The Post-Washington Consensus - Assignment Example

Issues in Development Theory What is the theoretical underpinning of the Post-Washington Consensus? Has this paradigm shift changed the practice of the Bretton Woods institutions? Introduction In recent history, the capitalist world and the western world at large has been faced with several key issues like inflation, third world debt and currency crises that have often been associated with the policies resulting from the Washington Consensus. Although it seems far fetched, yet even the rise in terrorism and terrorist activity has been linked with the policies created from the understandings of the Washington Consensus. In effect, it is a vital item of debate which must be clearly understood by all those who wish to be a part of the economic, social or political spheres of life. Definition From a technical viewpoint, the term ‘Washington Consensus’ is a name given to the policies which were suggested by Washington based institutes to the Latin American countries in order to bring up and improve their economies. The term was originally created by Williamson and has been a part of political and economic terminology ever since. The defenders of the consensus call it a boon and a path to greater economic freedom for the less developed countries of the world. Those who oppose it call it a cruel implementation of new liberalism and a tool for the global hegemony of America (Williamson, 2000). The Bretton Woods system was established in 1944 for the international management of currency between countries. It was a system that gave rules and regulations for the commercial and fiscal connections between the countries which had emerged as victorious after the Second World War. The main purpose of establishing this system was to rebuild those economies which had collapsed after the war utilizing the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (Bird, 1994). The central feature of the system was a promise each country made to all that their monetary policies would keep the currency of the country close to a fixed value (within 1%) to gold. The IMF would have the authority to close temporary payment imbalances between countries and would monitor the fiscal activities of other nations. While the system worked well for several years, it collapsed in 1971 once the United States pulled out from the gold standard (Bird, 1994). Williamson himself is well aware of the detractions and has said that people misunderstand the notion completely. He says that audiences around the world think that the Washington Consensus are a name given to neo-liberal policies that have been forced upon various weaker countries by the Washington-based international financial organisations that have led those countries towards a state of crisis and created misery for their people (Harvard University, 2003). The vastly different opinions created by the implementation of the Washington Consensus shows that the policies are controversial if nothing else. The Policies of the Washington Consensus The policies themselves were outlined by Williamson (2000) as the implementation of monetary discipline in terms of trade, redirection of public expenditure towards projects that could given high economic returns to the people as well as alleviate poverty (healthcare, education etc.), a broader tax base, free floating interest rates, liberalized trade policies, creation of foreign investment opportunities, privatization of national enterprises, deregulation of the economy and the establishment of competitive exchange rates. While the policies mentioned above might be seen as helpful and useful for a developing economy, there are situations where such policies can be harmful if the implementation is weak or uncontrolled (Robinson, 2005). Since these policies have been applied to several countries for a number of years, their success has been mixed and they have produced uneven results for Latin America. In certain cases, these policies have been disastrous while other countries have managed to pull back from bankruptcy and economic default simply by careful application of the methods mentioned above. Therefore an improved understanding of these ideas is necessary for development theory. A New Definition In light of this, there have been modification and alterations to the definition of the Washington Consensus. Held (2005) gives us the latest and enlarged definition of the Washington Consensus as: “An economic agenda that advocates, among other things, free trade, capital market liberalization, secure property rights, deregulation and the transfer of assets from the public to the private sectors. It has been the economic orthodoxy for most of the past 20 years in the Organisation for Economic Co-operation and Development, a club of rich countries, and was, until recently, prescribed without qualification, by the International Monetary Fund and the World Bank as the policy basis for developing countries (Held, 2005, Pg. 101).” By adding the words ‘until recently’, Held shows that the latest incarnation of the Washington Consensus is not the one which was created more than a decade ago. Rodrik (2001) is in complete agreement with him and says that the definition for the new millennium has expanded to include items like corporate accountability, corruption