Washington Consensus

 

Introduction:

The Final Two Decades of the Twentieth Century, theory and its development along with practice that is dominated by an overarching paradigm that placed market forces at the center of the policy. (Financer George Soros, 2002) sees this paradigm as “market fundamentalism”. It is interchangeably used as the term “Washington Consensus” by the other businessmen and researchers (John Williamson, 1990). It is referred as “neoliberalism” in Latin America. Ordinary People call it “free-market economics”. The term “Washington Consensus” is composed of ten characteristics as identified by Economist John Williamson:

Fiscal Discipline, Redirecting Public Expenditure, Tax Reform, Financial Liberalization, Adoption of Single Competitive Exchange Rate, Trade Liberalization, Elimination of Barriers to Foreign Direct Investment, Privatization of State-Owned Enterprises, Deregulation of Market Entry and Competition and Secure property Rights.

These ten characteristics and their reference to the “Washington Consensus” means that these are permitted under the ideas shared from time to time by the power circles of Washington. These ideas must include US Congress and Administration on one hand and International Institutions such as IMF and World bank on the other. All of this should be supported by the think tanks and the influential economists. At this point it must be noted that theoretical foundations of this concept are nothing else but are the neoclassical economics espousing firm belief in the “invisible hand” of the market. The rational distribution of the economic actors’ and a minimal view of states’ economy and regulation. With the development of Washington Consensus, the old theory of “Dependency School” was retreated in term of economic development (Naim,1999). The concepts such as neoclassical economics and methodological individualism were also developed and replaced by Washington Consensus. The Development Economics was the in charge and it had provided the policies and guidelines prior the Washington Consensus.  African Government is trying to promote the industrialization and improve the exports. The local production id encouraged to reduce number of imports and to promote the employment. The breakout model as prescribed by Prebish-Singer hypothesis (unfavorable terms for the export and local manufacturing of the import items). The Washington Consensus can act as a universal and applicable practical model in developing countries. The local discrimination in the model can be expected as per the implementation in a certain country.

The Policies of Washington Consensus are applied in Africa, Latin America and Asia for more than two decades. The Emerging Countries in Eastern Europe and Central Asia are also considering Washington Consensus.

The intervention is composed of two stages: where the first one focuses on the macro economic stability and structural adjustment programs and the other one includes the objectives to improve institutions and reduce corruption by making infrastructure more efficient (Naim, 1999). The conditionality as experienced by wealthy countries is playing a vital role in order to propose solutions for indebted countries and to continue macroeconomic stabilization reforms. This also provides the basics for structural adjustment programs. The crisis of the debt due to which Latin American Countries and African Countries suffered in 1970’s and 1980’s, caused an increase in dependence on the external loans. So, these countries are left with no option but to accept the terms and conditions and follow the prescriptions as defined by the system to access financing.

 

Issues Regarding Implication of Washington Consensus:

The Policies of Washington Consensus were being criticized from the very beginning in 1990’s. The leading economists were seeing this policy to be a threat to the global economy and the main cause of financial crises. Chief Economist of the World Bank, (Joseph Stiglitz, 2003) criticized that the policies which were prescribed by the IMF against financial crises in Russia and Asia. Paul Krugman favored the control over capital flows by the Asian Governments in 1998. This formulated the basis of the debate where leading economists either supported or opposed the policies of IMF. Those who are in the favor of the Washington Consensus insist on the stabilization of the exchange rates at the time of crises by public budget cuts and higher taxes. Other recessive measures and increased interest rate was also favored by those who are in favor of Washington Consensus. Those who are against the Washington Consensus criticized its policies and commented that this policy might lead to the recession. Stiglitz is also of the view that sharp interest rates would deepen the crises (Stiglitz, 2003).

It can be observed that these policies can have devastating impact on some of the countries like Sub-Saharan Africa. Economists believe that promotion of economic stability and the liberalization can cause a disproportionate effect on poor. This will eventually lead to increase in poverty and unequal distribution of the income. World Bank and other International Funding Institutions believed that these policies were made to favor the developing countries. According to the Funding Institutions, compensatory programs are launched as to make the financial and economic system of the country much stronger. One thing is for sure that these macroeconomic adjustments and structural stabilization caused an unrest which contributed to recrudescence of a number of civil wars in 1990’s. Later, in 1997 the Asian Crises also raised questions regarding de-regulation in financial market. The limits of the Washington Consensus and the policy-based impact of it on various parts of the Globe are also observed by various economists.

Recommendations and Conclusion:

Washington Consensus orthodoxy is developed by the blossoming alternatives and different kind of approaches that are refreshing and efficient. These alternatives were the part of the previous prevailing system and are to be taken as “part of the system”. This means that these dominant policies need to be revolutionized in order to be more effective and problem solving. The polished concepts such as evolution in the pre-existing system and institutional economy and neo-structuralist economy resurfaced. The Washington Consensus is opposed by many economists because they believe that it caused devastating impacts on the economical condition of the countries. IMF and World Bank on the other hand are of the view that the policies are not that much harmful but are mis understood to be a threat to the economic stability of the country. The policies as highlighted under the definitions of Washington Consensus are to be reconsidered and efficient reforms should be introduced in the pre-existing system in order to make economic and trade reforms in different countries to help them develop. In current position the ideology is guided by the Western policy makers and it is then imposed to the rest of the World. The Truth is that the Ideological Supremacy of the West is not an accident. The post-colonial theories and the philosophical cultural studies opened the field of political economy.

 

References:

1)      Lopes, C. (2012). “Economic Growth and Inequality: The New Post-Washington Consensus*”. RCCS Annual Review, (4).

 

2)      Broad * †, R. (2004). “The Washington consensus meets the global backlash: shifting debates and policies”. Globalizations, 1(2), 129-154.

 

 

 

3)      George Soros. En.wikipedia.org. (2021). available at, https://en.wikipedia.org/wiki/George_Soros. [(Last Visited 7th Mar 2021)].

 

 

4)      What Washington Means by Policy Reform. PIIE. (2021). available at, https://www.piie.com/commentary/speeches-papers/what-washington-means-policy-reform. [(Last Visited 7th Mar 2021)].

 

 

5)      (2021). available at,  https://www.imf.org/external/pubs/ft/seminar/1999/reforms/Naim.HTM. [(Last Visited 7th Mar 2021)].

 

 

6)      Joseph Stiglitz. En.wikipedia.org. (2021). available at,  https://en.wikipedia.org/wiki/Joseph_Stiglitz. [(Last Visited 7th Mar 2021)].