Moises Naim. Washington Consensus or Washington Confusion?

Washington Consensus or Washington Confusion?
Moses Naim

Publication date: March 26, 2001

M. Naim is a well-known Western specialist in the field of international political economy and economic reforms. In 1989, he played a central role in the implementation of economic reforms in Venezuela, being in the government of this country as Minister of Trade and Industry. He later held senior positions at the World Bank for a number of years. Since 1997, he has been editor-in-chief of Foreign Policy magazine.

What changes more often - the fashion models that come from Paris and Milan, or the economic policy models that Washington and Wall Street recommend to less developed or post-communist countries? While the comparison may seem frivolous, a review of the ideas that guided economic reform thinking and action in the 1990s shows that they were as outdated as the length of skirts or the width of ties. The difference, however, is that fashions in economic policy influence the lives of millions of people and determine the opportunities for their children to achieve a better future.

Ideas about how to make a country prosper have always changed. The last decade is no exception in terms of the variety and variability of policy prescriptions that have dominated among scientists, politicians and the more informed part of the world's population. However, the 1990s had one important feature: the world was under the impression that there was some clear and strong consensus about what poor countries should do to become more prosperous. This misconception was largely due to the surprising popularity of the term “Washington Consensus,” the name that economist John Williamson gave in 1989 to the following list of 10 policy recommendations for countries wishing to reform their economies:

1) fiscal discipline (large and persistent budget deficits contribute to inflation and capital flight; therefore, governments must keep them to a minimum level);

2) priorities for public spending (subsidies should be reduced or eliminated altogether; government spending should be redirected to education, health care and infrastructure development);

3) tax reform (the tax base “should be broad” and marginal tax rates “should be moderate”);

4) interest rates (domestic financial markets should determine the interest rates of a given country; positive real interest rates prevent capital flight and increase savings);

5) exchange rates (developing countries should accept “competitive” exchange rates that will stimulate exports);

6) trade liberalization (tariffs should be minimized and should never be applied to intermediate goods necessary for the production of exports);

7) foreign direct investment (foreign investment can bring the necessary capital and skills and therefore should be encouraged);

8) privatization (private industry operates more efficiently because managers either “have a direct personal share in the profits of the enterprise” or “are accountable to those who have it”; state-owned enterprises should be privatized);

9) deregulation (excessive government regulation can promote corruption and discrimination against smaller businesses that do not have wide access to the upper echelons of the bureaucracy; governments should deregulate the economy);

10) property rights (property rights must be strengthened; weak laws and a poor legal system reduce incentives to accumulate and accumulate wealth).

("What Washington Means by Policy Reform" In John Williamson, Ed., Latin American Adjustment: How Much Has Happened? √ Washington: Institute for International Economics, 1990.)

The ideas emanating from the "Washington Consensus" had a huge influence on economic reforms in many countries. At the same time, the nature of their interpretation in different countries varied significantly, and the nature of their implementation varied even more. Moreover, the original 10 policy prescriptions of the “Washington Consensus” reigned supreme for only a short time. Changes in the international economic and political environment, along with new domestic conditions in reforming countries, created problems that were not foreseen by the people who formulated the original provisions of the consensus, leading to a search for new answers. These responses were often in addition to the recommendations of the Washington Consensus, but some of them conflicted with them. Reforming governments have everywhere found that policy goals that only a few years or even months ago were considered the final milestones of the reform process have become only a prerequisite for success. New, more complex and more difficult to achieve goals were constantly added to the list of conditions for the acceptable functioning of the economy. If this was the “Washington Consensus,” then what should the “Washington Confusion” be like?

Creating a Global Stamp

In Williamson's justification, it must be emphasized that he was an innocent victim of the success of his convenient short formula. With much greater detail, he explained what exactly was meant when formulating the “Washington consensus.” He often sought to correct those who misinterpreted his approach and repeatedly attempted to clarify the nuances of his concept. However, Williamson's efforts were not enough to correct the distortions stemming from the term's global popularity and frequent misuse. The term soon took on a life of its own, becoming a ubiquitous cliché used regardless of the term's original meaning or even its content.

