The Washington consensus is an economic model that economists use to measure the development of a country. This theory was developed by John Williamson in 1989 and has been used as a guideline for international policymaking ever since. The goal of this theory is to create sustainable growth and reduce poverty. The idea behind this is that once these two goals are achieved, the economy will flourish, and there will be less crime because people will have jobs and food to eat.
There are many examples of how countries put into practice what they learned from their country’s experience with this theory, including; Mexico, India, China,
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The Washington Consensus is a set of 10 principles to minimize government intervention and maximize growth. We will look at those principles after discussing the history and development of this theory.
Overview: The Washington consensus was formed by economist John Williamson in 1989. When he developed this theory, it became a guideline for international policymaking ever since. He created this theory to measure the development of a country’s economy, and it has been used as a guideline for international policymaking ever since.
The history contains three main components that make up this theory:
1) Free trade
2) Open markets
3) Fiscal discipline
The best example is Mexico; they opened their market to foreign investment in 1986 because they were not performing economically. They were in a terrible crisis.
The results of this experiment have been amazing for Mexico. Since then, the GDP per capita has increased from $3100 to over $11k. That is an increase of over 300%. Poverty decreased by 50%. Of course, this was a great improvement, and not everyone was a part of the growing middle class, but it did help.
That being said, opening markets and trade is what helped Mexico become more stable. India took advantage of this opportunity as well as many others. They created policies that aimed to make their economy competitive on the world stage.
China abolished its state-owned enterprises in 2002, which allowed for foreign investment; these are just a few examples.
The Washington Consensus has been used as an evaluation tool for international policymaking since its creation in 1989 by John Williamson. He created it to measure the development of a country’s economy, and it has been used as a guideline for international policymaking ever since.
He named it the “Washington Consensus” because he was at a conference that took place in Washington D.C. The consensus came about due to the need for a common set of principles that would help Latin American and Asian countries modernize their economies.
A few years later, Larry Summers created what is known as the “Washington Program.” The program was a combination of the three most important policies to help countries emerge on the global economic stage. These three policies were: opening markets to trade and investment, controlling inflation rates, and funding anti-poverty programs like investing in health and education.
The Washington Consensus aimed at restoring market confidence in the Asian countries that were in crisis. The main purpose of this theory was to restore confidence and make a country’s economy more competitive in the global marketplace.
The term Washington Consensus was used by the economist John Williamson to describe ten economic policy reforms adopted by Latin American countries during the 1980s and 1990s. Williamson referred to these policies as the ‘first generation’ of reforms.
The theory was developed by the International Monetary Fund (IMF), the World Bank, and the United States, with contributions from a range of Western governments. They set up some working groups to assess what reforms were necessary to improve economic conditions in Latin America, as they had already done after previous financial crises.
The main idea behind it was to promote economic development through free trade, open markets, macroeconomic stabilization policies, and deregulation of industries, focusing on inflation reduction rather than unemployment. The IMF and World Bank saw this as their “mainstream” approach.
The IMF and the World Bank played key roles in implementing the policies. They used their financial power to impose structural adjustment programs (SAPs) on developing countries, which often required high levels of austerity.
This involved privatization and deregulation, which forced developing countries to curtail spending and increase taxes to reduce budget deficits.
Developing countries were also forced to open their markets and reform their economies based on neoliberal principles, such as privatization of state industries or deregulation of the financial sector.
The main features of the Washington Consensus are:
-Fiscal discipline – this refers to the budget cuts that most governments must make because of high debts.
-Tax Reform – this is an effort by the government to increase revenues and at the same time lighten their administrative responsibilities.
-Money Supply Growth at a Sustainable Rate – countries with fast money-growth rates usually have high inflation.
-Convertibility of the national currency – countries with non-convertible currencies usually have high inflation rates.
-Competitive exchange rates – for a country to be competitive, its currency must be stable and not overvalued or undervalued.
-Trade liberalization – tariff reduction is one of the most effective ways a government can encourage domestic investment and international trade.
-Liberalization of direct investment refers to the movement towards less regulated legal and tax conditions for foreign investment.
-Privatization of state-owned enterprises – by privatizing state firms, a government can increase efficiency in the economy and improve the allocation of resources because these firms are now run as profit-making companies.
-Narrow banking (no or less fractional reserve banking) – the money supply is directly tied to real wealth.
-Real interest rates are positive and constant (with a theoretical lower bound) – in this way, banks do not need to create credit out of anything, as explained by Irving Fisher. Fiscal discipline ensures that government budget deficits will be reduced.
-Consultative Group for International Affairs (CGIA) and the World Bank – these organizations saw a need for developing countries to improve their policies, so in 1985 they called an international conference of economists.
The purpose of this conference was to provide some recommendations and guidelines for governments that were going through economic crises. This is how the Washington Consensus came into effect.
The first major criticism is that there are no alternatives. This means that if a country rejects the Washington consensus, it would be left alone without any help or support from external organizations. Another criticism is its inability to promote liberal democracy and human rights in Latin America.
