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Washington consensus

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

 

 

Table of Contents:


 

 

 

List of Recommendations

The consensus included ten broad sets of recommendations:

  • Fiscal policy discipline;  to bring down public borrowng, to stop printing new money, and hopefully to ease inflation
  • Redirection of public spending from indiscriminate (and often regressive) subsidies toward broad-based provision of key pro-growth, pro-poor services like primary Education, primary Health care and infrastructure investment (roads airports, etc)
  • Tax reform – broadening the tax base and adopting moderate marginal tax rates;
  • interest rates that are market determined and positive (but moderate) in real terms;
  • Competitive Currency; not free floating, but instead, the currency needed to be competitive for exporter (not that this "managed"  exchange rate was a disaster in the case of Argentina)
  • trade liberalization –  focus on replacing subsidies with tariffs (more transparent), which should be gradually reduced to spur local competitiveness.   Also, there should be liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.);
  • Liberalization of inward FDI; countries should eliminate barriers to foreign investment, and treat foreign capital similarly to domestic capital  (this argument, however seems to miss a fundamental aspect of FDI in which FDI is really about "control" of foreign assets, and does not ever mean that foreign capital will be transferred to a country, because foreign companies may use domestic financing).
  • Privatization of state enterprises; taking state run businesses such as Telecom monopolies, and transferring control and ownership to private sector.
  • Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,
  • Legal security for property rights, with a special focus on getting property rights to the poorest and the "informal sector"

 

 

Criticisms of the Washington Consensus

 

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".

 

 

read more: Criticisms of the Washington Consensus

 

Washington Consensus refined (improved)

 

Washington consensus refined

 

 

In defence of the "Washington Consensus"

 

#1.  It was not developed in Washington.  Beyond the Washington Consensus

 

According to Joseph Stanislaw and Daniel Yergin, authors of The Commanding Heights, the policy prescriptions described in the Washington Consensus were "developed in Latin America, by Latin Americans, in response to what was happening both within and outside the region."[3] The same authors report that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label." [4]

 

 

#2.  There was never a "consensus"

 

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.

 

 

#3.  Conditions did improve as a result of these policies

 

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.   That there is still a long way to go does not directly discredit these policies

 

 

#4.  the Argentine crisis was not caused by adhering to the principles of the washington consensus, but rather to not adhering to them

 

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).

 

 

Results from Washington Consensus

 

Plano Real (Brazil changed currency) 

 

 

 

 

Background:  what is the "Washington Consensus"?

 

 

The Washington Consensus is a phrase initially coined in 1989 by John Williamson to describe a relatively specific set of ten economic policy prescriptions that he considered to constitute a "standard" reform package promoted for crisis-wracked countries by Washington, D.C-based institutions such as the International Monetary Fund - IMF (IMF), World Bank and U.S. Treasury Department.[1]

 

The term "Washington consensus" has since acquired a secondary connotation, being used (usually in a pejorative sense) to describe a less-precisely stipulated gamut of policies, broadly associated with expanding the role of market forces and constraining the role of the state, sometimes also described (almost invariably pejoratively) as neo-liberalism or market fundamentalism.

The Washington Consensus, especially in this second, broader formulation, has been the target of sharp criticism by some individuals and groups who argue that it is a way to open up less developed countries to investments from large Multinational corporations and their wealthy owners in advanced First World economies, which the critics would view as a negative development. As of 2007, several Latin American countries are led by socialist or other left wing governments, some (though not all) of which have adopted approaches contrary to the Washington Consensus set of policies.

 

In Williamson's own more recent words from 2002:

 

" It is difficult even for the creator of the term to deny that the phrase "Washington Consensus" is a damaged brand name (Naím 2002). Audiences the world over seem to believe that this signifies a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery. There are people who cannot utter the term without foaming at the mouth. My own view is of course quite different. The basic ideas that I attempted to summarize in the Washington Consensus have continued to gain wider acceptance over the past decade, to the point where Lula has had to endorse most of them in order to be electable. For the most part they are motherhood and apple pie, which is why they commanded a consensus."

 

 

History

The concept and name of the Washington Consensus were first presented in 1989 by John Williamson, an economist from the Institute for International Economics, an international economic think tank based in Washington, D.C.. [1] Williamson used the term to summarize the commonly shared themes among policy advice by Washington-based institutions at the time, such as the International Monetary Fund, World Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of Latin America from the financial crises of the 1980s. However, Williamson rejects subsequent use of the term to cover a more general "neoliberal" agenda [2].

According to Joseph Stanislaw and Daniel Yergin, authors of The Commanding Heights, the policy prescriptions described in the Washington Consensus were "developed in Latin America, by Latin Americans, in response to what was happening both within and outside the region."[3] The same authors report that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label." [4]

 

 

 

 

Analyses and critiques

 

External Links

 

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