Beyond the

Washington Consensus
B
Y THEIR nature, the heady times of 1989 were states vulnerable to the side effects of globalization, such as
given to hyperbole, with Francis Fukuyama declar- surging flows of private short-term capital that could exit a
ing the “End of History.” The Berlin Wall came country as swiftly as they entered.
tumbling down and communist regimes were Around the world, 10 middle-income developing countries
ousted across Eastern Europe. Soviet troops pulled out of experienced major financial crises between 1994 and 1999 that
Afghanistan. Even in China, where the military abruptly sup- damaged living standards and, in some cases, toppled govern-
pressed a wave of protest, an astonished world watched as a ments and left millions worse off. Suddenly, policymakers
solitary man stood defiantly to halt the advance of a column were confronted by the new issue of financial contagion—the
of tanks in Beijing’s Tiananmen Square. risk of a crisis spreading from one country to another—and
It was in this era of sweeping political change, when capital- economists questioned the pace and sequencing of deregula-
ism appeared triumphant and the Cold War was almost over, tion and liberalization. Markets were a bane as well as a bene-
that economist John Williamson coined the term “Washington fit, and there was a new emphasis on the need for governments
Consensus” to describe a set of market- to ensure that strong domestic institutions
oriented reforms that the sluggish state- and policies were in place before opening up
directed economies of Latin America could
The term became a their economies to flighty foreign capital.
adopt to attract private capital back to the lightning rod for those The international financial institutions
region following the crippling debt crisis of were often seen as the handmaidens of the
the “lost decade” of the 1980s. As disenchanted with Consensus, and the term became a lightning
Williamson explains on the following rod for those disenchanted with globaliza-
pages, although this 10-point policy pack- globalization and tion and neoliberalism or with the perceived
age was originally designed as a reform neoliberalism or with the diktats of the U.S. Treasury. In September
agenda for Latin America, it quickly became 1998, Jeffrey Sachs described the Consensus
seen as a model for the wider developing perceived diktats of the in the Economist as “phony” and called for “a
world. It emphasized macroeconomic (par- shared stewardship between rich and poor.”
ticularly fiscal) discipline, a market econ- U.S. Treasury. The reform agenda evolved into long “must
omy, and openness to the world economy do” lists for developed and developing coun-
(at least with respect to trade and foreign direct investment). tries alike. The need for competitive exchange rates became the
The Washington Consensus helped fill the need for an need for flexible or (maybe) firmly fixed exchange rates, with
economic policy framework following the discrediting of treacherous waters in between. Consensus begat Consensus. The
central planning and import-substitution trade strategies. As latest version—the 2002 Monterrey Consensus—has 63 action
Moíses Naím pointed out in the spring 2000 issue of Foreign points, including not just aid and economic issues, but also gov-
Policy, “The debt crisis of the 1980s and the end of the Cold ernance, corruption, and human rights.
War made it impossible for governments to sustain eco- Today, there is fresh debate about the way forward and the
nomic policies that were not anchored in sound macroeco- role of the international financial institutions. Many regions,
nomic policies or that were based on an adversarial posture including Latin America and Africa (see pages 14–20), have
toward foreign investment.” their own agendas, complemented by a complex international
Latin American governments championed the Consensus package of development goals and trade negotiations, and
in the early 1990s, and the policy agenda delivered some of Williamson is now promoting a revised blueprint that he
the things it was supposed to—healthier budgets, lower infla- hopes will leave behind the “stale ideological rhetoric of the
tion, lower external debt ratios, and economic growth. But 1990s.” What is his new agenda called? Anything but
unemployment rose in many countries and poverty remained “Washington Consensus II,” he suggests.
widespread, while the emphasis on market openness made Jeremy Clift

Finance & Development September 2003 9