International Development and the Washington Consensus

A Pluralist Perspective

John Marangos

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9780367200039
• eBook ISBN: 9780429534850
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Entwicklungsökonomie

In this book, John Marangos offers an insightful analytical and theoretical review of the Washington Consensus and its successors among the mainstream. Following an intuitive structure, it explores international development and the Washington Consensus, as a critique through the lenses of Neoclassical economics, Post Keynesian economics, Institutional economics, and Marxist economics. Ultimately, it provides a compelling alternative perspective to the dominant development paradigm, and enables readers to identify the interconnections, interrelationships, and intercontradictions between different frameworks and policies.

It will be a valuable supplementary reading for students, researchers, and policymakers in international development, development economics, heterodox economics, and the history of economic thought.

1
INTRODUCTION
International development and the Washington Consensus

Introduction

Williamson (1999, p. 1) maintains that “the debate on economic policy reform is one which I [Williamson] became engaged almost by accident ten years ago, when I [Williamson] invented the now notorious phrase ‘the Washington Consensus’”. Williamson introduced the term “Washington Consensus” in 1989. The term, as Williamson conceived it, was in principle geographically and historically specific, a lowest common denominator of the reforms that he judged “Washington” could agree were required in Latin America at the time. Williamson (1990a) attempted to outline what would be regarded in Washington as constituting a desirable set of economic policy reforms to stimulate development. “Washington”, for Williamson, incorporated the International Monetary Fund (IMF), the World Bank, and the Executive Branch of the US government, the Federal Reserve Board, the Inter-American Development Bank, the members of Congress interested in Latin America, and the think tanks concerned with economic policy; it is an amalgamation of political, administrative, and technocratic Washington. The Washington Consensus was portrayed as the “the conventional wisdom on the day” (Williamson, 1993, p. 1329), “the outcome of an opinion survey” (Williamson, 1994), “economic common sense” (Williamson, 1996, p. 20), and as “a statement of what ‘serious’ economists ought to believe” (Williamson, 1996, p. 21). The “Washington Consensus was originally used to describe a list of ten reforms that I [Williamson] argued were practically universally agreed in Washington to be desirable in most Latin American countries” (Williamson, 2004a, p. 195). In spite of this declaration, the ten policy recommendations were converted into “the Ten Commandments” for international development policy (Williamson, 2004b, p. 3). Williamson (2003a, p. 320, 2003b, p. 6) also labels the set of policies as the “first-generation” of reforms to distinguish them from what subsequently became known the “second-generation” of reforms. The Washington Consensus was accepted as common wisdom for policies on development and growth.

Despite Williamson’s original conception, the term has evolved to denote a different set of policies than were initially proclaimed. This is due in part to the fact that the father of the term in subsequent writings changed the set of policies by elaborating and expanding them and attempting to incorporate the criticisms associated with the definition and interpretation of the term. The Washington Consensus has been identified as a “neoliberal manifesto” and a debate was initiated as calls were made for the establishment of alternative sets of economic development policies. Those who opposed the policies of the Washington Consensus as a neoliberal manifesto, proposed policies emphasizing social equity, safety nets, and institutional development which, they alleged, were overlooked in the original Washington Consensus. Afterwards, Kuczynski and Williamson (2003) devised a new set of policies labeled “After the Washington Consensus” as a means to call attention to a new set of reforms required to resume growth in Latin America, but this time, as they argue, in a more equitable way (see Chapter 2). This chapter aims to present the original Washington Consensus as outlined by Williamson in contradistinction to the Washington Consensus as a neoliberal manifesto. I will employ a classification strategy, in which Williamson’s original list of the best practices for development strategies is the starting point in the formation of the Washington Consensus. The contradistinction of the two sets of policies is presented in Table 1.1 as a grid in which the rows represent various planks of the policies identified in the consensus, and the columns represent the original Washington Consensus and the Washington Consensus as a neoliberal manifesto. The table also incorporates the major events or intellectual challenges based on which the two sets of policies were founded. This format aims to give structure to the discussion by showing precisely which of the tenets are challenged by Washington Consensus as a neoliberal manifesto.

The chapter is structured as follows: The second section presents the original Washington Consensus as established by Williamson; the third section portrays and contrasts the Washington Consensus as a neoliberal manifesto; the fourth section offers Williamson’s reaction to the Washington Consensus as a neoliberal manifesto; the last section presents the conclusion.

The original Washington Consensus

The genesis of the term “Washington Consensus”, as the “father” of the term, Williamson (1996, p. 15) explains, commenced in 1989, when the inventor of the term was invited to a US Congressional Committee to articulate his support for the Brady Plan. The Brady Plan, the principles of which were first articulated by the US Treasury Secretary, Nicholas F. Brady, in March 1989, was designed to address the debt crisis of the 1980s. The debt crisis began in 1982, when several countries, primarily in Latin America, confronted by high interest rates and low commodities prices, admitted their inability to service hundreds of billions of dollars of their commercial bank loans.

