The Washington Consensus, as originally propounded by international economist John Williamson in 1990, consists of a set of free-market but middle-of-the-road economic policies, that the IMF and World Bank use as a template when judging Third World economies. Its highlights include the following:
-- Fiscal discipline, but with no preference between achieving this through higher taxes or lower spending
-- A redirection of public spending towards areas with a high economic and social return, such as public education, public health and infrastructure
-- Broadening the tax base
-- Liberalizing interest rates
-- A competitive exchange rate, and free movement of trade and foreign direct investment
-- Privatization and deregulation in areas where there are barriers to firms entering and exiting the business
-- Secure property rights.
The consensus failed to live up to its advance billing, with gross domestic product growth rates in Latin America, where it was most intensively pursued during the 1990s, declining from 4.2 percent per annum in the first half of the 1990s to 2.0 percent in the second half, and to negative overall economic growth since 2000. Clearly it is at best in trouble.
Criticism of the consensus has come from two directions, the free-market right, generally in the United States, and the anti-free-market left, in emerging markets themselves but also, since 1999, from the anti-globalization protesters of the rich west.
From the right, there are three major criticisms of the consensus:
-- It fails to discriminate between cutting public spending and raising taxes as methods of imposing fiscal discipline, thus over time inexorably expanding the public sector
-- It fails to provide adequately for the interests of the domestic private sector in emerging markets, in particular the interests of private sector savers, generally middle class, who are often the victims of repeated expropriation of one sort or another by local governments.
-- It rests on an assumption that government and the international financial institutions will direct policy, leaving inadequate policy space for the emerging markets private sector, the leaders of which aid bureaucrats tend to regard with deep suspicion. It is notable that in countries in which the IMF and World Bank have been prominent in recent decades, the private sector is of much less importance in policy formation than the government.
Indeed, even when comparing countries with equal degrees of poverty, a country such as Thailand in which the private sector is powerful is over the long run likely to be very much more successful than one such as Argentina, in which the local government and international policy bureaucrats call the tune.
There is thus a clear alternative to the consensus available, which has been in one form or another been proved successful in East Asia, and is now proving its mettle in India, a country of enormous social problems where the influence of Washington aid bureaucrats is limited.
In much of the world, however, Latin America in particular but also almost all of Africa and most of the Middle East, the critique of the consensus has come from the other direction. In the recession since 2001, it is this leftist criticism of the consensus that has achieved most political traction and made its way most prominently into emerging market public policy:
-- Fiscal discipline, the balancing of the national and state budgets, is denounced as "Herbert Hoover economics" (Hoover himself, of course, far from being fiscally disciplined, increased public spending sharply during his 4-year tenure of the presidential office.) Instead of "Hooverism," primitive Keynesian remedies for recession, involving public sector handouts to all and sundry, are repeatedly tried in an effort to restart the economy.
-- Education, health and infrastructure are neglected, particularly in Africa, and money is spent instead on social handouts and on propping up loss-making public sector monopolies.
-- Tax policies are given a populist tinge, in an effort to squeeze the "rich" for electoral gain
-- Interest rates are once more fixed and subsidized, and credit is directed by the government, to reduce the borrowing cost of the government and provide subsidies to favored companies at the expense of middle-class savers.
-- Free trade is denounced as "neo-liberalism," and bilateral deals are arranged with neighboring countries which are in a state of equal economic decrepitude
-- Exchange controls are reintroduced, not only on capital inflows, to prevent profits going to foreign "speculators" but more perniciously on capital outflows, in an attempt to trap domestic savings where they can be looted -- South Africa has recently strengthened these, as I mentioned last week.
-- Foreign direct investment is discouraged, particularly in industries that can be labeled "strategic" and existing foreign direct investors are harassed by national and local bureaucracy, in the hope of increasing the state sector's cash returns from them -- the Chilean Luksic group's unhappy experience in Peru is a good (or rather, bad) example of this.
-- Privatization is halted, and privatized companies which have been sold to foreign investors are harassed, in the hope that they can be returned to state control.
-- Property rights become once more a political plaything, with environmental dictats now being used to add to their restrictions, and outright expropriation in countries such as Venezuela.
The reversal of consensus policies is extremely widespread. In Latin America, there is now no country except to a limited extent Colombia, in which the hated "neoliberal" policies are still pursued -- Luiz Ignacio Lula da Silva's Brazil talks the talk, but is showing no sign of walking the walk. In Africa, "consensus" policies were never very extensively tried in the first place, and are now limited to at most Botswana and Uganda. In the Middle East, the existence of oil revenues appeared to obviate the need for fiscal and economic discipline, and only a few small polities such as Qatar remain the exception.
In Asia, the new Roh Moo-hyun government has turned away from Korea's version of the consensus, that had been implemented by the previous Kim Dae-jung administration, and appears to be flirting with nationalism, protectionism and anti-business activism, all of which are likely to cause trouble. Indonesia has effectively ceased privatization, and is pursuing increasingly nationalist economic policies, modified only by the need to get further money out of the IMF and World Bank, which are themselves only too eager to lend it.
More optimistically, there are at the other extreme a number of countries which have worked out their own variant on consensus policies, and are pursuing them with some success. Malaysia broke publicly with the international institutions in 2001, and has achieved continued economic growth in difficult conditions with a policy that can best be described as free market autarky. Thailand under prime minister Thaksin Shinawatra has taken its balance of payments for granted and pursued a policy of development oriented towards domestic small business, again with some measure of success. Both countries have paid much more attention to the needs of domestic middle class savers, and less attention to the needs of international capital, than the consensus would have recommended. India, too, has achieved a steadily improving rate of growth on the back of a high domestic savings rate and good returns for savers, without ever solving its fiscal problems as the consensus would have dictated.
The Washington Consensus is thus being applied in a small and decreasing number of countries currently, and as a policy mix is unlikely to be revived. (A new book "After the Washington Consensus" by John Williamson and Pedro-Pablo Kuczynski, suggesting a revised post-consensus economic development strategy for Latin America, was launched Monday at the Institute of International Economics; I will review its policy recommendations in due course.)
Clearly, if the useful recommendations in the consensus were kept, the errors discarded and the omissions rectified, this would be a good thing. However, in too much of the world this is not happening. Instead, country after country is reverting to a poisonous mix of nationalism, socialism and protectionism that promises to be economically highly counterproductive.
To see what the result of such a policy mix might be, one need only look at Venezuela, whose per capita GNP declined by 20 percent between 1950 and 2000, at a time when even in Latin America the average per capita GDP was more than doubling. Throughout that period, Venezuela has benefited from oil revenues, which were of course greatly increased by the oil crises of 1973 and 1979. However, by bad policy of democratically elected governments since 1958, Venezuela has squandered its oil wealth and impoverished its people.
Benjamin Disraeli, in "Sybil" (1845), wrote of "Two nations between whom there is no intercourse and no sympathy; who are as ignorant of each other's habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets. The rich and the poor."
As the current recession grinds on, the world may increasingly be divided into two worlds, differing as completely as did Disraeli's two nations. The poorer world, of the vast majority of Latin America, Africa and the Middle East, together with scattered countries elsewhere, will be separated from the richer to the same degree as Disraeli's two nations. But the separation will be due, not to differing resources, or to rich country oppression, or even to differing prior levels of wealth, but to differing policy mixes: the improved consensus vs. the rejected consensus.
By then, even to those who see its defects all too clearly, the Washington Consensus, and the slow growth and modest progress in emerging markets that it produced, will be seen as a lost Nirvana.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)