Washington Consensus
The
Washington Consensus is a set of policies promulgated by many
neoliberal economists as a formula for promoting
economic growth in many parts of
Latin America and other parts of the world. The Washington Consensus policies propose to introduce various free market oriented economic reforms which are theoretically designed to make the target economy more like that of
First World countries such as the
United States.
The Washington Consensus is the target of sharp criticism by both individuals and groups, who claim that it is a way to funnel economic productivity from less developed Latin American countries to large
multinational companies and their wealthy owners in advanced
First World economies. As of
2005, several
Latin American countries are led by
socialist governments that openly oppose the Washington Consensus, and many more are ambivalent. Critics frequently cite the
Argentine economic crisis of 1999-2002 as the case in point of why the Washington Consensus policies are flawed, as Argentina had previously implemented most of the Washington Consensus policies as directed.
It was first presented in
1990 by
John Williamson, an economist from the
Institute for International Economics, an international economic
think tank based in
Washington, D.C.. [
1] It is so called because it attempts 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.
In 1980, conservative writer
Michael Novak called the model "
democratic capitalism". According to
Joseph Stanislaw and
Daniel Yergin, authors of
The Commanding Heights the term "Washington Consensus" was developed "in Latin America, by Latin Americans, in response to what was happening both within and outside the region." They argue that the "Washington Consensus" was a conspiracy theory developed to shift blame from their own governments' failures to market failures. They also state that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label" (The Commanding Heights: Battle for the World Economy, pg. 237).
The consensus included reforms that should be undertaken from 1990 (these reforms were also summarized by the
World Bank in its year 2000 Poverty Report):
*
Fiscal policy discipline
*Redirection of
public spending toward education, health and infrastructure
investment*
Tax reform – Flattening the tax curve: Lowering the tax rates on proportionally high tax brackets (typically above median income), and raising the tax rates on the proportionally low tax brackets (typically below median income); lowering the marginal tax rate.
*
Interest rates that are market determined and positive (but moderate) in real terms
*Competitive
exchange rates
*Trade
liberalization – replacement of quantitative restrictions with low and uniform
tariffs
*Openness to
foreign direct investment*
Privatization of
state enterprises.
*
Deregulation – abolition of regulations that impede entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of
financial institutions
*Legal security for
property rights
The widespread acceptance of Washington Consensus was a reaction to the
macroeconomic crisis that hit much of Latin America during the 1980s. Due to economic stagnation and loss of access to foreign credit, many governments could no longer sustain high levels of public spending without igniting hyperinflation.
In the early
1990s,
President George H. W. Bush began to draw up a U.S.-
Mexican-
Canadian free-trade proposal that came to be known as the
North American Free Trade Agreement (NAFTA.) NAFTA was later signed into law by Bush's successor, President
Bill Clinton, and the three North American countries agreed to gradually phase out or sharply reduce tariffs on foreign goods, a policy perfectly in line with the ideals of the Consensus. Current President
George W. Bush continues to support NAFTA, and his administration negotiated a similar agreement known as the
Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) with the
Dominican Republic and
Central America, which was passed by Congress in 2005.
Proponents of NAFTA and DR-CAFTA claim that they promote economic growth in developing countries and are a boon to U.S. consumers, providing them with less-expensive foreign goods. Critics from
left and
right accuse the agreements of crippling the
working class of the United States by promoting the relocation of production to cheaper labor markets in Mexico, and allege that such shifts have resulted in the exploitation of Mexican laborers.
While a Democratic president, Bill Clinton, signed NAFTA and a Republican president, George W. Bush, signed CAFTA, the United States Congress's support of these agreements has been partisan. Most Republicans favor the agreements and most Democrats oppose the agreements.
Anti-Globalization Movement
Many critics of
trade liberalization, such as
Noam Chomsky 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 a huge markup, with the balance of the markup typically going to a large
multinational. The criticism is that workers in the
Third World economy remain poor, as any pay raises they receive over what they made before trade liberalization are 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 argue that
First World countries predatorily impose the consensus'
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 reforms (e.g. the privatization of state industries, tax reform, and deregulation) are criticized as mechanisms for ensuring the development of a small indigenous monied 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.
Socialist political leaders in Latin America such as
Venezuelan President
Hugo Chávez,
Cuban President
Fidel Castro,
Bolivian President
Evo Morales, and
Brazilian President
Luiz Inácio Lula da Silva are vocal and well-known critics of the Washington Consensus. Lula inherited an economy closely aligned to the principles of the Washington Consensus, and his socialist reforms have been gradual so as not to cause economic disruption. Cuba is a
Communist planned economy and Venezuela implements Chávez's own brand of
market socialism, powered by Venezuela's large
oil reserves. In
Argentina, the political will to continue implementation of the Consensus has largely evaporated since the economic collapse, which many people there blame on the Consensus' neoliberal policies (
see below).
Neo-Keynesian
Neo-Keynesian and
post-Keynesian critics of the Consensus argue that the underlining policies were incorrectly laid down and are too rigid to be able to succeed. For example, flexible work laws were supposed to create new jobs, but economic evidence from Latin America draws no such conclusion. In addition, they do not take into account economic and cultural differences between countries. They also point out that, should this set of policies work, it must be implemented during a period of rapid growth and not – as often is the case – during a crisis.
The Washington Consensus is widely held by many economists to be a 'suicidal policy' if implemented when an economy is weak.
Moises Naim, chief editor of
Foreign Policy, states that there was no 'consensus' in the first place, since there are major differences between economists over what is the 'correct economic policy', hence the idea of there being a consensus was also flawed.
