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Mainstream, Vol XLVI No 35

Whither Washington Consensus?

Tuesday 19 August 2008, by Girish Mishra

The ideological basis of the ongoing phase of globalisation is ‘Washington Consensus’, which some people call ‘neo-liberalism’ or ‘market fundamentalism’. The Washington Consensus was propounded by John Williamson in 1990. It indicated a set of policies that were prescribed by certain Washington-based institutions in 1989 originally to Latin American countries for adoption. These institutions included the US Treasury Department, Federal Reserve, and Trade Department besides the IMF, World Bank, Inter-American Development Bank and GATT. According to Joseph Stiglitz, it was basically the consensus between the 15th and the 19th streets of Washington, D.C.

None of the developing countries were consulted, not to speak of involving them, in evolving this consensus even though it was meant to be adopted and implemented by them. “One size fits all” was the mantra informing this prescription. It denied the state any active role in the economy. It was asserted that state enterprises, protection, subsidies, etc. actually harmed the economy and distorted the process of economic growth. Thus the state should confine itself to encouraging economic liberalisation, privatisation of public enterprises and macro stability. The Washington Consensus had ten points, namely, fiscal discipline (changing the existing priorities of public expenditure by drastically phasing out subsidies and terminating as early as possible all poverty alleviation programmes), the taxation reforms (leading to the broadening of taxation base and reduction in the maximum rates), financial liberalisation (determination of interest rates by market forces), reforming the fixation of exchange rate, trade liberalisation, unrestricted inflow of foreign direct investment and no discrimination against it, privatisation, removal of regulations to facilitate the new indigenous and foreign firms into economic activities, and reform of property laws so that there is no difficulty in acquisition, use and transfer of assets.

John Williamson asserted in the year 2000 AD that the key to economic development lay neither in natural resources nor in capital, whether physical or human, and its quantity and quality. The requirement was of a correct and appropriate set of policies that were available in the form of Washington Consensus.

A number of developing countries, willingly or unwillingly, were made to embark on economic reforms, based on this Washington Consensus from the 1990s onwards. Naomi Klein in her most extensive and well documented study, The Shock Doctrine: The Rise of Disaster Capitalism, has detailed how they were compelled by economic and political pressures or simply by creating situations where there was no escape route available to falling in line. Ideologues and publicists like Francis Fukuyama and Thomas L. Friedman tried to assure them that the days of class struggles were over, there was no alternative to capitalism and, once the entire world opted for the Washington Consensus, there would be no conflicts between two countries. ‘History will come to an end’, the capitalist socio-economic system would become ever lasting. All the residents, irrespective of differences of religion, language, region and economic status, would imbibe the same ideology and eat McDonald’s hamburger and drink Coke-Pepsi. Happily, they would not fight among themselves. Peace and cordiality would reign everywhere.

Besides, the emergence and growing dominance of ‘New Economy’, based on information technology, would bring in economic stability and business cycles would become a thing of the past. Economy would go on rising without any interruption or break. As the chief economic commentator of Financial Times, Martin Wolf, says, there were three claims made as regards the New Economy. It would seldom be in the grip of inflation and would be more stable, it would be propelled by innovations towards a long-lasting boom and the basic character of the market would undergo a permanent metamorphosis.

It did not take long to expose the falsity of these claims. Neither did social contradictions disappear nor could the wars between the nations be eliminated. India and Pakistan, both eating McDonald’s hamburger and drinking Coke-Pepsi, found the tensions between them increasing and, ultimately, leading to the Kargil war. Neither did the basic character of the market change nor did business cycles become a thing of the past. Soon after these assertions were made, the dot com crisis gripped the economy. Since then the American economy has been going from one crisis to another. At present, even before it could come out of the subprime crisis, a severe inflation has descended over it and fears are being expressed that it might have to go through a long spate of stagflation. Ignoring the prescription that the state should keep off the working of the market forces, the US Federal Government has come forward to rescue Fannie Mae and Freddie Mac and is pursuing military Keynesianism.

Globalisation, based on the Washington Consensus, has led to growing income inequalities and regional imbalances. One can easily discern this phenomenon in India. The situation has become so serious and disturbing that the talk of “inclusive growth” is heard all the time. The World Bank has been stressing it day in and day out. Increasing economic and social inequalities and growing regional imbalances are being reflected in regionalism, separatism, ill-treatment of immigrant workers and terrorism of various shades and all sorts of crimes. Instead of coming together under the American tutelage, more and more countries appear to be going their own way to build independent economies and polity of their own. This trend can be easily discerned in Latin America, for long considered as the backyard of the USA. In India, the contradictions between the democratic polity, based on adult franchise, and the economic reforms, informed by the Washington Consensus, have come to the fore. Neither the “Shining India” nor the aspiration to make the country a world super-power has enthused people at large who are increasingly terrified by rising prices and the lack of job opportunities. The Government of India has been trying, notwithstanding the protests and pressures from social Darwinist protagonists of the Washington Consensus, to pacify the masses by bringing in the National Rural Employment Guarantee Scheme, waiving the loans of farmers and according reservations to the minorities and ‘other backward classes’ in jobs and educational institutions. An internationally reputed Indian economist, Prof Amit Bhaduri, published, not long ago, a paper “Predatory Growth” in Economic and Political Weekly (April 19, 2008). Just two quotations from it will suffice to bring home the reality of economic growth in India since the onset of economic reforms. First:
The much-hyped story of India’s economic growth hides the truth about heightened inequality, the blatant biases against the poor, the hostility of the state toward welfare, and the misery wrought upon the poorest of the poor. Only an alternative path to development that lays stress on dignity and participation of all sections can be an answer to the ravages of predatory growth.


