Washington Consensus
Washington Consensus refers to a set of ideas that were dominant in IMF and World Bank policy from 1980 to 2008. This term was coined by John Williamson in 1989, and comprised of 10 principles which developing countries facing crises should apply.
These 10 principles, as he writes in his original paper (http://www.iie.com/publications/papers/paper.cfm?researchid=486) , are:
Fiscal policy discipline; Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; 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 exchange rates; Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment; Privatization of state enterprises; 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; Legal security for property rights.
Although these principles are particularly useful for developed countries, a shock therapy of infusing these in developing countries has proven disastrous - a "one size fits all" policy has deepened crises in Latin America (Argentina, Brazil, Mexico), Russia, ex-communist Eastern European states and Turkey. This is why this consensus has yielded to a "Beijing Consensus," which advocates that each emerging country should formulate the ideal policy composition itself for development.
According to Williamson, people all over the world are convinced that the Washington Consensus stands for a set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions, and has led these countries to crisis. He contends that formerly, there was a “global apartheid” that claimed that developing countries came from a different universe, one in which inflation, state-led industrialization, and import substitution enabled growth. He highlights that the ideas of the Washington Consensus have never been employed by Washington within the United States itself, despite preaching “macroeconomic discipline, a market economy, and liberalized trade” to less developed countries. In short, Washington hardly walks its talk[1].
Williamson contends that although it is worth analyzing the failures of the Washington Consensus, we need to move on. According to Williamson, the disappointing performances of the countries that followed the Washington Consensus can be explained by the following:
1.) Crises that emerging markets faced in the late 1990’s (tequila in Mexico for example)
2.) Reforms were incomplete: some of the 1st generation Washington Consensus reforms were neglected and the 2nd generation reforms needed more time for the advantage to be fully realized. For example, there was much effort to eliminate fiscal deficits but little effort to stimulate fiscal surpluses to give a cushion.
3.) Washington Consensus objectives were too narrow. In the end they accelerated growth without worsening income distribution. But that was all[2].
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