The
Argentine economic crisis of 1999-2002 is often held out as a recent example of the economic devastation 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. [
2]
There have also been major discrepancies between the Washington Consensus and the policies themselves. For example, the Washington Consensus stated a need for investment in education, but the policies pursued by the
International Monetary Fund stated the need to establish standard fees for primary education.
Most Latin American countries continue to struggle with high
poverty,
unemployment, and
underemployment.
Chile has been offered as an example of a Consensus success story, and countries such as
El Salvador and
Uruguay have shown some positive signs of economic development. However, as
Joseph Stiglitz argues the
Chilean success story owes a lot to state ownership of key industries and
currency interventions stabilizing
capital flows.
*
Argentina*
Bolivia*
Brazil (
Plano Real)
*
Chile*
Colombia*
Costa Rica*
Dominican Republic*
Ecuador*
El Salvador*
Guatemala*
Honduras*
India*
Mexico*
Morocco*
Nicaragua*
Paraguay*
Peru*
Tunisia*
Uruguay*
ZambiaNote: incomplete list.*
Argentina*
Belarus*
Brazil*
Bolivia*
China*
Cuba*
N. Korea*
Iran*
Russia*
Venezuela*
VietnamDevelopment of the neoliberal model
*
Accelerated Development in Sub-Saharan Africa: An Agenda for Action, Eliot Berg, coord., (World Bank, 1981).
*
The Spirit of Democratic Capitalism, by Michael Novak (1982).
*
El Otro Sendero (The Other Path), by Hernando de Soto (1986).
*
Toward Renewed Economic Growth in Latin America, by Bela Balassa, Gerardo M. Bueno, Pedro-Pablo Kuczynski, and Mario Henrique (Institute for International Economics, 1986).
*
Latin American Adjustment: How Much Has Happened, edited by John Williamson (Institute for International Economics, 1990).
*
The Macroeconomics of Populism in Latin America, edited by Rudiger Dornbusch and Sebastian Edwards (1991).
*
Global Linkages: Macroeconomic Interdependence and Cooperation in the World Economy, by Jeffrey Sachs and
Warwick McKibbin (1991).
*
World Development Report 1991: The Challenge of Development, by Lawrence Summers, Vinod Thomas, et. al. (World Bank, 1991).
* "Development and the "Washington Consensus"", in
World Development Vol 21:1239-1336 by John Williamson (1993).
* "Recent Lessons of Development," Lawrence H. Summers & Vinod Thomas (1993).
*
Latin America's Journey to the Market: From Macroeconomic Shocks to Institutional Therapy, by Moises Naím (1994).
*
Economistas y Politicos: La Política de la Reforma Económica, by Agustín Fallas-Santana (1996).
*
The Crisis of Global Capitalism: Open Society Endangered, by George Soros (1997).
*
Beyond Tradeoffs: Market Reform and Equitable Growth in Latin America, edited by Nancy Birdsall, Carol Graham, and Richard Sabot (Brookings Institution, 1998).
*
The Third Way: Toward a Renewal of Social Democracy, by Anthony Giddens (1998).
*
The Lexus and the Olive Tree: Understanding Globalization, by Thomas Friedman (1999).
*
"Fads and Fashion in Economic Reforms: Washington Consensus or Washington Confusion?", by Moises Naim (IMF, 1999).
*
Washington Contentious: Economic Policies for Social Equity in Latin America, by Nancy Birdsall and Augusto de la Torre (Carnegie Endowment for International Peace and Inter-American Dialogue, 2001)
*
"Did the Washington Consensus Fail?", by John Williamson (Speech at IIE, 2002).
*
After the Washington Consensus, edited by Pedro-Pablo Kuczynski and John Williamson (Institute for International Economics, 2003).
Analyses and critiques
*
The Commanding Heights: The Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw (2002). PBS series and book that traces the debate between advocates of the Washington Consensus and their critics.
The contentious Washington Consensus: reforming the reforms in emerging markets. by Carlos Santiso (2004). Review of International Political Economy 11(4).
*
Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World, edited by Joan M. Nelson (1990).
*
Latin American Political Economy in the Age of Neoliberal Reform and Democracy, Markets, and Structural Reform in Latin America, edited by William C. Smith, Carlos H. Acuña, and Eduardo A. Gamarra (North-South Center, 1994).
*
Crisis and Reform in Latin America: From Despair to Hope, by Sebastian Edwards (1995).
*
Politics, Social Change, and Economic Restructuring in Latin America, by William C. Smith and Roberto Patricio Korzeniewicz (North-South Center, 1997).
*
Fault Lines of Democracy in Post-Transition Latin America, Felipe Agüero and Jeffrey Stark (1998).
*
What Kind of Democracy? What Kind of Market? Latin America in the Age of Neoliberalism, by Philip D. Oxhorn and Graciela Ducatenzeiler (1998).
*
Latin America Transformed: Globalization and Modernity, by Robert N. Gwynne and Cristóbal Kay (1999).
*
The Internationalization of Palace Wars: Lawyers, Economists, and the Contest to Transform Latin American States, by Yves Dezalay and Bryant G. Garth (2002).
*
FONDAD:
Diversity in Development: Reconsidering the Washington Consensus, edited by Jan Joost Teunissen and Age Akkerman (2004).
*
The Washington Consensus as Policy Prescription for Development (World Bank)
*
What Should the World Bank Think about the Washington Consensus?, by John Williamson.
*
Fabian Global Forum for Progressive Global Politics: The Washington Consensus, by Adam Lent.
*
The Economics of Empire - Notes on the Washington Consensus, by William Finnegan.
*
Unraveling the Washington Consensus, An Interview with Joseph Stiglitz
