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There have been several discussions about whether or not the Washington consensus and the post Washington consensus (alos referred to as the new consensus) approach to development are fundamentally different approaches to development. The World Bank and International Monetary fund critics are quick to say both approaches are the same, and that the Washington consensus was just repackaged and given a new brand, name and identity in the Post Washington consensus development approach. Although it is easy to see how it can be assumed that the underlying fundamentals of the Washington consensus and the post Washington consensus are unchanged because the latter still encompasses the principles of the former that was generally a focus on market reform as the approach for growth and development. However, the fact that the post Washington consensus builds on market reform and includes various other elements ignored by the Washington consensus like institutional reform and good governance which are elements that extend the goals of the new consensus and enable it to promote ‘sustainable, egalitarian, and democratic development’ (Stiglitz 2001:17). These additions and extensive goals therefore make both approaches fundamentally different from one another, even though they both advocate market reform (which is where the similarities end). While the Washington consensus focused on the perfection of the market the post Washington consensus does the exact opposite, it points out market limitations and ways of correcting such limitations (Stiglitz 2001). The purpose of this paper is to illustrate just how different both approaches are by looking at the foundational economic theories they are built on, the components of both approaches and their methodology.
The Washington consensus is an approach to development that involves various economic policy prescriptions that are designed to move an economy towards economic growth and development when implemented. They include ten basic polices that create a liberal market and economy. According to Williamson who coined the term and the originator of the list, they include:
- Macroeconomic stability (restoring fiscal discipline by controlling budget deficit)
- Redirecting expenditure (reduction of government spending)
- Tax Reform (involved increasing tax and value added tax.)
- Financial liberalization
- Unified Exchange rate (to encourage and ease trade)
- ‘Replacement of quantitative trade restrictions by Tariffs’ (trade liberalization)
- Abolishment of Barriers to entry of foreign direct investments (Liberalizes FDI)
- ‘Privatization of state owned enterprises’ (reduce government spending)
- Deregulation (reduce state interference)
- ‘Legal system should provide secure property rights’ (Williamson 2005: 35-42)
The policies under the Washington consensus are designed to liberalize various sectors of an economy. They are also directed towards increasing market efficiency, productivity and growth. Not all the policies under the consensus are implemented at the same time and in most cases, there is a lot of mixing and matching done by the governments implementing these policies with a few policies being more popular than others. Williamson (2005: 43) notes that ‘(i)n terms of which reform(s) [policies] were most widely implemented, there have been widespread attempts to tighten fiscal policy, introduce extensive financial and trade liberalization, eliminate restrictions on foreign direct investment, and promote privatization and deregulation’. These policies have earned the Washington consensus a bad reputation of increasing poverty because ‘adjustment and stabilization policies tend to depress real wages, as control over money wages is combined with devaluation’ (Stewart 1991:1849), unemployment coupled with other various adverse effects from such policies on the poor in a country lead to social decay. The failures of such policies are evident in various developing countries like Bolivia, Nigeria, and Zambia (discussed in Adefulu, 1991) whose economies after adopting stabilization and adjustment policies experienced stagnant or slow growth. These countries experienced worse situations than they were in before the implementation of the structural adjustment programme under the Washington consensus policies prescribed by the World Bank and the International monetary fund in the 1980s. The failure of this approach to development gave rise to creation of a new development approach know as the Post Washington consensus which also included some of the policies listed above in relation to its market reform component. However, it focused not just on economic growth through market reforms but also included elements to enhance social growth and welfare and thus encourages sustainable development. It eased and monitored the effects of the market reform policies on the poor by paying attention to social issues and advocating the creation of safety nets. This new approach addressed areas that had been ignored by the Washington consensus and as a result of this, it provides a better-rounded approach to development. Unlike the Washington consensus:
- It aims at stabilizing the real economy as well as inflation
- It tries to improve financial sector regulation, rather than assuming that liberalization is the only game in town
- It includes competition policy
- It considers various mechanisms of improving government efficiency, rather than seeking to minimize government’s role
- It focuses on improving human capital formation
- It seeks to increase the transfer of technology to developing countries’.
Including these accompanying elements to the market reform policies was based on the recognition that ‘[m]aking markets work requires more than just low inflation; it requires sound financial regulation, competition policy, and policies to facilitate the transfer of technology and to encourage transparency, to cite some fundamental issues neglected by the Washington consensus’ (Stiglitz, 2001:17). The emphasis placed on trade liberalization, deregulation, and privatization under the Washington consensus approach often lead policymakers to disregard the importance of various factors like competition, which contribute to the effectiveness of a market economy and which may be just as important as economic success (Stiglitz, 2001:20-21).
