The term Washington Consensus was first used by English economist John Williamson in 1989.
Washington Consensus is a set of free-market economic reform policies suggested by the International Monetary Fund, World Bank and the US Department of the treasury. As all the institutions were based in Washington so the policy prescription was called Washington Consensus by John Williamson.
It was for the developing countries faced with the economic crisis. The Washington Consensus recommended structural reforms, in the free market promoting policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy.
Reform policies of Washington Consensus:
John Williamson was an economist from the Institute of International Economics, an economic think tank based in Washington, D.C. The consensus stated by Williamson included ten broad sets of reform policies.
The 10 points of the Washington Consensus are given below:
- Fiscal policy: Discipline with avoidance of large-scale fiscal deficits relative to GDP.
- Redirection of public spending from subsidies towards the broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment.
- Tax reforms: Adopting moderate marginal tax rates and broadening the tax base.
- Interest rates: The liberalization of interest rates.
- Competitive exchange rates
- Trade liberalization: Liberalization of imports, with particular emphasis on the elimination of quantitative restrictions.
- Liberalization of FDI (foreign direct investment) inflows
- Deregulation: Abolition of regulations in the sense of abolishing barriers to entry and exit, except for those justified on safety, environmental and consumer protection grounds and prudential oversight of financial institutions.
- Security of property rights: Legal security for property rights.
The widespread adoption by the government of the Washington Consensus was to a large degree a reaction to the macroeconomics crisis that hit much of Latin America, and some other developing regions during the 1980s.
- There was a crisis with multiple origins such as:
- The drastic rise in the price of imported oil
- mounting levels of external debt
- The rise in US interest Rates
- consequent to foregoing problems through loss of access to additional foreign credit.
- Many Latin American countries faced no obvious sustainable alternatives to reducing overall domestic demand via greater fiscal discipline, while in parallel adopting policies to reduce protectionism and increase their economies’ export orientation.
- So with the onset of the debt crisis in the developing countries’ world during the early 1980s, the powerful Western countries, and the US in particular, decided that both the World Bank and IMF should work for the management of that debt and also in global development policy more broadly.
John Williamson claimed that he was actually referring to a list of reforms that he felt key players in Washington could all agree were needed in Latin America. As well we know the term later became widely accepted in a pejorative way to describe the increasing harmonization of the policies recommended by those institutions.
Many countries have endeavoured to implement varying components of the reform package, the implementation sometimes being a condition for receiving loans from the IMF and World Bank.
Criticism of Washington Consensus:
The prescription was originally intended to address the real problems occurring in Latin America at the time, and their use later to handle a wide array of other situations has been criticized even by the original proponents of the policies.
- As of the 2000s, socialist or other left-wing governments led several Latin American countries, such as Argentina, and Venezuela, as they have campaigned for policies contrary to the Washington Consensus.
- Other Latin American countries with governments of the left, such as Brazil, Chile, and Peru adopted the bulk of policies included in Williamson’s list, even though they criticized the market fundamentalism that these are often associated with.
- Criticism of the economics of the consensus is now more widely established, as it is outlined by US scholar Dani Rodrik a professor of political economy at Harvard University, in his paper Goodbye Washington Consensus, Hello Washington Confusion?
- The Washington Consensus was also criticized by some Latin American politicians and heterodox economists such as Erik Reinert.
- US economists such as Joseph Stiglitz and Dani Rodrik have challenged the fundamental policies of IMF and the US Treasury, Stiglitz called it ‘ a one size fits all treatment of individual economies.
Anti – Globalization movement
The critics of trade liberalization such as Noam Chomsky, Tariq Ali, Susan George etc, see the Washington Consensus as a way to open the labour market of underdeveloped economies to exploitation by companies from more developed economies.
- The prescribed reduction in tariffs and other trade barriers allows the free movement of goods across borders according to market forces, but labour is not permitted to move freely due to the requirement of a visa or work permit. This creates an economic zone where goods are manufactured using cheap labour in under-developing economies and exported to rich economies for sale at what the critics argue are huge mark-ups, with the balance of the markup- said to accrue to large multinational corporations.
- The criticism is that workers in the Third World economy nevertheless remain poor, as any pay raises they may have received over what they made before trade liberalization are said to be offset by inflation, whereas workers in the First World country become unemployed, while the wealthy owners of the multinational grow even more wealthy
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