Washington Consensus

This page analyzes the policies known as the Washington Consensus. It will explain what is the Washington Consensus, examine the actors that have promoted these policies, and also discuss criticisms of the Washington Consensus. The article will then examine what economic and development prescriptions have been offered following the backlash towards the Washington Consensus.

What is the Washington Consensus?

The Washington Consensus is/was a set of policy recommendations said to be followed by a number of international monetary institutions that included the International Monetary Fund, the World Bank, and the World Trade Organization (WTO). They were a set of economic prescriptions that were believed by some of these economic institutions to benefit economically developing states. The initial name “Washington Consenus” was derived by economist John Williamson, who has said that “The Washington Consensus as I originally formulated it was not written as a policy prescription for development: it was a list of policies that I claimed were widely held in Washington to be widely desirable in Latin America as of the date the list was compiled, namely the second half of 1989” (1).

There were ten specific points within the Washington Consensus. The ten points are quoted below:

• “Fiscal discipline – strict criteria for limiting budget deficits
• Public expenditure priorities – moving them away from subsidies and administration towards previously neglected fields with high economic returns
• Tax reform – broadening the tax base and cutting marginal tax rates
• Financial liberalization – interest rates should ideally be market-determined
• Exchange rates – should be managed to induce rapid growth in non-traditional exports
• Trade liberalization
• Increasing foreign direct investment (FDI) – by reducing barriers
• Privatization – state enterprises should be privatized
• Deregulation – abolition of regulations that impede the entry of new firms or restrict competition (except in the areas of safety, environment and finance)
• Secure intellectual property rights (IPR) – without excessive costs and available to the informal sector
• Reduced role for the state.”

(quoted from the World Health Organization, 2014).

The Washington Consensus is structured on neoliberal economic policies, in particular, the reduction of borders to trade, and also the reduced role of government in economic policies. 

Thus, as Dr. Joseph Stiglitz (2004) writes, “the term “Washington Consensus”, in the minds of most people around the world, has come to refer to the development strategies focusing around privatization, liberalization, and macro-stability (meaning mostly price stability); a set of policies predicted upon a strong faith–stronger than warranted–in unfettered markets and aimed at reducing, or even minimizing, the role of government” (1). As Williamson (2004) states, he believes that there were “at least three distinct meanings,” which he explains as being:

1). “My original usage: A list of ten specific policy reforms, which I claimed are widely agreed in Washington to be desirable in just about all the countries in Latin America, as of 1989…”

2). “The set of economic policies advocated for developing countries in general by official Washington, meaning the international financial institutions (the IFIs, primarily the IMF and World Bank) and the US Treasury.”

3). Critics’ beliefs about the set of policies that the IFIs are seeking to impose on their clients. These vary somewhat by critic, but usually include the view that the IFIs are the agents of “neoliberalism” and therefore are seeking to minimize the role of the state.”

In fact, some have argued that these policies had “professional consensus” by those who espoused such economic viewpoints not just in Latin America, but rather, throughout the world (Woo, 2004).

Was the Washington Consensus Effective?

Many have been highly critical of the Washington Consensus as a blanket economic policy for the world’s economically developing states. There were many reasons for this. One of the top points that critiques brought up was that the liberalization focus of the Washington Consensus, without recognizing the possibility of effective economic growth with state involvement. As Stiglitz (2004) explains in his critique of the Washington Consensus policy points:

“There was a failure in understanding economic structures within developing countries in focusing on too narrow a set of objectives, and on too limited a set of instruments. For instance, markets by themselves do not produce efficient outcomes when technology is changing or when there is learning about markets; such dynamic processes are at the heart of development; and there are important externalities in such dynamic processes, giving rise to an important role of government. The successful East Asian countries recognized this role; the Washington Consensus policies did not” (2).

Now, scholars have pointed out that the state and its involvement is not a prerequisite for economic growth; many times state actions can damage the economy (Stiglitz, 2004). However, this Washington Consensus initiative offered little faith in the government to offer any positive role towards economic growth and development, and thus, without setting policies per said state, these policy points were more of a “one size fits all” approach (Stiglitz, 2004: 3), with some arguing that “little attention is given to national specificities…” (McCord, Sachs, & Woo, 2005: 43), with some arguing that international organizations such as the International Monetary Fund and the World Bank (which we cover here and here) have fault (McCord, Sachs & Woo, 2005). There were in fact many examples in East Asia where different government involvement helped grow the agricultural and industrial sectors of their respective economies. There are also many cases of failed economic growth in states that did adopt many of the Washington Consensus positions (often, their loans from the IMF, and their aid from the World Bank depended on it). For example, Stiglitz (2004), speaking on the effects of the Washington Consensus program in Africa, explains that:

“In Africa, the costs of a simple-minded belief in the magic of the market were palpable and huge. For example, policy conditionality’s imposed on the countries of the region, too often focused much too narrowly on liberalization of agricultural prices without adequate attention to the prerequisites to make that effective such as functioning markets for inputs and outputs, credit availability and infrastructure (especially roads); the insistence on static comparative advantage led to the fallacy of composition whereby increasing exports of commodities by many countries led to collapse in their prices; financial sectors reforms were focused excessively on making interest rates market-determined in very thin and rudimentary markets leading often to prolonged periods of very high interest rates without improving the availability of credit” (5).

