Question

Market reforms have long been advocated by such Bretton Woods institutions as the International Monetary Fund and the World Bank. In light of this, how would you explain the widespread adoption of market reforms in the guise of a “Washington Consensus” in the late 1980s? What is the Washington Consensus and why did so many countries in the region turn to the market at this particular point in time?

Answer 1

Washington Consensus is a collective term used for 10 economic policy prescriptions as a part of a “standard” reform package promoted for crisis-wracked developing countries. Washington Consensus was advocated by Washington, D.C.-based institutions viz. International Monetary Fund (IMF), World Bank, and the US Treasury Department. The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy. The term was coined in 1989 by John Williamson. It included the following:

1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP
2. Redirection of public spending from subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates
4. Market determined interest rates.
5. Competitive exchange rates
6. Liberalization of trade
7. Liberalization of inward FDI
8. Privatization of state enterprises.
9. Deregulation and
10. Legal security for property rights.

Some of these implementations were imposed as a condition for receiving loans from the IMF and World Bank. The results of these reforms are much debated. They have been widely criticized. Most criticism has been focused on trade liberalization and the elimination of subsidies, and criticism has been particularly strident in the agriculture sector. Though, in nations with substantial natural resources, criticism has tended to focus on privatization of industries exploiting these resources. Some critics focus on claims that the reforms led to destabilization. Some critics have also blamed the Washington Consensus for particular economic crises such as the Argentine economic crisis (1999–2002), and for exacerbating Latin America’s economic inequalities. The IMF and World Bank started softening their insistence on these policies in the 2000s largely due to political pressures surrounding globalization, but any reference of these ideas as a consensus essentially ended in the wake of the 2008 global financial crisis, as market fundamentalism lost favour. This is called end of Washington Consensus.

The term Washington Consensus has been used more broadly to describe the general shift towards free market policies that followed the displacement of Keynesianism in the 1970s. In this broad sense the Washington Consensus is sometimes considered to have begun at about 1980. Many commentators see the consensus, especially if interpreted in the broader sense of the term, as having been at its strongest during the 1990s.

Some have argued that the consensus in this sense ended at the turn of the century, or at least that it became less influential after about the year 2000. More commonly, commentators have suggested that the Consensus in its broader sense survived until the time of the 2008–2009 global financial crisis.

Following the strong intervention undertaken by governments in response to market failures, a number of journalists, politicians and senior officials from global institutions such as the World Bank began saying that the Washington Consensus was dead.