Discuss the main components of development policy promoted by the Washington Consensus. On what grounds has it been criticised? Illustrate your essay with specific examples.

This essay aims first to elucidate the key components of the Washington Consensus with regards to development policy and second to present an overview of the various critiques made of it. The term Washington Consensus was made famous by the economist John Williamson who formulated a model reform program that encompassed a set of policy proposals designed to ‘save’ failing economies in developing countries, to be implemented by transnational organisations such as the International Monetary Fund and the World Bank. Williamson’s package of reforms was sparked by the macroeconomic crises faced by many Latin American states during the 1980s and the Washington Consensus came from the attempt to provide a framework by which ailing governments could seek to prevent economic meltdown and collapse. Williamson (2002) has stressed that he originally intended the policy prescriptions promoted by the Washington Consensus as specific to the problems faced by Latin American during the late 1980s and not as some sort of universal panacea to all the difficulties faced by developing nations regardless of their historical, political and socio-economic context.
Let us then examine the central tenets of development policy as envisaged by the Washington Consensus. Williamson (1990) originally formulated a set of ten key recommendations:
Strict Fiscal Discipline: Governments must not allow large budgetary deficits to accrue as doing so would inevitably lead to a balance of payments crisis and thus high inflation, which would have a disproportionately negative effect upon the poorest members of society. This theory held that “large and sustained fiscal deficits are a primary source of macroeconomic dislocation in the forms of inflation, payments deficits, and capital flight” (Williamson, 1990). Such thinking represents an overt dismissal of the Keynesian argument that economic stimulation by increased government spending financed by budget deficits will stimulate the economy and kick-start growth.
Restructuring of Government Expenditure: Public spending ought to be redirected from state subsidies towards “pro-poor” services such as primary heath care and primary education, as well as greater spending on the national infrastructure. Rather than simply slash public spending across the board, as some of the more extreme advocates of free market economics advocate, the Washington Consensus adopts a more subtle approach that holds that government expenditure should be restructured. Subsidies are to be greatly reduced, if not eliminated outright, as they encompass the twin evils of distorting the market as well as being a drain on the budget.
Tax Reform: The tax system should allow for a broader tax base that reaps more modest taxes, rather than a more punitive system that taxes the rich disproportionately.
The Liberalization of Interest Rates: Interest rates must be market determined and real interest rates ought to be positive (but moderate) in order to discourage capital flight
Competitive Exchange Rate: A consistently competitive exchange rate will increase business confidence and help the export industry, especially with regards to long term planning and investment.
Trade Liberalization: This means the practice of free trade with the specific emphasis upon removal of quantitative restrictions on imports, and strictly limited trade protection. Quantitative restrictions on imports, such as import licensing, are seen as a breeding ground for corruption and so should be eliminated. Furthermore, the protection of domestic industries against foreign competition grossly distorts the market and is held to be detrimental to the economy. The primacy of free trade is paramount, although some exceptions are allowed; specifically with respect to “infant industries, which may merit substantial but strictly temporary protection” (Williamson, 1990) as well as industries which require diversification and significant investment. It is also acknowledged that an economy that is highly protected cannot be expected to drop all its protectionist policies and practices immediately; there is the recognition that the move towards free trade should be one of evolution not revolution.
Liberalization of Inward Foreign Direct Investment: Such investment should act as a spur for economic growth as well as providing greater competition. Outward investment can also bring other benefits aside from the financial, such as much needed skills and knowledge, or what is termed ‘human capital’. Economic nationalism can prevent such gains and so should be discouraged.
Privatization of State-owned industries: The ‘invisible hand’ of the market is deemed to be more efficient and effective than the ‘dead hand’ of the state and so state industries should be sold off to the private sector. Whilst the state may prop up failing enterprises market forces ensure that any dead wood is lost from the economy. Privatization also lessens the government’s fiscal burden as in the short-term the sale of state assets means a boost in revenue and in the long term such industries no longer require financing by the state.
Deregulation: It is feared that an abundance of overly-bureaucratic regulation upon business would discourage new entrants into the market and thus limit competition. This being the case, the drive towards deregulation is motivated by a desire to increase competition within an economy. Greater regulation by central government, as well as local and quasi governmental agencies, is though also to be a contributing factor to the high levels of corruption seen in much of the developing world.
Property Rights: Free market economics and the capitalist system have traditionally relied upon widespread property ownership and so the Washington Consensus demands that property rights should be legally enshrined.
Williamson (1990) himself concludes that the Washington Consensus can be simply described as “prudent macroeconomic policies, outward orientation, and free-market capitalism.” It is worth noting that the ideas are inspired and influenced by mainstream or classical economic theory rather than any newer ideas that were formulated specifically with the matter of development in mind.
