Gobind Nankani, vice president of the Bank’s Poverty Reduction and Economic Management network, provided opening comments and introductory remarks. Nankani noted John Williamson was the father of the Washington Consensus, an early critic of capital liberalization and bipolar exchange rate systems, and rejected the notion of Brazil’s impending default. Nankani was followed by Paulo Fernando Gomes, an executive director with the Bank, who chaired the event. Gomes said it was important to challenge development theories including the Washington Consensus, and countries that have implemented such measures are seeking more accountability. Gomes said problems persist as 60% of Africans live below the poverty line and long-term growth projections suggest unsatisfactory outcomes, so new thinking is necessary.
Williamson said the Washington Consensus was originally formulated not as a policy prescription for development, but was a lists of policies that were widely held in Washington in 1989 that were desirable for implementation in Latin America. He noted there were other development policies that he thought were useful, but were not included in the Washington Consensus since they did not enjoy widespread support. He suggested the Washington Consensus had three different meanings. First, was his original list of ten specific policy reforms. The second understanding was that the Consensus was a set of economic policies advocated for developing countries in general by official Washington, such as the IMF, Bank and US Treasury Department. These policies augmented the original policies advocated by Williamson, and emphasized institutional reforms. The third meaning was espoused by critics of the IMF and Bank who suggested these were policies imposed on client countries, and were an attempt to minimize the role of the state. Williamson criticized the third view as one not grounded in fact. In retrospect, he added that he was wishful in his thinking about a consensus on the issue exchange rate policies. He was also strongly critical of the IMF’s move to rapidly dismember capital controls in Asia during the financial crisis of the late 1990’s.
Williamson then discussed the ten policy reforms of the Consensus. First, was that budget deficits should be small enough be financed without recourse to the inflation tax. He said the view that widely held was that macroeconomic stability was an indispensable precondition for growth, the reasonable price stability was an essential aspect of macroeconomic stability and in most of Latin America price stability had been undermined by excessive budget deficits. Therefore, restoration of fiscal discipline was essential and there should be an avoidance of inflation taxes. Williamson said he disagreed with economist Joseph Stiglitz’ contrarian views that moderate price inflation has no measurable growth effect and therefore has no serious welfare consequence. He also noted that the crises of recent years suggests that a country make incur further risks with an excessive fiscal deficit, such as unsustainable debt dynamics. Another criticism this policy reform has faced is that it focuses exclusively on stabilizing inflation and neglects the Keynesian case for stabilizing the real economy. Williamson used Chile’s decision to gradually reduce inflation while not rapidly establishing price stability that allowed the country to establish economic health during the 1990’s. Fiscal policy should be tight during boom times, so it can be loose during recessionary times, he said. Full employment, he added encourages a high rate of investment.
Second, was advocation of redirecting public expenditures from political sensitive areas to areas which had been previously neglected but would yield high economic returns and potentially improve income distribution in areas such as health, education and infrastructure. He said, unfortunately, he has not seen much progress since 1989. He has not seen evidence that the Bank’s approach to public expenditures was not having much impact with its clients. Across the board reductions reduce the good things as well as bad. A more efficient approach would be to establish a chain of command consisting of people who actually believe in the ends of the program being pursued. Third, tax reform where taxes used to finance public expenditures should be raised in a way that would minimize distortions. He used the Bradley-Kemp tax act of 1986 in the US as an example. Most tax reform in the developing countries during the 1990’s has been driven by the desire for a broad based resilient revenue source such as VATs. The main problem with VATs is that it is regressive and Williamson was critical of the Bank and IMF’s resistance to exempting basic necessities such as food and medicines. Fourth, financial liberalization should involve an ultimate objective of market-determined interest rates. The first experiences in applying financial liberalization did not work in the South in 1970’s because of sequencing and supervision. Recent evidence suggests that it can yield a real social benefit in terms of an improved allocation of investment. Williamson believes it should be pursued, but should delay capital account liberalization until many other reforms have been successfully completed, and that supervisory institutions be in place.