The Washington consensus and Post-Washington consensus not only differ based on their development goals, the economic theories and principles on which they are based upon are from different schools of thought. The former based on the logic of Keynesian economics of liberalization and the mantra of lazzie faire allows the market to stabilize itself with little or more preferably no government intervention. The Washington consensus therefore was founded on the neo-classical economic theory centered on the idea of instrumental rationality (North 1995). Instrumental rationality implies that individuals in the market make decision in such a way that creates a perfect market. Their decisions are made based on factors that offer them maximum utility. Under instrumental rationality it is assumed that ‘values are accepted and given as constant, objective decision of the world as it is can be postulated and.. decision maker’s computational powers are unlimited’ (North, 1995:7) thus when an imperfection arises in the market because of this factors, the market will correct the imperfections itself. Therefore, there is no need for government intervention. Under this approach government, interference is seen to disturb the flow of the market and impede its efficiency and growth of the economy.
The Post-Washington consensus is however eclectic, drawing from the logic of different economic principles. It draws from both the principles of the new development economics, and the new institutional economics (NIE) which understand and value the role the state plays in the regulation of market functions. New development economics according to Ben Fine (2006) was created to accommodate the shift towards the post Washington Consensus. It extends beyond only economic principles and includes other fields of study like sociology and non-economic factors. It also places emphasis on market imperfections and asymmetrical information amongst parties in a market. In this theory in ‘contrast to economic approach, institutions, customs, as well as economic and social structures are taken seriously rather than presumed to be equivalent to as an “as if” market situation’ (Fine, 2006 :8)
NIE advocates the significance of institutions, and their importance in solving the problem of transaction costs that may exists in the market due to asymmetrical information. Institutions are an important aspect because they “are the rules of the game of a society, or, more formally, are the humanly devised constraints that structure human interaction” (North, 1995: 23). They could be formal in the sense of laws created to govern and informal based on norms. The post- Washington consensus as a development approach recognises the fact that markets in developing countries often carry a high cost of transaction, which deters investment and slows down market productivity. Transaction costs arising from asymmetrical information will often lessen confidence in the market and cause insecurity. To remedy the problem institutions are required because;
‘“efficient institutions lessen insecurity and thereby increase readiness to invest”'(North,1991 in German Fed Ministry, 2004: 7). ‘Over the long term, dynamic growth processes can only be sustained when institutions exist that encourage the growth of productivity and guarantee a high degree of stability, that is, reduce vulnerability to external shocks.’ (German Fed Ministry, 2004: 7)
Another difference between both development approaches is in relation to their view on state intervention in the market. The Washington consensus approach views government intervention as an interference with “market perfection”. Under this approach, the market will resolve its problems and set the right price, and government or state intervention disrupts this ability and therefore create imperfections and inefficiency. A good illustration is of African countries like Nigeria and Ghana who after independence interfered with the export markets using commission boards and “monosponies” (singles buyer where there are many sellers) for their agricultural products (discussed in Bates 1981). The boards had an influence on market prices and could afford to be inefficient because the cost of inefficiency could be easily transferred from the states board to the farmers and consumers (Bates 1981). This supports the Neo-liberal view that when states are involved in markets, macroeconomic rationality if foregone for their preference of macroeconomic policy instruments. The Washington consensus follows the policy of a non-interventionist state or one with minimal role in markets. The post Washington consensus however, draws from the example of the East Asian countries miracle (which attributes most of its success to state intervention in markets) and promotes the importance of government intervention because of imperfections that already exist within the market. It advocates that the state regulate the market through the creation of institutions, legal framework, and property rights. All of which will solve the problems that exist in an imperfect market like inadequate flow of information and allow proper contracts to be drawn between transacting partners. The government according to the logic of the post Washington consensus ‘should serve as a compliment to markets, undertaking actions that make markets work better and correcting market failures’ (Stiglitz, 2001:41).
