Washington Consensus


The Washington Consensus refers to a set of broadly free market economic ideas, supported by prominent economists and international organisations, such as the IMF, the World Bank, the EU and the US.
Essentially, the Washington consensus advocates, free trade, floating exchange rates, free markets and macroeconomic stability.
The ten principles originally stated by John Williamson in 1989, includes ten sets of relatively specific policy recommendations.
1. Fiscal Discipline. This was in the context of a region where almost all countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.
 2. Reordering Public Expenditure Priorities. This suggested switching expenditure in a progrowth and propoor way, from things like nonmerit subsidies to basic health and education and infrastructure. It did not call for all the burden of achieving fiscal discipline to be placed on expenditure cuts; on the contrary, the intention was to be strictly neutral about the desirable size of the public sector, an issue on which even a hopeless consensus-seeker like me did not imagine that the battle had been resolved with the end of history that was being promulgated at the time.
3. Tax Reform. The aim was a tax system that would combine a broad tax base with moderate marginal tax rates.
 4. Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, stressed that views differed on how fast it should be achieved, and—especially—recognized the importance of accompanying financial liberalization with prudential supervision.
 5. A Competitive Exchange Rate2 . I fear I indulged in wishful thinking in asserting that there was a consensus in favor of ensuring that the exchange rate would be competitive, which pretty much implies an intermediate regime; in fact Washington was already beginning to edge toward the two-corner doctrine which holds that a country must either fix firmly or else it must float “cleanly”.
6. Trade Liberalization. I acknowledged that there was a difference of view about how fast trade should be liberalized, but everyone agreed that was the appropriate direction in which to move.
7. Liberalization of Inward Foreign Direct Investment. I specifically did not include comprehensive capital account liberalization, because I did not believe that did or should command a consensus in Washington.
8. Privatization. As noted already, this was the one area in which what originated as a neoliberal idea had won broad acceptance. We have since been made very conscious that it matters a lot how privatization is done: it can be a highly corrupt process that transfers assets to a privileged elite for a fraction of their true value, but the evidence is that it brings benefits (especially in terms of improved service coverage) when done properly, and the privatized enterprise either sells into a competitive market or is properly regulated.
 9. Deregulation. This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons, or to govern prices in a non-competitive industry.
10. Property Rights. This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost (inspired by Hernando de Soto’s analysis).
The Washington consensus was important for determining policy towards economic development in Latin America, South East Asia and other countries. Some implications of the Washington consensus.
Criticisms of the Washington Consensus
1. Strategic trade theory. Some economists argue that free trade is not always in the best interest of developing economies. A strict adoption of free trade and comparative advantage can leave developing economies producing low income growth and volatile priced primary products. If countries promoted new industries, it may require both selective tariffs on cheap imports and also government subsidies. For example, the Brazilian government’s support and development of Embraer, helped Brazil become successful in airline manufacturing.
2. Low government borrowing is not always appropriate. Implementing fiscal rules can cause unnecessary economic hardship, if the government cuts spending at inappropriate timing. For example, fiscal consolidation during the great recession has caused low growth rates, and a failure to reduce debt to GDP ratios. If governments are pressured to cut spending it can also cause welfare support programmes to be hit, increasing poverty. However, in the long term, most economists would suggest it is prudent to reduce structural borrowing to manageable levels.
3. The Chinese approach. An interesting development in recent years is that Chinese firms have invested substantial sums in developing economies, such as Africa and Latin America. The interesting thing about the Chinese approach is that it involves substantial investment in infrastructure and public sector investment – showing that for economic development, an interventionist approach can have a bigger return than leaving it to free markets.
4. Problems of privatisation. Privatisation has the capacity to increase efficiency and improve the quality of the product / service. However, for key public sector industries, privatisation may mean companies ignore wider social objectives. For example, in the 1990s, under World Bank pressure, Bolivia privatised its water industry. But, this led to water supplies being cut off from the poorest members of society.
5. Mis-interpretation. The second point about redirecting of public spending towards public sector initiatives like primary education, primary health care and infrastructure investment, has often been ignored. Instead the ‘Washington Consensus’ has come to refer to more market oriented policies, which have focused on less government intervention.
6. The macro-economic crisis of Latin America in 1980s and South East Asian crisis in 1990s, made this free market policies unpopular in the countries where they were implemented.
7. Credit crisis and instability of free markets. The credit crisis beginning in 2007 has illustrated the potential for free markets to create instability and high unemployment. Financial deregulation has created potential for financial instability.

Monday, 27th Jul 2015, 10:10:08 AM

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Aug 25, 2017 07:45 AM