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The Washington Consensus: the Sad Triumph of Neo-Liberalism

 

1. Introduction: liberalism in a global world

 

As one of the most fashionable inventions of modernity, neo-liberalism has attracted as much attention as criticism. A natural outcome of the new ideological post Cold- War dimensions of security, which praised individual empowerment and happiness rather than state security, the neo-liberalist model aimed at the fast recovery of the world’s poorest regions – Latin America, Asia and parts of Africa. In a thoroughly global world, the neo-liberalist doctrine was an antipode, and a relatively adequate counteraction towards the sweeping forces of globalization and the uneven nature of global economics. Designed to tackle one of the most negative consequences of globalization – marginalization of the already marginalized ones – neo-liberalism was the panacea for the ones who suffered the consequences of the so - called “complex interdependence” the most (Keohane & Nye, 2001).

As Hirst and Thomson write, the “global economy is a distinct ideal type from that of the international economy and can be developed by contrast with it. In such a global system distinct national economies are subsumed and rearticulated into the system by international processes and transactions” (Hirst & Thomson, 2001). This is where the need for neo-liberal policies comes into place – it was conceived as the solution for the contradictions and tensions between national economies and an ever-growing, progressing global economy. Neo-liberalism in a global world was dictated not only by totally revised ideological assumptions about the new world order, but also by the economic complexities deriving from this brave new global world. One can speculate on the numerous outcomes that globalization has had over the developed and developing world, but the most obvious outcome has been the uneven redistribution of resources such as drinking water and food, affecting in a detrimental way the poorest populations of the planet.

An alternative to classical liberalism, neo-liberalism sought to transfer control of economics from the public to the private sector, with the idea to make national governments more self-sustainable and economic growth – upward sloping (Rodrik, 2002; Stiglitz, 2002). In reality, things happened in a very different way. Neo-liberalism turned out to be not only a failure in the eradication of poverty and global inequalities, but also a lethal injection whose effects on the poorest nations were irrevocable. The reasons behind this failure are structural as well as practical, and they will be explored in the rest of this paper.

 

2. Research Question

One of the best known manifestations of neo-liberalism in the modern world was a set of policies implemented by the global West that were labelled the “Washington consensus”. Contrary to its initial purposes, the set of policies implemented by the World Bank (WB) and the International Monetary Fund (IMF) was named by John Williamson “Washington consensus” in a pejorative manner, to highlight the failure of the rich and progressive West and its institutions to help the poor nations of the developing world (Williamson, 1990). The Washington Consensus’ failure as an economic policy extrapolates the failures of neo-liberalism to fit the needs of the deprived in a globalizing world.

Using the Washington Consensus as an example, this paper we will try to explain the weaknesses of neo-liberalism not only as a strategy, but also as an ideology. This paper will aim to propose several different explanations for the failure of the Washington consensus, rooted in its policies of privatization and market liberalization. These aspects of the Washington Consensus will be discussed separately in order to trace the functionality, or rather the dysfunctionality of neo-liberalism in world ravaged by poverty. It is important to note from the beginning that the failures of the Washington consensus do not necessarily imply that the ideas behind it were bad. They were just implemented in a very inadequate manner – a mistake which necessitates the reconsideration of the whole global agenda. The ill-conceived implementation of the Washington Consensus was the main reason for the detrimental results that it invoked among the recipient countries.

 

3. A Sad Neo-liberalist triumph – the Washington Consensus

Intended to eradicate poverty in the developing and parts of the post-communist world, the Washington consensus had several important pillars, including privatization, liberalisation, fiscal austerity, tax reform, and deregulation. These were the most general concepts imbedded in the Washington consensus, and they aimed at the fast economic recovery of the most impoverished nations. The Washington Consensus had to be implemented Washington’s strongest institutions - the World Bank and the International Monetary Fund, labelled by economist and Nobel Prize Winner as the “faceless symbols of the world economic order” (Stiglitz, 2002: 3). As Stiglitz observes, this change of ideological direction in the behaviour of the IMF and the WB came from the neo-liberalist policies proposed by Margaret Thatcher and Ronald Reagan at that time. The neo-liberalist formula that they decided to export on the international plane did not seem to work so well as in their domestic cases. The explanation for this discrepancy is simple, as Stiglitz argues – the new country recipients, for which the Washington Consensus was devised, lacked any economic base and functional institutions to channel the proposed reforms. Instead, the policies were hastily and randomly planted in one of the most ravaged countries such as Kenya, Ethiopia, members of the former Soviet Bloc, Argentina, Brazil, etc., causing more distress and harm for the unprepared economies, than recovery or progress. The truth is that neo-liberalism worked in the UK and USA because both had strong economies at the time and could afford the implementation of the neo-liberal mechanisms. Dani Rodrik’s grim summary on the consequences of the Washington Consensus goes like this:

 

In Latin America, only three countries have grown faster during the 1990s than in the 1950-80 period. One of these three was Argentina, a country whose hopes of economic salvation through financial integration with the world economy now lie in ruins. A second was Uruguay, also in deep trouble. Only Chile looks like a long-term success. Among the former socialist economies, real output still stands below 1990 levels in all but four of them. And poverty rates remain higher than in 1990 even in Poland, unquestionably the most successful of the East European countries. In sub-Saharan Africa, results remain very disappointing, and far worse than those obtained prior to the late 1970s (Rodrik, 2002).

