John RapleyTHE WASHINGTON Consensus is the term that has been used to describe the neo-liberal policy framework which has been promoted for Third World countries over the last two decades. It is so called because of the close agreement on policy which developed among the key players in the promotion of neo-liberalism, which in Third World countries took the form of structural adjustment. These players were the US Treasury Department, the International Monetary Fund and the World Bank.
With their offices only a few blocks from one another in downtown Washington, the degree of contact among these players is high. Moreover, as the principal voting member on the boards of the IMF and World Bank, the US government exercises considerable leverage over these institutions. Further strengthening its hold on them has been the fact that Europe is still struggling to find its voice on matters of foreign policy while Japan, since the late 1980s, has been in recession and so otherwise preoccupied. This meant the US ended up providing much of the direction for global economic policy over the last generation.
With the eruption of the debt crisis in 1982, Third World countries found themselves turning to the IMF and World Bank for aid at the very time these institutions were increasingly coming under the sway of neo-liberal thought. The same happened after the Asian Crisis in 1997-98. Approaching these institutions cap in hand, Third World governments found that the condition for assistance was the implementation of structural adjustment programmes.
In fairness to the Washington players, structural adjustment was not always rammed down the throats of unwilling Third World governments. In many cases, Third World policy elites favoured the implementation of structural adjustment, because of the policy failings and economic problems they were dealing with. Very often, governments which blamed the IMF had in fact played the game willingly.
Nonetheless, the promises were the same. The mix of currency devaluation, fiscal austerity, tight monetary policies, liberalised trade and capital accounts, privatisation and state retrenchment would, it was allowed, cause recessions and hardship in the short-term. However, as inefficient firms and sectors went under, resources would be
freed up for more productive activities. As demand dropped, so too would inflation. As trade was liberalised, competition would make firms stronger, enabling them to penetrate foreign markets. As foreign investors saw they could repatriate their profits, they would invest more readily in all these emergent industries. In other words, there would be short-term pain, followed by long-term gain.
After two decades of structural adjustment, what is the evidence telling us? Was the confidence of the Washington Consensus to be justified by experience? Apparently not. While foreign direct investment in the Third World did increase in the 1990s, this was more than offset by the drain of capital seeking portfolio investment in the First World. Intensifying this effect was the fact that trade liberalisation, while augmenting Third World exports, drove imports even higher. The chief beneficiary of this shifting balance of trade was the US. The result has been a truly massive transfer of capital from poor to rich countries. In fact, there is a case to be made that the 1990s US boom, and the surging stock market, was driven largely by this flow of Third World capital. In other words, the Washington Consensus was good for Washington.
A recent study done by the Brookings Institution and the United Nations Economic Commission for Latin America and the Caribbean found little improvement in the region's economic conditions. Moreover, the study ended in 1988. This is when the Asian Crisis drove the region into recession, wiping out any gains that had been made. In short, after two decades of the Washington Consensus, the Third World's experiment with structural adjustment appears to have fallen well short of expectations. The gap between rich and poor countries has widened. As a result, even some economists once associated with the Washington Consensus have come to disown it.
But what is the alternative? Until a coherent response is produced, we are stuck with the Washington Consensus. That is because, to paraphrase what Winston Churchill once said of democracy, it is the worst possible economic policy, except for all the others. There is no golden age to go back to. We need to look to the future, and find an alternative that is wholly original.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
