Washington consensus

In the 1980s, the Latin American countries faced various economic crises including huge external debts, crises believed to have been caused by accumulated issues originating from ISI policies and a hike in international oil prices during the 1970s. Imported oil required quick cash; but the inward looking orientation of ISI policy that had been adopted for several decades did not allow them to raise export earnings. As a result, the Latin American countries experienced an imbalance in foreign exchange, resulting in increased external obligations (Franko, 2007).

In an effort to relieve the debt burden of the Latin American countries, John Williamson argued for the need to help the debtor countries to overcome the countries’ burden using good policies instead of the Brady Plan1. Williamson coined the term ‘the Washington Consensus’ for a set of policies that seemed to reflect the broader views of various Washington-based organisations. The consensus has been explicitly associated with ten policy instruments: (1) fiscal discipline; (2) controlling budget deficits; (3) prioritizing public expenditure on basic health care, education and infrastructure; (4) financial liberalization; (5) ensuring a competitive exchange rate; (6) trade liberalization; (7) liberalization of inward foreign direct investment; (8) privatization; (9) deregulation; and, (10) securing the informal sector to gain property (Williamson, 2008, pp. 2-18).

Several points indicated that the Washington Consensus underlined the views of free markets and liberalisation paradigms as an approach to generating efficient economy and growth. According to Öniş & Şenses (2005), this efficient market view

1 _{This was a U.S. strategy that emphasized debt-forgiveness for highly indebted developing}

countries, named after US treasury secretary Nicholas Brady who proposed the debt-reduction agreement ideas; whereby bonds issued by the International Bank for Reconstruction and Development (IBRD) to convert bank loans to mostly Latin American countries into a variety of new bonds to help their defaulted national debts 1980s.

was rooted in the neoliberal orthodoxy's preference for individualism, market liberalism, and a smaller role for governments in the economy.

This view seems to have been widely accepted by the International Financial Institutions (IFIs), the World Bank and the International Monetary Fund (IMF), which began using these policy reforms as a condition of lending to developing countries (Sheng, 2009, p. 110), and as a means to create efficient markets. This approach contrasted with the ISI strategy adopted by many Latin American countries, which embraced heavy reliance on ‘government manipulation of market prices, barriers to entry and access to imports and finance’ (Felix, 1989, p. 1455), all of which appeared to contribute to the debt crisis of the 1980s.

The reduction of government intervention in the market became a general rule for the IMF when dealing with economic crises. But, during the Asian economic crisis of 1997, that mainly affected Thailand, Malaysia, Indonesia and Korea, IMF programs not only accelerated the crisis but turned it into a recession (Stiglitz, 2003). The IMF program in Korea, for example, pursued financial liberalisation and floating of the exchange rate, a combination of which led to wild fluctuations in the Korean Won (KRW). The currency devalued around 90% in two months; but, it stabilised in six months after an aggressive high interest rate policy, as high as 30% (S.-J. Lee & Han, 2006, p. 307). In Indonesia, the IMF program not only impacted in economic and monetary terms, but also led to massive social riots culminating in political regime change. Based on the experience of responding to the Asian crisis, the highly prescriptive application of market liberalization in developing countries was seriously questioned, and led to the setback of the Washington consensus, even the underlying assumptions about minimum state intervention for an efficient market.

Joseph Stiglitz, exploring the dominant economic theory adhered to in the 1970s, showed that market failures were widespread, especially in developing economies rife with imperfections in information, limited competition and incomplete markets. Under these conditions, it is evident that markets are not always operating efficiently. Therefore, it came as no surprise that the Washington consensus prescriptions failed to work as promised (Serra, Spiegel, & Stiglitz, 2008).

According to Williamson (2008), however, the set of policies had been interpreted differently from their initial intention. There were three main interpretations: the first was that the set of policies has been interpreted as ‘bashing’ the state, a new imperialism, the creation of a laissez-faire global economy and, that the only thing that matters is growth of Gross Domestic Product (GDP), and doubtless much else besides’(Williamson, 2008, p. 21). Even though Williamson argued that the ten policy reforms did not have any close relationship to the above, economic historians stated that it was implied, as the developed countries ‘kicked away the ladder’ they had used to climb up to where they are now (Chang, 2003, pp. 24-28). As Chang points out that many developed countries only championed free trade after long protection of their economies, when their technological capacity was unchallenged. Britain, in the 19th century, only championed free trade after longstanding tariff barriers associated with the Corn Laws had been implemented between the period 1721 and 1846. In the early 20th century, Germany applied strong tariff protection to its strategic iron and steel industries, while the USA industries were the most protected in the world until 1945. Viewed from this historical perspective, promoting free trade seems to be primarily about the need to open up new markets for products from the developed countries.

The second interpretation is that the policies ‘refer to policies the Bretton Woods institutions applied towards their client countries’. As Williamson (2008) argues, in the beginning there were no differences, but over time some substantive differences emerged, such as in the interpretation of ‘competitive exchange rate’ and ‘liberalisation of capital flows of FDI’ (p.21). Further Williamson explained that the former deviated from either float their exchange rate cleanly or fix it firmly by adopting some institutional device like a currency board, to competitive exchange rate implying intermediate control. This is important, since both fixed and floating rates can easily become overvalued. Meanwhile, the liberalisation of capital moved towards ‘liberalisation of capital accounts’ rather than towards ‘limited liberalization of capital flows to Foreign Direct Investment (FDI)’. In effect, ‘it was the liberalisation of capital that ignited the Asian crisis of 1997’ (Williamson, 2008, p. 21).

The last interpretation of ‘the Washington Consensus’ was that it should be used “as a synonym for neo-liberalism or market fundamentalism”. The application of the Washington consensus, which was originally designed to provide an answer to the Latin American debt crisis of the 1980s, has been interpreted loosely and treated as a single alternative for economic development policies in developing countries. According to Williamson (2008), however, ‘the failure of the consensus started when the policy became a prescription list, advocated to all countries at all times as many critics have interpreted it to be’ (p.24).