The Washington consensus approach to development as mentioned previously wanted little or no state intervention and disregarded the role of the state. The post Washington consensus approach however, values state role so much so that the approach includes elements designed to better the governance of a developing state in the form of good governance and democracy. Under this new consensus because the state is seen as an important factor for growth and development, it provides for the reform of the state itself. The post Washington consensus recognises the fact that most developing countries are faced with government inefficiency, corruption and bureaucracy. The approach therefore proposes that states should practice good governance, which entails democracy, transparency, and rule of law to mention a few. The post-Washington consensus approach to development considers the practice of good governance as a pre-requisite for sustainable economic growth and development. Under this approach, state’s role, efficiency or lack thereof and politics is taken into consideration for development purposes, while the Washington consensus approach lacks this attention to governance issues. The disregard for state issues is due to ‘[n]eo-liberalism’s skepticism of the state and autonomous exaltation of individual… [and the view that] the state…needs to be extricated from the market…Economic reforms accordingly take priority over political reforms and civil liberties’ (Abrahamsen, 2000:30) under the Washington consensus.
The post Washington consensus approach to development considers factors outside of economics for instance education and health care. This is another fundamental difference between it and the Washington consensus. The new consensus values the importance of such elements to the development process unlike the Washington consensus that disregards them. Under the new consensus, there is an understanding that development needs to be sustainable and in this regard, it provides for elements that carry it in that direction. Education allows for the development of human capital and the society. If the people are developed, they can move development along by making valuable contributions in the society. According to Stiglitz (2001:46), ‘promoting human capital is…a policy that can help promote economic development, equality, participation and democracy’. The East Asian countries for instance Japan (Stiglitz, 2001) placed an emphasis on educating its citizens by making basic education compulsory make viable examples of how educating a country’s citizens can contribute to sustainable economic growth and development. Social aspects like education ignored by the Washington consensus is regarded an important element of the post Washington consensus approach.
The post Washington consensus approach to development is created in a way that ensures its effects are long-term on the economy as supposed to the short-term effect of the Washington consensus. It achieves this because of its broader goal and dedication to issues outside the realm of economics and the market. According to Stiglitz (2001:68) ‘The new development strategy takes as its core objective development, the transformation of society’, this fact and its inclusion of social factors as part of the development agenda ensures that it encourages sustainable development and not only the growth of gross domestic product (GDP).
Participation and sense of ownership is another aspect in which both approaches to development have fundamental differences. The Washington consensus approach pays little or no attention to fostering the sense of owner ship instead it reduced state ownership through the heavy promotion of instant privatization. The post Washington consensus on the other hand recognizes that fostering a sense of ownership and participation of developing country governments and its people has an effect on how effective the programs being adopted will be. The government has to implement the development programs that have been recommended by international institutions and if the developing country feel like they are in control and have an opinion about the changes going on in their country they might ensure that the programmes are implemented effectively and not on a superficial level. Lack of proper implementation on part of developing nation’s government is one explanation offered by the World Bank as a reason for the failure of the structural adjustment programs under the Washington consensus. By including a sense of ownership and encouraging participation, the post Washington agenda ensures that the new approach to development does not face the same problem.
The differences between both approaches also extend to how their various components are implemented. For instance, privatization, which is an element of both development strategies as a part of the market reform component of the Washington and Post Washington consensus, has been implemented and understood differently under both approaches. The concept of privatization under the Washington Consensus was to reduce government spending and deficit while removing inefficient state enterprises and creating economic stability. Sale of state owned companies would create revenue and competition between private owners would make enterprises more efficient and more productive therefore it had to be immediate. The post Washington consensus however views privatization as something that has to occur gradually, most importantly after the necessary institutions that would enhance competition has been put in place and not before. The premise for this is that just because public enterprises are made private does not guarantee their efficiency because if the proper institutions were not in place to encourage their efficiency they would not be as productive as expected. The post Washington consensus is however not against privatization, as Stiglitz (2001:38) comments: ‘The Washington consensus is right- privatization is important. The government needs to devote its scarce resources to areas where private sector does not and is not likely to enter’. The new consensus is in support of privatizing public enterprises that are unnecessary and can be undertaken by the private sector with institutions to aid its efficiency already in place. Nonetheless, the approaches to privatization under both development programs are different.
Both approaches though having a common goal, which is to bring about growth and development, go about it in different ways and have different fundamentals. The Washington consensus approach to development places emphasis on economic growth through increase in GDP levels and market reform. Its fundamental objective is to make market forces more efficient and increase productivity within the economy. This approach is a strong advocate for policies involving deregulation, privatization and stabilization. The post- Washington consensus approach (devised after failure of the previous consensus) on the other hand focuses on development through societal transformation. This approach goes beyond the market approach of the Washington consensus to include broader goals and social factors like health care and education. The new consensus’ core objective is a more equal, egalitarian and democratic type of development (Stiglitz, 2001:17). The broader goals and objectives pursued under the post-Washington consensus makes it fundamentally different from the Washington Consensus’ approach to development.
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