Washington consensus is a set of economic policy prescriptions for developing countries, particularly Latin American, promoted to solve crisis-wracked developing nations. The economic policy recommendation only dealt with economic growth, ignoring the political and social aspects of life. With its popularity in the 1980s, the Washington Consensus primarily focused on Latin America, struggling financially due to a decade of the debt crisis. The Washington Consensus constitutes ten economic policies promoted by the World Bank, International Monetary Fund, and the U.S. Department of Treasury. All the parties shared their view through a market approach typically labeled neoliberal, stating that free-market operation and the reduction of federal government involvement were vital to the development of the global south. The main recommendation encompassed policies like economic openness, macroeconomic stabilization, and diversification of market forces. Due to the inception of the debt crisis in the early 1980s, the first nations, particularly the United States, postulated that both IMF and World work together in debt management and global development policy. However, the impact of the Washington Consensus increasingly encountered criticism by the late 1990s as it was far from achieving the optimal goal, which led to a change in approach, and the famous “Washington Consensus Dead” came into existence. Over the last two decades, the Consensus has received backlash from different economists. Despite the significance the Washington Consensus achieved, the approach failed to consider significant issues such as poverty reduction and ensure participation by both civil society and developing-country governments.
Original Sense: the William’s Ten Economic Policies
The concept of the Washington Consensus was first developed in 1989 by economist John Williamson, from International; Economics Institute, a center for International economics thinkers based in Washington. The Washington Consensus grew in this institution in hand with an institution such as IMF, U.S. Treasury Department, and World Bank (Ahmed et al., 2011). The institution believed the economic policies would assist the Latin American countries from economic and financial crises faced in the 1980s. The Consensus by Williamson included the ten set of specific policy recommendations:
|Fiscal discipline||This policy examined that countries had run into significant deficits that resulted in high inflation and balance of payments crises. This mainly affected the sparse population as the rich could access money from abroad.|
|Public expenditure Priorities||The policy postulated switching towards pro-poor expenditure and pro-growth, particularly to education, primary health, and infrastructure.|
|Tax Reform||Suggested combining foreign tax based with the moderate rates of tax.|
|Liberalizing Interest rates||The Consensus suggested significant financial liberalization appropriately combined with the supervision of strengthened prudential.|
|Competitive Exchange rate||A rate that is not overvalued or undervalued, thus it implies an intermediate regime.|
|Trade Liberalization||The appropriate direction of trade, regardless of argument about speed.|
|Liberalization of Inward direct foreign Investments||No comprehensive capital account towards the inward direct abroad investments.|
|Privatization||Concerned with how privatization on the property is done and that of privatized enterprise in the competitive markets.|
|Deregulation||States that barriers to entry and exit needs easing but not the removal of beneficial regulation such as safety or environmental reason, and govern the prices of non-competitive industry|
|Property rights||This policy primarily delved into providing the informal sectors to gain property rights, particularly at an acceptable cost. Hernando Soto’s analysis inspired it.|
The Washington Consensus, as aforementioned above, primarily focused on the economic aspect of developing countries regardless of their social apparatus. These policies majorly focused on Latin America responding to the issues the country faced at that time. Joseph Stiglitz stipulated that the Washington Consensus policies responded to real challenges faced in Latin America (Altenburg, 2011). This policy made a positive differential change and many sense. For instance, countries that adopted the Consensus, such as China and India and other Third World nation, experienced a surge in their per capita incomes and a significant reduction in poverty level in human history.
However, in some countries like Latin America, the Consensus leads to limited economic growth, particularly in the long term. For instance, after the seven years of solid growth in Latin America, the country faced another seven years of stagnation and great recession (Lopes, 2012). Countries that also applied the Consensus only promote growth which was not accompanied by the substantial reduction in poverty.
Broad Sense of Williamson’s Washington Consensus
The Washington Consensus continued to face different meanings along with its original prescriptions. Williamson postulates that the new global governance, alternative use of the Consensus, misinterprets the initial formulation covering market fundamentalism or the neoliberal agenda. According to William, his Consensus never intended to include policies such as capital account liberalization; instead, he focused on monetarism or the supply side of economics. This first element was designed to enhance economic stability by lowering government deficit and inflation as many developing countries were facing hyperinflation.
Through the monetarist approach, government spending was estimated to be reduced, and the interest rates rose to balance the money supply. The second approach suggested reforming trade as well as exchange rate policies for the country to be integrated into a dominant global economy (Stiglitz, 2005). To achieve this policy, the government needed to lift restrictions on export and imports and incorporate devaluation of the currency. The final approach was to give market forces freedom to operate by removing state control and subsidies and engaging in a privatization program.
The prescriptions focused on reducing the federal government’s particular function and strengthening states’ ability to take action like supporting health and education. Such functions include reducing ownership of productive enterprises. Williamson suggested that market fundamentalism does not improve economic growth while Consensus prescription can benefit the poor if accurately implemented. According to Williamson, the adoption of the Consensus on a large scale by the federal government in Latin America and other parts of developing countries was due to a macroeconomic crisis.
