Failure of Washington Consensus - Coursework Example

FAILURE OF WASHINGTON CONSENSUS By Location Introduction According to Stiglitz & Chang (2001, p. 5) Washington Consensus is a combination of economic ideas operating freely in a market that command the support of renowned economists as well as international organizations, which include European Union, International Monetary Fund (IMF) and the United States. It advocates for floating exchange rates, free market, free trade and macroeconomic stability (Fine, 2001, p. 142). Floating exchange rates are the exchange rate system for a country in which the specific county’s currency value is set as determined by the market mechanisms. They are changed freely in the forex market. In a free market, the price at which goods and services are sold are determined by the market mechanisms, that is demand and supply. On the other hand, macroeconomic stability is enhanced by the policies that are put in place in the market with the sole purpose of minimizing exposure to external shock. As a result, chances of full employment are increased with a better external balance. Through these policies also, there is guaranteed price stability and potential economic growth. Principles of Washington consensus Low government borrowing and prevention of extreme fiscal arrears relative to gross domestic product (GDP). From economic perspective, low government borrowing sets a situation where by the government seeks to boost it balance of payments by reducing its rate of borrowing both locally or from external bodies (Williamson, 1994, p. 52). Fiscal deficits can also be referred to as the budget deficit. This implies a situation where by the expenditures incurred exceed the receipts, a situation that forces the government to look for other sources to meet the deficit. Controlling these two will lead to favourable balance of payment and the GDP will also rise. Tax reforms enable the transformation of tax collection, the process through with the collection is made, and the manner in which the taxes are managed (Bigman, 2007, p. 127). Tax reforms include making the tax base more broad and opting for moderate marginal tax rates. Broadening tax base creates a situation where by the amount of text collected is increased, making it possible for the government to make a bigger revenue collection than before. It moderates the marginal tax rates, hence increasing the chances of attracting more investors; as a result, capital formation will be realized. The principle of economy will also be realized due to well laid down measures of tax collection. Interest rate liberalization involves interest rates that are positive, and market determined which are moderate in real terms. Moderate interest rates will balance the interests between investors and savers. Investors are attracted when interest rates are low while savers are encouraged to save more when interest rates are high. Therefore, moderate interest rates need to be established to bring a balance between them. Therefore country’s growth will be realized. Competitive exchange rates, the term exchange rate in relation to currency refers to the price of a country’s currency in terms of another country’s currency. Therefore, competitive exchange rates will help to eliminate the dominance of one currency. Competitive exchange rate is aimed to prioritize growth and stability. Trade liberalization, it involves liberalizing imports, elimination of restrictions on trade and lower trade tariffs (Herdegen, 2013, p. 145). Trade liberalization will encourage more investment, variety of goods and services, relationships among nations will be boosted. It encourages free trade, which enables the partnering nations to trade with one another with no restrictions. Through trade liberalization growth of a nation can be realized. Privatization, involves transfer of ownership from government to private individuals. It can also mean that government selling most of its shares held in particular bodies, leaving the ownership by individuals or its citizens. Privatization will help to bring quality goods and services, variety of products, abolition of monopolies and also more investment will be realized. All these will help the nation to raise its gross domestic product and also realize favourable balance of payment. Deregulation is the changing of rules and policies that restrict the entry of new entrepreneurial firms to reduce competition (Hofmann, 2007, p. 6). Also, the change of the policies can be made to encourage new firms in the market. It will help control the monopoly and enhance market competition. Monopoly firms have low quality services and they customers buy products at high prices. Washington consensus has formed a principle of increasing foreign direct investment (FDI), aiming at a sustained growth in investments. Also, the consensus wants to eliminate barriers like taxes and high costs of licensing new firms so that the economy of the country can grow (Held, 2013, p. 16). Effects of Washington consensus It supports free trade that has less or no restrictions governing the market forces. For example, the Washington consensus supports free trade through the North Atlanta Free Trade Association and World Trade Organization. This has led to the rise of many entrepreneurs and the economy of the country has a notable increase due to the free trade. Bailing out of the IMF was advantageous because it helped fund the businesses that were falling out. Finance is a key factor in starting up a business and to maintain the business. The concept of comparative advantage should be practiced in a country where the products and goods that are on high demand should be maximized in production. It will help the country to realize greater profit margins and reduce the cost of production. In addition, the comparative advantage will help the firms to understand the market forces and exploit opportunities (Herdegen, 2013, p. 147). Shortcomings of the Washington Consensus Free trade has led to the growth of many producers in the market and as a result, there is flooding of goods. It has led to fall of market prices because the competition is high and the gods are many. Even though free trade has led to growth of the economy, it is not the best solution for an economy. According to the demand and supply curve, when the market is flooded with the same goods the