The fifth policy reform was a unified exchange rate at a level sufficiently competitive to induce a rapid growth in nontraditional exports. He said he believe export growth leads to general growth, but had been not been accurate in having it as part of the Washington Consensus. Most of Washington believes in one or other of the polar positions, but he still believes his position is good policy. Sixth, was having quantitative trade restrictions replaced by tariffs which should be progressively reduced to a uniform low rate. This channels the rents to the government instead of privilege imports and allows import quantities to expand in response to shocks that increase the need for imports. Critics have generally been non-economists who believe this will reduce jobs, but he suggested higher prices for protected goods will reduce jobs. The next policy reform was to abolish barriers which impeded foreign direct investment. He said making intellectual property available in developing countries likely contributes to development. FDI’s are more stable than portfolio capital. Eighth, was privatization of state-owned enterprises. Research on privatization suggests that it worked in improving efficiency and profitability, and increasing access to utilities. It is less clear on other dimensions on impact of wages, prices, output, employment and quality. He also noted privatization has not been popular in Latin America, in part, because of corruption and nationalism concerns. Ninth, was abolition of regulations that impede the entry of new firms or restricted competition. The final policy reform is that the legal system should provide secure property rights without excessive costs, and should make these available to the informal sector.
Williamson believes that implementation went furthest in Lain America, but less so in East Asia. China and South Asia move unambiguously but slowly, and Sub-Saharan Africa moved spottily and grudgingly. Argentina failed to maintain a competitive exchange rate and didn’t put its fiscal policy in order which precipitated the crisis it had in 2001. Reforms that were widely implemented were tightening fiscal policy, extensive financial and trade liberalization, elimination of FDI restrictions, privatization and deregulation. Least was public expenditure priorities, maintaining a competitive exchange rate and extending property rights to the informal sector. He said most countries would have benefited if they had moved on implementing the reform prescriptions he described in 1989. The new agenda for the future should include having governments avoid crises and stabilize the macroeconomy which includes stabilizing inflation and avoiding currency misalignments. This agenda argues to the desirability of completing rather than reversing the liberalizing reforms of the Washington Consensus. Third, is building institutions. Fourth, is that governments should recognize that who gets an increase in income matters.
Williamson briefly outline his view on criticisms by economists Stiglitz and Dani Rodrik on the Washington Consensus. He concluded that the Washington Consensus was a sensible, if incomplete, reform agenda. The Washington Consensus today, he believes, no longer exists as a profound gulf has development between the Bank and IMF and the Bush Administration.
Professor Alice Amsden of MIT provided some commentary following Williamson’s remarks. She described the neoliberalism of the Washington Consensus as dominant both in North and South. The preceding period from post-World War II to 1980 was Keynesian, New Deal and interventionist was radically different in comparing growth rates. Under the Washington Consensus, developing countries experiences a significant decline in economic growth. In the future, countries interested in strong economic growth should study the period preceding the Washington Consensus, Amsden said. She cited the end of colonialism as spurring entrepreneurial growth and development. She said the GATT allowed flexibility where the WTO does not, and suggested a positive step in trade and economic growth would be to move back to the GATT. Foreign aid from the US and the Bank was tied to making productive assets in a way it is not today. She also noted that the Cold War allowed developing countries to play the US and Soviet off against each other, and this also impacted development and growth. Currently there are no engines for growth, she said. She characterized foreign investment positively. She also noted that where indigenous firms exist, there appears to be more incentive for profitability than having foreign firms operating in a developing country. She concluded that the Washington Consensus is collapsing as developing countries seek less dependance with the West.
Ricardo Ffrench-Davis, the principal advisor of the Economic and Social Statistics Series for Latin America (CEPAL), was the second commentator. Developing countries want growth with equity, he said. To have this, what is necessary is timing and sequencing. Latin America’s growth was converging with world growth in the 1970’s, but is now diverging. Growth is very slow over the last 14 years. He agreed with Williamson’s assessment on Chile. Low inflation is good, but not at the expense of growth. Ffrench-Davis said economics was about balancing instruments. Macroeconomic reforms espoused by the Washington Consensus has not been friendly for the private sector in the region, however. Investment, perhaps more efficient than the 1970’s, has been significantly lower in the current period. He noted many governments made the mistake of using capacity rather than creating capacity.
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