Some also argue that this theory led to widespread poverty and the rise of unemployment because many governments implemented policy changes that were harmful to their economies.
The main criticism, however, is its alleged failure to promote growth and development in Latin America. Consequently, there have been attempts to revise the Washington Consensus or create a new consensus (see Beijing Consensus).
The Washington Consensus failed for several reasons:
1) The economic growth of the industrialized world did not generate enough demand for Latin American products, so they could not exploit their comparative advantage
2) During the 1990s, interest rates were high, and economies experienced some financial instability
The protests in Seattle against the World Bank and the IMF showed that some people criticized these organizations for not considering equity issues. The protestors were mainly from the environmental movements, so they did not share a common interest with social movements about other issues.
These critics influenced politicians and changed attitudes within the World Bank and International Monetary Fund to improve their policies on equity and other international organizations.
Due to pressure from social movements and critics, these organizations have adopted a new approach based on the greater participation of civil society in policymaking. The World Bank also has a more balanced view between equity and growth. These two international organizations are also working with NGOs to improve economic development in different countries and promote transparency.
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There are many ways in which one can interpret the term Washington Consensus.
Some authors use it to describe neoliberal reforms implemented in Latin American countries during the 1980s and 1990s. According to some, these policies led to increases in crime rates because they resulted in rapid economic growth but did not deliver increased prosperity for large population sectors. Other uses include a set of ideas adopted by the international community to promote economic development and stability. The most popular of these ideas is the free market, which is meant to eradicate poverty.
Neoliberal reformers focused on stabilizing international capital markets, which prevented Latin American governments from implementing industrial policies to promote economic development.
Writer Mark Tovey argues that there is a connection between implementing the Washington Consensus and incidents of crime.
According to him, these neoliberal reforms did not lead to increased wealth for all sectors of society, so many people resorted to crime to survive.
Tovey bases his argument that during the 1980s and 1990s, there was a massive migration of peasants from Latin American countries into major cities.
These migrants were extremely poor, which is why they had no other option but to live in slums where the government could not provide basic social services like housing, healthcare, and education.
Another point made by Tovey is that the policies implemented by Washington Consensus reforms were not intended to address inequalities within society.
They did little to reduce poverty or improve living conditions for people who lived in poor neighborhoods. Instead, these policies promoted economic policies that reinforced inequalities between the rich and the poor.
Smolski believes that implementing these reforms created a ‘neoliberal paradox’ where crime rates increased, and police efficiency decreased.
At the same time, there was an increase in inequality and poverty levels. According to Smolski, Washington Consensus policies did not address the social, economic, and political causes of crime.
In sum, the Washington Consensus hurt Latin America and contributed to increases in crime rates since it did not generate the economic growth its designers are hoping for. Some authors believe that this strategy only benefitted rich countries while neglecting developing countries.
Washington Consensus policies only benefited large corporations and created free-trade agreements that benefited the U.S.
Political Scientist Mary Kaldor is critical of the Washington Consensus because she believes that it emphasizes promoting economic growth. As such, this approach neglects political freedom and civil liberty issues to promote U.S. interests in Latin America and around the world.
The ten points of the Washington Consensus are:
1) Fiscal discipline: government economic policies should aim at
a) Stabilizing the rate of growth of the money supply. b) Reducing fiscal imbalances, i.e., avoiding deficits during periods of high growth and keeping inflation low and stable c) Adopting a legal framework that guarantees property rights d) Liberalizing the trade and investment regime
2) Monetary policy to remain independent
3) Exchange rate regimes must be flexible and allow for the efficient management of inflation expectations.
4) Governments should adopt transparent rules for foreign direct investment (FDI).
5) Deregulation is encouraged to gain efficiency of the allocation of resources.
6) Openness: countries should avoid protectionist policies and embrace free trade.
7) Governments must promote competition, increasing resource allocation efficiency, and fostering productive sectors’ development.
8) Governments should invest in education and training to prepare workers for a more complex and modern economy.
9) Favorable tax incentives should be considered to encourage savings.
10) The costs of the social security system must be reduced so that it does not crowd out spending on other areas, such as health or education.
The most important issues this policy left out are:
1) Civil society and its role in economic policymaking
2) The importance of equity issues for development (for example, how to produce more with fewer efforts but compensate those who need it)
3) Poverty reduction is not necessarily linked to sustained growth over time (there are “pockets of poverty” that can be alleviated with targeted policies)
4) Inequality is an important determinant of growth
5) Structural reforms are complementary to liberalization, and they should focus on the development of human capital (education, health care), not only on deregulating the economy
6) The role and importance of institutions that promote development (such as the judiciary, the media, and parliament)
7) Good governance is important for economic growth, but it has many components
The World Bank and the International Monetary Fund were criticized for only considering short-term growth without considering development policies. They started to be more open to including equity issues, poverty reduction, and greater civil society participation in economic policymaking.
