The IMF, World Bank and the Washington Consensus

The IMF, World Bank and the Washington Consensus The Washington Consensus was created in 1989 by John Williamson; it was used to describe the 10 policy prescriptions. The Washington Consensus was made to be the baseline of directions for countries, who are in need of assistance from international economic entities, for example the international Monetary Fund and the World Bank. Washington Consensus has been referenced many times; this has made it a general term of disparagement to those who go against the free market fundamentalism. (Williamson 1989) The ten points of the Washington Consensus were rather vague because they were to represent a baseline. The points included were, liberalizing foreign investment opportunities, keeping competitive exchange rates within the nation, privatizing enterprises run by the state, letting interest rates be handled by the market and remaining positive and moderate, strong legal guarantees for property rights, spending away from subsidies and to direct investments in infrastructure, education and health care, deregulation and reduce competition, except for consumer safety, environmental health and financial institutional stability. The last point raised is reforming the tax system to a broader tax base. (Williamson 1989) The Washington Consensus has resulted in limited success when it has been applied in nations which are suffering economic crisis. It has come under some criticism for a number of destabilisations for example the Argentinean crisis. John Williamson himself noted that the results have been disappointing upon implementation and how it could be improved and noted some of the flaws. John Williamson pointed out that the reason for failed results were that the Washington Consensus did not place any special measures on mechanisms for avoiding economic crisis. (Williamson 1989) People who opposed the ideas of the Washington Consensus believe that it represents exploitation of developing countries by developed countries. Some nations in Latin America have implemented policies which go directly against the Washington Consensus which resulted in good results in some occasions. Some socialist leaders like Evo Morales, Hugo Chavez and Nestor Kirchner have all spoken out against the Washington Consensus and implemented policies which have taken their nations to very different directions. (Reed 2007) Though other Latin American counties with governments of the left wing have in practice adopted the bulk of the policies included in Williamsons list but they often criticize the principles of market fundamentalism that they are often associated with. These policies have been promoted by the International Monetary Fund but have come under some criticism by US economists like Rodrik and Joseph Stiglitz. They have both challenged the fundamental policies of the IMF (International Monetary Fund) and the US treasury, Stiglitz called this a one size fits all action for individual economies. Joseph Stiglitz stated that the treatment that was suggested by the IMF is far too basic; he said the policies did not prioritise or look for side effects. (Reed 2007) The policies for the Washington Consensus were originally created as a response to the crisis that was happening in Latin America. In 2010, several nations from the area are now being led by socialists or other left wing governments. Some of the countries are campaigning for and have adopted some policies which are opposite to the Washington Consensus policies. Even though some nations in Latin America have left wing governments such as Chile, Peru and Brazil, they have still adopted most of the policies that are in the Washington Consensus, even though they go against the principle of market fundamentalism that on such occasions are associated with. (Reed 2007) There has been a lot of criticism about the Washington Consensus. Most of the criticism has been focused on the elimination of subsidies and on trade liberalisation. The criticism has been rather harsh towards the agriculture sector. Countries which have a substantial amount of natural resources, they have criticised the privatisation of industries exploiting these resources. Neo-Keynesian and post-Keynesian have both been very critical of the consensus and they have argued that the core policies were wrongly been laid out and are too inflexible to be successful. An example of this would be flexible labour laws were supposedly meant to create new job opportunities; economic evidence from Latin America has been largely inconclusive. Some critics have criticised that the policies do not take into account of the cultural and economic differences between the nations. They believe that these policies should be only implemented at times of economic growth and should not be implemented during economic crisis. (Naim 1999) Foreign Policy chief editor, Moises Naim, argued that there was no such consensus in the first place. Moises Naim had argued that there was and still is important differences between economists over what is the best and correct economic policy. This is the reason the idea of there being a consensus was also flawed. (Naim 1999) SOURCE: WORLD BANK and ECLAC As you can see from the chart above, it shows that Brazil and Latin America who have implemented the Washington Consensus from 1990-2004 have showed that the Economic Growth has dropped by more than half. East Asia economic growth has gone up and they have not implemented the Washington Consensus. This has shown that the Washington Consensus has had a considerable impact on the growth. East Asia did not follow the Washington Consensus policies in some important respects. They adopted strong industrial and government policies, as well as creating successful government enterprises. They were also slow to liberalise capital markets and trade. Such difference accounted for the performances between East Asia and Latin America, because of this there was faster and increased growth in East Asia. They also benefited from growth that was widely shared and became more stable except for the 1997 crisis where all the countries recovered quickly expect for Indonesia. (Franko 2007) SOURCE: ECLAC SOURCE: ECLAC The adoption of the Washington Consensus has had an immense impact on GDP per Capita. The GDP per Capita at the end of 2003 is -0.3 % and