However, the crisis had other root causes, such as a rise in oil price due to the emergence of OPEC. This aspect mounted external debt, which rose in the U.S.; hence, the international interest rates (Stiglitz, 2005). Also, rising deficits lead to loss of direct access to additional credit from abroad. The import substitution approaches pursued by most developing federal governments in Latin America, and other nations left their economies less equipped to diversify exports to pay for additional oil import costs. Due to the inability to expand their borrowing ability or earn extra revenue from exports, many Latin American nations continued to face no substantial alternative to lowering domestic demand through fiscal discipline formulated by Williamson(Choudhry & Landuyt, 2012).
Implications of Washington Consensus
The Washington Consensus significantly results in weakened trade unions as well as socioeconomic exclusions leading to massive unrest in these nations. The Consensus initially alleviated excessive regulation and high inflation; however, poverty relief and economic was insignificant (Serra & Stiglitz, 2008). The Consensus leads to the shrinking of the middle class; especially in Latin America, escalated dissatisfied neoliberals and famous leaders criticize the Consensus citing it as “failure or death.” Hugo Chavez, Evo Morales, and Rafael Correa from Venezuela, Bolivia, and Ecuador respectively criticized the prescription.
William claimed that the overall growth in most are “disappointing” and has less ability to curb unemployment and poverty reduction. He defended his prescription by postulating that most countries put less emphasis on mechanisms that control economic crises. Second, most developing countries implemented incomplete policies than those in the document. Lastly, Williamson claimed that reform most dissatisfied neoliberals cited were inappropriate ambitious in targeting growth of income distribution, yet it needs strong support towards development goal.
However, several leaders, such as Barack Obama, who spoke at a fundraiser in the Institute for Public Policy in 2018, acknowledge that globalization and the policies associated with Washington Consensus escalated economic inequality (Saad-Filho, 2010). These aspects fuel the rise in the alternative right. Thus, the implementation of the procedures related to the Washington Consensus gradually improved the real Gross Domestic Product per capita for the last five to ten years horizon.
By late 1990, the results of the Washington Consensus revealed limited optimal achievement. The rollercoaster with these policies leads to a change in approach, which significantly shifted focus away from development as only economic growth and poverty reduction. The shift saw both the civil society and the federal government working together to change the direction of the financial crisis.
Criticism of William’s Washington Consensus
The Washington Consensus policies have received much criticism since the 1990s by several reputable economists who claim that the prescription is dead. The most notable economist who criticized the reforms is Joseph Stiglitz, the chief economist at World (1997-2000) (Naim, 2000). Joseph criticized these policies in response to what had happened in Russia and Asia. In order to control the economic crises in the developing countries, Joseph and Paul Krugman were in favor of the Asian states government imposing significant control over the capital flows from 1997 to 1998 (Naim, 2000). This debated provided a succinct division between an economist who supported or opposed the policies set by International Monetary Fund. Those in support of the Consensus insisted on the value of stabilizing the exchange rate s during the crisis by public budget cuts, exorbitant interest rates, higher taxes as well as other recessive measures. In contrast, those who opposed the Consensus argued that these measures would exacerbate the recession. Economist like Stiglitz postulated that sharp rise in interest rates contribute to deepening the states of economic crises.
The macroeconomic stabilization programs and structural adjustments proved to widen further affect the social policies as well as the poverty levels in most developing nations. The first wave of reformers undertaken in Latin America and African countries, debt-affected government, included introducing charges in health and education (Manuel, 2003). Also, public expenditure cuts and industrial protection reduction lead to poverty, high unemployment rates, and unequal income distribution. This called the UNICEF on the adjust of Human Face (1987) through directive measure recognized as social protection programs to focused on protecting both economic sectors and social sectors crucial towards the survival of the sparse population.
Some economists further criticized the policies for their negative impacts on economic performance. For instance, some Latin American countries like Venezuela and Argentina are led by socialist and other left-wing federal government’scampaigns for policies contrary to Williamson’s Washington Consensus policies (Manuel, 2003). Other Latin American nations such as Brazil, Peru, and China adopted significant policies, including William’s policies, but they criticized policies directed toward market fundamentalism associated with Consensus. Stiglitz postulates that excessive dependence on market international economic institutions and market fundamentalism is greatly attributed to Washington’s Consensus’s failure or death. In his article, “The Post Washington Consensus,” Stiglitz claimed that the consensus prescription failed to sufficiently address developing countries’economic structure (Stiglitz, 2005).
In order to prove the failure of the policies that stipulate for market fundamentalism and less of states invention, Stiglitz claimed that East-Asian countries like Taiwan and Korea achieved a remarkable success story in their economic growth as the government played a significant role in industrial policies and also increasing the domestic saving with the country (Stiglitz, 2005). For that reason, the government’s role in economic growth is substantial, refuting the Washington Consensus, which suggests a free market and less protection on industries. This notion proves that the federal or states government plays a vital role at the initial stage of the dynamic development process until all markets can sustainably produce efficient outcomes.
