Washington Consensus

BIBLIOGRAPHY

The phrase Washington Consensus has come to refer to a neoliberal economic agenda for developing countries and carries the implication that the Washington, D.C.–based public organizations concerned with development agree on the appropriateness of this agenda. Neoliberal refers to the ideas about the virtues of free markets and small, regulatory states emanating from the Mont Pelerin Society and developed primarily by Milton Friedman and Friedrich von Hayek, and to some extent implemented by Ronald Reagan, Margaret Thatcher, Augusto Pinochet, and the New Zealand Labour government during the 1980s.

The phrase had more modest beginnings. It was coined in a 1990 article by the British economist John Williamson, who had spent years working in a Washington, D.C., think tank, the Institute for International Economics. Williamson noticed that during the second half of the 1980s Latin American countries experienced a major change in economic policy norms. Previously, Latin American governments tended to think that import substitution, state enterprises, and inflationary finance constituted the core of development strategy, and that macroeconomic stabilization, free trade, and a framework-providing state were only appropriate for the already-developed countries. In the wake of the 1980s debt crises, both Latin American governments and the Washington organizations “saw the light” and concluded that what was appropriate for the developed countries was also appropriate for them.

Williamson’s list of what he considered to be generally accepted policy priorities in Washington and in Latin America by the late 1980s included the following:

1. Keep budget deficits small.
2. Shift public expenditure priorities from non-merit subsidies to expenditures that are pro-growth and pro-poor, like spending on basic health, education, and infrastructure.
3. Construct a tax system that combines a broad tax base with moderate marginal tax rates.
4. Liberalize interest rates (meaning that while independent central banks should fix the base rate, commercial lenders should be free to set whatever the market can bear on top of base rate).
5. Maintain a competitive exchange rate via an “intermediate” regime, between fixed and freefloating.
6. Liberalize trade.
7. Liberalize inward foreign direct investment—but without pursuing comprehensive capital account liberalization.
8. Privatize state enterprises.
9. Ease sectoral barriers to entry and exit.
10. Provide the informal sector with the ability to gain property rights at acceptable cost.

After Williamson published his list, champions of neoliberalism deployed the phrase Washington Consensus for their own purposes. They detached it from Williamson’s policy list by adding elements like low taxes, a minimal state, and rapid liberalization of cross-border financial flows (“opening the capital account”). They also detached it from its regional origin, implying that it applied to all developing countries, including those “in transition” from socialism to capitalism. In this newly fundamentalist form it coursed through the echo chamber of the Washington-based organizations, including the International Monetary Fund, the World Bank, the U.S. Treasury, USAID, and think tanks; through transatlantic components including The Financial Times, The Economist, and the U.K. Treasury; and into finance and development ministries in many developing countries.

“Stabilize, deregulate, open up, and privatize” became the slogan of technocrats and political leaders through the 1980s, and it inspired a wave of reforms that had transformed the policy landscape of much of the developing world by the early 1990s. The common denominator was the drive to extend private property rights geographically and “vertically,” to types of assets not previously privately owned, and in this way expand profit opportunities for global firms facing declining profits at home. The reforms accelerated the “financialization” of the world economy and the shrinkage of the economic sovereignty of the state. Yet economic performance of most developing countries remained disappointing. Many countries that adopted this approach to a high degree had worse performance than during the era of “bad” import-substituting industrialization, and worse performance than those that adopted it to a small degree. In particular, many countries that followed the neoliberal prescription of “economic growth with foreign savings”—which entailed opening the economy to free flows of finance—were hit by financial crises through the 1990s.

In response a new consensus, sometimes called the Augmented Washington Consensus, began to emerge by the mid-1990s (see Williamson 2003). It said that neoliberal policies would not have lasting effects where institutions were unfriendly to markets, an argument in line with the major thrust in development economics over the 1990s to assert the role of institutions in affecting transaction costs and thereby economic performance. “Get the prices right” had to be supplemented with “get the institutions right.” The new “good governance” agenda called for reforms in the civil service (the budget office, the central bank, the customs bureaucracy), the judiciary, the financial sector (the accountancy profession, the rights of minority shareholders, credit registries), systems of primary education and primary healthcare, and microcredit.

The Augmented Washington Consensus retained the neoliberal premise that the state was the problem and the market the solution, and the aim was to make markets work better and to extend surrogate markets into the state. The word reform was reserved for changes in this direction. Many champions hoped that financial reforms would strengthen regulation sufficiently so that opening the capital account could again become a top global priority. Issues of equity, income distribution, technology, firm-level capabilities, and industrial policy remained firmly off the radar screen.

However by the late 1990s some parts of the “international development community,” notably the United Nations’ General Assembly and the United Nations Development Programme (UNDP), began to unite around an action agenda that emphasized poverty reduction and investment in primary health and primary education. This perspective was spelled out in the Millennium Declaration and in the Millennium Development Goals adopted by the UN in 2000. Critics of neoliberalism took advantage of the new discussion to declare that the Washington Consensus was dead and had been replaced by a “Post ‘Washington Consensus’ Consensus,” which held that “countries should be given scope to experiment, to use their own judgment, to explore what might work best for them” (Stiglitz 2004, p. 12).

A more open-minded stance toward policy experimentation is surely a good thing. But pragmatism is not a strategy. At the operational levels of the Washington-based organizations and in the most powerful agencies in developing countries—finance ministries as distinct from development ministries—the Washington Consensus is far from dead, if only because nothing coherent has emerged to replace it. Development technocrats find it a huge advantage to be able to use the Washington Consensus one-size-fits-all approach; whatever the country, they know what the government should be doing. Certainly the Millennium Development Goals are an addon rather than an alternative because they assume that the core microeconomic reforms of the Washington Consensus are necessary conditions for achieving the goals. In short, reports of the death of the Washington Consensus are greatly exaggerated, whether for better or for worse.

SEE ALSO Neoliberalism

BIBLIOGRAPHY

Seccareccia, Mario, ed. 2002–2003. Beyond the Washington Consensus: Overhauling the Neo-Liberal Reforms. International Journal of Political Economy 32 (4). (Spec. issue.)

Stiglitz, Joseph. 2004. The Post Washington Consensus Consensus. Initiative for Policy Dialogue Working Paper. New York: Initiative for Policy Dialogue, Task Force on Governance of Globalization, Columbia University.

Williamson, John. 1990. What Washington Means by Policy Reform. In Latin American Adjustment: How Much Has Happened? Ed. John Williamson, 7–20. Washington, DC: Institute for International Economics.

Williamson, John. 2003. The Washington Consensus and Beyond. Economic and Political Weekly 38 (15): 1475–1481.

Robert H. Wade