in the 1960s it was 2.6% The Washington Consensus policies had only produced very limited growth, but when growth occurred it was not equitably share. The Washington Consensus was at best indifferent, and at worst hostile, to specific ideas and policies that would have promoted equality. Unemployment rates have steadily been rising and the Washington Consensus has no impact on reducing unemployement rates. Critics of trade liberalisation such as Tariq Ali and Susan George, see that the Washington Consensus is a way to open up labour markets of underdeveloped economies so companies from developed nations can exploit this. Washington Consensus allows free movement of items across the borders, however labour is not allowed to move freely there are requirements like a work permit or a visa. This then creates a scenario which goods are manufactured by cheap labour in developing nations and then these good are exported to developed nations for a big mark-up. The criticism of this is that the underdeveloped economies workers remain poor, any pay rises that the workers may receive over the money they made before the trade liberalisation are then offset by inflation. Developed nations workers become unemployed because of work being moved offshore and the owners of the businesses become richer. (Reed 2007) Joseph Stiglitz believed that the Washington Consensus had proved that it was neither sufficient nor necessary to be successful for development. He believed that even if each of its policies made sense for specific nations at specific times it was still unsuccessful. Joseph Stiglitz said that any future consensus cannot be made just in Washington and that any new framework should provide tailored adaptation to particular circumstances that the nations are involved in. (Change, 2001) There has been a lot of criticism of the Washington Consensus policies; there has been evidence of their impact on health, which has led to the development of the post-Washington Consensus. The ideas and policies of the post-Washington Consensus aimed to: Create vertical and horizontal policy coherence Include the creation of enforceable codes and standards, and concessions to social welfare through targeted social safety nets Manage liberalized trade, finance and monetary systems Include firms and businesses in a Global Compact for Development and the PRSP process. Many supporters of the post-Washington Consensus believe it differs from the original ideas and fundamentals of the Washington Consensus. The main goal for the Washington Consensus was to make economic growth in development. The new post-Washington Consensus differed from this and moved away from the neo-liberal, market-friendly approach and places sustainable, egalitarian and democratic development at the heart of the agenda. The post-Washington Consensus is more focused on poverty, which supports and protects the poor and aims towards social spending on health and education. Some still argue that the original ideas of the Washington Consensus neo-liberal agenda still underpins the new ideas and policies of the post-Washington Consensus, referring to the social safety net aspects of the new policies are there to be an add-on to cope with market failures. (World Health Organisation 2010) Joseph Stiglitz believed that new framework was needed to guide us to stable, democratic, sustainable and equitable development. He also believed the framework should reform global economic architecture to promote efficiency, developing countries to focus on their goals and objectives, stability and equity among nations. The post-Washington Consensus looks at the importance of employment, and balanced roles of the government and markets. This would be completed by promoting and regulating markets, providing physical and institutional infrastructure and also by endorsing innovation, technology and education. (Change 2001) The Post-Washington Consensus recognises the importance of the a nation in open markets as well as more liberal policy environment. This approach sees the importance of avoiding state failure which needs institutional innovation and democratic governance. The Post-Washington Consensus sees the need to tackle inequality as well as poverty as their main objectives looking away from efficiency and growth objectives. An example would be that markets, themselves do not produce efficient outcomes when there is a changing of technology or the learning about markets. These processes are important in development and East Asian countries recognised this but the Washington consensus did not. In respect to all these points the Post-Washington Consensus is a more progressive approach to development compare to the Washington Consensus. (Onis and Senses, 2005) There has been criticism of the Post-Washington Consensus that it adopts a technocratic and narrow approach to markets in both a global and at national level. The Post-Washington Consensus sees existing power structures as pre-determined. This is the reason why it fails to tackle the asymmetries of power and the fundamental power relations that are between the classes at level of nation state, and also the powerful versus less strong nations in the economy. These issues would need to be tackled in order to get over development issues. (Onis and Senses, 2005) The IMF and the World bank have not welcomed the Post-Washington Consensus policies. The IMF went through a crisis with their identity straight after the Asian crisis and they have been trying to reform themselves. However the IMF has a restrictive understanding and viewpoint of what should be the foundations for the Post-Washington Consensus. This has had vital consequences because the IMF is an important player for crisis nations and emerging nations. (Onis and Senses, 2005) The criticisms that was given to the Washington Consensus by the newly designed Post-Washington Consensus has fallen short in terms of dealing with the main issues but the Post-Washington Consensus still has cracked the neoliberal approach, which may lead to new and fresh viable alternative. The jury is still out for the Post-Washington Consensus as a definitive viable alternative but together with flourishing other globalisation movements and alongside the background of growing distributional imbalances at every level, this would bring such a change to be an alternative option.