An unbridled market whose rules are fixed by the corporations aided by state power shapes this process. The ideology of progress through dispossession of the poor, preached relentlessly by the united power of the rich, the middle class and the corporations colonise directly the poor, and indirectly it has begun to colonise our minds. The result is a sort of uniform industrialisation of the mind, a standardisation of thoughts which sees no other alternative. And yet, there is a fatal flaw. No matter how powerful this united campaign by the rich corporations, the media and the politicians is, even their combined power remains defenceless against the actual life experiences of the poor. If this process of growth continues for long, it would produce its own demons. No society, nor even our malfunctioning democratic system, can withstand beyond a point the increasing inequality that nurtures this high growth. The rising dissent of the poor must either be suppressed with increasing state violence flouting every norm of democracy, and violence will be met with counter-violence to engulf the whole society. Or, an alternative path to development that depends on deepening our democracy with popular participation has to be found. Neither the rulers nor the ruled can escape for long this challenge thrown up by the recent high growth of India.

FOR quite some time, the consequences flowing from the Washington Consensus-inspired reforms have been worrying America and the organisations situated on the 15th and 19th streets of Washington, D.C. They have been thinking of ways and means to bring about suitable changes in the Washington Consensus without altering its basic structure to lessen hostility towards it. Its repackaging is also needed. With this end in view, two-and-a-half years ago the World Bank contacted the Stanford University’s Prof Michael Spence who is also a Nobel Prize winner. The “Commission on Growth and Development: Strategies for Sustained Growth and Inclusive Development” was set up under his chairmanship. As many as 21 members, including the Chairman, were appointed from all over the world. India came to be represented by Montek Singh Ahluwalia. It needs to be noted that most of the members have been associated with the World Bank and the IMF and their outlook.

Towards the end of May this year, the Commission submitted its report. Lack of space prevents us from undertaking a detailed discussion of its recommendations. However, we shall refer to some of them. First, the protagonists of the Washington Consensus do not evince the same enthusiasm and self-confidence as in earlier times. They hesitate to claim that liberalisation, deregulation, privatisation and free market would accelerate the rate of growth and bring about prosperity. They have also realised that ‘one size does not fit all’. Thus the prescription should be suitably altered taking into account the specific conditions of the country to which it is going to be applied. The basic composition of the drug, however, may not change and remain based on the Washington Consensus. The after-effects have to be carefully monitored and tackled by changing the size and frequency of the dose. Second, the role of state in the economy has been re-emphasised for the simple reason that it alone can mitigate the harmful effects of economic reforms based on the Washington Consensus. It must constantly monitor them. Third, controlled experiments need to be undertaken before taking any of the ten steps of the Washington Consensus for universal application. For example, if free trade is introduced all of a sudden, it may lead to the collapse of indigenous enterprises, rendering a large number of labour force jobless. This may lead to adverse political results. Fourth, in the words of Prof Dani Rodrik of the Harvard University,

The Spence report reflects a broader intellectual shift within the development profession, a shift that encompasses not just growth strategies but also health, education, and other social policies. The traditional policy framework, which the new thinking is gradually replacing, is presumptive rather than diagnostic.

The report recognises that growth is not an end in itself. It should help realise those goals that are relevant both to the individual and the society in order to the removal of poverty and misery. For the first time, equitable distribution of the results of growth too has been emphasised.

The Washington Consensus had laid more emphasis on foreign direct investment and facilitating its inflow through suitable economic reforms. The Spence report says something different. To quote,
Our view is that foreign saving is an imperfect substitute for domestic saving, including public saving, to finance the investment a booming economy requires.

It warns the over-enthusiasts about economic reforms:
Just as growth is not the ultimate objective, reforms aren’t either. Both are means to ends. Reforms may be admirable and represent major achievements, but if growth does not accelerate, or if large numbers of people do not feel any improvement in their circumstances, then there is more work to do. Relying on markets to allocate efficiently is clearly necessary (there is no known, effective substitute), but that is not the same thing as letting some combination of markets and a menu of reforms determine outcomes.

In the end, there is a talk of a new Washington Consensus for which, as Dani Rodrik says, “the rulebook must be written at home, not in Washington”. If this happens, it will mean “real progress” as
it rightly emphasises that each country must devise its own mix of remedies. Foreign economists and aid agencies can supply some of the ingredients, but only the country itself can provide the recipe.

The author, a well-known economist, used to teach Economics in Kirorimal College, University of Delhi before his retirement a few years ago. He can contacted at e-mail: gmishra@girishmishra.com

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