control, WTO accords, monetary standards, independent banking, and an increased focus on social security as well as poverty reduction measures for the populace. These policies are in effect the representation of the paradigm shift in the practice of the Bretton Woods institution. The IMF Connection On the other hand, there are voices which say that the Washington Consensus is a failed idea and no particular definition can be attached to it in any way. The detractors are often very vocal in speeches against the ideas of the Washington Consensus and the debate goes on regarding the Washington Consensus, its meaning, application, success and failure (Harvard University, 2003). Even the existence of the consensus is debated (Akbar, 2005). Keeping that aside since it is beyond the scope of this paper, it can be clearly seen that the elements of the Washington Consensus are directly connected to many social and economic policy issues that are mandated by the IMF. Therefore the connection between the IMF and the Washington Consensus is worth looking into. The history of this connection is particularly interesting since it has its roots in the decades after World War II. The economies of the world and the international monetary system were in chaos after the war and the IMF was established as a part of the Bretton Woods system to monitor the currency prices and trade relations between countries for stability and protection (Bennett & Estall, 1991). However, as time went by the economic stress factors caused the collapse of the Bretton Woods system leaving the World Bank and the IMF as a part of the legacy. To remain relevant to the world as it is, the IMF has had to modify and adjust itself to the changing realties of the world. Those realities are represented by the changes in ways countries earn money and the effects it has on the balance of trade. India for instance, has become a significant trade partner for America simply because there is billions of dollars worth of software being produced in India and the IT back end services provided by the Indian labour earns billions more. China has become the largest trade partner to America and many other countries of the world simply due to its excess production capacity for electronic goods and other objects of desire wanted by developed and developing countries. This dependency of one nation on another has also created a network which needs to be stable since small events taking place in America can affect the stock markets around the globe (Bennett & Estall, 1991. For example, Microsoft announced that their latest operating system would be delayed by a few months before it is released to the public which caused the tech industry stocks to jump a few points downwards all the way from New York to London to Amsterdam to Bombay and onwards to Tokyo. This much publicised delay meant that many people would put off buying a new computer till the new operating system was launched and this meant that tech stocks all over the world for that day were not a good thing to be invested in. This is merely the smallest example of how the economies of the world are connected and larger examples can be found in situations like the Latin American crisis or the Asian Crisis where business all over the world were deeply affected. As the de facto global financial controller, the IMF takes it as a serious responsibility that it has to prevent the occurrence of such problems. Luckily, with the changing times, the IMF has shown responsibility and has altered many of its long standing policies to be in touch with the Zeitgeist. An Examination of Current IMF Policies The current policies of the IMF regarding low-income countries have been outlined by the Managing Director of the Fund (Rodrigo de Rato) who has set the adjustment of policies and economic bodies of poor countries as a priority. This would enable these countries to come out of debt and the poverty cycle on their own rather than assistance from the outside. In fact, the focus of the IMF appears to be on creating partnerships with countries rather than a master/slave relationship. At the same time, the IMF wants to take control of the areas which come under its expertise of macroeconomic growth, debt management, policy advisement and financial stability (IMF, 2006). Debt relief for the poorest countries of the world is a big part of this agenda since the IMF has already given 100% debt relief which was owed to it by the 19 poorest countries of the world. 13 of these countries were in sub-Saharan Africa and plans are being made to reduce or forgive the debts owned by several other poor nations. At the same time, policy recommendations from the IMF would prevent or restrict additional loans until certain conditions were met so that the economy has the chance to grow without substantial debt servicing (IMF, 2006). This policy would certainly help poor countries avoid the situation faced by the Central Asian Republics which came into being after the collapse of the Soviet Union. When they gained independence, the countries were debt free but within a few years they had heavy debts that caused a strain on their economy and depressed their future prospects. In fact, their debts have made them some of the most indebted nations of the world and the IMF is seriously looking into that