Washington Consensus - Essay Example

Washington Consensus Name: Tutor: Course: Date: What is Washington Consensus? Washington Consensus is a term coined in 1989 showing a list of ten specific economic policy reforms agreed in Washington that was to have far reaching benefits to the countries of Latin America. It got its name Washington because of the place the conference was held. In retort, the Latin American countries claimed that Washington was out to impose policies to the world and take credit for the reforms (Caprio & Honohan, 2001). The economic policies were meant for developing countries and came directly from the World Bank and International Monetary Fund (IMF). The initial ten policies were augmented with other ten emphasizing on recognition of social dimension and institutional reforms. IMF and World Bank have been viewed as agents of ‘neoliberalism’ hence seeking to reduce the role of state. Some of the objectives of the consensus were to impose cost recovery in primary education. Critics viewed this as the US treasury trying to press its clients to rapidly dismember capital controls. Consensus implied a broad measure of agreement (Easterly, 2001). The interpretations: Evaluating the Ten Commandments of Washington Consensus Washington consensus was a ten policy reform held in Washington and directed to Latin American Countries in a way to accelerate their development (Ffrench-Davis, 2000). 1. Fiscal Discipline: Brought in the context that Latin America was under large deficits that resulted in high inflation and payment crises. The poor were hurt as the rich banked their capital resources abroad. 2. Reordering Public Expenditure Priorities: Pro-growth and pro-poor switch in expenditure from issues such as non-merit subsidies to infrastructure, education and basic health. 3. Tax Reforms: Moderate marginal tax rates are combined with a broad tax base to form a new tax system. 4. Liberalization of interest rates: Recognize the relevance of financial liberalization and prudent supervision. 5. Competitive exchange rate: Ensure that exchange rates are competitive in the intermediate regime in the form of a two-corner doctrine of float ‘cleanly’ or fix firmly. 6. Trade Liberalization: Defined how rapid trade needs to be liberalized and provide a general agreement on the direction to be taken. 7. Inward Foreign Direct Investment Liberalization: Barriers that impeded the entry of FDI be repealed. 8. State owned enterprises should be privatized: A broad acceptance of neoliberal idea depending on how it is done. Asset transfers could take the form of a highly corrupt process for a fraction of true value to privileged elite. 9. Eliminating regulations restricting competition or impeding entry of new firms: Easing exit and entry barriers to trade and investment. It does not abolish the regulations governing environmental or safety concerns or prices in non-competitive industries. 10. Property Rights: The informal sector should obtain property rights at favorable cost. Proponents and Critics: The Success of Washington Consensus Reasonable price stability was needed for growth and macroeconomic stability. Kuczynski and Williamson (2003) note that budget deficits had seriously affected most Latin American countries with exceptions of Colombia and Chile. There was need to restore fiscal discipline and avoid the resolve to inflation tax. One should be prepared for faster inflation permitted by larger budget deficits without serious welfare consequences. Critics claim that focus on inflation alone is a ill result of excessive deficits. Few countries in Latin America in the 1980s could finance deficits using domestic debt. The unsustainable debt dynamics were a result of excessive debt creation. This undermines fiscal discipline. The Keynesian case of real economy stabilization is neglected as more focus is given to stabilizing inflation (Fischer, 2003). Proponents of the consensus argue that it was not about general cuts in public expenditure but World Bank had advised on redirecting public expenditure in a way to support the poor and spur growth. The poor do not need to heavily depend on subsidies but expand their capabilities through education, healthcare and expansive infrastructure (Lucas, 2003). However, it was argued that there has been minimal progress in this area with Public Expenditure Reviews from the World Bank wanting. Expenditure decisions were not rational and reductions in public expenditure could not improve the quality of spending but instead wasted. IMF and the World Bank were not able to correct exemption of basic items like medicines and food hence the need for regulation of VAT that was seen as recovery for loss of revenue. However, the formulation missed the goals that steered tax reforms (Fischer, 2003). More emphasis should have been given to methods of raising additional revenue, increasing public expenditures, introducing trade reforms and correcting budget deficits. Financial liberalism is about shifting to market established interest rates. This allows banks or the market and not the government to establish means of obtaining credit. The private sector should work under measures to ensure lenders make decisions on risk