 

One should not ignore the fact that financial crises followed in Mexico, East Asia,

Brazil, Russia, Argentina, and Turkey shortly after the implementation of the Washington Consensus, which exacerbated the inequalities between rich and poor and made economic insecurity even more susceptible.

The very few success stories after the Washington Consensus include the isolated cases of China, Vietnam and India. Their economic success was due mainly to the fact that these three managed to preserve their economic independence from the West, and that they relied on primarily market-oriented, rather than neo-liberalist approach (Stiglitz, 2002; Woods, 2001; Wade & Wolf, 2001). As it was noted earlier in this essay, ideas behind the Washington consensus were not necessarily bad, but their implementation was more than damaging. Because of this, the Washington consensus became a symbol of the sad triumph of neo-liberalist thought in a global economy. As this section summarized the outcomes of the Washington Consensus, the next sections will concentrate on the weaknesses in its practical policies and the gaps in its implementation.

 

4. The Washington Consensus and the Failure of the World Institutions

The failure of the Washington consensus was largely the failure of the world institutions occupied with its executions – the World Bank (WB) and the International Monetary Fund (IMF). According to Stiglitz (2002), the institutions responsible for the implementation of the Washington Consensus, especially the IMF, were not sensitive to the local economic environment in the countries recipients, and tried to use a method known as “one size fits all”. In the case of sub-Saharan Africa, not only that one size did not fit all, sadly, it did not seem to fit any of the countries on the IMF agenda. Stiglitz describes a series of situations where the IMF was using the same preliminary reports for two different countries, simply changing the name on the front page and implementing the exact same economic rules from one country to the other. To make things worse, the IMF experts were not acquainted with the economic situation in any of the countries that they were assisting at the time, and often became unhappy if a country was demonstrating a more independent economic behaviour (Stiglitz, 2002). In other words, regardless of the economic situation in the country and its local peculiarities, the same policies of economic liberalization, privatization and fiscal austerity were to be implemented. The greatest tragedy of the Washington Consensus was that it was implemented by an institution, which despite its acute lack of knowledge of development issues, was nevertheless heavily weighing on them. As Stiglitz observes, most of the economists in the IMF were not prepared the challenging and complicated world of absent markets and sweeping levels of unemployment. Cynical as it may sound, the people who were assigned the heavy task of saving the victims from their poverty traps were educated with models that hardly ever involved any level of unemployment (Stiglitz, 2002).

Analyzing the role of the world institutions in the Washington Consensus, one should consider the situation of Ethiopia - one of the poorest African nations. In the early 1990s Ethiopia was a borrower from the IMF and was one of the recipient of the Washington Consensus policies. Throughout the process of its ‘economic recovery’ though, there were several confrontational situations between the Ethiopian government and the experts of the IMF, who accused the national government of behaving too independently by not consulting them about the economic liberalization and the repayment of their loan. Blind intervention in the national economies of the poorest countries was adopted as a style of a dictatorial and rarely accountable IMF. Other observers on the work of the IMF and the way in which it implemented the Washington Consensus share the view that despite being ill informed about the local economic situations and cultural peculiarities of the countries, the IMF was conveying its policies in a very non-transparent, non-democratic way (Rodrik, 2002; Woods, 2001; Castells, 2001; Swank, 2001). Being delegated all the economic and political power of the Western world, the IMF was practically unaccountable for any decision taken, most of the policies were decided in complete and total secrecy sometimes even from the countries directly involved in the process. This disproportional model of organization, which excluded the recipient countries from decisions about their economic future, was another reason for the failure of the Washington Consensus to achieve its initial goals.

 

5. Liberalization and Privatization – the Scourges of Neo-Liberalism

As it was mentioned earlier, the main pillars of the Washington consensus were liberalization and privatization. It many other measures, but they are the topic of another research. The examination liberalization and privatization is crucial for understanding the mechanisms of the Washington Consensus and the impact they had on the developing economies.

In the economic world, liberalization refers to the removal or at least minimization of government intervention in financial matters, as well as the elimination of trade barriers. Even the IMF today has agreed that economic liberalization was one of the reasons for the financial crises in the 1990s and has been an affliction, rather than a remedy for the small, emerging economies of the poor South ( Naim, 1997; Mason, 1999). This is why of all the pillars of the Washington consensus market liberalization seemed to be the worst. What the experts from the IMF and the WB did not realize was that the recipient countries did not have institutional mechanisms to absorb the shocking economic changes prescribed by the West. As Stiglitz goes

 

Even if Smith’s invisible hand were relevant for advanced industrialized countries, the required conditions were not satisfied in developing countries. The market system requires clearly established property rights and the courts to enforce them (Stiglitz, 2002: 74).