situation as well (IMF, 2006). Similarly, the problem of aid management can be and issue for a country which does not have the expertise to handle large sums of money for productive causes (Akbar, 2005). Aid is often given to specific causes or programs like hunger elimination, poverty reduction, improving education and disease control (AIDS/HIV, Malaria etc.) which means that there are conditions attached with its use since they are also a part of the UN millennium goals (UN, 2005). The IMF wants to advice countries on how this money can be used within the country without causing a false rise in the currency value or increased inflation within the aid receiving country (IMF, 2006). By furthering the chances of a poor country’s citizen’s access to micro-lending programs and soft loans for small businesses, the IMF involves itself deeply in the financial sector of a poor country (IMF, 2006). This can have negative influences since financial control and independence might have to be given up to some extent (Stiglitz, 2002). On the other hand, it has a lot of benefits since the IMF can call upon a global strength of experts who are familiar with similar processes established in other regions of the globe. Perhaps the most controversial policy of the IMF is their involvement in governance policies where even a limited contribution or suggestions can be seen as a negation of sovereignty (Robinson, 2005). For instance, the IMF advises countries on how to improve their Public Expenditures since they are important for managing increased aid flows (Craig, 2000). This also helps in the reduction of corruption to a certain extent and can even create accountability for the governments. However, this is a thorny issue and the Managing Director of the fund has appealed for international support in these matters by saying: “But on governance and on many other issues, the international community must work together if policies are going to be effective. We are already talking with our colleagues at the World Bank about the division of responsibility between the two institutions. I look forward to discussing this approach further with the rest of the international community. (IMF, 2006, Pg. 1)” Additionally, the IMF has a policy to provide training and education to the officials of poor countries so they can learn improved skills for performance enhancement. The input from the country is given due value since the people who have been living in the area are often the best resource available to them. This is contrary to the idea of forced imposition of policies which the IMF has been accused of in the past. Of course these services may not be provided free of cost but the IMF plans to keep the country’s ability to pay in mind when she is billed for these services. Financial liberalization has several advantages and disadvantages which are directly connected with the needs of developing countries. While there may be examples of how some countries have seen economic booms with a liberal approach to the financial markets, others have experienced inflation, erosion of wealth and a dire need for assistance and loans (Craig, 2000). Developing countries in Asia, Africa and Latin America serve as good examples of what pros and cons financial liberalization brings to a country and why capital controls are necessary for the healthy development of an economy. Asia has long been home to world’s most dynamic economies. The last decade has shown us a broad flowering of entrepreneurship throughout Asia in the face of different challenges. Factors attributed to this trend include a huge wave of private equity and venture capital funding, but more importantly, regulatory laws for financing and capital acquisition were eased and the less stringent rules governing the listing of young companies at the various stock markets helped in many companies getting the money they need for business (Robinson, 2005). It would be useful if the policies are also examined in relation to high performance countries. The Stars The ease of getting loans and the financial liberalization process helped the growth of Pacific Rim for countries such as China, India, Hong Kong, Taiwan and even Japan. In particular, after the Second World War, Japan came to represent a model of economic development. Of course the massive gains made by the economy were based on the manufacturing of electronics and automobiles but the financial liberation process certainly helped the country gain its footings after the destruction it experienced (Herring, 2006). Similarly, Hong Kong has always been rated as one of the more free economies and even though it went through a change of government i.e. from Britain to China, it has retained the financially liberal attitude of the British economy rather than the controlled system of the Chinese. Taiwan can also be put on the list of countries benefiting from financial freedom. Although it has had a share of political instability and outright threats of invasion from China, it has led the way in semiconductor and IC manufacturing (Bremmer & Zakaria, 2006). Perhaps the biggest surprises resulting from the process of financial liberation are the giants that started emerging in early 1990s, China and India (Hubbard, 2005). China changed from socialist economy to a mixed market and still faces a big