawed. Naim is, however, known among policy analysts as one who enjoys playing the role of "devil's advocate."

[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 by some 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]

Many economists, however, challenge the view that Argentina's failure can be attributed to close adherence to the Washington Consensus. 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 key provisions of the Consensus, and paved the way directly to the ultimate macroeconomic collapse. The market-oriented policies 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). [4]

In 2003, Argentine President Nestor Kirchner and Brazilian President Lula da Silva signed the "Buenos Aires Consensus," a manifesto in opposition to the policies of the Washington Consensus. [5] Skeptical political observers note, however, that Lula's rhetoric on such public occasions should be distinguished from the policies actually implemented by his administration. [6]

[edit] Continuing controversy

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 also 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. Many other economists, though, argue that Chile's economic success is largely due to its combination of sound macroeconomics and market-oriented policies (though the country's relatively strong public institutions, including one of the better public school systems in the region, also deserve some credit). [7]

There have been claims of discrepancies between the Washington Consensus as propounded by Williamson, and the policies actually implemented with the endorsement of the Washington institutions themselves. For example, the Washington Consensus stated a need for investment in education, but the policies of fiscal discipline promoted by the International Monetary Fund have sometimes in practise led countries to cut back public spending on social programs, including such areas as basic education. Those familiar with the work of the IMF respond that, at a certain stage, countries near bankruptcy have to cut back their public spending one way or another to live within their means.[8] Washington may argue for enlightened choices among different public spending priorities, but in the last analysis it is domestically-elected political leaders who ultimately have to make the tough political choices.

Some commentators argue that Argentina under President Nestor Kirchner has made a break with the Consensus and that this has led to a significant improvement in her economy; some add that Ecuador may soon follow suit. [9] However, while Kirchner's reliance on price controls and similar administrative measures (often aimed primarily at foreign-invested firms such as utilities) clearly runs counter to the spirit of the Consensus, his administration has in fact run an extremely tight fiscal ship and maintained a highly competitive floating exchange rate; Argentina's immediate bounce-back from crisis, further aided by abrogating its debts and a fortuitous boom in prices of primary commodities, leaves open issues of longer-term sustainability. [10] The Economist argues that the Kirchner administration will end up as one more in Argentina's long history of populist governments. [11]

[edit] Countries that have implemented market policies 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. Among other commentators, work published by the World Bank reports that Brazil, China and Vietnam, at least, in their practical policy actions, draw heavily on the substantive elements of the Washington Consensus.[12]

[edit] Beyond the Washington Consensus

A significant body of economists and policy-makers argues 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.[13] This view claims that countries such as Brazil, Chile, Peru and Uruguay, now governed by parties of the left, have – whatever their rhetoric – not in practice abandoned most of the substantive 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 among the most important positive contributions of recent years to the welfare of the country's poor. Nor have these countries in practice reversed their more open orientation to global trade and international investment in favor of a return to the policies of autarchy pursued between the 1950s and 1980s.

These economists and policy-makers would, however, overwhelmingly 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.[14] 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 the quality of 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

  1. ^ Yergin, Daniel and Stanislaw, Joseph, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World, 1998, pg. 237
  2. ^ "NAFTA Revisited: Achievements and Challenges" edited by Gary Clyde Hufbauer and Jeffrey J. Schott (Washington, 2005, Peter G. Peterson Institute for International Economics).
  3. ^ "Statistical Yearbook for Latin America and the Caribbean" (annual). UN Economic Commission for Latin America and the Caribbean.
  4. ^ See, e.g., Perry and Serven, "The Anatomy of a Multiple Crisis" (2003); Mussa, "Argentina and the Fund" (2002); Blustein, "And the Money Kept Flowing In.... and Out" (2005).
  5. ^ Massaldi, Julian, "Buenos Aires Consensus: Lula and Kirchner's agreement 'Against Neoliberalism'", Znet, November 20, 2003
  6. ^ See, e.g., Financial Times at following link: http://www.ft.com/cms/s/d62ca1a2-c219-11db-ae23-000b5df10621.html.
  7. ^ See, e.g., Martinez and Diaz, "Chile: the Great Transformation" (1995).
  8. ^ http://econ161.berkeley.edu/Politics/Fischer_Asia.html
  9. ^ Weisbrot, Mark, "Doing it their own way," International Herald Tribune, December 28, 2006
  10. ^ http://www.petersoninstitute.org/publications/papers/mussa0406.pdf
  11. ^ See, e.g., The Economist. 12 April 2006. Latin America - The return of populism.
  12. ^ For general discussion of economic policies on a cross-country basis see, e.g., World Bank. "Economic Growth in the 1990s." (Washington, 2005). For Brazil, see Financial Times at following link: http://www.ft.com/cms/s/d62ca1a2-c219-11db-ae23-000b5df10621.html.
  13. ^ See, as examples representative of a much more extensive literature, e.g., Birdsall and de la Torre. "Washington Contentious" (2003); Kuczynski and Williamson (eds.), "After the Washington Consensus" (2003).
  14. ^ See, e.g., Birdsall and de la Torre, "Washington Contentious" (2003); de Ferranti and Ody, "Key Economic and Social Challenges for Latin America" (2006): http://www.brookings.edu/views/papers/20060803.pdf

[edit] Development of the Washington Consensus 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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