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WASHINGTON AND AFTER
- The new consensus might incorporate the experience of Beijing

The term “Washington Consensus” has been used as a term of abuse or of endearment depending upon the perspective of the observer. Those who protest against the recent trend of globalization and privatization have seen in Washington Consensus the pet object of hate. They have identified it with an increasing tendency to open up economies to constrict the role of the state, restrict the rights of labour and favour the private sector. It had come to mean an inclusive agenda of reforms that would be against the interests of the poor.

In a recent article on the Washington Consensus in the Economic and Political Weekly dated April 12, 2003, John Williamson, who originally coined the term in 1989, has taken pains to explain that the consensus did not mean any of these. It incorporates 10 core principles which he had elicited from a study of the Latin American experience and put together at the end of a conference held in Washington in 1989.

The conference was held under the auspices of the Institute for International Economics in 1989. Experts from 10 Latin American countries were asked to say how much reform had happened in each country. To provide the basic agenda to help them focus, Williamson had laid out 10 areas of policy reform, which, he thought most people in Washington would agree, were needed in Latin America.

These ten areas are fiscal discipline, reordering public expenditure priorities, tax reform, liberalizing interest rates, a competitive exchange rate, trade liberalization, liberalization of inward foreign direct investment, privatization, deregulation, and property rights.

Williamson emphasizes that the Washington Consensus did not imply consensus with the policymakers of the American administration, although many of the elements of the agenda were acceptable to Washington. Notwithstanding Williamson’s explanation, the common impression is that the consensus did have the blessings of the United States of America’s power structure.

The core principles did not include such items as emphasis on monetarism, which the then US president, Ronald Reagan, had accepted. Nor did the consensus include an insistence on capital convertibility.

That the original concept of the Washington Consensus had basic strengths is obvious. Unfortunately, the actual experience with its implementation has been less than satisfactory. Williamson takes pains to clarify that the application of the consensus failed because of significant diversions from its core principles. It is not right, he therefore feels, to blame the consensus for the disappointing economic outcome. The descent of Argentina into chaos is often cited as a failure of the Washington Consensus of which it was often pictured as a poster child. The problem lay in two misguided decisions that led to Argentina’s decline. One was to link the peso firmly to the dollar and another was Argentina’s decision to splurge on expenditure using resource flows from abroad. Argentina had thus violated two of the ten commandments of the original version of the Washington Consensus: a competitive exchange rate and fiscal discipline.

Williamson explains that he did not have a chance to have a discussion with Joseph Stiglitz, a Nobel laureate and a critic of globalization. Stiglitz declined the request on the ground that he disagreed little about the substance as opposed to semantics. In his article, Williamson insists that the Bretton Woods institutions themselves had not sponsored the consensus. This is contrary to the widespread belief that it summarized the policy attitudes of the two institutions. The evangelists of the Bretton Woods institutions have been, to a large extent, responsible for the increasing acceptance of the broad profile of the consensus in many developing countries.

Williamson takes the argument further by sketching out the next stage of reforms on the lines of the Washington Consensus. He says that that the Institute for International Economics had recently assembled another group of economists from Latin America to discuss the future agenda. While the focus of the conference was on Latin America, its lessons could be extended to the rest of the world.

Four big themes emerged from the conference. They are crisis-proofing, completing and where necessary, correcting the first generation liberalizing reforms that constituted the Washington Consensus, complementing them with second generation (institutional) reforms and broadening the reform agenda to include a concern for income distribution.

The agenda gives priority to crisis-proofing, especially because Latin America has been prone to crisis. Reducing the vulnerability of the countries of the region has, therefore, the highest importance. Some of the actions that are needed to curb volatility of these economies involve their moving away from an export profile too dependent on just a few primary commodities. One of the other important suggestions is that it should be ensured that sub-national governments are subjected to hard budget constraints. Failure in this area has been at the core of the problem of some Latin American countries, like Brazil.

The second item on the new agenda is to adopt a sufficiently flexible exchange rate regime to allow external competitiveness to be improved through currency depreciation. Williamson admits that he does not rule out the need for extraordinary measures, such as imposition of restrictions on capital inflows to avoid overvaluation of the currency. He, however, rules out dollarization as a panacea. He suggests that monetary policy should be focussed on targeting a low rate of inflation. The suggested new reform package includes creation of a regional body to develop an analogy to the Maastricht criteria for fiscal discipline. The bitter experience of the European Union, with the growth and stability pact of leading countries like Germany and France, struggling to meet the criteria, has apparently impressed Williamson.

While Willamson admits that India has been a vastly more stable economy than Latin America, he has reason to worry that it is playing with fire in allowing such large budget deficits to persist year after year and the public debt to escalate. His suggestion is that non-merit subsidies should be reduced in order to restore fiscal balance.

Williamson argues that first-generation reforms need to be supported by a second-generation package, which includes institutional reforms. These involve correction of labour policy, financial reform and further trade liberalization. Labour markets in India, Williamson shows, are even more sclerotic than those of Latin America. Further, India’s import restrictions are still too high and reservations for industries in the small-scale sector are inappropriate. While Willamson admits that the gradualist reform of India prevented it from being ensnared by the Asia crisis, mainly because it did not open its capital account, the liberalization agenda still leaves a lot to be desired.

The most important second-generation reform is institutional change. This includes cleaning up the judiciary and the public services as also the regulatory system. One aspect Williamson emphasizes is that reforms have to be country-specific; there can be no one uniform global model.

Williamson points out that the Indian political system appears to outsiders to be quite eccentric, in that governments regularly advocate reforms, while oppositions oppose even reforms that they themselves had proposed when in office. This is a remark which is to be heeded by the present Indian opposition, who had been avid reformers while in power.

Williamson admits that the original version of the Washington Consensus to included the essential elements of income distribution, which is critical to further problems. In this context, the only asset that the state can help in providing is education, in which respect India has a long way to go.

While Williamson’s discussion of the Washington Consensus is instructive, it is relevant to remark that it ignores the experience of the Asian countries, especially the successful experience of China. While we should not dismiss the relevance of Latin America, we should emphasize that the originator of the consensus needs to admit that the Chinese experience also provides valuable object lessons, some of which deserve to be incorporated in the new consensus. The fact is that China has turned out to be the manufacturing powerhouse of the global economy, both in respect of exports and domestic manufacture, as also in attracting foreign direct investment, notwithstanding that it ignored many of the basic principles of the consensus. Maybe we should look forward to a new version of the Washington Consensus which would incorporate Beijing’s experience.

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