price will fall and most businesses will make losses(Gabrisch, & Palgrave Connect (Online service), 2006 p. 46). If tariffs and taxes are in place, it will help control the number of producers and sustain the growth of the economy. It has led to a reduced rate of getting loans in Washington. This is to reduce the rate of burden created by the individuals who apply for loans. The reduced amount of borrowing has negatively affected the welfare programs because they are operating at a low account balance (Ritzen, 2005, p. 45).Secondly, thereduced in spending can lead to few economic hardships due to insufficient available funds. Problems associated with privatization; the idea of privatization is a good one, but no all sectors of an economy should be privatized. It is true to say that privatization increases efficiency and more so improvement of quality of products and services. For key public sectors, privatization may mean ignorance of wider social objectives by these companies. The consensus failed the extent to which privatization could have been allowed. Privatization in key sectors would lead to discrimination and uneven distribution of resources, income and services among different groups in the region (Columbus 2003, p. 31). The key sectors include health, education and environment. If these key sectors are left to individuals, the poor members of the society will be in great problem because they are not in a position to afford and access them. Failure of redirecting public spending from subsidies, towards the broad based provision of key pro-growth, pro-poor services and investment infrastructure to the following extent, the principle resulted to misinterpretation where by primary health care, primary education and infrastructure investment has been ignored. These problems are as a result of encouraging little government intervention, therefore resulting to public goods and services to be disregarded. The consensus focuses on market orientation policies with less government intervention (Columbus, 2003, p. 25). The extent to which it failed is that government is left with few powers and few roles to play in the market, due to this reason imbalance is created between provision of basic commodities and private goods. It resulted in instability of free markets, the cause of instability of free markets emanated from the abolition of regulations that restrict the entry of the market and also, deregulation does not restrict competition. When there is free entry and competition is encouraged the infant industries will decline due to uncontrolled competition. The consensus failed to put restrictions on market entry and competition leading to some local industries closed down. This challenge leads to increased unemployment levels (Herdegen, 2013, p. 149). Financial instability, it emanated from the credit crisis. The credit crisis is a situation when there is a high level of serial defaulters. This resulted from interest being determined by the market. The rate of interest being determined by the forces of demand and supply with no government intervention, resulted in crisis in finance. The additional effect of financial instability limits economic growth, mobility of factors of production decreases and the rate of unemployment levels increases (Herdegen 2013, p. 116). Therefore, restrictions in some cases are beneficial if controlled. The consensus failed to fathom ultimate engine of growth, the primary and key growth of the predominantly private market economy, is creativity and technological innovation. The consensus failed to allow government to take in initiative, leaving the market to private individuals and firms. The state has a vital role in innovation and its exclusion creativity and innovation is limited. Then need of technological innovation is to meet the changing demands and new needs arising in the market. It focused more on trade-led growth failing to acknowledge and consider science-led growth, which is characterized with innovation and is even more important than trade-led growth (Sutton & Wiegers, 2012, p. 97). Due to the reason described Washington Consensus is criticized. The consensus failed to recognize that the growth potential of a state can be constrained by geography and ecology set. These two factors are not the same in every country. This is because trade led growth strategy of landlocked and a country which is not land look cannot work with the same efficiency. Foreign direct investment also depends on the geography and ecology of a nation. A nation that has good environment conducive for investment will be highly opted in comparison with a country with hardships. Example, areas that are Malaria free will be preferred to malaria infested places (Engel, 2012, p. 107). It denied the state its rightful role; Washington consensus concentrated all powers to individuals and market forces. In the free market, prices are allowed to be determined by forces of demand and supply. The government role in ensuring that the right price is charged is not put into consideration. The government role in the provision of public goods is also privatized. By so doing the government is denied its rightful role in providing vital range of public goods. In addition, it also led to limitations of self-help posing social challenges. The level of poverty increases as the availability of social help is restricted (Sutton & Wiegers, 2012, p. 107). Criticism in mode of governance, the consensus failed on choosing the best mode of governance. The Washington consensus adopted structurally adjusted good governance in comparison with democratic governance. This method of governance especially to developing countries did not work as intended. The problem of poverty was not solved; this is because it’s only in democratic governance where the solution can be found. Good governance is the one authority lies with the people, and can only be realized where there is democratic good governance (Fine 2001, p. 48). Democratic governance is based on people’s choice and allows them to participate in key decisions. Failure of meeting millennium goals (MDGs), the consensus failed to meet the MDGs especially in developing countries. Most of the developing countries are coupled with many challenges especially the rates of poverty levels. Most of these developing countries are working hard to eliminate poverty levels