In 1989, a set of policies and economic reforms were introduced in the Latin American countries to mitigate the debt crisis of the 1970s and reduce turbulence in the macroeconomics. John Williamson, an economist at the Peterson Institute for International Economics, proposed the concept of the Washington Consensus that consisted of all the policies for Latin America. Most American national banks like the World Bank, the US Treasury, and more accepted these reforms and joined hands in mitigating the Latin American debt crisis. Post this, the Consensus was widely accepted throughout the world, especially in those developing countries that have taken financial loans from the United States of America. From highlighting the importance of fiscal discipline to demanding tax reformations, this Consensus played a crucial role in stabilising the global economy after the Berlin Blockade and Communism.
A brief introduction to the Latin American debt crisis
Due to the economic system of the Latin American countries being in disarray, when two sudden and most unexpected oil price shocks hit the countries in the 1970s, they weren’t able to offer any solution for damage control. As the economy started to go haywire, with almost no revenue generated from these countries, soon they had to take loan from US commercial banks.
As they continued to take money, by the end of the 1970s, the Latin American countries owed about $29 billion. This further escalated to $159 billion in 1978 and $327 million by 1997. With such a huge international outstanding loan, a debt crisis formed in the countries. Residents were scared about their economic state as the countries suffered from high inflation rates.
Ideation and formation of the Washington Consensus
The Latin American countries were considered military colonies, mainly as the natives used this word. It is crucial for everyone to understand that the Consensus is not just a set of policies to stabilise the economic state. Rather, it will have ways to help the developing countries grow and flourish. There are certain restrictions though, especially those who want to take help from the augmented Washington Consensus. Four major organisations from the US are involved at present:
- IMF or International Monetary Fund
- World Bank
- US Treasury
With the help of all the policies, Williamson explained the probable changes to be introduced for mitigating the macroeconomic distress and debt crisis in the Latin American countries through the Washington Consensus. The two main areas considered were the introduction and prevalence of the free market and reduction in state involvement in economics. Along with Williamson, several other economists from top US institutions believed that the Latin economy needed to be brought under the federal government for a unified approach and operation.
10 policies of the Washington Consensus
To define what is the Washington Consensus, it is crucial to consider all its ten policies that Williamson shared.
- Reduction of domestic expenses and dependency on government funds will mitigate the national budget deficiency
- Focusing on areas with higher economic returns like education, social services, judicial and administrative infrastructure, and others will improve the revenues and reduce dependency on national funds.
- Reformation of the taxation system will help the government levy more restrictions on the expenses of the funds, make tax exemptions more meaningful, and improve collection of the funds.
- Liberalisation of the financial market will help everyone to make exchanges, savings, deposits, take credits, and more at market-decided interest rates.
- Adoption of a single rate for exchanges will help in promoting economic growth throughout the country.
- Reduction in restrictions for trades shall allow increase in revenues through exporting and also saving the funds via importing goods at lower costs than self-manufacturing.
- Abolishment of FDI investment barriers will help organisations gain more visibility in the global market. Thus, expansion will become easier with potential increase in efficiency and productivity.
- Privatisation of state-owned companies via the augmented Washington Consensus will make them independent, and they won’t have to use the government funds further.
- Eliminating policies and allowing competition will compel the Latin American governments to introduce new and more efficient reforms for survival.
- Inclusion of secure property rights shall protect intellectual properties from any sort of damage.
Impact of the Washington Consensus
Even though it is clear from the above that the policies will reduce the participation of the state in the economy and finances. However, Williamson didn’t provide any outlook for what the states will look like, or how much power they can hold. Besides, the Consensus somehow opened channels of corruption and financial inefficiency in several poor countries. Apart from this, several economic leaders have deemed the Consensus policies to be authoritarian and meant for countries having huge financial debts only. These are a couple of impacts that the Consensus has till date on several developing countries.
From fiscal discipline to the liberalisation of state-owned financing firms, multiple aspects were considered under the Washington Consensus. Williamson preached the idea of establishing a stability in the country’s economy by opening opportunities for free trades and relinquishing the state’s control over finances. This is why he formulated policies that can reduce international debts by decreasing domestic expenses and increase revenues from foreign sources. Even though the Washington Consensus has a clean and transparent vision, no further study is present with proper studies that can show the results of this Consensus. This is why the advantages of WC are still debatable.