Washington Consensus Overview

Washington Consensus

• The Washington Consensus was first articulated in a 1989 article by John Williamson.
• The Washington Consensus was a set of policy reforms envisioned by the International Monetary Fund (IMF), the World Bank, and the US Treasury Department.
• The Washington Consensus centered on a rejection of state-led (or interventionist) approaches to development, and instead focused on market-based policies.
• The Washington Consensus outlined ten specific principles which it contended were necessary to secure the conditions under which development could be achieved.

Ten Principles of the Washington Consensus

• Fiscal Discipline:
  • Economic stability (low inflation) was a prerequisite for securing economic growth.
  • Large government deficits undermine price stability and threaten to increase inflation.
  • Governments should reduce expenditures, especially non-merit subsidies (spending that cannot be rationalized as offsetting externalities or improving income distribution).
• Tax Reform:
  • Broaden the tax base by bringing more economic activity into the formal sector and by creating a more uniform tax code.
  • Cut the marginal tax rate to promote foreign direct investment and increase tax revenue (based on the Laffer Curve).
• Liberalization
  • Reduce the role of government in the economy and open the economy to global market forces.
  • Liberalize interest rates, trade rules, foreign direct investment, and other regulations.
  • Countries should devalue their currencies to be more competitive globally.
• Privatization:
  • Privatize state-owned enterprises to increase efficiency, reducing prices and expanding the availability of services.
• Establishment and Protection of Private Property Rights:
  • Protect private property rights.

Criticism of the Washington Consensus

• The Washington Consensus is a "one size fits all" solution that ignores local expertise and assumes all countries face the same problems.
• The IMF's mathematical models are frequently flawed or out-of-date.
• The Washington Consensus often failed to deliver the promised economic growth.
• Economic growth in many Latin American countries slowed after Washington Consensus-styled reforms were adopted.

Key Figures

• John Williamson: Economist who first articulated the Washington Consensus.
• Joseph Stiglitz: Nobel Prize-winning economist who served as chief economist of the World Bank.
• Arthur Laffer: Economist who developed the Laffer Curve.
• Rudyard Kipling: Author whose phrase "white man's burden" was used to criticize the IMF's approach to development.

Key Terms

• Structural adjustment programming: Mandatory conditions countries had to meet to be eligible for emergency assistance from the IMF.
• Non-merit subsidies: Government spending that cannot be rationalized as offsetting externalities or improving income distribution.
• Laffer Curve: Suggests tax revenues increase as tax rates increase up to a certain point, but after that point, tax revenues will decline.
• Floating exchange rate system: A system where the value of a currency is allowed to fluctuate freely based on market forces.
• Currency devaluation: Decreasing the value of a currency relative to other currencies.

Explore the key elements of the Washington Consensus, including its origins, objectives, and the ten principles proposed for economic development. This quiz outlines the importance of market-based policies over state-led approaches and emphasizes the need for fiscal discipline and stability.