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Washington Consensus



The Washington Consensus is a phrase initially coined in the early 1990s to describe a relatively specific set of ten macroeconomic policy prescriptions that were considered by the phrase's originator to constitute a "standard" reform package promoted for crisis-wracked countries by Washington-based institutions such as the International Monetary Fund, World Bank and U.S. Treasury Department.


 


Subsequently, the term acquired a second, broader connotation, being widely applied, generally in a pejorative sense, to describe a less-precisely stipulated gamut of policies stated to be promulgated by so-called neoliberal economists (again, a term most often applied pejoratively) as a formula for promoting economic growth in many parts of Latin America and other parts of the world. In this sense, it is argued that the Washington Consensus policies propose to introduce various free market oriented economic reforms which are theoretically designed to make the targeted nation's gross domestic product more like that of First World countries such as the United States.


 


The Washington Consensus is the target of sharp criticism by individuals and groups who argue that it is a way to open up less developed Latin American countries to investments from large multinational corporations and their wealthy owners in advanced First World economies. As of 2006, several Latin American countries are led by socialist governments, some of which openly oppose the Washington Consensus. Critics frequently cite the Argentine economic crisis of 1999-2002 as the case in point of why the Washington Consensus policies are flawed, as they argue that Argentina had previously implemented most of the Washington Consensus policies as directed.


History

The concept and name of the Washington Consensus were first presented in 1990 by John Williamson, an economist from the Institute for International Economics, an international economic think tank based in Washington, D.C. Williamson used the term to summarize the commonly shared themes among policy advice by Washington-based institutions at the time, such as the International Monetary Fund, World Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of Latin America from the financial crises of the 1980s. However, Williamson rejects subsequent use of the term to cover a more general neoliberal agenda.


 


In 1980, conservative writer Michael Novak called the model "democratic capitalism". According to Joseph Stanislaw and Daniel Yergin, authors of The Commanding Heights the term “Washington Consensus†was developed "in Latin America, by Latin Americans, in response to what was happening both within and outside the region." They argue that the "Washington Consensus" was a conspiracy theory developed to shift blame from their own governments' failures to market failures. They also state that the term's creator, John Williamson, has "regretted the term ever since", stating "it is difficult to think of a less diplomatic label" (The Commanding Heights: Battle for the World Economy, pg. 237).


List of Reforms

The consensus included reforms that should be undertaken from 1990 (these reforms were also summarized by the World Bank in its year 2000 Poverty Report):


 


* Fiscal policy discipline;


* Redirection of public spending toward education, health and infrastructure investment;


* Tax reform – Flattening the tax curve: Lowering the income tax rates on proportionally high tax brackets (typically above median income), and raising the tax rates on the proportionally low tax brackets (typically below median income); lowering the marginal tax rate;


* Interest rates that are market determined and positive (but moderate) in real terms;


* Competitive exchange rates;


* Trade liberalization – replacement of quantitative restrictions with low and uniform tariffs;


* Openness to foreign direct investment;


* Privatization of state enterprises;


* Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,


* Legal security for property rights.

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