Is PWC A True Successor To Washington Consensus - Essay Example

Is PWC a true successor to Washington consensus? Introduction: The term Washington consensus refers to a common term that means orientation towards free market policies from 1980 to 2008 followed by the US and its allies (Development Policy 1950 – 2008). This was influential among the mainstream journalists, economists as well as global institutions like the IMF and the World Bank. In short these refer to market friendly policies that were advised to be used in developed and developing economies. In the narrow sense it is somewhat used as the economic policy of the developing nations only that includes reduction of government deficits, liberalization and deregulation of international trade as well as cross border investment. This term was first used by John Williamson in 1989. It was used to describe a set of ten specific economic policy prescriptions that was considered by his as the standard reform package promoted for the crisis wracked developing countries. This consensus was influential during the 1990’s. During the first decade of the 21st century, this concept became increasingly controversial. After the outbreak of the economic chaos during 2008 and 2009, it was thought that Washington consensus has found its end (Poverty and development policy). John Williamson who used this term first used this to support the commonly shared themes among the policy advices by Washington based financial institutions. These institutions were the IMF, World Bank and the US treasury department. These policies were believed to be used for the recovery of Latin America from the financial crisis of the 1980’s. But Williamson’s concept of the theme was neoliberal in its approach. Even though the policy was put forward by Americans, the policy makers in Latin America used their own perspectives to develop these and introduce them in their own countries. These were developed keeping in mind what happened inside and outside the country. It was also said that these policies were largely a creation of Latin American politicians and technocrats and Williamson being a person to gather these policies first at one place. Neo liberalists argue that Washington consensus is a set of policies that are imposed on hapless countries by the Washington based international financial establishments. They also argue that these policies have increased the misery of such countries than before. This concept that was initiated by John Williamson inspired a wave of reforms in Latin America and sub Saharan Africa. This policy fundamentally transformed the financial policies in these regions. After the fall of the Berlin wall and the collapse of the Soviet Union, socialist countries also made significant leaps towards free market economies. This policy boosted privatization, deregulation and trade liberalization in Latin America and Eastern Europe that in any other part of the world. The African government’s moved with less speed. As a result of the overwhelming response by these nations, international capital flows and liberalization went much further than what Williamson has dreamed off. This concept imposed the principles of neo liberalism and market fundamentalism on developing nations. A major criticism that has been high lighted against this consensus is that things have never been done as expected. The most ardent supporters of this concept conceded that growth was low in as per the expectations in Latin America. Even though there was some progress in Sub Saharan Africa (Rodriki.2006). The main reason which prompted the developing countries to adapt to the principles of the Washington consensus was due to the prevailing unfavorable financial situations in their countries. One among the main problems that was affecting the relationships with the developed and the developing countries was that of international migrations (Haas.2007). At the start of the 21st century, it was estimated that around 3% of the world population lived and worked outside their own countries (Morvaridi). The remittances sent by these persons to their countries had a profound impact on the development of their home countries in Asia, Africa, Middle East and Latin America (Copy of remittances data). They represented the second highest important source of international funding (Human Development Report 2009). As a result of this overdependence, these developing countries were forced to comply with the standards and specifications promulgated by the developed countries (Adams.R.H.&. Page.J. 2005) More developing countries started giving importance to developmental policies that would increase the economic growth and the GNP as well as per capita income. They thought that the adoption of the Washington consensus would help them to achieve these (Morvaridi. B). This concept of consensus was developed by Williamson in 1989. This was developed due to the failure of the Keynesian dominance in the world economy after the mid 1970’s. After the collapse of the Keynesian theory, neo liberals under the leadership of Reagan and Margaret Thatcher administrations gained ground. Their policies became the new orthodoxy in the new economic situation. The Washington consensus developed by Williamson, aimed to reduce the gap between the financial cooperation between the developed countries and the less developed countries. Williamson explicitly stated that a type of apartheid existed in the world economy that separated the developed countries with that of the lesser developed ones. The Washington consensus aimed to break this jinx (Mavroudeas.S.D&Papadatos.D. 2005). The implementation of the Washington consensus was done by many lesser developed nations in Latin America, Saharan Africa and Eastern Europe and in some parts of Asia. But other growing economies like China and other East Asian economies did not follow this concept. These countries were slow to remove the trade barriers as proposed by the Washington system. Moreover china was still not in a position to liberalize its capital account. Theses countries used their own industrial and trade policies to promote exports and global technology transfers against the advice of Washington based institutions. In spite of the rejection by these countries; predominantly China achieved better growth than other developing countries that followed the Washington consensus (Bianchi.