Sunday, June 19, 2016

The "Washington Consensus"

John Williamson claims credit for injecting the phrase "Washington Consensus" into the world's economic vocabulary in A Short History of the Washington Consensus (2004):

The term “Washington Consensus” was coined in 1989. The first written usage was in my background paper for a conference that the Institute for International Economics convened in order to examine the extent to which the old ideas of development economics that had governed Latin American economic policy since the 1950s were being swept aside by the set of ideas that had long been accepted as appropriate within the OECD. In order to try and ensure that the background papers for that conference dealt with a common set of issues, I made a list of ten policies that I thought more or less everyone in Washington would agree were needed more or less everywhere in Latin America, and labeled this the “Washington Consensus.” Little did it occur to me that fifteen years later I would be asked to write about the history of a term that had become the center of fierce ideological controversy.
In his 2004 paper, Wiliamson lists again those 10 features that he had identified in 1989:

  1. Fiscal Discipline. This was in the context of a region where almost all countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.
  2. Reordering Public Expenditure Priorities. This suggested switching expenditure in a progrowth and propoor way, from things like nonmerit subsidies to basic health and education and infrastructure. It did not call for all the burden of achieving fiscal discipline to be placed on expenditure cuts; on the contrary, the intention was to be strictly neutral about the desirable size of the public sector, an issue on which even a hopeless consensus-seeker like me did not imagine that the battle had been resolved with the end of history that was being promulgated at the time.
  3. Tax Reform. The aim was a tax system that would combine a broad tax base with moderate marginal tax rates.
  4. Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, stressed that views differed on how fast it should be achieved, and—especially—recognized the importance of accompanying financial liberalization with prudential supervision.
  5. A Competitive Exchange Rate. I fear I indulged in wishful thinking in asserting that there was a consensus in favor of ensuring that the exchange rate would be competitive, which pretty much implies an intermediate regime; in fact Washington was already beginning to edge toward the two-corner doctrine which holds that a country must either fix firmly or else it must float “cleanly”.
  6. Trade Liberalization. I acknowledged that there was a difference of view about how fast trade should be liberalized, but everyone agreed that was the appropriate direction in which to move.
  7. Liberalization of Inward Foreign Direct Investment. I specifically did not include comprehensive capital account liberalization, because I did not believe that did or should command a consensus in Washington.
  8. Privatization. As noted already, this was the one area in which what originated as a neoliberal idea had won broad acceptance. We have since been made very conscious that it matters a lot how privatization is done: it can be a highly corrupt process that transfers assets to a privileged elite for a fraction of their true value, but the evidence is that it brings benefits (especially in terms of improved service coverage) when done properly, and the privatized enterprise either sells into a competitive market or is properly regulated.
  9. Deregulation. This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons, or to govern prices in a non-competitive industry.
  10. Property Rights. This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost (inspired by Hernando de Soto’s analysis).
On point 5, he includes a footnote:

I have seen it asserted that a competitive exchange rate is the same as an undervalued rate. Not so; a competitive rate is a rate that is not overvalued, i.e. that is either undervalued or correctly valued. My fifth point reflects a conviction that overvalued exchange rates are worse than undervalued rates, but a rate that is nether overvalued nor undervalued is better still.
Ironically, though the Washington Consensus is almost a synonym for neoliberalism, Williamson himself in the 2004 shows some reticence about the term "neoliberalism," writing in another footnote, "I use the word 'neoliberalism' in its original sense, to refer to the doctrines espoused by the Mont Pelerin Society. If there is another definition, I would love to hear what it is so that I can decide whether neoliberalism is more than an intellectual swear word." Later on, he writes that using Washington Consensus "as a synonym for neoliberalism or market fundamentalism" is something he regards "as a thoroughly objectionable perversion of the original meaning."

Language is funny that way. Just because you introduce a term doesn't mean you control its evolution in real usage.

Williamson was not giving his 10 points as a oppositional analysis. On the contrary, he recalls, "I not only argued that the policies included in my ten points were in fact being adopted fairly widely in Latin America, as our conference had confirmed, but also that this was a good thing and that lagging countries should catch up."

But he also observes:

When I invented the term 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, and a terrible one in the world that George W. Bush has created, where mention of Washington is hardly the way to curry support from non-Americans. It was, I fear, a propaganda gift to the old left.
Naomi Klein in this 2012 video talks about the real-world results of the Washington Consensus policies in Argentina in particular showed how had that particular set of ideas were, Naomi Klein on Global Neoliberalism 04/23/2012:

Williamson in the 2004 paper tries to get his own 1989 version of the Washington Consensus off the hook for the Argentine results by arguing that he wouldn't have recommended two aspects of the Argentine neoliberal regimen as implemented by President Carlos Menem, the peg of the Argentine peso to the dollar and the removal of capital controls, which he implies were the major reasons for the 2001 crisis in Argentina. Those two were obvious proximate causes, but the rest of the package was also very much involved in the disastrous result.

In the latter part of his paper, Williamson pitches for one of the very favorite neoliberal goals, reducing wages and protection for workers. As he puts it in the standard jargon, in "the labor market ... economic performance is being held back by excessive rigidity." Flexibility, in neoliberal (and conservative) language means lower wages for fewer protections for workers. But you're versed in some of the jargon, this following claim justifying the empoverish-the-workers argument is good for a chuckle: "This proposition is such a basic part of economic thinking that it is actually rather difficult to think of a work that conclusively establishes its truth."

In other words, Establishment economists are so committed to the idea that they rarely feel the need to actually try to justify the propaganda claims made in favor of it.

But that doesn't stop him from going on to explain that it's a great idea, especially in Latin America.

Neoliberal policies like those that Williamson advocates while being squeamish about calling them "neoliberal" are the kinds of economic policies currently being implemented by the governments of Argentina and Brazil. Proven failed policies as far as general economic well-being are being given yet another try. Because they do benefit a lot of politically powerful economic interests. Including many American corporations doing business in Latin America.

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