Washington Consensus: Williamson & Norberg Views

• The Washington Consensus is a doctrine or imperialism that is being resurrected
• Part 3 of the study session was held on Jan 13 and covers the views of Williamson and Norberg

Context

• The era of Margaret Thatcher and Ronald Reagan brought an end to Keynesian economics
• The late British PM Thatcher and Reagan advocated for Friedman-Von Hayek recipes

The Washington Consensus

• Officially known as the Washington Consensus in 1989, it involved the following :
• Privatization of the public sector
• Dismantling of public services
• Deregulation of labor laws
• Market forces were allowed to decide everything

US vs The South

• The US supported the freedom of MNCs locally for nearly two decades
• The Free Trade Commission in 2025 will face challenges in enforcing American laws on large corporations
• The US maintained protectionist policies through anti-dumping tariffs, security based tariffs, and copyrights/patents

The Recipe

• In response to Latin America's debt crisis in the 1980s, the World Bank and the International Monetary Fund used the Washington Consensus as a remedy
• The remedy included:
• Liberalizing trade
• Deregulation of laws
• Integrating the financial sector with FDI
• Free flow of capital
• Rolling back the state

Effects

• The South experienced a knowledge gap, leading to challenges in development
• Local establishments were demolished, and some were reliant on MNCs
• States heavily relied on foreign investments, making them vulnerable to market fluctuations.
• Labor exploitation happened, and became a sacrifice for developing states to attract MNCs
• States were trapped in production while the MNCs siphoned profits to the North

Williamson's Paper

• The original consensus had a neo-liberal view of diminishing dent, steering public funds to the deficit
• Focused on cutting the state to finance trade deficit and loans
• Integrating the state into the market's forces via trade and financial liberalization
• Trade liberalization was considered key to combat inflation, with some impacts being job losses, local monopolies etc

Budgets and Taxes

• GDP formula: GDP = C + I + G + B.o.P (Ex – Imp)
• C = Consumption
• I = Investment, regulated through the "i," the interest rate
• G = Governmental Expenditures
• B.o.P. Exports – Imports
• Exports > Imports = Revenue
• Imports > Exports = Deficit
• Trade deficit means that the state lost money (think of it as a firm, you buy more than you sell)
• To finance the deficit you need to borrow money
• Countries in deficit suffer from a horrible cycle: currencies depreciate → Import go down, but prices of commodities go up --> if no reform → default on loans → Enter the IMF

Continued

• The consensus primary objective is to cut down the deficit, to minimise inflation
• Public expenditure should only be made for direct economic solutions, anything else should be disregarded
• Taxes should be broadened to everyone, and income tax abolished - to attract the MNCs
• Privatization should occur where ever possible, to reduce the costs on the budget, and cover the deficit

Market Integration: Trade

• Implemented through Trade Liberalization, paving the path for MNCs and foreign corporations into the market.

• Includes;

• A gradual cut down on tariffs

• Deregulation of any laws that may impede on corporations market

• Full implementation of copyrights, protecting the the knowledge of corporations,

Market Integration: Finance

• To attract capital for investment, barriers for foreign capital to exit the state are eliminated through fixed currency exchange rate
• Free flow of capital included full integration of the banking sector, stock, and bond markets and direct investments
• MNCs have the same rights as local companies, but without the labor unions
• Protection of knowledge through copyrights will allow MNCs to have the advantage to wipe out all local businesses

Williamson's Argument

• Williamson argues that his 1990 article was misrepresented and that reforms should be temporary and not full-blown liberal
• There needs to be a Keynesian recipe to empower local economies
• He argues that he did not intend for full capital liberalization, especially out-going capital
• Exchange rates should not be fixed and that the Argentinian case shows how ludicrous policies could be

Williamson Concludes

• He did not intend for the washington consensus to be a cookbook and the role of the WB/IMF should not be a cookbook either
• America's leadership in the issue of liberalization of the South was criticized by the IMF
• The Washington Consensus no longer became a Consensus
• He regrets that the Washington Consensus was synonomous with Neo-liberal order

Norberg's View

• Economic indications since 1965 show:
• Western Countries increased their wealth by 65%
• Latin America by 60%
• Africa by 80%
• Asia's income increased by 300%
• UNDP (1997): The 2 great ascent since the industrial revolution as developing countries are winning against poverty, hunger, disease, and illiteracy

Absolute Poverty

• Absolute poverty refers to people earning less than one dollar a day at the time (currently $1.90 or less)
• 1820: 85% of the world's population lived in absolute poverty
• 1950: Less than 50% , 1980s : Less than 33%, and 2000s: %18
• The UN Goal: to lower to AP to 1.5% worldwide by 2015 was "achieved" by 2003

Developing World

• Citing sen: Small wages mean beyond poverty : lack of choice, and basic accessibility to opportunities and basic life
• Sen criticizes the absolute poverty ratio and definition because it overlooks current standards and potential living capabilities
• China declared that it eliminated absolute poverty and 24 million people no longer live there

Norberg - Life Expectancy

• Life expectancy in the developing world was less than 30 years old
• By 1960: increased to 46 and by 1998: increased to 65
• OECD countries have a life expectancy of 76 and a world wide expectancy of 60
• Doctors: On average there are 1.15 per 1000, increase by 50% since 1 doctor per 1000
• The children mortality rate of 18% was reported in the 1950s which went down 6% in the 1900s ( still 37% when looking at under 5 according to the WHO)

Open discussion Topics

• Are the shown percentages reflective or not
• Wage prices, cannot reflect reality of living
• Many villages have agricultural industries and love better for lower wages in the absence of the washington consensus
• In Poverty and wages (1982), The market should secure people-in-need food
• Access to food is determined by wages, politics, and availability of food supply.
• 1973 Ethiopia and 1974 Bangladesh faced mass famines, food was exported due to market forces

Explore the Washington Consensus, a doctrine involving privatization, deregulation, and market-driven forces, as discussed by Williamson and Norberg. Examine its origins in the Thatcher-Reagan era and its implications for global economics and US policy. Understand the challenges it poses to enforcing laws on multinational corporations.