“Washington Consensus” was created in 1989 by economist John Williamson as an acronym for ten market-oriented principles favoured throughout Washington-based policy organizations as a set of measures to improve Latin American economies. Fiscal restraint, market-oriented internal reforms, and trade and investment liberalization were the main of the Washington consensus policies.
The socio-economic consequences of these measures are still being argued today. Implementing pro-poor policies with market-oriented policies played a critical role in achieving good policy outcomes. We examine market-oriented reforms implemented in the 1980s and 1990s, including privatization, budgetary restraint, and trade liberalization, with the advantage of more recent data.
What Exactly is the Washington Consensus in Economics?
Let’s start with the Washington consensus definition. The International Monetary Fund, the US Treasury, and the World Bank issued a series of neoliberal economic prescriptions to developing nations experiencing economic difficulties. In return for urgent financial assistance, it suggested structural changes that would strengthen the influence of market forces.
John Williamson, a British economist, created the phrase in 1989. The Washington Consensus has been criticized for imposing severe conditions detrimental to economic recovery. In contrast, others have maintained that it was beneficial to long-term economic development in emerging nations despite its shortcomings.
The Washington Consensus’s Original Principles
National budget imbalances must be reduced
High and fluctuating inflation resulted from excessive government expenditure in Latin America throughout the 1980s, and to avoid further government debt and restore economic stability, politicians prescribed fiscal discipline, which included boosting taxes or lowering domestic spending.
Redirect expenditure from politically favourable sectors to low-cost fields
Some aspects of government expenditure, such as subsidies to state-owned enterprises or allowances for food or fuel consumption, created economic inefficiencies and favoured affluent urban residents over the rural poor. Reducing contributions to politically linked business sectors may cost some people money, but it frees up funds to finance fundamental social care, education, and development.
The taxation system should be changed
Reforms should widen the tax base and eliminate exclusions that exclude specific politically connected individuals and entities from paying taxes. Tax reform that broadens and simplifies the revenue system may boost efficiency, increase tax collection, and minimize tax evasion.
Liberalize the banking sector for market-determined rates
Controlling interest rates by the government has the effect of punishing savers and discouraging investment, limiting financial progress; restricting credit has the effect of breeding corruption and favouring political insiders. In addition to encouraging saving, market-determined interest rates guarantee that banks or financial markets, rather than government officials, control the distribution of credit.
Adopt a single exchange rate that is competitive
Move away from inflated exchange rates that deter exports and result in foreign currency rationing; a competitive, market-driven exchange rate may support export-led economic development while alleviating balance of payments concerns in certain countries.
Trade barriers should be reduced
In principle, trade barriers that benefit particular interests should be eliminated. Tariffs are superior to quotas and other unjustified trade restrictions that suffocate commerce; they enable local enterprises to adapt since they are progressively decreased. Unlike allocation rentals for special interests, they provide income for the government.
Remove obstacles to foreign direct investment
By prohibiting or limiting inbound foreign investment, indigenous companies gain a monopoly, and competition is reduced. Foreign investment helps a nation earn cash, generate employment, and develop skills while increasing competition for indigenous enterprises. Domestic enterprises that attract FDI may generate intellectual property advances that help the country grow.
State-owned firms should be privatized
State-owned enterprises are often inefficient, living only on government subsidies that exacerbate nations’ economic deficits. Some jobs may be lost due to privatization, but it is more likely to improve the effectiveness and profitability of enterprises and boost national growth and productivity.
Eliminate policies that stifle competitiveness
The elimination of rules and other barriers that prohibit new enterprises from coming to market may help to increase competition, productivity, and economic development.
Ensure that property rights are safe and affordable
When a legal system recognizes and protects the rights of persons who work in unregistered jobs or own property without the required documents, investment and individual freedom are boosted. Owners of private assets can get credit, boosting the economy and the government’s revenue base.
Impacts of the Washington Consensus
- Support for free trade via the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) — lower tariff barriers.
- To obtain money from the IMF, countries were usually required to implement free-market reforms.
- Those who believe in free trade believe that nations should focus on products and services in which they have a competitive advantage. It might indicate that emerging economies must continue to manufacture basic goods.
Criticisms of The Washington Consensus
- Some economists claim that free trade isn’t necessarily in developing countries’ best interests. To ensure long-term prosperity, specific key and newborn sectors must be preserved first. Subsidies or taxes against imports may be required to safeguard particular sectors.
- The Chinese government has helped Chinese companies spend billions of dollars in developing countries in Africa, Asia, and Latin America. These businesses usually invest in infrastructure, which allows for long-term commerce and development.
- Privatization may boost production while improving the quality of a product or service. On the other hand, privatization may sometimes lead to businesses disregarding specific low-income segments or the social demands of a growing economy.
- There are flaws and instability in the free market. As we witnessed during the Great Recession of 2008-2009, increased deregulation may contribute to the financial instability that can spread across the economy during the Post-Washington consensus.
In conclusion, changes should be a continual process of reevaluation, adaptation, and realignment throughout the reform process. There is no such thing as a one-size-fits-all strategy when it comes to economic growth, and the reforming agenda should be tackled with caution and flexibility.