Part I: The failures of so-called ‘Washington Consensus’ School 

Back in 1989, in the backdrop of a disintegrating Soviet Union, ‘Washington Consensus’ as a term was coined. It tried to offer a solution to the chronic indebtedness problem of the developing world, particularly that of Latin America.

The prescription of John Williamson included tax reform (‘broad tax base with moderate marginal tax rates’ that naturally aids more income inequality); liberalizing interest rates (read low interest rates); liberalization of inward FDIs (read free flow of capital); privatization (as a panacea); and deregulation (market knows the best). It actually had a ten-point agenda, out of which I highlighted the five that increasingly have come under attack due to their contributions to the ongoing economic crises since 2008 in the developed world. The history of the destructive role, played by ‘Washington Consensus’ in developing economies, is older.  

While reviewing the history of ‘Washington Consensus’, its creator talked about ‘saving’ only once while looking at the successes of the NICs like Hong Kong, Taiwan or South Korea. It didn’t address the conflict between desired saving rates and low interest rates (or the financial speculations that result out of low interest rate regimes). ‘Washington Consensus’ essentially originated from the mindset that less government is good as observed in developed societies where inequality didn’t rise to the levels where quality human lives became unsustainable for the ‘have nots’. 

Back in 1989, the core problem of developing nations was poverty affecting a significant part of their populace and not stagnating GDP per se (or mounting external debts, those were symptoms), whatever close their relationships may be. Reducing poverty (or generating employment in the developed world) is not same as having higher and higher GDP growth. Marginal tax rates of the few who could afford it, privatization as a panacea, deregulation, etc. didn’t suit the need of the large backward sections of people living below the so-called $1-dollar-a-day in those developing societies. 

Against mounting criticism, John Williamson in 2004 (A Short History of Washington Consensus) admitted:‘When I invented the term (Washington Consensus) I was not thinking of making propaganda for economic reform (insofar as I was contemplating making propaganda, it was propaganda for debt relief in Washington, not propaganda for policy reform in Latin America). From the standpoint of making propaganda for policy reform in Latin America, Moisés Naím (2000) has argued that in fact it was a good term in 1989, the year the coalition led by the United States emerged victorious in the Cold War, when people were searching for a new ideology and the ideology of the victors looked rather appealing. But it was a questionable choice in more normal times…’ 

As the United States remained an unchallenged single superpower in the world over the next decade, more debate on ‘Washington Consensus’ naturally led to different schools of thoughts as its importance grew. Many felt it to be synonymous with the phrase ‘neoliberal policies.’ Wikipedia explains ‘Washington Consensus’ as the term ‘to describe a set of ten specific economic policy prescriptions that John Williamson considered should constitute the ‘standard’ reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department (the so-called International Financial Institutes (IFIs) that can create liquidity in the face of flight of capital from developing nations).

Unfortunately the prescription of cure as formulated by the World Bank or the IMF, under the supervision of the US Treasury, often looked like setting the bond to a pound of flesh from the poor Antonio (indebted nation) in a typical Shylock style.

Naturally there were criticisms due to the ‘standard’ nature of the solution where the problems were all unique. Combining the reputation that economists have in society when it comes to building consensus, people talked of ‘Washington Confusion’ as such policies looked as frivolous as ad-hoc fashion statements for the season. Subsequent attempts to ‘Augment Washington Consensus’ resulted in generating more confusion. Ten more dictums were added, but what were amiss again were the insights of priorities that different situations demanded when one of these recommended dictums clashed with another prescribed one.

From 1989 to 2010, the world has gone through significant changes; and has faced quite a few global crises. Majority of these crises originated from wrong economic policies (partly a result of Washington Consensus?) than misplaced military priorities, as it had been in the past. If global opinion is sought on identifying a country (or a single policy) that has done the best amidst these challenges on the overall front (in inducing growth in its economy that has helped a large section of poor people to come out of poverty and simultaneously have a relatively sustainable domestic economy); the name of China is bound to emerge as a contender.

Surprisingly China didn’t follow many of these dictums of the ‘Washington Consensus’ policies; and it didn’t affect its growth adversely. The vulnerabilities of its economies (over-capacity, bubble in real-estate prices) are a result of the noises in the interface of the economic integration of domestic China with the rest of the world largely following ‘Washington Consensus’ policies.

Part II of the article (The emergence of the ‘Beijing Consensus’) can be found here. 

Ranjit Goswami is a Professor at Indian Institute of Foreign Trade, Kolkata; and is the author of Wondering Man, Money & Go(l)d.  Ranjit is also on Twitter.

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