NS3040 Summer Term 2014 The Washington Consensus

1. NS3040 Summer Term 2014The Washington Consensus

2. 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.

3. 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 economic developments.

4. 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

5. Washington Consensus IV • Since the 1990s “Washington Consensus” has been a lightning rod for dissatisfaction among anti-globalization 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”.

6. 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

7. 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.

8. 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 economy

9. 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.

10. Contrasting Models I

11. Contrasting Models II • Washington Consensus vs Evolutionary Institutionalist (contd.)

12. Contrasting Models III • Washington Consensus vs Evolutionary Institutionalist (contd.)