The last two decades of the 20th century were dominated by one overbearing policy that places emphasis on market forces. This policy was known as the Washington consensus, a term that was coined by John Williamson. The principles of the Washington consensus are as follows: privatization, deregulation, debt crisis management, trade and financial liberalization. In Latin America the policy was known as neo-liberalism while many simply called it “free market economics.” This policy not only dominated governments but also corporate entities, international financial institutions and academic circles. The Washington Consensus policies provided a liberal, unregulated privatized space for capital to become global. It dominated development theory and practice in the 1980’s and the 1990’s.
The Washington consensus was borne out of the acknowledgement that the involvement of the state in trade was the primary reason for weak economies around the world. It was therefore imperative that the market be freed from the intervention, large public sectors and controls. It was proposed that the involvement of the state would gradually be decreased through a systematized program that entailed a reduction in public spending, liberalization of trade, lifting the control of exchanges and liberalizing the key prices such as interest rates. The efficient allocation of resources by government would be determined by impersonal forces in the market.
The Washington Consensus triggered a wave of reforms across Latin America, Sub Saharan Africa and Eastern Europe. There was little conviction among the governments in Sub Saharan Africa but they went ahead to dismantle marketing boards, privatize state corporations, open up trade and fast track efforts to cut down inflation. However in spite of the resounding efforts invested towards implementing the Washington Consensus, the results have not been that good. There has been a growing concern over the state of Sub Saharan economies post Washington Consensus in addition to Latin America markets that are still on the decline. It is against this background that this paper shall critically examine the Washington Consensus based on the gains and losses made following its implementation.
The effect of the Washington consensus
The main goal of the Washington Consensus was economic growth. However in John Williamson’s own words, the consensus” had little to say on social issues and almost had nothing to say on the environment.” On the ground where the policies were being implemented the results were evident: there was an increase in inequity, increased damages to the environment and a decrease in the benefits and rights of the employees. There were little signs of the promised aggregate economic growth coming to fruition.
The beneficiaries were a select few among them large corporations that had cashed in on privatization, a few workers in the exporting zones and some consumers who benefited from a reduction in the prices on the goods. As a result, the effect of the Washington Consensus was therefore a one sided policy that had little benefit for the majority. This majority were casualties and they included workers, small scale farmers, women, small and medium enterprises, health care, human rights and democracy, indigenous people and diversity in society.
Decline in the performance of the world economy
Studies on the world economy indicate that the performance of the world economy was worse during the period of the implementation of the Washington Consensus as compared to the period before. This cast doubt on the policies given that it was initially lauded as the policy that would provide a much needed boost in the world economy. The gap between the developed and the developing countries became wider with disparities appearing among the Third World countries. For instance, countries in Latin America and Sub Saharan Africa seem to have sluggered in the period of the implementation of the Washington Consensus while there was a remarkable growth among the Asian nations. There was a stagnant investment performance and underwent de-industrialization among the nations in Latin America and Sub Sahara Africa. The 1990’s saw the countries in Eastern Europe apply “shock therapy” to their economies as they sought to liberalize and privatize in line with the Washington Consensus.
Not only was economic growth stunted during the era of neo liberal restructuring but the degree of inequality also increased during this period. It is estimated by the World Bank that the number of people living on less than a dollar a day remained almost constant in the period between 1987 and 1999. However there was a decline in the overall poverty rate in the same period from 28.3% to 23.3%.
This decline can be attributed to the good economic performance of Asia especially China. The exclusion of China therefore means that the overall decline in the overall poverty rate is from 28.3% to 25%. China was successful during in this era after taking up the shape of a market economy with the encouragement of inward investment, increasing in the exports and allowing the peasant farmers to be in charge of what they produced. This resulted in at least 200 million Chinese people being lifted out of poverty.
It is evident that the implementation of the neo liberal policies initiated a variation in the performance of the economy among different nations of the world. There is little evidence to suggest that the implementation of the Washington Consensus by different nations could have resulted in sustained economic growth. Even in cases where there was economic growth after the implementation of the policy, this was not sufficient to deal with the problem of endemic poverty as was the case in Turkey and Argentina.