How could such a label become so popular? For the creators of this scheme, its formulation in the late 1980s coincided with the sudden collapse of the Soviet system. Disillusionment with socialist ideas and the principles of central planning, which at one time were also common in many developing countries outside the Soviet bloc, created an urgent and widespread need for an alternative set of ideas regarding the organization of economic and political life. The “Washington Consensus” has become a temporary substitute for the overarching ideological construct that millions of people cling to in an effort to organize their opinions about events at home and abroad, their judgments about public policy, and even their behavior in some areas of everyday life. Its appeal was enhanced by its self-confident tone (“consensus”), its prescriptive focus, and its origins in Washington, the capital of a prosperous empire. The push for the "Washington consensus" was reinforced by the need of newly elected market-oriented administrations to downplay and inflate the merits of their economic reforms, and by the lack of credible alternatives offered by the often disreputable opposition. And if all this were not enough, what made the product even more irresistible was the persistence of the International Monetary Fund and the World Bank in making loans conditional on agreeing to consensus-inspired reform policies.

Unfortunately, the relative simplicity and supposed reliability of the “Washington consensus” did not translate into the practice of market reforms of the 90s. Policymakers often implemented an incomplete version of the model, and the results turned out to be quite different from what was promised to politicians, what people expected, and what was predicted in the econometric models of the IMF and the World Bank.

The Evolution of Conventional Wisdom

British economist Alfred Marshall once said that short formulas usually make bad economic formulas. From this point of view, the past decade, which gave birth to such terms as "maleficence", "tequila effect", "moral hazard", "crony capitalism", "globalization", may not have been one that would have won his admiration . Each of these terms, at some point during the 1990s, became the focus of sustained attention and heated debate among experts, politicians, and commentators interested in market reforms. But none of them figured in the original formulation of the “Washington Consensus.”

These concepts and expressions, and the realities they tried to capture, came to prominence through many unexpected events that harmed the implementation of market reforms. While this list of jargon terms may seem like a jumbled cacophony of words, in reality they can be used as road signs for the way in which conventional wisdom about market reform has evolved over the past 10 years.

This evolution followed a certain pattern. It usually began with the rise in popularity of a general set of policy recommendations. For some time, around them, if not a consensus, then at least some convergence of views arose among an influential majority of scientists and representatives of the senior management of the IMF, the World Bank, the US Department of the Treasury, as well as employees of research centers and journalists. Very soon - sometimes only a few months after a certain degree of comfort in using new ideas had been achieved - some unexpected event could raise doubts about their adequacy. New data usually showed that the main "lessons" learned from previous crises were missing some important element (often summed up in a single general concept such as "weak institutions" or "corruption"), the critical importance of which was clearly revealed in in the light of a new crisis. And the data also suggested that even more reforms were needed.

Throughout the decade, authorities in reforming countries saw the bar for defining the success of reforms rise and the changes they envisioned becoming increasingly difficult and sometimes politically impossible. Presidents and treasury secretaries have also found their concerns denounced as manifestations of their ignorance or lack of political will, while the changing demands emanating from Washington and Wall Street were presented as reasonable adjustments to recommendations made as a result of lessons learned. practical experience. Conventional wisdom has simply “evolved.” Resistance to reform was derided as “populism.”

In this evolution of ideas about market reforms, four groups of discoveries can be distinguished, the implementation of which roughly coincides with the chronological sequence of events of the 1990s: the discovery of economic orthodoxy, the discovery of the meaning of institutions, the discovery of globalization, and the rediscovery of economic backwardness.

The Discovery of Economic Orthodoxy

One of the clear historical merits of the “Washington Consensus” is that it marked the end of the opposition between the conventional economy and the economy of developing countries. It now seems clear, for example, that large government deficits and lax fiscal policy are fueling inflation. However, many developing countries have long rejected these ideas as a kind of short-sighted “monetarism.” Inflation was thought to be the result of "structural" conditions, such as the inequitable distribution of income and wealth.

Likewise, in less developed countries there was (and to some extent continues to be) a widely held view that such a country could not benefit from greater freedom of foreign trade and investment. Consequently, the “Washington Consensus” recommendation regarding the need to remove barriers to imports and exports, foreign investment and foreign exchange transactions was in sharp contradiction with the long-held belief that developing countries must protect their economies from an unfair and exploitative international systems.

Many developing countries have thus had to discover orthodox macroeconomic policies and dismantle existing protectionist structures. This was especially true for countries that were heavily indebted and desperately seeking respite from their enormous external financial obligations - a respite that was offered in exchange for accepting economic reforms.

In many countries, market reforms have brought rapid and rich rewards in the form of price stability and, in some cases, economic growth. However, it soon became apparent that the magic of macroeconomic orthodoxy had its limits.