or return trade-off. Gambling and insider lending need discipline since Southern Cone countries engaged liberalization without institutional preconditions (IMF, 2003). Critics claim that capital account liberalization needs delaying until successful completion of other reforms. There was no pressure for capital account liberalization but there should have been appropriate supervisory institutions created. Export growth is essential to a competitive exchange rate and general growth process enabled by export growth. Exchange rate that is adequately competitive is likely to induce rapid growth in exports. Competitiveness means one will be able to support one or the other intermediate exchange rate regimes. On the contrary, Malan (1991) argues that a bad reporting of the Washington scenario is seen as admirable development prescription. With infatuation into the bipolar solution, economics profession or Washington institutions was a disservice to development. Replacement of quantitative restrictions with high tariffs in order to support the government and not privileged importers compliments increased need for imports. Progressively reduce tax to result in freer imports and limit terms of trade cost. Critics objected on the speed of reducing protection and the possibility of creating a dependent protection based on the strength of balance of payments. Jobs are threatened when protection is reduced. Real exchange rates may be adjusted (Rodrik, 2003). An obligation to trade liberalization isolates a country from engaging protectionism as a means to grow infant industries. Developing countries could not be able to sustain infant industries despite being given temporary protection. They risked sanctions for non deployment of WTO rules. Consumers should be allowed to take on certain items if they wish hence protection of consumer sovereignty. Companies diversify only if has a stake in intellectual property to compensate for a disadvantage among local competitors (Naím, 2000). Countries are able to offer investment incentives with undue proportion of benefits to the companies originating the investments. Contrary opinions suggest that FDI flows are more stable compared to certain bank loans and capital portfolio. Premature liberalization of capital account was the primary cause of the Asian crisis that interrupted the miracle of East Asia and overtook the tigers in 1997. When conducted properly it brings benefits in the form of improved service coverage. Privatized enterprises are properly regulated or sold into a competitive market. Privatization has brought about profitability and efficiency of privatized enterprises. It helps to increase access and coverage to privatized utilities. Foxley (2003) argue that that the effects of privatizations are not felt in terms of employment, output quality, prices and wages. Public attitudes show that privatization is increasingly and intensely unpopular. It is seen as corrupt or lacking adequate regulatory mechanism due to monopoly power. Nationalist sensibilities arise as national firms are sold to foreign buyers especially to neighbors regarded as archrivals. Economists dismiss public concern on corruption during the privatization process (Malan, 1991). The public may prefer destruction of wealth rather than acquisition through dubious means. Democratic proprieties must oblige future privatizations to be squeaky clean. Part of the antipoverty agenda to support appropriate structured deregulation. It is a good policy for development. It is expected to sail well and be implemented in developing countries. Deregulation of India’s trucking industry in the 1980s was a great success. Service delivery will be improved due to increased level of technology and innovation (Fischer, 2003). The Banks have been able to develop websites in every developing country and showcases how entry into the banking business is difficult in many emerging economies. Deregulation is an outstanding ingredient for inclusion in the developmental policy description. On the contrary, it is argued that property rights have not been granted to Peruvian informal enterprises. It was in their best interests to formalize cheaply so as to reduce the costs of property protection (Williamson, 1990). This ensured greater benefits accruing to own investment and empowerment to credit access. Poverty reduction is closely linked to protection of property rights. The theme deserved placement in the Washington Consensus (Ffrench-Davis, 2000). Latin America and the economies in transition were the regions that moved furthest in terms of liberalization, stability and integration to the global economy. East Asia was slower in capital account liberalization but grew rapidly in policy stance (stabilization front) with relation to OECD countries. South Asia and China were gradual with unambiguous direction of movement. Sub-Saharan Africa moved grudgingly and spottily not out of conviction but under foreign pressure. Argentina was excellent in liberalizing reforms in the 1990s but failed to get its fiscal policy in order and maintain a competitive exchange rate (De Soto, 2000). Argentina’s implosion could be blamed on the Washington consensus. There was a stringent