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Criticisms of the Washington Consensus

Page history last edited by Brian D Butler 8 years, 9 months ago

 

 

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Table of Contents


 

 

see also:

 

 

My Thoughts

 

In general terms, I believe the most of the items are in line with sound economic theory for development. I had a few areas, however, where I disagreed.

 

 

#1. The recommendation to focus investment on primary education rather than specialized universites....This argument seems to contract the theories of Michael Porter when he talked about the importance of specialization in developing clusters which are essential for development of a national Comparative Advantage (and for attracting FDI). This recommendation by Williamson seems to run counter to this advice.

 

 

#2. The exchange rate controls that Williamson sugggested seem to be unsustainable. He suggests that a country should manage their exchange rates keeping them low enough to stimulate exports. In the long run, however, I question if this policy is sustainable. According to the Mundell trilemma, if a country fixes their exchange rates, then they must give up either (a) internal monetary controls, or (b) free movement of external capital.

 

But, since the movement of capital if pretty much a given in the world today, that essentially means that a country must give up the monetary policy (cant raise interest rates to combat inflation, and cant cut rates to stimulate growth). Im not sure that this is really ideal for a country that is looking for development (growth), as many Latin American countries are. For this reason, I disagree with Williamsons prescription.

 

 

#3. In retrospect, the prescription of "privatizaion" was taken too far, too fast, with too little supervision. In effect, it created too much public backlash against the "Washington consensus".

 

 

 

From Wikipedia 

 

Critics frequently cite the Argentine economic crisis of 1999-2002 as a case in point of why they believe that 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.

 

 

Anti-Globalization Movement

 

Many of the criticisms against the Washington "consensus" have come from the anti-globalizaion 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 claim that First World countries 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,[6] 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 are vocal and well-known critics of the Washington Consensus, such as Venezuelan President Hugo Chávez, Cuban dictator Fidel Castro, Bolivian President Evo Morales, and Rafael Correa, President of Ecuador. Cuba is a Communist planned economy and Venezuela implements Chávez's own brand of "twenty-first century 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 at least 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, by Tabare Vasquez in Uruguay, 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.

 

Neo-Keynesian criticisms

 

see our discussion on Keynes (economics)

 

Neo-Keynesian and post-Keynesian critics of the Consensus have argued that the underlying 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 or, to use his own words, "offering readers a perspective they can't find anywhere else". [7]

 

 

Helsinki Process

Participants in the 2007 third Helsinki Process conference, one of a series of international conferences initiated in 2002 by the Governments of Finland and Tanzania, were quoted as achieving a consensus view that "the neoliberal Washington consensus is not a solution to the problems of developing countries, but rather one of the causes of these problems".[8]

“Neoliberalism is not the solution to the economic and social problems confronted by developing countries....We are seeing in Latin America the devastating consequences of 25 years of application of neoliberalism,”

said Josep Xercavins, professor of development economics at the Technical University of Catalonia, Spain, and co-ordinator of the World Forum of Civil Society Networks, an umbrella organisation of civil society groups studying economic and social development.

Saying that they rejected prescriptions which they maintained were offered by Washington Consensus institutions such as the IMF and the World Bank, participants in the Helsinki Process conference were quoted as favoring an approach that is democratic and allows the local population to participate and debate the policy choices, is tailored to the strengths and conditions of the target country instead of a one-size-fits all approach, and takes social concerns into account as much as economic growth concerns.[9]

 

 

The case of Argentina

The Argentine economic crisis of 1999-2002 is often held out as an 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 for 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). [10]

 

The IMF's independent evaluation office has issued a review of the lessons of Argentina for the institution, summarized in the following quotation:

The Argentine crisis yields a number of lessons for the IMF, some of which have already been learned and incorporated into revised policies and procedures. This evaluation suggests ten lessons, in the areas of surveillance and program design, crisis management, and the decision-making process. [11]

Some commentators argue that, in more recent years, Argentina under President Nestor Kirchner has made a break with the Consensus and that this has led to a significant improvement in its economy; some add that Ecuador may soon follow suit. [12] 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. [13]The Economist argues that the Kirchner administration will end up as one more in Argentina's long history of populist governments. [14]

 

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. [15] Skeptical political observers note, however, that Lula's rhetoric on such public occasions should be distinguished from the policies actually implemented by his administration. [16]

 

 

 

 

Subsidy for agriculture in Malawi

Some critics of the Washington Consensus cite Malawi's experience with agricultural subsidies as exemplfying perceived flaws in the package's prescriptions. For decades, the World Bank and donor nations pressed Malawi, a predominantly rural country in Africa, to cut back or eliminate government fertilizer subsidies to farmers. World Bank experts also urged the country to have Malawi farmers shift to growing cash crops for export and to use foreign exchange earnings to import food.[17] For years, Malawi hovered on the brink of famine; after a particularly disastrous corn harvest in 2005, almost five million of its 13 million people needed emergency food aid. Malawi’s newly elected president Bingu wa Mutharika then decided to reverse policy. Introduction of deep fertilizer subsidies (and lesser ones for seed), abetted by good rains, helped farmers produce record-breaking corn harvests in 2006 and 2007; according to government reports, corn production leapt from 1.2 million metric tons in 2005 to 2.7 million in 2006 and 3.4 million in 2007. The prevalence of acute child hunger has fallen sharply and Malawi recently turned away emergency food aid.

 

In a commentary on the Malawi experience prepared for the Center for Global Development[18] , development economists Vijaya Ramachandran and Peter Timmer argue that fertilizer subsidies in parts of Africa (and Indonesia) can have benefits that substantially exceed their costs. They caution, however, that how the subsidy is operated is crucial to its long-term success, and warn -- for example -- against allowing fertilizer distribution to become a monopoly. Ramachandran and Timmer also stress that African farmers need more than just input subsidies -- they need better research to deveop new inputs and new seeds, as well as better transport and energy infrastructure. The World Bank reportedly now sometimes supports the temporary use of fertilizer subsidies aimed at the poor and carried out in a way that fosters private markets: "In Malawi, bank officials say they generally support Malawi’s policy, though they criticize the government for not having a strategy to eventually end the subsidies, question whether its 2007 corn production estimates are inflated and say there is still a lot of room for improvement in how the subsidy is carried out".[19]

 

Continuing controversy

Most Latin American countries continue to struggle with high poverty 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. Brazil, despite relatively modest rates of aggregate growth, has seen important progress in recent years in the reduction of poverty.

 

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). [20]

 

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.[21] 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.

 

 

 

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