and also meeting MDGs. The economic integration had no great impact as the countries competed for the same markets with primary commodities. Free trade as a principle of consensus did not give the result expected (Ritzen 2005, p. 47). Poverty reduction was not realized, as in the case of millennium goals, poverty reduction was not realized. The developing countries are still working to meet food security, reducing levels of unemployment and reduction in poverty levels. The donor assessment of the regime illustrates that it was well committed to alleviate poverty. Democracy is key element and foundation in the eradication of poverty ensuring that participation of public is enabled, and their views are used in decision making policies. Due to this factor Washington Consensus is criticized (Sutton & Wiegers, 2012, p. 132). The consensus was based on wrong readings of growth experience; the consensus was based on the East Asian growth experience which had wrong readings. In some other states they used free trade regimes to succeed even though they had included extensive tariffs on imports and subsidizing exports. Due to this factor Washington consensus suffers fundamental inadequacies. Elimination of tariffs is also a threat to country’s budget, because there is likelihood of experiencing budget deficits and the nation will have inadequate capital to spend on the development project (Sutton & Wiegers, 2012, p. 70). Elements of the Washington consensus that also aided in its failure Hegemony of modern neoclassical theory within development economics, the theory states and assumes that, the market is fully efficient and state is inefficient. According to the theory, it assumes that it is only the market rather than the state should address problems of economic developments. They include industrial growth, creation of employment and international competitiveness. The best interest rates are believed to foster sustainable levels of consumption and investment, favourable balance of payment, low inflation and increased allocation of resources and therefore high growth rates in the long run. The failure of the Washington consensus originated from analysing one variable (Gabrisch, Hölscher & Palgrave, 2006, p. 56). The idea that poor countries remain poor because of state intervention, before the Washington Consensus poor countries remained poor due to lack of capital which aid in development. Capital includes machines, money and infrastructure. The term development can be defined as a method of sequential transformation via industrialization and modernization, propelled by domestic consumption and capital accumulation financed domestically. According to Washington consensus, it is opposite, countries are poor due to corruption, misconceived state intervention and economic incentive that is misguided and inefficient. It further elaborates that development is an outcome of incentives and neoclassical policies. Policies include privatization, fiscal restraint, and flexibility in labour markets, abolition in prices intervention by government and liberization in trade, finance and capital account (Sutton & Wiegers, 2012, p. 87). Emphasis on market virtues and general equilibrium theory of mainstream economics, these freedoms can only be permitted through the state. Meaning that the provision of and core set institutions and functions can only be granted through the state. They range from monetary and fiscal policies, law and order and property rights. Consensus policies are associated with authoritarianism limiting democracy (Engel, 2012, p. 183). Due to reason highlighted state intervention is encouraged on a discretionary basis and directed towards heavily and globalized financialized capitalism. Conclusion Washington consensus despite it coupled with many inefficiencies, a conclusion cannot be made that it is a total failure, because all of its ten principles have economic validity that is considerable. Investment in education, tax base broadening, sustained government borrowing and flexible interest rates help to improve welfare of the economy. Free trade and privatization cannot be concluded that it is a total failure, because they are associated with potential benefits. Both free trade and privatization encourages foreign investment, variety of quality goods and services among others that help to improve economic welfare (Engel, 2012, p. 190). The challenges of economic set principles, conclusions are arrived that the problems depend on the mode of implementation. Free trade in specific, the way it is implemented, how, where and when matters a lot. States have different geography and ecology, and it favours developed countries rather than developing ones, it is therefore advisable that enough is evaluation is done before a policy is implemented. Free trade promotes international trade, which is enabled through lower tariffs (Ritzen 2005, p. 123). To avoid the challenges of stiff competition and decline of infant industries, limited protectionism is encouraged, even though it depends on the mode of implementation. Bibliography Bigman, D., 2007. Globalization and the least developed countries potentials and pitfalls. Wallingford, Oxfordshire, UK Cambridge, MA: CABI Pub. Columbus, F., 2003. Russia in transition. New York: Nova Science Pub. Engel, S. 2012. The World Bank and the post-Washington Consensus in Vietnam and Indonesia: Inheritance of Loss. Washington, DC: Routledge Fine, B., 2001. Social capital versus social theory political economy and social science at the turn of the millennium. London New York: Routledge. Gabrisch, H., Hölscher, J., & Palgrave Connect (Online service)., 2006. The successes and failures of economic transition: The European experience. Basingstoke [England: Palgrave Macmillan. Held, D., 2013. Global Covenant: The Social Democratic Alternative to the Washington Consensus. Hoboken: Wiley. Herdegen, M., 2013. Principles of international economic law. Oxford, United Kingdom: Oxford University Press. Hofmann, M., 2007. Aid as a catalyst for poverty reduction. München: GRIN Verlag GmbH.p6 Ritzen, J., 2005. A chance for the World Bank. London: Anthem Press. Stiglitz, J. & Chang., 2001. Joseph Stiglitz and the World Bank : the rebel within. London, England: Anthem Press. Sutton, M. & Wiegers, S., 2012. Echocardiography in heart failure. Philadelphia, PA: Elsevier/Saunders. Read More