Download The Washington Consensus

NS3040
Winter Term 2015
The Washington Consensus
Washington Consensus I
• Washington Consensus originates with John Williamson in
the early 1990s
• Reflective of the policies suggested for Latin American trade
and development by IMF, World Bank, and U.S. Treasury
• In the original formulation by John Williamson the
components included:
• Fiscal discipline. Governments aim to restrict budget deficits to a
level that can be financed in a non-inflationary manner
• If interpreted as a medium-term objective, this can be a corollary
to, rather than competitive with fiscal policy being conducted in a
counter-cyclical manner
• No view was taken or was implied about the right combination of
expenditure restraint and tax policy to achieve fiscal discipline
• Public spending. Governments should redirect public
expenditure from low-priority expenditures like general subsidies
to education, health and infrastructure.
2
Washington Consensus II
• Tax Policy. In re-designing tax policy, governments should
aim to raise revenue by a broad tax base combined with
moderate marginal tax rates.
• Financial Liberalization. Governments should aim for
domestic financial liberalization
• Initial focus was on interest rate liberalization – too narrow a focus
• Now recognizes the importance of effective financial supervision
• Feels the liberalization of capital flows as low-priority
• Exchange rate. Should be unified and set at a level that is
competitive – neither over- or under-valued
• Trade. Governments should liberalize trade
• Initially by converting various import restrictions into equivalent tariffs
• Subsequently by reducing tariffs
• Issues concern the speed with which tariffs should be reduced and the
expediency of allowing the process to be interrupted by adverse
3
economic developments.
Washington Consensus III
• Foreign Direct Investment (FDI) – should be allowed
without restriction
• Privatization. State enterprises should be privatized – few
or no exceptions
• Entry and exit to industries should be deregulated
• Secure property rights should be extended to the
informal sector
• Number of competing frameworks:
• Augmented Washington Consensus
• Beijing Consensus
• Buenos Aires Consensus
• Post-Washington Consensus
• Singapore Consensus
4
Washington Consensus IV
• Since the 1990s “Washington Consensus” has been a
lightning rod for dissatisfaction among antiglobalization groups.
• Term use interchangeably with the phrase “neoliberal
policies”
• Williamson feels that this version of the Washington
Consensus was invented to be a “straw man” easy to
attack, but not in line with his original intent
• To address some of the issues raised by critics
(Stiglitz) several variants of the Washington
Consensus have evolved including the “Augmented
Washington Consensus”.
5
Washington Consensus V
• The “Augmented Washington Consensus” adds:
• Corporate governance
• Anti-corruption
• Flexible labor markets
• WTO agreements
• Financial codes and standards
• “Prudent” capital account opening
• Non-intermediate exchange rate regimes (intermediate usually
involve soft pegs and tightly-managed floating)
• Independent central banks/inflation targeting
• Social safety nets
• Targeted poverty reduction
• The debate continues about the Washington
Consensus, its definition its successes and failures
6
Washington/Beijing Consensus I
• Contrasting the original Washington Consensus (WC)
with the Beijing Consensus (BC)
• The Beijing Consensus has never been precisely spelled
out
• Term introduced by Joshua Cooper Ramo in 2004, but no
formal list of recommended policies
• Williamson therefore assumes the BC to be revealed in
the policies actually pursued by China
• Gradualism versus Shock Treatment
• Williamson feels issue is not at heart of WC but that
countries may not have luxury of gradualism as China did
with its continuity in regimes.
7
Washington/Beijing Consensus II
• Encouraging Innovation
• Has been explicitly favored by many adherents of BC, while
the WC is silent on topic
• Williamson not convinced of the existence of a “middle
income trap” – therefore not part of his framework
• Possible downside – key to catch-up growth is imitation,
not innovation and possible to waste resources re-inventing
the wheel – Brazil prohibiting importation of computers
• Macroeconomic Stability
• Major theme in WC, and China has pursued low inflation
policies
• Open Economy
• WC calls for competitive exchange rate (not overvalued),
trade liberalizing and opening toward FDI
• If one measure openness of an economy by the ratio of
exports to GDP, then China world’s most open large
8
economy
Washington/Beijing Consensus III
• Market Liberalization
• Most sharp difference between WC and BC
• WC is basically pro-market while BC allows a far greater
role of the state
• Probably this aspect that provoked the strong reactions to
WC
• Market liberalization key to WC
• WC financial liberalization – needs to be accompanied with
prudential supervision; BC might prefer planners make key
investment decisions
• WC trade liberalization important; BC more import substitution
• WC privatization – key in WC; BC no real hurry – still has many
state enterprises
• WC deregulation, WC confined to abolish restrictions on entry
and exit; BC much more extensive control
• WC property rights, WC very important; BC not high priority.
9
Contrasting Models I
10
Contrasting Models II
• Washington Consensus vs Evolutionary Institutionalist
(contd.)
11
Contrasting Models III
• Washington Consensus vs Evolutionary Institutionalist
(contd.)
12