THE WASHINGTON CONCENSUS

The last two decades of the 20th century were dominated by one overbearing policy that
places emphasis on market forces. This policy was known as the Washington consensus, a
term that was coined by John Williamson. The principles of the Washington consensus
are as follows: privatization, deregulation, debt crisis management, trade and financial
liberalization. In Latin America the policy was known as neo-liberalism while many
simply called it “free market economics.” This policy not only dominated governments
but also corporate entities, international financial institutions and academic circles. The
Washington Consensus policies provided a liberal, unregulated privatized space for
capital to become global. It dominated development theory and practice in the 1980’s and
the 1990’s.

The Washington consensus was borne out of the acknowledgement that the involvement
of the state in trade was the primary reason for weak economies around the world. It was
therefore imperative that the market be freed from the intervention, large public sectors
and controls. It was proposed that the involvement of the state would gradually be
decreased through a systematized program that entailed a reduction in public spending,
liberalization of trade, lifting the control of exchanges and liberalizing the key prices such
as interest rates. The efficient allocation of resources by government would be
determined by impersonal forces in the market.
The Washington Consensus triggered a wave of reforms across Latin America, Sub
Saharan Africa and Eastern Europe. There was little conviction among the governments
in Sub Saharan Africa but they went ahead to dismantle marketing boards, privatize state
corporations, open up trade and fast track efforts to cut down inflation. However in spite
of the resounding efforts invested towards implementing the Washington Consensus, the
results have not been that good. There has been a growing concern over the state of Sub
Saharan economies post Washington Consensus in addition to Latin America markets that
are still on the decline. It is against this background that this paper shall critically
examine the Washington Consensus based on the gains and losses made following its
implementation.

The effect of the Washington consensus

The main goal of the Washington Consensus was economic growth. However in John
Williamson’s own words, the consensus” had little to say on social issues and almost had
nothing to say on the environment.” On the ground where the policies were being
implemented the results were evident: there was an increase in inequity, increased
damages to the environment and a decrease in the benefits and rights of the employees.
There were little signs of the promised aggregate economic growth coming to fruition.
The beneficiaries were a select few among them large corporations that had cashed in on
privatization, a few workers in the exporting zones and some consumers who benefited
from a reduction in the prices on the goods. As a result, the effect of the Washington
Consensus was therefore a one sided policy that had little benefit for the majority. This
majority were casualties and they included workers, small scale farmers, women, small
and medium enterprises, health care, human rights and democracy, indigenous people and
diversity in society.

Decline in the performance of the world economy

Studies on the world economy indicate that the performance of the world economy was
worse during the period of the implementation of the Washington Consensus as compared
to the period before. This cast doubt on the policies given that it was initially lauded as
the policy that would provide a much needed boost in the world economy. The gap
between the developed and the developing countries became wider with disparities
appearing among the Third World countries. For instance, countries in Latin America and
Sub Saharan Africa seem to have sluggered in the period of the implementation of the
Washington Consensus while there was a remarkable growth among the Asian nations.
There was a stagnant investment performance and underwent de-industrialization among
the nations in Latin America and Sub Sahara Africa. The 1990’s saw the countries in
Eastern Europe apply “shock therapy” to their economies as they sought to liberalize and
privatize in line with the Washington Consensus.
Not only was economic growth stunted during the era of neo liberal restructuring but the
degree of inequality also increased during this period. It is estimated by the World Bank
that the number of people living on less than a dollar a day remained almost constant in
the period between 1987 and 1999. However there was a decline in the overall poverty
rate in the same period from 28.3% to 23.3%.

This decline can be attributed to the good economic performance of Asia especially
China. The exclusion of China therefore means that the overall decline in the overall
poverty rate is from 28.3% to 25%. China was successful during in this era after taking
up the shape of a market economy with the encouragement of inward investment,
increasing in the exports and allowing the peasant farmers to be in charge of what they
produced. This resulted in at least 200 million Chinese people being lifted out of poverty.
It is evident that the implementation of the neo liberal policies initiated a variation in the
performance of the economy among different nations of the world. There is little
evidence to suggest that the implementation of the Washington Consensus by different
nations could have resulted in sustained economic growth. Even in cases where there was
economic growth after the implementation of the policy, this was not sufficient to deal
with the problem of endemic poverty as was the case in Turkey and Argentina.