Opening of institutes

On January 1, 1994, the North American Free Trade Agreement (NAFTA) officially came into force. But it was also the day the Zapatista Army of National Liberation launched an uprising against the Mexican government in the province of Chiapa, taking both the administration of President Carlos Salinos de Gortari by surprise and an admiring world marveling at the success of Mexico's market reforms. Perhaps this date should symbolize the moment when politicians, reform experts and journalists around the world began to seriously recognize that the implementation of macroeconomic reforms, although necessary, is not sufficient to put countries on the path to prosperity. Supporters of the “Washington Consensus” widely used the example of Mexico to justify their case. They saw NAFTA as decisive proof that market reforms were working, allowing a poor country to succeed in joining the richest countries on the planet. The armed uprising of the peasants of the province of Chiapa destroyed this thesis.

Reforming countries began to discover that economic growth was of little benefit to people if there were no drugs in hospitals, and that a stock market boom could be very dangerous if the nation's equivalent of the US Securities and Exchange Commission performed poorly. An exchange rate that makes national products cheaper on world markets is insufficient to support an export-oriented economic growth strategy if ports are paralyzed by inefficiency and corruption, and fiscal reforms are of little value if taxes cannot be collected. The removal of restrictions on foreign investment, although necessary to attract foreign capital, does not make the country competitive in the international competition to attract long-term foreign investment. A sound legal system, a well-educated workforce and an efficient telecommunications infrastructure are some of the additional factors that can help the country in its efforts to attract foreign investors. In short, the urgent need for stronger, more effective institutions in addition to changes in macroeconomic policies became apparent.

The discovery of globalization

The greatest irony is that the "Washington Consensus" has overlooked globalization. This omission is indeed ironic, since the removal of barriers to international trade and investment, which greatly spurred economic integration in the 1990s, certainly owes much to the influence exerted by the “Washington Consensus” on many liberalizing countries.

The Washington Consensus did not contain any set of policy prescriptions that would help newly opened economies cope more effectively with the consequences of globalization, especially in the financial sphere. While the 1990s will be remembered for the period in which a large number of countries began experimenting with market reforms, they will also be remembered for the periodic financial crashes that rocked these countries and spread quickly and unexpectedly across their borders. Between 1994 and 1999 alone, 10 middle-income developing countries experienced major financial crises. These "accidents" led to the collapse of the financial systems of these countries, to the bankruptcy of their banks, deprived them of the economic gains that had been accumulated over years of painful reforms, and in some cases caused significant political unrest. And they have also created a need to reform the institutions that govern the international financial system.

But mostly, these crashes have caused confusion: is financial openness a good idea? Is trade liberalization a good idea? Should countries fix their exchange rates, or should they let the free market determine the value of their currencies? Is the combination of interest rate mobility and fiscal tightening (as often prescribed by the IMF during such crises) a good medicine, or a kind of poison that undermines the patient's health, aggravates the disease and makes it more difficult to treat? Should the IMF be abolished, or, on the contrary, strengthened? Does releasing countries experiencing a financial crisis from their obligations lead to global stability, or, on the contrary, does it create instability? The so-called "Washington Consensus" has become the subject of very widespread and sometimes nasty debate among experts over how to implement and strengthen market reforms in a global economy.

Rediscovery of underdevelopment

For much of the past decade, the main concern has been the sustainability of market reforms. Today, the sustainability of democracy in many reforming countries, from Russia to Peru and Indonesia to Venezuela, is a matter of concern. Eradicating poverty continues to be an overriding goal, but it is now taking center stage alongside growing concerns about rising inequality and its consequences. Inequality is now seen not only as a threat to political stability, but also as a major obstacle to a country's competitiveness on an international scale.

The reform program has expanded and become more complex. World Bank President James Wolfensohn noted: “We cannot accept a system that separates macroeconomic and financial aspects from structural, social and humanitarian aspects, and vice versa...” Some of the concerns reflected in Wolfensohn’s words are similar to those were first voiced in the 40s and 50s in the concepts of “development economics”. Economic underdevelopment, it was argued, could not be dealt with without a broad, comprehensive approach that took into account the importance of institutions, inequalities, “structural factors,” cultural characteristics and the contradictions generated by the international economic environment.

An important feature of the current revival of these classic ideas is that almost all statements about reform priorities, economic programs or "new development frameworks" must now be accompanied by a solid preface explaining the need for sound macroeconomic principles. However, after this clarification, the usual list of social transformations is offered - more honest governments, an impartial legal system, well-trained and well-paid government officials, transparent regulatory systems, etc. The paradox is that any country that can meet such stringent requirements is already a developed country. The measures recommended to achieve utopia are often themselves utopian.

The challenge for policymakers is to build on the many lessons learned from decades of development efforts to create programs that set more achievable goals and identify intermediate means to achieve them.

Originally published in Foreign Policy , Spring 2000

Abridged translation by Grigory Weinstein