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Washington Consensus Essay

1597 words - 7 pages

Williamson said the Washington Consensus was originally formulated not as a policy prescription for development, but was a lists of policies that were widely held in Washington in 1989 that were desirable for implementation in Latin America. He noted there were other development policies that he thought were useful, but were not included in the Washington Consensus since they did not enjoy widespread support. He suggested the Washington Consensus had three different meanings. First, was his original list of ten specific policy reforms. The second understanding was that the Consensus was a set of economic policies advocated for developing countries in general by official Washington, such as ...view middle of the document...

Williamson said he disagreed with economist Joseph Stiglitz’ contrarian views that moderate price inflation has no measurable growth effect and therefore has no serious welfare consequence. He also noted that the crises of recent years suggests that a country make incur further risks with an excessive fiscal deficit, such as unsustainable debt dynamics. Another criticism this policy reform has faced is that it focuses exclusively on stabilizing inflation and neglects the Keynesian case for stabilizing the real economy. Williamson used Chile’s decision to gradually reduce inflation while not rapidly establishing price stability that allowed the country to establish economic health during the 1990’s. Fiscal policy should be tight during boom times, so it can be loose during recessionary times, he said. Full employment, he added encourages a high rate of investment.

Second, was advocation of redirecting public expenditures from political sensitive areas to areas which had been previously neglected but would yield high economic returns and potentially improve income distribution in areas such as health, education and infrastructure. He said, unfortunately, he has not seen much progress since 1989. He has not seen evidence that the Bank’s approach to public expenditures was not having much impact with its clients. Across the board reductions reduce the good things as well as bad. A more efficient approach would be to establish a chain of command consisting of people who actually believe in the ends of the program being pursued. Third, tax reform where taxes used to finance public expenditures should be raised in a way that would minimize distortions. He used the Bradley-Kemp tax act of 1986 in the US as an example. Most tax reform in the developing countries during the 1990’s has been driven by the desire for a broad based resilient revenue source such as VATs. The main problem with VATs is that it is regressive and Williamson was critical of the Bank and IMF’s resistance to exempting basic necessities such as food and medicines. Fourth, financial liberalization should involve an ultimate objective of market-determined interest rates. The first experiences in applying financial liberalization did not work in the South in 1970’s because of sequencing and supervision. Recent evidence suggests that it can yield a real social benefit in terms of an improved allocation of investment. Williamson believes it should be pursued, but should delay capital account liberalization until many other reforms have been successfully completed, and that supervisory institutions be in place.

The fifth policy reform was a unified exchange rate at a level sufficiently competitive to induce a rapid growth in nontraditional exports. He said he believe export growth leads to general growth, but had been not been accurate in having it as part of the Washington Consensus. Most of Washington believes in one or other of the polar positions, but he still believes his...

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