Many policymakers and economists argue that the Washington Consensus had missing aspects that would have made it effective in economic growth. Nations such as Uruguay, Peru, Chile, and Brazil, predominately governed by parties, have abandoned most Consensus policies. Research proves that most countries with substantial macroeconomic stability by monetary disciplines and fiscal policies have left the Washington Consensus (Fischer, 2012). For instance, Brazil’s former president defeated the staggering hyperinflation in the country by abandoning the economic and budgetary policies, which still stands out as the crucial positive contribution to the country’s poor welfare. However, the other Consensus policies on tackling poverty and sustaining a low inflation rate affected the Brazilian economy.
These policymakers and economists further agree that the Washington Consensus prematurely came into implementation when it was incomplete. Thus, countries applying these policies have to drop the first generation and incorporate macroeconomic and trade reforms to strengthen their productivity-boosting reforms (Stiglitz, 2005). Additionally, to direct establish programs that help the poor grow financially rather than languishing in extreme poverty or vicious poverty cycles. The developing nations, including Africa, Latin America, also should forge the Consensus and concentrate on eliminating red tapes, particularly for small firms. Additionally, by focusing on improving the investment climate, strengthening institutions (justice system), improving quality of educational institutions, and boosting effectiveness in technology.
Washington Consensus Policies Death Path
The Washington Consensus initially dead trap concentrated on the economic policies and ignored the social and political aspects that the business operates. Remarkably, the policy eliminated the subsidies on fertilizer products, which negatively impacted agricultural output and productivity. The price reform majorly promoted export crops than the traditional crops. According to policymakers and economists, the export crop significantly contributed to indebtedness and adjusted programs that exacerbated inequality in land distribution (Estevadeordal & Taylor, 2013). This encourages deindustrialization by wholesale privatization as well as unfettered markets.
Similarly, the implication of significant policies imposed by the World Bank and the IMF lead to difficulty in economic instability and liberalization that impacted disproportionately, leading to substantial unequal income distribution and poverty (Estevadeordal & Taylor, 2013). The World Bank further displays un-accountability by failing to acknowledge the negative impact of these policies and denying policymakers and economists’ criticisms leveled towards the prescriptions. This notion limited the response towards creating and launching compensatory programs.
The move by the most developing nation to abandon the Washington Consensus continues to put the policies in the death trap. Notably, the failure to include new comprehensive agenda remarkably for the economic forum will lead to the death of the Washington Consensus (Azariadis, 1996). With the Consensus aiming at the Latin Americans, its efficiency in other developing nations has proven to be futile, especially in African nations, the policy first leads to economic growth. Still, over the last decade, most countries have remained stagnant and deficient people are languishing in extreme poverty (Kraay & Raddatz, 2005). The level of people living below one dollar has is 40 percent, and 70 percent lives below two-dollar in sub-Saharan Africa, which falls below the global poverty lines (UNDP, 2006). Thus, the macroeconomic advances have done less to reduce poverty and inequality experienced, particularly in Latin America. Despite the country’s population increasing to over 165 million, these populations continue to live below two dollars a day. The level of electricity in the country shows that a third still have no access to reliable electricity, and an estimated 10 million children are suffering from malnutrition.
With most moving towards a change of direction famously known as post- Washington Consensus, the policy continues experiencing “extinction” over the coming years.Many nations will adopt the current global policies that integrategovernments’economic growth influences (Chang, 2010). Thus, based on the trends experienced with the incorporation of the Washington Consensus policies, there is a colossal spike in food prices, energy prices, financial downturns, and economic crises aggravated by the impact of global climate change growing democracy. The Latin American nations and some developing countries are pulling out the policies that mainly affect the 2008 financial crises when the global economy crumbled due to a lack of control over the financial sector (Chang, 2010). This move is significantly putting the Washington policy towards the dead zone.
The Washington Consensus is a remarkable policy that intended to improve the economic growth of Latin America and nations that adopted it afterward. The prescription, however, has faced numerous criticism due to its focus on the financial aspect of a country’s will, directing countries to allow the free market, reduce interest rates, liberalization of foreign investment, and significant minimum government influences towards trade. The policies lead to minimal or negative benefits to most nations such as Latin America, Africa, and some East-Asian nations. However, countries such as South Korea and Taiwan Achieved significant economic development by adopting these policies while incorporating government influence in their operations. The failure of the Washington Consensus began shortly after its adaptation in many countries, with most of the reducing significant poverty levels, stagnant economic development, and disparity in income distribution, and rise in the food prices. The notion has encapsulated nations to adopt other effective policies to offset the significant economic issues experienced by incorporating Washington Consensus policies. To this, it is fair to conclude that the Washington Consensus is facing a gradual death as it continues to languish in assumptions and old policy agenda.