attempt to tighten fiscal policy, eliminate restrictions on inward FDIs and extensive trade and financial liberalization. There was also dismal deregulation and a lot of privatization. Areas that were neglected were maintaining of a competitive exchange rate, reforms in public expenditures and extension of property rights. Tax reform formulation completely failed. What a good policy prescription could look like There is a lot that needs retracting given the light of experience of fewer countries benefiting instead of more. Countries should implement the policies without pressure from Washington. There is need for more recognition in terms of trade liberalization and macroeconomic discipline instead of substitute industrialization (McKinnon, 2003). Market economy development should be the case instead of dependence on the leading role of the state. The governments need to stabilize macro-economy and avoid crises by stabilizing inflation. Avoid currency mismatches and misalignments while accepting that specific issues on fixed rates that make sense. We have to join the general view that desirability is in completing rather than reversing the reforms for liberalization. Specific emphasis goes to liberalizing the labor market in the Latin American countries (De Soto, 1989). The benefits should allow continuation of the privatization program especially in the Latin America. A larger part of labor force should be priced back to the formal sector jobs so as to get minimal social protections. Reformist countries should recognize that effective and good policies come from strong institutions. A reformed tax code mired in corruption is not of much use. There is need to focus more on institutions instead of policies which is essential in innovation of development economics in the near future (Nellis, 2003). The most important issue is that governments need to know people getting increased income and not merely to increase country growth rates. The traditional mechanism of increasing income distribution needs to be increased in scope. These issues are levying taxes on the rich that disproportionally benefits the poor increases social spending (Bruno & William, 2008). Increased middle income earners are likely to increase assts in Miami. Major improvements will take a long time as long as the region remains highly skewed in terms of income distribution. There is need for improved educational opportunities where the poor can obtain micro-credit, asset titling, land reforms and accumulation of human capital (Bruno & William, 2008). Conclusion Whether Washington Consensus was a good development prescription policy or not depends on personal interpretation. If incomplete, the specific set of proposals initially applied the term explaining a sensible, reform agenda. This agenda was misguided in two of the ways where Washington subsequently departed. Today, a consistent and protracted argument compounds the second sense the Washington Consensus has evaporated owing to the IFIs on fiscal policy because of the profound gulf of the Bush administration (Besley & Robin, 2003). Capital account convertibility and Income distribution have taken centre stage. It can be understood why anyone brainwashed as a neoliberal agenda rejects it as unhelpful is the thought of the term in its third sense. . References Besley, T. & Robin, B. (2003). Halving Global Poverty. Journal of Economic Perspectives, 17(3), Summer, pp. 3-22. Bruno, M. & William, E.(2008). Inflation Crises and Long-run Growth. Journal of Monetary Economics, 41, February, pp. 3-26. Caprio, G. & Honohan, P. (2001). Finance for Growth: Policy Choices in a Volatile World. Washington: World Bank. De Soto, H. (1989). The Other Path: The Invisible Revolution in the Third World. New York: Harper and Row. De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. London: Black Swan. Easterly, W. (2001). The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Cambridge, MA.: MIT Press. Ffrench-Davis, R. (2000). Reforming the Reforms. London: Macmillan. Fischer, S. (2003). Globalization and its Challenges. American Economic Review, 93(2), May, pp. 1-30. Foxley, A. (2003). Development Lessons of the 1990s: Chile. Lecture in the “Practitioners in Development” series given at the World Bank, June. IMF. (2003). World Economic Outlook, May. Kuczynski, P. & Williamson, J. (2003). After the Washington Consensus: Restarting Growth and Reform in Latin America. Washington: Institute for International Economics. Lucas, R. E. (2003). Macroeconomic Priorities. American Economic Review, March, 93(1), pp.1- 14. Malan, P. S. (1991). Critique to the Washington Consensus. Revista de Economia Política, 2(3), July/September. McKinnon, R. I. (2003). Money and Capital in Economic Development. Washington: Brookings Institution. Naím, M. (2000). Fads and Fashion in Economic Reforms: Washington Consensus or Washington Confusion? Foreign Policy, 118(86), Spring. Nellis, J. (2003). Privatization in Latin America. Mimeo. Washington: Center for Global Development. Rodrik, D. (2003). Growth Strategies. Harvard University, processed Williamson, J. (1990). Latin American Adjustment: How Much Has Happened? 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