John Williamson, the influential free market economist and at that time a key adviser to the International Monetary Fund (IMF) and the World Bank, unveiled in 1989, what he called the Washington Consensus (Klein 2007). The economic policies unveiled fundamentally advocated for the privatization of state enterprises, abolition of barriers impeding the entry of foreign firms and the drastic cut to government spending.
These, he said, were considered to be the bare minimum for economic health as per the two institutions, IMF and the World Bank. In effect Washington consensus espoused free trade theories that the Washington institutions intended to use while addressing the economic crisis that the Latin America countries were going through as of 1989.
Centre for International Development at Harvard University, Global Trade Negotiations Home Page of March 2003, states specifically these countries were required to institute fiscal discipline and tax reforms, the redirection of public expenditure towards high economic returns sectors, liberalization of trade and interest rates and inflows of foreign direct trade investments, allow market driven exchange rates, privatization of state corporations, deregulation and secure property rights.
These were the reforms that every country in Latin America and later Sub-Saharan Africa were supposed to institute in order to receive loans and financial support from the two institutions. Those countries that resisted implementing these reforms did not receive funding from IMF and the World Bank for their development projects but those that accepted to go along with the prescription had their projects funded. Proponents of Washington Consensus The chief proponent of the Washington Consensus was Milton Friedman the late professor of economics at Chicago School of Economics.
Friedman advocated for the running of states on pure capitalism ideals, cleansed of all state interruptions ranging from regulations, trade barriers and entrenched interests (Klein 2007 p60). What the private sector could do, governments should keep off, thus allowing the private sector to perform those functions without interference. Private sector should be given complete freedom to regulate such items as wages, prices, repatriation of profits by multinational companies.
Friedman was completely opposed to the Keynesian perspective of demand manage and government intervention (Beams 2006). It was not the work of government to regulate the economy through spending, but its function is to ensure that there is sufficient money supply to take care of natural economic growth while the market will take care of unemployment and recession. In summary those in support of Washington consensus are of the view that governments should not engage in economic activities that the private sector can do in accordance with the prevailing market forces.
The free market theories as advocated by the Washington consensus was vigorously implemented by the Chicago School of economics graduates particularly in Bolivia and Chile. The free market advocates consider Chile to be a success story that every country should copy. Critical counter-arguments Contrary to what is displayed as success stories by the proponents, critics consider the reform agenda of the Washington consensus as an overly ideological effort to impose “neo-liberalism” and “market fundamentalism” on developing countries (Rodrik 2006 p774).
Privatization and free trade, which are considered central pieces of the structural adjustment package, appear to have no direct link with creating stability. They contend that these policies were in appropriate, were forcibly implemented by the regimes and where they are said to have succeeded; the result was increased poverty and massive unemployment (Klein 2007 p 100). The reforms that are successful in one country may not necessarily succeed in another country given that the developing countries are not on the same level of development particularly in regard to the capacity to absorb the required policy reform.
Mahathir Mohamed, Malaysia’s controversial Prime Minister in response to instituting theses reforms in his country said that he did not think that he should have to ‘destroy the economy in order that it should become better’ (Klein 2007 p338). The proponents of the Washington Consensus realized that their reforms agenda was not achieving the intended results, they therefore added other requirements from the initial list of ten to twenty (Rodrik 2006). The doubling of the items in the reform agenda is in itself an acknowledgement that initial approach was not working.
This was done when the Washington Consensus realized, over time, that standard policies did not produce lasting effects if the background institutions were poor. They had concluded that sound polices could only be embedded in solid institutions. This brought some success, but there is no established linkage between any particular design feature of an institution and economic growth. Growth is understood to takes place when investors feel confident but this cannot be linked to a particular institution blueprints whose improvements will make them feel even more secure.
By emphasizing that the institutions had to emulate the best-practice institutional standards of the developed countries was indeed unrealistic requirement as this was construed to suggest that the only way to develop is to become developed, a hardly useful policy advice (Rodrik 2006). Conclusion The policies advocated by the Washington Consensus, notwithstanding the way they were implemented, did assist the developing countries to privatize inefficient loss making public institutions.
The blending of the free market development approach and the Keynesian advocacy of government intervention whenever necessary is likely to enhance the desired economic results for the third world developing economies.
Beams, N (2006). World Socialism Web Site; Milton Friedman 1912-2006: “Free Market” architect of social reaction, 21 November 2006. Available at http://www. wsws. org/articles/2006/nov2006/frie-n21. shtml accessed on 21 February 2009. Centre for International Development at Harvard University, Global Trade Negotiations Home Page of April 2003 available at http://www.cid. harvard. edu/cidtrade/issues/washington. html accessed on 21 February 2009. Klein, N (2007). The Shock Doctrine-The Rise of Disaster Capitalism; Published by Henry Holt and Company, New York, USA. Rodrik, D (2006). Goodbye Washington, Hello Washington consensus? A review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform; Journal of Economic Literature Vol. XLIV (December 2006) available at Rodrick_-_Goodbye_Washington_Conensus (1). pdf accessed on 21 February 2009.Sample Essay of RushEssay.com