challenge of balancing controlled economy with capitalistic economy while turning into the manufacturing unit of the world (Herring, 2006). India has developed into the back office of the world due to its human resource skilled in information technology and still faces the challenge of reducing its dependency on services (Hubbard, 2005). An Adequate Description? Given the policy structure and the goals of the IMF, it seems clear that the mandate and the aims of the IMF go far beyond those which have been accepted as a part of the Washington Consensus. While the Washington Consensus comes across as a broad level agenda of countries which are interested in neo-liberal policies, the policies of the IMF are shown to be more in line with the goals of the United Nations and other organisations which are working to control and govern the spread of poverty and the spiralling debt situation for the poorest countries of the world (UN, 2005). At the same time, there are visible connections between the Washington Consensus and the policies recommended by the IMF and it does come back to the description for the Washington Consensus as a broad level agreement on policies which should be adopted by poor or less developed countries trying to join the globalisation race. However, it is an interesting case because at first sight it does not even seem that the policies are connected, while a deeper examination shows that the policies of the IMF go far deeper in the fiscal and governmental controls of a nation than what is generally suggested by the Washington Consensus. Conclusion In the final analysis, financial liberalization can certainly help a country and the business in the country to gain the capital they need for investment, creation of services and improving the economy of the country. However, financial liberalization alone is nothing more than a disaster since it can lead to heavy inflation that can considerably weaken an economy. In effect, financial liberalization must be coupled with stringent application of other policies which work towards the benefit of the people within the country and in the case of developing countries; it might be a good idea to have an established system which governs how these policies are to be enacted. Finally, internal or external controls with regard to capital are also important because it is clear that whoever has the money can make the rules which are to be followed before that money can be shared with others. I believe the IMF is simply doing what it was established to do i.e. to control and develop the international systems of fiscal dependency that connects country to country (Rodrik, 2001). Overtime, the role has expanded beyond the Washington Consensus and as time goes by I think that the role of the IMF will continue to expand since there will always be countries that are relatively poor when compared to the ones who are relatively rich. I do not think that the IMF is cruel or that their rules bring hardship to a nation which is already in trouble, rather with the help of the IMF and the correct application of the policies outlined by the fund a country can find itself on the path to recovery. It should not matter if the path is dotted with the Washington Consensus or neo-liberal economics as long as it gives a better future for the nation as a whole. Word Count: 3,452 Works Cited Akbar, N. 2005, ‘Scoring the Millennium Goals: Economic Growth Vesus the Washington Consensus’, Journal of International Affairs, vol. 58, no. 2, p. 233-244. Bird, G. 1994, ‘Changing partners: perspectives and policies of the Bretton Woods institutions’, Third World Quarterly, vol. 15, no. 3, p. 483-503. Bennett, R. and Estall, R. 1991, Global Change and Challenge; Geography for the 1990s, Routledge: London. Bremmer, I. and Zakaria, F. 2006, ‘Hedging Political Risk in China’ Harvard Business Review, Nov 2006, vol. 84, no. 11, p. 23-24. Craig, B. 2000, ‘Aid, Policies and Growth’, American Economic Review, vol. 90, September, p847-68. Harvard University. 2003, ‘Washington Consensus’, Global Trade Negotiations, [Online] Available at: http://www.cid.harvard.edu/cidtrade/issues/washington.html Held, D. 2005, ‘Washington gets it wrong’, Global Agenda, vol. 1, no. 3, p. 100-101. Herring, S. 2006, ‘How you should structure investment in China and SE Asia’ International Tax Review, vol 17, no. 2, p. 13-15. Hubbard, G. 2005, ‘Keep your eye on Japan’ Business Week, vol.1, no. 3851, p. 146-147. IMF (International Monetary Fund). 2006, ‘The IMFs Medium-Term Strategy for Low-Income Countries’, Remarks by Rodrigo de Rato: Managing Director of the International Monetary Fund, [Online] Available at: http://www.imf.org/external/np/speeches/2006/031606.htm Robinson, W. 2005, ‘Global Capitalism: The New Transnationalism and the Folly of Conventional Thinking.’ Science & Society, vol. 69, no. 3, p. 316-328. Rodrik, D. 2001, The Global Governance of Trade as if Development Really Mattered, UNDP: New York. Stiglitz, J. 2002, Globalization and Its Discontents, Norton, New York. Williamson, J. 2000, ‘What Should the World Bank Think About the Washington Consensus?’, World Bank Research Observer, vol. 15, no. 2, p. 251-264. UN (United Nations). 2005, ‘What are the Millennium Development Goals?’ UN.org, [Online] Available at: http://www.un.org/millenniumgoals/ Read More