Argentina in the period after war embarked on an aggressive plan to implement the neo
liberal reforms as an attempt to stimulate economic growth. With a strict adherence of
advice from the International Monetary Fund, Argentina was successful in the formative
years of the implementation where they managed to stem inflation to a single digit figure.
This aided in the attraction of huge capital flows and the 1990’s, Argentina was soaring
high economically under the implementation of the Washington Consensus. It was
singled out as a model by most international financial institutions. However the debt led
growth crumbled seriously in 2001after an economic crisis which was accompanied by
massive protests.
The rapid implementation of the Washington Consensus proved to be disastrous to the
countries in Eastern Europe. It has been termed as the complete opposite of the economic
miracle that was experienced by the countries in Asia in the 1960’s and the 1970’s. This
was as a result of an overzealous implementation of the market liberalization policies
after years of being a statist pack. There was little or no safeguards at all in place hence
the after effects spilled over fast to the economies of these nations.

One of the countries that had been quick to implement the Washington Consensus was
Turkey. Initially, there was a steady rise in the economic prowess which led to Turkey
often being cited as a case in point by financial institutions. However the success was
short lived after opting to open up capital accounts at the turn of the 1990’s without
having achieved macro economic stability and putting in place proper market safe guards.
Turkey is still reeling under the effects of the economic crisis in 2001 hence adds to a
growing list of countries that initially experienced growth under the Consensus only for
the growth to be stunted by debt and financial crises.

Under the neo liberal reforms, countries have experienced a disjointed growth in their
economies marked by premature capital and financial account liberalization. This
premature exposure to the global financial markets has landed several countries in a trap
characterized by short bursts of growth followed by an uncertain flow of capital. The over
reliance of growth that is funded by debt at the expense of culturing local savings and
internal investments has therefore exposed nations to a perennial cycle of poor debt
management, frequent financial crises and vulnerability to speculative attacks.

The volatile flow of capital in addition to the frequency of financial crises has proven to
not only to individual nations but in turn spilled over to the regional and global levels.
They have seriously impeded sustainable economic growth at the level of the individual
state but also at the regional level and the global level in turn. A crisis in the flow of
capital in one nation sends panic to other nations around in terms of driving investors
away since their confidence and their perception is interfered with.
This was seen in the financial crisis experienced in Asia in1997 and in Russia in 1998. In
the aftermath to these financial crises, investors were skeptical about investing their
money in emerging markets for fear that they were a high risk venture that could turn in
hefty losses. As a result, there has been deflation for both the individual nations which
has in turn had an impact on the global economy. The effect spills over to the distribution
of income in addition to increasing the levels of poverty. The effect is mostly felt by the
poor in the country in addition to the middle class who have to bear the brunt of the cost
of increased living standards.

Continuing debate
While there are several nations that initially thrived under the Washington Consensus,
there is growing evidence of countries that thrived in spite snubbing the policy. China and
Vietnam are two such examples. Both nations have successfully entered the export
market by maintaining low wages and attracting long term foreign investments. They
have selectively opted to protect infant industries in addition to implementing an active
industrial policy. India which has also experienced rapid growth in the recent years has
gradually been liberalizing its markets and capital account regime. Malaysia which is
another success story that has deviated from the Washington Consensus has done so by
regulation of short term flow of capital.
The countries that were deemed as the poster success stories of the Washington
Consensus have gradually deviated from it. Chile for instance has effected active state
involvement in the exportation of natural resources in addition to the regulation of short
term flow of capital over the 1990’s. Russia has also sought to regain control over its
economy through the regulation of the capital flow. The countries that have deviated from
the neo liberal reforms include: Poland, Hungary, Czech Republic.

The limited number of countries that consider themselves successful after the
implementation of the neo liberal reforms are trapped in vicious cycle. These countries
find themselves trapped in a cycle of perennial debt to fund their economies while the
local investments and industries dwindle at the expense of foreign ones. There is little
evidence of economic growth and a shift in the overall poverty rates.

In conclusion, it can be said that the Washington Consensus was only beneficial for a
while and to a select few including large corporations and workers at export zones.
However the long term effects have been far more detrimental and outweigh the initial
excitement and growth that was experienced when it was first implemented.

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