Williamson argued that there was mistaken cultivation of the belief in developed countries that Latin America had failed to implement a structural adjustment program. In contrast to this belief, Williamson acknowledged that many Latin American countries had started to implement outstanding deep economic reforms. Per se, Latin America deserved support in the form of debt relief. A few weeks later, Williamson presented a seminar at the Institute of Development Studies at Sussex on the same theme. At this time, he reiterated his support for the Brady Plan and debt relief for Latin America. As the creator of the term explains, the term originated from an attempt to answer the following question posed to him by Hans Singer during the seminar: “What were these ‘sensible’ policies that were pursued in Latin America?” (Williamson, 2000, p. 254). To respond to this question, Williamson outlined a list of the ten reforms which he thought command general support in Washington, baptizing the set of policies as the “Washington Consensus”.

In November 1989, the Institute for International Economics convened a conference to investigate what was actually happening with the economic reforms in Latin America. Structural adjustment in Latin America had the goal of moving to a market-based economic system from a traditional statist economic system (Williamson, 1990b, p. 402). In this conference, Williamson (1990a, pp. 7–20) found the opportunity for the first time to reveal his newfound term in a background paper that would spell out the substance of the policy debate for the conference, entitled What Washington Means by Policy Reform? The background paper was sent to ten authors who had agreed to write the country studies for the conference. The papers presented were subsequently edited by Williamson (1990c) and published in a book entitled Latin America Adjustment: How Much Has Happened? As a result, the term “Washington Consensus” became public knowledge.

Williamson (1990a, 1993, 1994, 2004a) identified and debated ten policy instruments – regarded as “The Ten Commandments” (Williamson, 2004a, p. 205, 2004b, p. 3) – whose proper deployment could muster a reasonable degree of consensus in Washington. The ten reforms listed “were practically universally agreed in Washington to be desirable in most Latin American countries” (Williamson, 2004a, p. 195). The consensus or “first-generation” policy reforms, as Williamson (2003a, p. 320) later named them, signified a reconsideration of what used to be traditional economic development advice: import substitution, nationalization, planning, and use of the inflation tax to raise savings. The erroneous dominant perception at the time, based on Williamson’s judgment, was that developing countries benefit from inflation (to reap the inflation tax and boost investment); the leading role of the state in initiating industrialization; and import substitution. As of 1989, systematic thinking on international development had produced a set of multiple and complementary reforms that specified the need to establish property rights and effective market incentives, and to maintain macroeconomic stability.

Williamson (2000, p. 262) insisted that the Washington Consensus policies accelerate growth and eventually equitable distribution of income, as a result of macroeconomic discipline, a liberal market economy, and openness to the world (at least in respect of trade and foreign direct investment (FDI)). These reforms had long been regarded as orthodox in the Organisation for Economic Co-operation and Development (OECD) countries, as Williamson argued, “but there used to be a sort of global apartheid which claimed that developing countries came from a different universe … The Washington Consensus said that this era of apartheid was over” (Williamson, 2002a, p. 2) and this “is something to be celebrated rather than mourned” (Williamson, 2004b, p. 12). The goal of the conference and the subsequent writings of Williamson were to use the term to impress on Washington that Latin America deserved debt relief under the Brady plan. The region had rejected the economic development mentality of the 1960s and the time was right to validate that Latin America had implemented reforms that Washington would agree were required and hence should be funded.

The policy framework of the Washington Consensus was the part of the Reagan-Thatcher agenda that had endured and received the general agreement, “even though a good part of the original agenda was pretty nutty” (Williamson, 2002b, p. 5), such as monetarism, supply-side economics, minimalist government and therefore minimal taxes, and capital account convertibility. Williamson (1999, p. 2) is in favor of government action, as an efficient economy requires a government to preserve a stable macroeconomic environment, to reduce unreasonable uncertainty and to provide public goods. In addition, market failures can be addressed only by government action, in the presence of externalities, monopolies and income inequality. Especially with regard to the latter,

the old and necessarily divisive question of income distribution is back on the table (some of us think it was scandalous that it was ever off the table, but the fact is that, at least in Washington, it practically disappeared as an issue in the 1980s).

(Williamson, 1999, p. 16)

Any remaining activity does not require government action, thus can be exercised by the private sector. Kuczynski (2003, p. 25) reaffirmed that the conference omitted ideologies like supply-side economics, monetarism, and socialism, and instead, developed an agenda based on mainstream economic thought which recognized the importance of both the market and the state.

The Washington Consensus was the lowest common denominator of orthodoxy during the years of the dominance of Ronald Reagan’s conservative ideology (Williamson, 1996, p. 13). This set of policies prevailed in the mainstream economic thought, instead of being dismissed once Ronald Reagan retired. The Washington Consensus was a review of international development poli...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of tables
• Prologue
• 1 Introduction: international development and the Washington Consensus
• 2 The evolution of the Washington Consensus
• 3 Neoliberal economics and international development: the neoclassical response to the Washington Consensus
• 4 The Washington Consensus and Shock Therapy process of transition
• 5 Post Keynesian economics and international development: the Post Keynesian response to the Washington Consensus
• 6 Institutional economics and international development: the institutional response to the Washington Consensus
• 7 Marxist economics and international development: the Marxist response to the Washington Consensus
• Index