The Washington Consensus was trying to promote neoliberal policies, so these two organizations are now adopting new approaches. The new approach is based on market efficiency and allowing for greater flexibility of governments in economic policymaking.
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As a reaction to the failures of the Washington Consensus by the beginning of the 21st century, Beijing Consensus was introduced as a new model to replace Washington Consensus.
China and some developing countries have promoted this economic policy like India.
The basic principle underlying Beijing Consensus is that all countries are different, so no single formula (Washington Consensus) can be used to fit all. It means openness (free trade, free flow of capital, and technological progress), efficiency (state-owned enterprises are better than private enterprises), sustainability (environmental considerations must be taken into the development process since they are relevant for future generations).
Beijing Consensus is based on a pragmatic approach to economic development and cooperation (China is the largest trading partner of Latin America), bringing positive results.
The difference between the Beijing Consensus and the Washington Consensus is:
The Washington Consensus was developed in the 1980s by Latin American Governments and international financial institutions (IMF, World Bank) to promote a market economy.
The Post Washington Consensus is a new term that describes recent changes in economic policies. The policies have started to introduce political factors into decision-making, mainly due to the failure of neoliberal policies.
The Washington Consensus was based on the idea that allowing free market forces and democracy to develop in Latin America would lead to long-run prosperity. The Post Washington Consensus is a reaction against this failed approach. It suggests that political factors be included in economic policymaking as well.
What is Meant by the Washington Consensus Quizlet?
The Washington Consensus refers to the agreement between the IMF, World Bank, and the U.S. government over economic measures for Latin American countries after the debt crisis. Neoliberal policies were incorporated into development projects worldwide through organizations such as the World Bank and IMF.
The priorities of the Washington consensus was to:
1) Reduce inflation, which created problems in refinancing government debt
2) Maintain low-interest rates on foreign loans to attract more investors into the country
3) Stop government intervention in the economy
4) Reduce budget deficits and balance fiscal policy
5) Enable foreign direct investment (FDI) into Latin America
6) Privatize public companies and reduce regulation
7) Eliminate barriers to imports, such as tariffs or quotas
8) Create a legal framework for business contracts and international investment disputes
9) Improve the job market to attract investment through deregulation
10) The policy was based on macroeconomic stability and transparency in government spending.
Neoliberalism is a political program that promotes free trade, open markets, privatization of state industries, and deregulation. It also encourages greater participation of civil society in policymaking through more collaboration between government and business.
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The IMF and World Bank carried out structural adjustment programs (SAPs) in Latin America based on the Washington Consensus recommendations. The SAPs included macroeconomic policies to fight inflation and reduce budget deficits. Countries also had to privatize public companies and promote FDI. They also had to eliminate barriers to trade and finance while creating a functioning legal framework for economic issues.
Based on neoliberal theory, governments should play a minimal role in economic policymaking and let free market forces prevail. Governments should privatize public services, such as the health and education systems, to be run by private companies and corporations. One of the purposes is to maximize profit for shareholders. Governments should also eliminate regulations for businesses, such as those regarding environmental policies or worker’s rights. They should remove barriers to trade and capital flows, such as tariffs or quotas. The government should have a balanced budget by reducing public spending and raising taxes.
In addition, states must reduce the role of governments in regulating business activities and let market forces prevail. States must also support creating an international trade regime through organizations such as the World Trade Organization (WTO). International competition should be based on free and fair market rules and not government intervention in business activities. The WTO is often criticized for its role in supporting neoliberal policies.
There are similarities Between Neoliberalism and Washington Consensus theories in terms of policy objectives. They both promote free trade, macroeconomic stability, and greater efficiency through deregulation. However, there is a big difference regarding the regulation of financial markets.
Examples of Neoliberal Economic Policies include:
– Letting market forces prevail in the economy
– Raising interest rates high enough to eliminate inflation
– Privatizing state industries and services, such as the health and education sectors
– Reducing government spending on social programs that redistribute wealth, such as unemployment benefits or welfare payments
– Reducing corporate taxes to attract foreign investment and business operations
– IMF & World Bank Structural Adjustment Programs (SAPs)
The IMF and the World Bank have used structural adjustment programs (SAPs) to impose neoliberal economic policies on developing countries.
– Structural Adjustment Program – an economic program imposed by the IMF or a creditor nation on a developing country if it has trouble meeting its debt payments.
– SAPs require high levels of austerity that often require cuts to social spendings, such as public education. Example: Argentina’s economic crisis in 2001 forced the government to default on its loans from the IMF, World Bank, and other creditors.
As a result, it accepted massive SAPs from the IMF that included freezing wages and pensions, a 45% cut in government subsidies for heating and transportation costs, and the elimination of price controls on most goods.
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Bretton Woods refers to the economic system launched in 1944 after World War II. Bretton Woods, an agreement between 44 nations, agreed to international finance and trade framework during peacetime. The main features of Bretton Woods included fixed exchange rates, capital controls, and regulations concerning the balance of payments.