Development a là Washington Consensus
At the same time as Reagan and Thatcher were pushing market liberalization and the dissolution of centrally-planned welfare economies in their own countries, a framework of ideas and standards about development policy dubbed the Washington Consensus was emerging that called for the implementation of similar policies abroad.
As mentioned above, the IMF and the World Bank took over debt from private banks that offered developing countries credits in the 1970s, but only on the condition that certain economic reforms were made in those countries. These reforms were structural in nature – that is, they weren’t just intended to reduce the deficit at hand, but instead, to restructure the economies of the nations they were implemented in — and their widespread implementation led to the adoption of a new development paradigm in which the award of IMF/World Bank Loans was conditioned on these structural adjustment programs.
In 1990, John Williamson named the new developmental policy consensus that was emerging in DC among IMF, World Bank, and US Treasury staffers the “Washington Consensus”. This new developmental framework flew in the face of its predecessor, the Substitution Industrialization Model (ISM), which focused its policies on reducing the dependency of developing nations on more technologically advanced ones. Under the ISM, developing countries employed a variety of policies –like import taxes and subsidies for domestic industrial entrepreneurs, among other things – to shelter fledgling industries in the hopes of making domestic production competitive with that of more developed countries.
But, like Babb writes in “The Washington Consensus as transnational policy paradigm,” as the mainstream of the economics discipline moved back towards core neoclassical principles (in which supply and demand, and not government intervention, determine prices, production, and consumption), interventionist development policies became more difficult to justify. And there were, of course, perhaps most significantly the coercive pressures from the lending organizations (namely the World Bank and the IMF) mentioned above to adopt the strategies and goals outlined by the Washington Consensus. As Babb notes, lending conditioned on policy reform was nothing new for the IMF, but loans a lá Washington Consensus were a whole new ballgame. “Lending for policy reform had long been practiced by the IMF, but had been limited to fiscal and monetary conditions, such as cutting deficits and reducing money supply, and were aimed narrowly at stamping out inflation and promoting currency stability,” she writes. “In contrast, the World Bank structural adjustment loans were aimed at changing the underlying structure of national economies to promote exports and economic growth.”
Under the Washington Consensus, a suite of policies was employed to encourage trade and liberalize markets. High on this list of policies in terms of prioritization (and also in terms of long-term effects) was the implementation of drastic tax reforms in developing nations. In Brazil, the top marginal income tax rate was slashed from 60% to a mere 25%; in Mexico, from 55 to 35%, and in Argentina from 45 to 20%. While non-progressive taxes, like the sales tax, were raised, corporate taxes were reduced, in many countries by 10% or more.
Tax reforms were also used, among other things, to liberalize trade, another policy goal highly prioritized by the Consensus. Where ISM used tariffs to support fledgling industries, under the Washington Consensus developing countries were encouraged to reduce import tariffs and embrace free trade. The extent of this encouragement was drastic: tariffs on imports in Latin America dropped from average levels of 42.2% in 1985 to 13.2% in 1991.
Financial liberalization was emphasized through the elimination of foreign exchange and capital controls, allowing for capital (including Foreign Direct Investment, in which one country has a controlling share of a business based in another country) to flow freely. Initially under the Washington Consensus exchange rates floated freely, but, when currencies began to depreciate they were replaced by fixed exchange rates between national currencies and the US dollar. Interest rate ceilings were eliminated and interest rates raised to attract foreign investment.
Along with the liberalization of trade and finance, Latin America saw a wave of privatization from the mid-1980s to the late 1990s. The extent of this privatization was, again, drastic: the contribution of state-owned enterprises to GDP was halved between 1980 and 1995, dropping from 10% to 5% of GDP in just 15 years. Affected most were the energy, telecommunications, transportation, water, and sewage industries.
Welfare systems in place under ISM suffered as austerity measures were pushed, and Latin America saw large cut-backs in government spending on things like education and social spending, as well as a transition from public pensions to private pensions and the deregulation of the labor market.
The outcomes of the new policies of the Washington Consensus were mixed. Only 10 years after Williamson originally named the new suite of policies the Washington Consensus the editor of Foreign Policy observed the rise of a new ‘Washington Confusion.” “The list of policy reforms required by the IFIs was getting steadily longer and more difficult,” Babb writes, “and debates among development experts had become so heated that they were ‘spill[ing] over from scholarly seminars to television shows and from the pages of technical journals to those of daily newspapers.’”
While external debt was reduced, economic growth mostly failed to materialize in Latin America, where Washington-inspired reforms had proliferated. While current accounts deficits initially dipped – meaning that developing countries were increasing their exports – they increased again in the 1990s. When several countries abandoned structural adjustment in the early 2000s they experienced commodity booms.
The push of Washington Consensus policies away from industrialization saw a loss of manufacturing-sector jobs, although this was partly compensated for by the creation of Maquiladoras, which were specific production zones for foreign companies with tariff and tax exemptions.
But again: a mixed bag (or maybe just a largely bad bag). Real wages decreased due to labor market deregulation and unemployment increased from 5.8% to 10% in Latin America during the 80s and 90s. Informal employment began to skyrocket as employment security decreased. Poverty and inequality increased, and Latin America saw recurring and devastating economic crises.