Woo (2004) also looks at the case of African states, and says that there is little evidence to suggest that the Washington Consensus was effective in dramatically improving the domestic economies of these states. And if there was some growth due to the Washington Consensus policies by the IMF, the World Bank, and other neo-liberal international organizations, it paled in comparison to the growth that states in East Asia were experiencing (Woo, 2004), many of which were adopting policies completely counter to the prescriptions of the Washington Consensus. Thus, what some have suggested is to explain the “poverty trap” taking place in Africa (where they are unable to establish high levels of economic growth) (McCord, Sachs & Woo, 2005) that for effective economic development in Africa, there is a need “…to recognise that before privatization and market liberalisation can unleash private sector-led economic growth in Africa, a massive amount of public investment in health, education, and infrastructure is required, which African countries cannot afford” because of small markets, transport costs that make trade difficult, less in agricultural production, effects of diseases, issues with the spread of technology, as well as the history of colonialism (McCord, Sachs, & Woo, 2005: 27-29).

In fact, Woo (2004) has stressed a number of flaws with the Washington Consensus. The five problems that he sees are:

1). “The Washington Consensus was based on a wrong reading of the East Asian growth experience…”

2). “There have been two phases to the Washington Consensus doctrine. The mantra of the first phase (Washington Consensus Mark 1) is “get your prices right”, and the falsification of this first mantra led to the emergence of the second phase of the Washington Consensus doctrine. The new mantra from the Washington Consensus Mark 2 is “get the institutions right”. The danger is that an elastic definition of the term “institutions” will render the current mantra intellectually vacuous.”

3). “While central planning went overboard in suppressing the private market economy, the Washington Consensus runs the risk of denying the state its rightful role in providing an important range of public goods. The Washington Consensus also runs the danger of denying the limitations of self-help in the case of sub-Saharan Africa by overlooking the possibility of poverty traps.”

4).The Washington Consensus does not understand that the ultimate engine of growth in a predominantly market economy is technological innovation, an that the state can play a role in facilitating technological innovations. The Washington Consensus is too focused upon trade-led growth to acknowledge that scientific growth is becoming even more important.

5). The Washington Consensus does not recognize the constraints that geography and ecology could set on the growth potential of a country. For example, the trade-led growth strategy of East Asia cannot work with the same efficiency for a landlocked country. Foreign investment is also less likely to go to places that are malaria-infested” (13-14).

Others have stressed similar concerns with the effectiveness of the Washington Consensus policies on economic stability, as well as economical development. For example, towards the end of the 1990s, due to economic crises in many states Latin America and East Asia, leaders in the next decade challenged the ideas of free markets and unlimited capital, where “By 2008, most emerging-market countries had reduced their exposure to the foreign financial markets by accumulating late foreign currency reserves and maintaining regulatory control of their banking systems. These policies provided insulation from global economic volatility and were vindicated by the impressive rebounds in the wake of the recent crisis: the emerging markets have posted much better economic growth numbers than their counterparts in the developed world” (Birdsall & Fukuyama, 2011: 46). This development led some, such as Dr. Joseph Stiglitz (2008) to say that this “should, by itself, have been enough to lead countries to abandon these strategies” (44).

What is the Post-Washington Consensus?

The Post-Washington Consensus has focused on not only the response that states and non-state actors (such as human rights and development organizations) have had towards the Washington Consensus, but also ways to approach economic development outside of the prescriptions laid out with the Washington Consensus. In fact, there was a great deal of attention on such neo-liberal policies such as the Washington Consensus with the recent economic crisis that occurred in the United States and internationally (Birdsall & Fukuyama, 2011). Based on some of the flaws, inefficiencies, and false promises of the Washington Consensus as some saw it, there is a belief that states are going to become even more skeptical of Washington Consensus policies such as free markets, focusing more on policies that they believe will focus more on domestic stability, promoting local industries instead of focusing on attracting outside capital, all the while providing an additional government role for social programs (Birdsall & Fukuyama, 2011: 46). Again, it is not to suggest that states will turn away from free market capitalism. But what some believe they will do however, is have some sort of regulations in place (Birdsall & Fukuyama, 2011).