 

What was intended to be an accelerated recovery from poverty was soon transformed into a technocratic dictatorship executed by the IMF upon the developing world. Its primary target was the so-called trade liberalization, which aimed to utilize the comparative advantage of the emerging economies by moving the national resources from less productive to more productive channels (Stiglitz, 2002; Naim, 1999; Mason, 1997). This rapid and rather shocking reform however ended in the loss of jobs and shrinking of the economies under the pressure of the developed economies. Without trade barriers, it made them much more vulnerable and exposed to the economic global pressures. The IMF believed that the elimination of state protectionism will create new jobs, which were potentially hindered under the iron hand of state intervention, but this was not the case. Instead, growth in the target countries sank and unemployment rose. Stiglitz offers a very simple explanation for the unexpected outcome:

 

It takes capital and entrepreneurship to create new firms and jobs, and in developing countries there is often a shortage of the latter, due to lack of education and of the former, due to lack of bank financing […] The IMF in many countries has made matters worse […] (Stiglitz, 2002: 59).

 

 

The direct result of the austerity policies undertaken by the IMF was soaring interest rates, and the indirect – hardships in the sustainability and even mere survival of the labour market.

The other important mechanism under the Washington Consensus was privatization. The logic behind is the transformation of state firms and businesses into private ones. The problem with this policy was that the IMF insisted on rapid privatization and expected that the gap left by the state-owned firms will be quickly filled by new, private ones. Once again, this was not the case. The situation was the worst in developing countries, which lacked stable (if any) market mechanisms, and where the elimination of government enterprise left a huge gap and caused a lot of suffering (Stiglitz, 2002; Woods, 2001).

This is how two of the most lucid policies of the Washington consensus did not past the test of a global economic environment. What the IMF experts disregarded or refused to take into consideration was that globalization had already made the developing countries economically volatile. The Washington Consensus simply put that volatility into execution.

 

6. Conclusion: After the Washington Consensus

Several years after the implementation of the Washington consensus, it is obvious to all that it was an ill-conceived and badly implemented set of policies. One question inevitably rises: could the economic meltdown caused by the Washington Consensus in Latin America, parts of Africa and post-communist Europe have been prevented? Most of the experts will probably say no, even the ones who have their forecasts on how the Consensus could have been improved. Dani Rodrik writes that what it lacked was institutional reform and sensitivity to local contexts and needs (Rodrik, 2002). Although Rodrik is making a good point here, none of his prescriptions seem to be met by the successor of the Washington Consensus, the so-called ‘augmented Washington Consensus’. At first sight more ambitious and sophisticated than its predecessor, the second Washington consensus still does not demonstrate any clear understanding of how development works, and has no practical prescriptions of how the developing countries can reach the level of their rich patrons. The potential weaknesses in the augmented Washington Consensus leads to one conclusion – top-bottom techniques for economic recovery do not work in a world of global inequalities and insurmountable poverty. The reason is simple – exporting and implementing ideas in unprepared countries will only exacerbate dependency and widen the gap between the rich and prosperous North and the poor and global South. No one can deny the achievements of neo-liberalism in the context of globalization – the access to information, knowledge, and technology have changed relations between people, governments, organization in a highly recognizable way. However, there will always be some space for skepticism, with the promises for poverty reduction through neo-liberalism becoming less and less likely to be kept.

 

Bibliography:

 

Castells, M. (2001) “The Rise of the fourth World” in The Global Transformations Reader. An Introduction to the Globalization Debate, 2nd edition, D. Held and A. McGrew (ed), Cambridge: Polity Press, pp. 421-423

 

Mason, M. (1997) Development and Disorder: A History of the Third World since 1945. Hanover: University Press of New England.

 

Naim, M. (1999) “Fads and Fashion in Economic Reforms: Washington Consensus or Washington Confusion?”

 

Rodrik, D. (2002) “After Neoliberalism, What?” BNDES seminar on “New Paths of Development,” Rio, September 12-13

Available at http://www.bndespar.com.br/SiteBNDES/export/sites/default/bndes_pt/Galerias/Arquivos/conhecimento/seminario/novosrumos_Dani.pdf

Accessed: [24.02.2010]

 

Stiglitz, J. (2002). Globalization and Its Discontents. Penguin Books 80 Strand, London England

 

Swank, D. (2002) “The Effects of Globalization on Taxation, Institutions, and Control of the Macroeconomy”, in The Global Transformations Reader. An Introduction to the Globalization Debate, 2nd edition, D. Held and A. McGrew (ed), Cambridge: Polity Press, pp. 385-403

 

Wade, R. and Wolf, M. (2001) “Are Global Poverty and Inequality Getting Worse?”, in The Global Transformations Reader. An Introduction to the Globalization Debate, 2nd edition, D. Held and A. McGrew (ed), Cambridge: Polity Press, pp. 440-447

 

Williamson, J. (1990) “What Washington Means by Policy Reform in John Williamson, (ed). Latin American Adjustment: How Much Has Happened? , Washington DC, Institute for International Economics

 

Woods, N. (2001) “Order, Globalization and Inequality in World Politics” in The Global Transformations Reader. An Introduction to the Globalization Debate, 2nd edition, D. Held and A. McGrew (ed), Cambridge: Polity Press, pp. 463-477

 

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