NS4053 Winter Term 2013

The Washington Consensus

Washington Consensus I• Washington Consensus originates with John Williamson

in the early 1990s• Reflective of the policies suggested for Latin American

trade and development by IMF, World Bank, and U.S. Treasury

• In the original formulation by John Williamson the components included:

• Fiscal discipline. Governments aim to restrict budget deficits to a level that can be financed in a non-inflationary manner

• If interpreted as a medium-term objective, this can be a corollary to, rather than competitive with fiscal policy being conducted in a counter-cyclical manner

• No view was taken or was implied about the right combination of expenditure restraint and tax policy to achieve fiscal discipline

• Public spending. Governments should redirect public expenditure from low-priority expenditures like general subsidies to education, health and infrastructure. 2

Washington Consensus II

• Tax Policy. In re-designing tax policy, governments should aim to raise revenue by a broad tax base combined with moderate marginal tax rates.

• Financial Liberalization. Governments should aim for domestic financial liberalization

• Initial focus was on interest rate liberalization – too narrow a focus

• Now recognizes the importance of effective financial supervision

• Feels the liberalization of capital flows as low-priority

• Exchange rate. Should be unified and set at a level that is competitive – neither over- or under-valued

• Trade. Governments should liberalize trade

• Initially by converting various import restrictions into equivalent tariffs

• Subsequently by reducing tariffs

• Issues concern the speed with which tariffs should be reduced and the expediency of allowing the process to be interrupted by adverse economic developments. 3

Washington Consensus III

• Foreign Direct Investment (FDI) – should be allowed without restriction

• Privatization. State enterprises should be privatized – few or no exceptions

• Entry and exit o industries should be de regulated

• Secure property rights should be extended to the informal sector

• Number of competing frameworks:

• Augmented Washington Consensus

• Beijing Consensus

• Buenos Aires Consensus

• Post-Washington Consensus

• Singapore Consensus4

Washington Consensus IV

• Since the 1990s Washington Consensus” has been a lightning rod for dissatisfaction among anti-globalization groups.

• Term use interchangeably with the phrase “neoliberal policies”

• Williamson feels that this version of the Washington Consensus was invented to be a “straw man” easy to attack, but not in line with his original intent

• To address some of the issues raised by critics (Stiglitz) several variants of the Washington Consensus have evolved including the “Augmented Washington Consensus”.

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Washington Consensus V

• The “Augmented Washington Consensus” adds:

• Corporate governance

• Anti-corruption

• Flexible labor markets

• WTO agreements

• Financial codes and standards

• “Prudent” capital account opening

• Non-intermediate exchange rate regimes (intermediate usually involve soft pegs and tightly-managed floating)

• Independent central banks/inflation targeting

• Social safety nets

• Targeted poverty reduction

• The debate continues about the Washington Consensus, its definition its successes and failures

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Washington/Beijing Consensus I

• Contrasting the original Washington Consensus (WC) with the Beijing Consensus (BC)

• The Beijing Consensus has never been precisely spelled out

• Term introduced by Joshua Cooper Ramo in 2004, but no formal list of recommended policies

• Williamson therefore assumes the BC to be revealed in the policies actually pursued by China

• Gradualism versus Shock Treatment

• Williamson feels issue is not at heart of WC but that countries may not have luxury of gradualism as China did with its continuity in regimes.

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Washington/Beijing Consensus II

• Encouraging Innovation• Has been explicitly favored by many adherents of BC,

wile the WC is silent on topic• Williamson not convinced of the existence of a “middle

income trap” – therefore not part of his framework• Possible downside – key to catch-up growth is imitation,

not innovation and possible to waste resources re-inventing the wheel – Brazil prohibiting importation of computers

• Macroeconomic Stability• Major theme in WC, and China has pursued low inflation

policies• Open Economy• WC calls for competitive exchange rate (not

overvalued), trade liberalizing and opening toward FDI• If one measure openness of an economy by the ratio of

exports to GDP, then China world’s most open large economy 8

Washington/Beijing Consensus III

• Market Liberalization• Most sharp difference between WC and BC• WC is basically pro-market while BC allows a far greater

role of the state• Probably this aspect that provoked the strong reactions

to WC• Market liberalization key to WC

• WC financial liberalization – needs to be accompanied with prudential supervision; BC might prefer planners make key investment decisions

• WC trade liberalization important; BC more import substitution

• WC privatization – key in WC; BC no real hurry – still has many state enterprises

• WC deregulation, WC confined to abolish restrictions on entry and exit; BC much more extensive control

• WC property rights, WC very important; BC not high priority.9

Contrasting Models I

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Contrasting Models II

• Washington Consensus vs Evolutionary Institutionalist (contd.)

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Contrasting Models III

• Washington Consensus vs Evolutionary Institutionalist (contd.)

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