Washington consensus refined
see aslo: Washington consensus
Good points (went well)
1. Fiscal discipline
2. Lower inflation
3. Liberal trade
Areas for improvement
1. Stability of the banking sector should be more important.
2. Deregulation of domestic financial systems did not included enough supervision, which led to instability in the banking sectors (examples: Mexico, Venezuela, and Argentina).
3. Public spending reform was slowed down by special interests
4. Property rights for poor have not progressed, and they need better legal protection in the courts.
5. Not enough GDP growth to sell results to democratic societies (voters becoming disillusioned).
Suggested adjustments to the Washington Consensus
1. Extra emphasis on social investing in health, education and infrastructure. In order to do this, the governments need more public funds. In order to increase the money available, there needs to be more emphasis placed on increasing that national savings rates. More savings are needed to increase the pool of money available for investments. In addition, governments need to tackle the issue of “capital flight”…rich people sending money overseas, rather than investing at home.
2. Additional focus on running government surpluses rather than deficits. Without running surpluses, they governments of Latin America will always be dependent upon foreign capital inflows. (not sure I agree with this, because the US has clearly shown that running a trade deficit over 20 years has been sustainable as long as foreigners are willing to finance the capital budget surplus. Maybe the US is unique because the debt is issued in their own currency, but there is lots of debate still going on in this issue).
3. Focus should be placed on strengthening the state, and not just on shrinking it. In Latin America, the critics argue, a weaker state is a bad thing. The trouble is that many of the US based economists have a “smaller is better” attitude when thinking about the role of the state (vs the free market). But, in Latin America, as in any developing nation, a smaller state might also be weaker, and less capable of standing up to the special interests (both domestic and foreign) that try to buy influence (corruption is a big problem). So, the emphasis should shift away from creating a smaller state, and more toward creating a smaller if possible, but stronger as necessary state infrastructure.
Williamson's proposals for adjustments
(John Williamson is the guy that originally coined the term "Washington consensus"
1. Fiscal policy needs to be more conservative. Governments in Latin America need to run a bigger surplus in times when the economy is booming so that they have a war chest of funds to help get them through the times of recessions. One good example is what Chile is doing with the funds they set up to collect copper revenues when commodity prices are high, which should help them in the future if copper prices were to fall. Williamson also suggests that Latin America should ban together in a similar way as the European Union’s Growth and Stability pact, in which countries could be fined for running a budget deficit that is too large.
2. Another adjustment to the original “Washington Consensus” that Williamson recommends is for Latin American countries to focus more on labor laws reform. He offers labor reform as a solution for the “informal economy” problem of Latin America, in which a mass of the population is hired informally, and is outside of the real of income taxes and health benefits. Only by designing systems that encourages companies to hire workers officially are we going to see any real benefits to Latin American societies. He suggests that labor laws need to be adjusted to allow companies to hire and fire more easily. The labor laws need to be made more flexible.
3. In order to smooth the transition to a free market system, Williamson notes that Latin American countries need to improve the institutions that are essential for the working of such a system, such as (a) tougher and more predictable regulations, (b) a stronger and more independent civil service, and (c) judiciary that is more independent and stronger as well.
4. Income inequalities also need to be addressed, according to Williamson. In his view, this should not be accomplished by taxing the rich, but rather by increased public spending on areas such as education, increasing microlending, and also by increasing private property rights for the poor.
One area that Williamson would like to change from the original Washington Consensus:
1. He would like to roll back the “capital account liberalization” clause, in which they originally called for countries to allow free flowing capital into and out of countries. Williamson seems particularly concerned with the destabilizing and harmful effects of “fast money” and the “herd mentality” of international traders. He notes that international bond markets were not as efficient in predicting a crisis in Argentina as they were supposed to. And everyone waited until the last minute, and exited en masse. He regrets countries such as Chile that has removed taxes on short term capital flows, and fears that fast capital flows may destabilize the regions.
My take on the "property rights" issue was as follows: I thought he was referring to the need in places like Brazil for people in "favelas" to get property rights.
If you can find some political solution where people can get real ownership of the places in which they live, then two things should (theoretically happen), (1) there is an incentive to build and improve upon that which you own, and (2) people can then take out equity loans from banks that would be backed by home equity. So, poor people could then raise (small) amounts of money to start businesses, etc.
So, part of the "Washington consensus refined" would be the need for countries like Brazil to tackle the need for property rights reform (in order to unlock massive economic potential that is currently tied up in the "informal" economy)
See also:
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.[23] This view asserts 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.[24] 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.
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