&Labory.2006). The Washington consensus that was developed by Williamson failed to deliver the desired developmental goals in developing countries despite their theoretical approach. Many economists put the blame on Williamson for developing this concept that cannot be worked out in practice. On the other hand the theoretical approach of this policy also was criticized on the ground that its visible progression when using the policy was deemed to be only short term. Many Latin American countries who enjoyed initial boom adopting this policy suffered lately. Opening up of the economies, decreasing the role of the state and deregulation of the market has in fact exposed the developing countries into increased development but with increased exploitation. The theoretical idea of this consensus specifies that if implemented correctly, this theory would work. The consensus framed by Williamson had originally ten points in it they were Fiscal discipline to overcome balance of payments crisis, reordering public expenditure priorities for switching expenditure in a pro poor way, tax reforms having a broad tax base with moderate tax rates, liberalistic of interest rates formulated in a broader way of financial liberalization, competitive exchange rate based on competitive principles , trade liberalization based on fast principles, liberalization of inward FDI, privatization based on non liberal principles, deregulation for easing barriers, and property rights to gain rights at acceptable cost. With the backing of the two major corporations, the WTO and the IMF, Williamson introduced this concept into the financial world. These policies essentially involved a rolling back by the state because of the de regularization procedures (Greg&Turner). Williamson never identified the Washington consensus as a paradigm. All his ten points were generalizations. The theory of opening up was well with developed countries because they had nothing to lose but not suitable to developing countries (The Washington Consensus as Policy Prescription for Development). An ideological defense put forward by Williamson about the failure of this consensus is that his original concept was altered by different countries who adapted it and these countries suffered because of opening up their capital account prematurely and letting the money flood in thereby overvaluing the currency (Did the Washington Consensus Fail. 2002). Post Washington consensus: The ideological failure of the Washington consensus as well as its practical difficulties resulted in a new type of consensus known as the post Washington consensus. The hegemonic paradigm, Washington consensus failed on many grounds. The growing intellectual challenges to the neoliberal orthodoxy was one reason moreover success of some east Asian countries like, China, South Korea and Taiwan without adopting this system, was the final blow. The overall growth rate in the neo liberal era when compared with the other periods was also low (Stiglitz). The post Washington consensus was developed under the supervisions of the Bretton Woods based financial institutions. There was a shift from neo liberalism to a new kind of synthesis which could be clearly described as the emerging post Washington consensus. This process was initiated by the World Bank .The new concept emphasized the importance of increasing the performance of the state as a necessary ingredient to the market oriented reforms. Deep research into the transition economies of the post communist era also appeared to provide additional support to the claims of institutions that state should have a better hand in converting and driving the economy towards success. Moreover it was widely thought that the problem of poverty could not be brought down through expected trickle down effects (Post Washington Consensus: International Development agencies). A key element that distinguishes PWC from the earlier plans is that it recognizes the importance of change in institutions as an essential component for the new developmental strategies that have to be implemented. The PWC thinks that creating effective institutions is part and parcel of good economic development. Moreover more importance is given to the social and income distributional consequences of economic policies that are followed and implemented (PWC diagram). It is beyond doubt that the PWC plan represents a considerable improvement over the earlier neo liberal approach. The major highlight of the PWC was that the role of the state to overcome the failures of the market was given high importance (Neo Lib diagram). This concept was absent in the neo liberal plan. In spite of its strengths, the PWC also reveals some weaknesses on closer investigations. One major criticism it adopts is that it follows a rather narrow and technocratic approach towards the state market interactions at the national as well as global levels. The existing power structure is predetermined here. However the PWC fails to address the fundamental power relations that exist between different classes (Imai,Gaiha,Thapa&Annim). Conclusion: The spread of the neo liberal ideas towards the developing countries and to the post communist countries did have a self perpetuating effect. This plan reinforced the view that there was no other alternative available. These criticisms leveled against the Washington consensus by the post Washington consensus developers still represents a crack in their armor. But the question remains whether the PWC could bring demanding changes that have occurred due to the effects of flourishing alternative globalization movement and against the emerging distributional imbalances at all levels, has to be answered quickly (Onis.&Senses.). References: Adams.R.H.&. Page.J. (2005)Do International Migration and Remittances Reduce Poverty in Developing Countries?. Vol 33. No 10. pp 1645-1699 Bianchi.P&Labory.S. International handbook on industrial policy.Cheltenham: Edward Elgar publishing.2006 Copy of remittances data Development Policy 1950 – 2008 Did the Washington Consensus Fail? John Williamson Institute for International Economics Outline of speech at the Center for Strategic & International Studies Retrieved November 23, 2010 fromhttp://machernucha.wordpress.com/washington-consensus/ Greg. A&Turner.M. The MDGs as an Institution of Hope. Haas.H.D. (2007). Remittances, Migration and Social Development. Human Development Report 2009 Overcoming barriers:Human mobility and development Imai.K.S,Gaiha.R, Thapa.G, &Annim.S. Is the Millennium Development Goal of Income Poverty Still Achievable? Role of Institutions, Finance and Openness Mavroudeas.S.D&Papadatos.D. (2005)Neoliberalism and the Washington Consensus. Retrieved November 22, 2010 from http://www.econ.uoa.gr/UA/files/1435329852..pdf Morvaridi. B Development Policy Issues Morvaridi. B. Neo Liberalism and development policy Neo Lib diagram Onis.Z&Senses.F. Rethinking the Emerging Post-Washington Consensus .Retrieved November 22, 2010 from http://home.ku.edu.tr/~dyukseker/onis-senses.pdf Poverty and development policy: Millennium Development Goals, Poverty Reduction Papers. University of Bradford. PWC diagram Post Washington Consensus: International Development agencies (World Bank, IMF, WTO) perspective and influence on Development Policy: Developmental policy issues. Rodriki.D. 2006. GOODBYE WASHINGTON CONSENSUS, HELLO WASHINGTON CONFUSION? Stiglitz.J.E. The post Washington consensus consensus. The Washington Consensus as Policy Prescription for Development. Retrieved November 22, 2010 from http://www.iie.com/publications/papers/williamson0204.pdf Read More