WHY DID THE WASHINGTON CONSENSUS POLICIES FAIL?

Luciana Daz Frers Director of the Fiscal Policy Program at CIPPEC (Centro de Implementacin de Polticas Publicas para la Equidad y el Crecimiento) Argentina
CIPE is an affiliate of the U.S. Chamber of Commerce and one of the four core institutes of the National Endowment for Democracy

The origin of the Washington Consensus

Term coined in 1990 by John Williamson Described a "standard" reform package Targeted countries coming out of 1980s crises (mainly Latin America) Promoted by Washington-based institutions such as IMF, World Bank, Inter-American Development Bank, and U.S. Treasury Reinforced by policy-based lending and conditionality

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Tenets of the Washington Consensus

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Fiscal discipline Rationalized public spending Tax reform Competitive exchange rates Liberalized trade Liberalized financial markets Liberalized inward FDI Privatized state enterprises Deregulated markets Legal security for property rights
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The three guiding principles

Macroeconomic discipline Openness to trade and FDI Market competition They were supposed to:
Increase efficiency Improve resource allocation Become the engine of growth

They implied a deep process of state reform

Latin America embraced the Consensus with some positive macroeconomic results
BUT not all results were as good as expected
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BUT little emphasis was given to the issues of equity

Proof of faith: Latin America embraced the Consensus

Monetary prudence
Inflation went down to single digits almost everywhere

Fiscal discipline
Average budget deficit went from 5 percent of GDP to 2 percent Public external debt went from 50 percent of GDP to less than 20

Trade liberalization
Average tariffs went from more than 40 percent to nearly 10 percent

Financial liberalization
Direct credit controls abandoned, interest rates deregulated, FDI eased, foreign exchange and capital account controls dismantled

Privatization
More than 800 public enterprises privatized between 1988 and 1997
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Disappointing results
+ Surge of private capital inflows + Expansion of investment and export volumes Real GDP growth 3 percent a year during the 1990s
(just 1.5 percent per capita, barely better than 2 percent during lost decade of 1980s and well below the rates of 5 percent in the 1960s and 1970s)

Unemployment rose Poverty remained widespread Inequality increased Generalized disappointment and sense of injustice Sharp rise in crime and violence

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A sequence of crises
GDP per capita (PPP)
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Mexican tequila crisis Brazilian devaluation of the Real Russian crisis Thailand devaluation hits Asia Argentina and Uruguay
Argentina Bolivia Brazil Chile Ecuador Mexico

Venezuelan recession Ecuador and Turkey Bolivian crisis

Paraguay Russia Thailand Venezuela

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Debates surrounding the Washington Consensus concept

Was there really a consensus? Was it imposed from abroad or originated from within? Is it the same as neoliberal policies? Why did the Washington Consensus fail? Did it fail?

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Why did the Consensus fail? The position of the defenders

Prescribed reform measures were not implemented as a whole
Hence more of the same policies are needed

The mix and sequencing was not correct Exogenous factors interfered
External crises, unfavorable terms of trade, globalization, contagion, etc.

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Why did the Consensus fail? The Washington Critique

Recommendations were too simple and incomplete
Insufficient attention to equity and poverty Did not emphasize crisis avoidance One-size-fits-all recipe

Imposed after a crisis Danger of combining fiscal tightness with rising interest rates Flexible labor laws have not created new jobs Gradual trade liberalization might have better protected nascent industries FDI does not always deliver long-term capital: it may exacerbate economic cycles
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False assumptions of the Washington Consensus

Assumed the existence of underlying mechanisms necessary for functioning market economies Little attention given to existing institutions and stakeholders Privatization was not carefully done Latin American economies are interdependent but have independent policymaking process Underestimated the capacity of Latin American labor unions to compromise policy programs

Governments currently against the Washington Consensus

Argentina* Bolivia Brazil* Cuba Ecuador Venezuela
* Distinction between rhetoric and policies

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Country examples of failures

Mexico: privatization of banks; NAFTA, overvalued peso, and government debt destabilized the currency Brazil: pegged the real but had to free-float in Jan 1999 Ecuador: irresponsibly liberalized its financial market, which led to high private debt and interest rates Argentina: followed almost all prescriptions, yet kept uncompetitive exchange rate and fiscal indiscipline Venezuela: long recession after Consensus reforms Bolivia: IMF recommended privatization of oil and gas industries and requested a cut in the fiscal deficit by raising the income tax; BUT opposed taxing newly arrived gas and oil companies, citing concerns over maintaining a good investment atmosphere
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Lessons learned
Focus on equity and income distribution Not necessarily a smaller state but one that spends wisely on empowering the poor Need to smooth the economic cycle: fiscal rules and safety nets Gradual and cautious liberalization until regulatory and supervision capacity is strong Means for achieving greater equity:
Ensure access to credit for all (as opposed to just cheaper credit) Give small business a chance Tackle discrimination and property issues in rural areas

Need for strengthening the institutions that underpin markets Need to reduce protectionism in developed countries
Focus on market and democratic governance institutions is necessary to overcome the limitations of the Washington Consensus.
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The views expressed by the author are their own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE). The Center for International Private Enterprise grants permission to reprint, translate, and/or use in the classroom the materials available through the CIPE Development Institute website provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified how and where these materials are used. Center for International Private Enterprise 1155 Fifteenth Street NW Suite 700 Washington, DC 20005 USA ph: (202) 721-9200 www.cipe.org e-mail: education@cipe.org

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