It seems that states will continue to establish a place for governments to have a role in the domestic economy, particularly in the context of social programs for their respective populations. Much of this is political. As leaders are in power, they want to ensure their political survival. This can be done a number of ways, one of which includes economic development. However, when there is an economic crisis, scholars argue that citizens of that country will rely on their leadership to help in those troubled times. An inability to have adequate social protections with an economic crisis could be very troubling for re-elections, and thus, leaders have become aware of this with the recent economic crisis (Birdsall & Fukuyama, 2011).

One other development issue that arose from the policies of the Washington Consensus, that was alluded to earlier, is the renewed attention to domestic industries. In decades past, focusing too much of one’s economic resources on developing domestic industries was risky. But, with the concerns about the economic crisis (that again, focused heavily on Washington Consensus policies of free markets (and thus little government action)), states are now involved in finding ways to help encourage domestic industrialization (Birdsall & Fukuyama, 2011). Again, this is not to say that everyone has altered their position on the challenges with state involvement; concerns about corruption, as well as political pressure to continue inefficient government actions continues to exist. This also raises the question about the level of technocrats needed within the government to ensure effective actions as it relates to economic policies, as well as concerns about how to bolster the public sector in these states (Birdsall & Fukuyama, 2011: 50). However, it is one thing to ask about effective policies that combine free markets as well as the role of government in economic development, and it is another to continue to suggest that the free market will fix everything, and that the government was always the issue (Stiglitz, 2008: 50).

This idea regarding a balance between free markets and government within the context of economic development is stressed in the Barcelona Development Agenda, which arose out of the Barcelona Conference in 2004. The Barcelona Development Agenda advocates, amongst other things, notions of “a balanced role for the state and markets, experimentation as a tool for development, and the use of microeconomic interventions to redress market failures and promote productivity (combined with incentives for improved performance (Serra, Spiegel, & Stiglitz, 2008: 6). Thus, it looks as if states and non-state actors are looking to continue to find room for both markets, while not ignoring the place that governments can have and serve with regards to economic development, something many believe the Washington Consensus failed to do.

Stiglitz (2007) because he also criticized the Washington Consensus, arguing that it “put little emphasis on equity[,]” instead “sees governments having a more active role, in both promoting development and protecting the poor. Economic theory and historical experience provide guidance on what governments need to do. While markets are at the center of any successful economy, government has to create a climate that allows business to thrive and create jobs. It has to construct physical and institutional infrastructure…” (27). He goes on to say that “[t]here are many other ares in which markets, by themselves, do not work well. There will be too much of some things, like pollution and environmental degradation, and too little of others, like research. What separates developed from less developed countries is not just a gap in resources but a gap in knowledge, which is why investments in education and technology–largely from government–are so important” (28).

Washington Consensus Books

Narcis Serra and Joseph E. Stiglitz (2008). The Washington Consensus Reconsidered: Towards a New Global Governance.

Stefan Halper (2010). The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century. Basic Books.

 

References

Birdsall, N & Fukuyama, F. (2011). The Post-Washinton Consensus: Development After the Crisis. Foreign Affairs, March/April 2011, Vol. 90, No. 2, pages 44-53.

McCord, G., Sachs, J. D. & Woo, W. T. (2005). Understanding African Poverty: Beyond the Washington Consensus to the Millennium Development Goals Approach. Paper presented at the “Africa in the Global Economy: External Constraints, Regional Integration, and the Role of the State in Development and Finance. FONDAD, June 13-14th, 20015. Available Online: http://www.fondad.org/uploaded/Africa%20in%20the%20World%20Economy/Fondad-AfricaWorld-Chapter2.pdf

Serra, N., Spiegel, S. & Stiglitz, J. E. (2008). Chapter 1, Introduction: From the Washington Consensus Towards a New Global Governance. Pages 3-13. In In Serra N. & J. E. Stiglitz (eds). The Washington Consensus Reconsidered: Towards a New Global Governance. Oxford, England. Oxford University Press.

Stiglitz, J. E. (2004). The Post-Washington Consensus Consensus. The Initiative for Polhttp://policydialogue.org/files/events/Stiglitz_Post_Washington_Consensus_Paper.pdf

Stiglitz, J.E. (2007). Making Globalization Work. New York, New York. Norton.

Stiglitz, J. E. (2008). Chapter 4: Is There a Post-Washington Consensus Consensus? In Serra N. & J. E. Stiglitz (eds). The Washington Consensus Reconsidered: Towards a New Global Governance. Oxford, England. Oxford University Press.

Williamson, J. (2004). The Washington Consensus as Policy Prescription for Development. Practitioners of Development, at the World Bank, January 13th, 2004. Available Online: http://www.iie.com/publications/papers/williamson0204.pdf

Woo, W. T. (2004) “Serious Inadequacies of the Washington Consensus: Misunderstanding the Poor by the Brightest, in Teunissen and Akkerman (eds.), pages 9-43.

World Health Organization (2014). Washington Consensus. Available Online: http://www.who.int/trade/glossary/story094/en/