Argentina in the period after war embarked on an aggressive plan to implement the neo liberal reforms as an attempt to stimulate economic growth. With a strict adherence of advice from the International Monetary Fund, Argentina was successful in the formative years of the implementation where they managed to stem inflation to a single digit figure. This aided in the attraction of huge capital flows and the 1990’s, Argentina was soaring high economically under the implementation of the Washington Consensus. It was singled out as a model by most international financial institutions. However the debt led growth crumbled seriously in 2001after an economic crisis which was accompanied by massive protests.
The rapid implementation of the Washington Consensus proved to be disastrous to the countries in Eastern Europe. It has been termed as the complete opposite of the economic miracle that was experienced by the countries in Asia in the 1960’s and the 1970’s. This was as a result of an overzealous implementation of the market liberalization policies after years of being a statist pack. There was little or no safeguards at all in place hence the after effects spilled over fast to the economies of these nations.
One of the countries that had been quick to implement the Washington Consensus was Turkey. Initially, there was a steady rise in the economic prowess which led to Turkey often being cited as a case in point by financial institutions. However the success was short lived after opting to open up capital accounts at the turn of the 1990’s without having achieved macro economic stability and putting in place proper market safe guards. Turkey is still reeling under the effects of the economic crisis in 2001 hence adds to a growing list of countries that initially experienced growth under the Consensus only for the growth to be stunted by debt and financial crises.
Under the neo liberal reforms, countries have experienced a disjointed growth in their economies marked by premature capital and financial account liberalization. This premature exposure to the global financial markets has landed several countries in a trap characterized by short bursts of growth followed by an uncertain flow of capital. The over reliance of growth that is funded by debt at the expense of culturing local savings and internal investments has therefore exposed nations to a perennial cycle of poor debt management, frequent financial crises and vulnerability to speculative attacks.
The volatile flow of capital in addition to the frequency of financial crises has proven to not only to individual nations but in turn spilled over to the regional and global levels. They have seriously impeded sustainable economic growth at the level of the individual state but also at the regional level and the global level in turn. A crisis in the flow of capital in one nation sends panic to other nations around in terms of driving investors away since their confidence and their perception is interfered with.
This was seen in the financial crisis experienced in Asia in1997 and in Russia in 1998. In the aftermath to these financial crises, investors were skeptical about investing their money in emerging markets for fear that they were a high risk venture that could turn in hefty losses. As a result, there has been deflation for both the individual nations which has in turn had an impact on the global economy. The effect spills over to the distribution of income in addition to increasing the levels of poverty. The effect is mostly felt by the poor in the country in addition to the middle class who have to bear the brunt of the cost of increased living standards.
Continuing debate
While there are several nations that initially thrived under the Washington Consensus, there is growing evidence of countries that thrived in spite snubbing the policy. China and Vietnam are two such examples. Both nations have successfully entered the export market by maintaining low wages and attracting long term foreign investments. They have selectively opted to protect infant industries in addition to implementing an active industrial policy. India which has also experienced rapid growth in the recent years has gradually been liberalizing its markets and capital account regime. Malaysia which is another success story that has deviated from the Washington Consensus has done so by regulation of short term flow of capital.
The countries that were deemed as the poster success stories of the Washington Consensus have gradually deviated from it. Chile for instance has effected active state involvement in the exportation of natural resources in addition to the regulation of short term flow of capital over the 1990’s. Russia has also sought to regain control over its economy through the regulation of the capital flow. The countries that have deviated from the neo liberal reforms include: Poland, Hungary, Czech Republic.
The limited number of countries that consider themselves successful after the implementation of the neo liberal reforms are trapped in vicious cycle. These countries find themselves trapped in a cycle of perennial debt to fund their economies while the local investments and industries dwindle at the expense of foreign ones. There is little evidence of economic growth and a shift in the overall poverty rates.
In conclusion, it can be said that the Washington Consensus was only beneficial for a while and to a select few including large corporations and workers at export zones. However the long term effects have been far more detrimental and outweigh the initial excitement and growth that was experienced when it was first implemented.
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