Washington Consensus

Economist John Williamson of the Peterson Institute for International Economics coined the phrase “Washington consensus” in 1989. As a reaction to the macroeconomic turmoil and debt crises of the early to mid-1980s, Latin American politicians supported several programs to resolve the debt problem. These measures were also supported by the International Monetary Fund, the World Bank, and the US Treasury.

Though Williamson meant his list to be descriptive rather than prescriptive, the phrase took on a life of its own. From the 1990s, it became associated with privatisation and loosening of state control over national economies after the collapse of communism. While some economists are suspicious of the term “Washington Consensus,” after decades of global economic turmoil and various policy triumphs, others believe it to be an invaluable resource.

As outlined by the Washington Consensus, policy priorities for public spending should shift from subsidies to health and education, and taxes should be reformed. Other Washington Consensus policies include:

• Allowing the market to determine interest rates and maintaining a competitive exchange rate
• Liberalising trade and foreign investment
• Privatising state-owned enterprises
• Removing regulatory barriers to entry and exit
• Safeguarding property rights

Williamson pointed out that these policies defied common thinking in emerging nations, many of which had adopted state-dominated systems in the 1950s.

Early Arguments About Poverty

Keynesianism, structuralism, and a basic form of welfare supported the orthodoxy’s view of development. Most areas of development economics adopted a modernisation-to-advanced-capitalism paradigm as their primary methodological framework mainly because of Walt Whitman Rostow’s five phases of economic evolution.

State coordination of large-scale investment projects, including public ownership in critical industries, if necessary, was thought to be vital to building the economic infrastructure needed for private sector-led industrialisation. Fast growth, job creation, macroeconomic stability, and a sustainable balance of payments depended on this “big push” strategy, which was expected to eliminate poverty by trickle-down effects, mainly through job creation. As a result of economic expansion, both poverty and inequality were alleviated. In the early stages of development, some growth in inequality was inevitable as the disparity would aid capital accumulation. A Keynesian theory of consumption suggests that the affluent have a more significant marginal propensity to save than the poor.

Economic Growth, Poverty, and Inequality

Although they were aimed against an orthodoxy that now seems progressive in contrast to the present, the power of the proposed radical alternatives demonstrated this. The many varieties of dependence theory, which propagated the concept that progress and underdevelopment are two sides of the same coin and that independent development is only feasible under socialism, marked a significant challenge to the orthodoxy.

When it became clear that solid economic expansion in the 1960s and early 1970s was accompanied by widespread poverty and growing inequality, the debate over rival development methods was reignited. This was a surprise, considering that the trickle-down effect would naturally reduce poverty.

This contrasted sharply with post-war Keynesian social-democratic triumphs in the wealthy nations and the economic successes of countries based on Soviet and Chinese models.

A joint publication of the World Bank’s Hollis Chenery and the Institute for Development Policy, Redistribution with Growth, was released in 1974.

The World Bank’s previous policy of funding “large push” economic initiatives while relying on market mechanisms to eliminate poverty and inequality has been questioned by this research. In response to Growth and Redistribution, an assessment of the World Bank was initiated.

The World Bank’s focus on capital-intensive growth and maximising the investible surplus, as they seem to result in income and wealth concentration and a lack of job generation, is problematic. For some time, it had been proposed that the World Bank’s new priorities should be to promote labour-intensive industries, as well as education and infrastructure for the poor, particularly in small-scale agriculture (which is now considered to be at least as productive as large-scale production), as well as land and other assets transfer to the poor. Policies aimed at enhancing the well-being and productivity of low-income people and expanding access to essential services like healthcare, education, and food were expected to underpin these initiatives.

They never had time to mature and become fully implemented due to shifts in the global political economy. As a result, resources that might have been used to assist “redistribution with growth” were diverted away from the poorer nations.

On the other hand, the economics profession made a significant turn towards monetarism and the associated supply-side and new classical economics. After the 1980s neoliberal consolidation in the United States, the United Kingdom of Great Britain and Northern Ireland, and others, these elements of the mainstream became canonical. Rent-seeking and corruption were more critical issues in development economics. The developing nations were held responsible for prolonged poverty, particularly for their refusal to adopt the “right” economic theory and policies. A distributional approach was clearly out of bounds from this perspective.

Post-Washington Consensus

Dissatisfaction with post-Washington Consensus policies has risen since the 1990s, with several Washington institutions feeling the effects. IMF officials emphasise the “virtues” of reform and blame impoverished nations for their shortcomings, despite their lack of progress. Therefore, governments should “do more of the same, and do it well,” according to the IMF. Starting with East Asian success and its connection to the distribution of income and assets, mass education, and state-guided investment, World Bank programs have been evaluated more closely.

After Joseph Stiglitz was named chief economist in 1997, it was clear that the World Bank was departing from the neoliberal dogma. Thanks to Stiglitz’s influence, new Institutional Economics (NIE) is a mainstay at PWC.  Since 1999, Stiglitz’s ideas have significantly impacted the development discussion, as shown by his Nobel Prize in 2001 and subsequent high-profile appearances in these debates.

Conclusion

Instead of an approach emphasising market competition and the benefits of (ideal) markets, the post-Washington Consensus focuses on the economic activity’s institutional framework, flaws in markets, and what may happen if institutions vary or change. Conventional stabilisation programs have long-term and short-term negative repercussions, and the post-Washington Consensus opposes the Washington Consensus’s uncompromising opposition to state involvement.

The post-Washington Consensus may provide a complete picture of economic progress. For example, the post-Washington Consensus acknowledges that social relations, property rights distribution, work patterns, urbanisation, and family structures, among other things, have undergone profound changes as a result of development and that a focus on macroeconomic aggregates is inadequate and potentially misleading. Accordingly, the post-Washington Consensus policy is state-friendly, but only in a limited way.