Having outlined the main components of the Washington Consensus we shall now turn our attention to the various criticisms that it has attracted. Much of the criticism of the Washington Consensus has focused upon the issue of trade liberalization. What can be termed the anti-globalization critique, as advanced by Klein (2001, 2008) and George (2004) amongst others, states that the removal of protectionist policies in developing nations has led to a situation in which such nations’ economies are easily exploited by powerful outside forces, such as transnational companies. Whilst the removal of trade barriers, tariffs and other such restrictions on free trade have been removed there has been no simultaneous erosion of the barriers restricting the free movement of labour. This has resulted in a situation in which goods and products are cheaply manufactured in developing nations by the inexpensive native workforce and then sold in the developed work at a large mark up, resulting in vast profits for these multinational entities. Trade liberalization, it is argued, keeps the poor in the developing nations poor and the large corporations rich and so serves only to benefit a wealthy elite. The anti-globalization lobby cites the continuing economic crises in Latin America during the 1990s, as well as the high levels of poverty and income inequality that continue to blight the continent despite the implementation of Williamson’s proposals as further proof that the Washington Consensus has failed. Instead of alleviating problems the Washington Consensus has in fact exacerbated the situation by making many nations indebted to organisations such as the IMF and World Bank, producing a situation in which the developing world is yet further beholden to the developed world. The Washington Consensus is seen by Klein and George as a neoliberal agenda that has benefited only the elite at the expense of the poor and that the real winners have been multinational corporations and the wealthy élites in the developing nations who have found themselves incentivized to maintain the status quo for reasons of economic and political self-interest.
Keynesians have also taken aim at the Consensus, claiming that its policies are too uniformly rigid, that they are a ‘one-size-fits-all’ solution that fails to take into account the specific nature of each economy’s problems. They also reject the philosophical underpinnings of the Consensus, particularly in regard to its dislike for budgetary deficits. Paul Krugman has also questioned some of the Consensus’ most basic assumptions; for instance, he has shown that showed protectionism for domestic industries can increase a nation’s income by diverting profits away from foreign companies (cited in Gallagher 2008). Moises Naim (2002) meanwhile rejects any notion of a consensus, claiming that such an idea was and is a fabrication that ignores alternative development philosophies and policies.
Williamson (2000, 2002) has responded to such criticism by claiming that his critics have misunderstood – either willfully or otherwise – the Washington Consensus. He contends that the term has been stretched to encompass a plurality of meanings that he did not originally intend. The Washington Consensus that his critics refer to is one synonymous with neoliberalism and market fundamentalism and this, he claims, is a bastardisation of its original meaning. As such, it is neoliberalism that his critics object to, not his ten specific (non-neoliberal) policy proposals. Williamson (2002) goes on to explain that in fact many of his critics actually endorse the policies laid out by the Washington Consensus, citing the example of Stiglitz, who has declared himself to be in favour of gradual trade liberalisation as well as evolutionary privatisation. Despite this argument over semantics, the man who designed the reforms of the Washington Consensus has admitted that the results of their practical application have been disappointing, something which he attributes to the Consensus lacking measures to avoid economic crisis in the first place, as well as a lack of attention regarding financial supervision, the incomplete nature of the reforms, and also the reluctance of policy makers in the developing nations to take appropriate steps towards greater income distribution (Williamson, 2002).
In conclusion, we have detailed the main components of development policy promoted by the Washington Consensus and outlined the ten key policy proposals as advocated by Williamson, namely fiscal discipline, restructuring of government expenditure, tax reform, a competitive exchange rate, trade liberalisation, the liberalisation of inward foreign direct investment, the privatisation of state enterprises, deregulation and property rights. The Washington Consensus has clearly been influenced by classical economic thinking, as evidenced by the importance placed upon free trade and fiscal prudence. We have also outlined the main criticisms of the Consensus. The anti-globalisation critique focuses upon the matter of trade liberalisation, claiming that such a policy leads to the exploitation of developing economies by more powerful outside forces. Writers such as Klein and George argue that the Washington Consensus primarily benefits multinational corporations and the wealthy elites at the expense of the native poor. They also point to the relative lack of success that the Consensus policies have had in Latin America. The Keynesian critique has highlighted the inflexibility of the Consensus and its alleged inability to adequately adapt to the particular social, cultural and political situation of each individual nation. Others reject the philosophical assumptions that underlie the Consensus polices whilst Naim openly rejects the idea of any consensus actually even existing. Williamson, in his defence, has countered that the meaning of the Washington Consensus has been misinterpreted by his opponents, whilst also admitting to some of the shortcomings of his original proposals.