Analyze the Key Political and Economic factors Underlying the Rise of the Washington Consensus Approach to Development.
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Contents
- Introduction. 2
- Washington Consensus. 3
2.1 History. 3
2.2 Policy Recommendations. 3
2.2.1 The discipline of Fiscal policy. 4
2.2.2 Redirection or reordering of the public Spending and expenditures. 4
2.2.3 Reforms of taxes. 4
2.2.4 Liberalizing Interest rates. 4
2.2.5 Exchange rates. 4
2.2.6 Liberalization of trade. 4
2.2.7 Foreign Direct Investment. 4
2.2.8 State enterprises. 4
2.2.9 Deregulation. 4
2.2.10 Proper rights. 4
- Economic and Political Factors and Rise of Washington Consensus. 4
3.1 Origin of the Debt Crisis 1980s. 5
3.2 Rise of Policy. 5
3.3 Development of the Washington consensus. 6
3.4 Implementations of Washington Consensus. 6
3.4.1 Reduce barriers to the tariffs by offering support to the free trade by NAFTA and WTO.. 6
3.4.2 The World Bank (WB) and International Monetary Policy (IMF). 6
3.5 Relationship between the World Bank and the International Monetary Funds. 7
3.6 Role of two main Contributors, World Bank, and International Monetary Fund. 7
3.7 Influence of World Banka and international monetary Funds. 8
- Conclusion. 8
- References. 8
1. Introduction
The article is concerned with the Washington Consensus and the key factors that were involved in its rising. The whole analysis gets covered under the two major sections. The first part is started by giving a brief introduction of the Washington Consensus along with its historical background and recommendation policies. The next section is concerned with the rising of the Washington Consensus and the implementations of the Washington Consensus along with the issues of developing countries.
2. Washington Consensus
John Williamson was the one who gave the idea about the term ‘Washington Consensus”. This term was introduced in 1989 with the proposal of a paradigm that was based on the turn front state led to market-oriented policies. Well, this was the new liberal approach that carried the developments problems and the explanation to give clarification of the problem. The Washington Consensus was being implemented in different countries to balance the change and to control the rate of shift. It persisted until the late 1990s (Political Economy of Development, 2015)
The reform got implemented in the countries that were facing the wracked development crisis and were Washington based on the institutes like World Bank, IMF (International Monetary Fund), and the United States Department. (Williamson, 2002)
2.1 History
This is concerned with the broad spectrum that gives the stability of economic market through the respective and relevant set of policies and ideas. John Williamson was and\ economist who gave the concept of the ‘Washington Consensus” that was based on the thinking of implementing the policies that were proposed by the International Monetary Fund, World Bank and United State Treaty Department. These departments were supposed to manage the economics and related crises in the developing countries specifically those present in the Latin America, South Asia and many others that have been indebted over decades due to the voluntarist and other state-led development policies. The countries got the favor and then receive the loans from the International Monetary Fund and World Bank to make and complete the development process of their states.
In the 1990s both the institute, World Bank and the International Monetary Fund (IMF) faced strong criticism and had to go through the crisis. This was all the result of counter productivity in consequences of the reforms hey advocated for the developing countries to which they offered extremely heavy loans (Jomo K.S, 2006)
Later, after the 20 years of continuous efforts, it was seen that the countries like Latin America, South Asia, Africa, and the Caribbean were facing the hard situation in which they had the highest unemployment rate and the fastest growth of poverty. Seeing this the proponent of the concept of Washington consensus, John Williamson, claimed that the reforms were intended to make the country stable by making its economic growth and alleviate the factor of poverty and that they were designed in the best interest of indebted countries for fulfilling their need for economic stabilization (Williamsons, 2004).
2.2 Policy Recommendations
The consensus did not carry a big reform but deals in with the ten basic and broad policy recommendations that are presented as follow (Tejvan Pettinger, 2017)
(Williamson, 2002)
2.2.1 The discipline of Fiscal policy
This included the fact that the government will lower the borrowing to avoid the deficit from the relative GDP. This was in the context of a region where almost all the countries had been going through the balance of payment crises and very high inflation that mostly affects the poor because the rich people were able to park their money abroad (Williamsons, 2004)
2.2.2 Redirection or reordering of the public Spending and expenditures
The purpose and direction of spending will get changed from subsidies to the most important needs that will help the economy to grow at a faster rate, like providing pro-poor service, primary education, health care, and infrastructural development.
It did not call for achieving all the disciplines of fiscal policy to be placed on the cuts. The intention was to strictly focus on the primary sector of needs to alleviate poverty.
2.2.3 Reforms of taxes
This was of the idea that aims to make the broader range of marginal taxes and boarding the tax base.
2.2.4 Liberalizing Interest rates
The policy involved the recommendations that will guide and to be focused on the interest rates. According to the recommendations, the interest rates should be market determine, moderate and practicable in real times.
2.2.5 Exchange rates
The exchange rates must be competitive
2.2.6 Liberalization of trade
The trade liberalization includes the import liberalization with the emphasis over the elimination of quantitative restrictions like licensing, any trade protection to be provided by low, relative and uniform Tariffs
2.2.7 Foreign Direct Investment
The reforms recommendation gave the policy to liberalize the foreign direct investment.
2.2.8 State enterprises
The state enterprises got the privatization policy recommendations
2.2.9 Deregulation
Termination of regulations and rules that hamper with the market entry or make the competition restrict, except for those who justify the safety, environmental and consumer protection ground and prudential oversight of the financial institutes.
2.2.10 Proper rights
There is legal security for proper rights. This was primarily aimed to give the property rights to the informal sectors at a very acceptable cost
3. Economic and Political Factors and Rise of Washington Consensus
The fact of rising of the Washington consensus can be better understood by a worldwide perspective with the logic of its implementations as well as the impacts.
3.1 Origin of the Debt Crisis 1980s
Smith and Torado emphasized and described the economic situation and development of different countries as outward looking with aggressive export policies experiencing the economic rate of 6.6% in the time of 1967 to 1973. For this process, the international institutes IMF and World Bank lend loans at the low-interest rates to stabilize the economy which resulted in the debt service burdens.
Later in the 1970s, the industrialization process got slower as with making a dominant and very prominent impact on the economic growth of the developing countries. In the aftereffects of the of strong economic crisis the heart of the matter of market reforms was to sustain the high sustainability by improving high macro-economic performances that will further lead to the economic growth overall with low fiscal deceit and low rate of inflation, these all measure are to sustain the balance of economics of developing countries. This led the developing countries to go through the high rates of growth by getting high loans from the western bank. The consequences can be explained by the first oil crisis in the western economies (Todaro and Smith, 2003)
Increases oil prices following the second shock of 1979 with the 20% decline in the commodity exports prices but the consequences of these economic growths proved to be negative in the early 1980s. Another contributor, Paul Volcker’s stabilization policy introduced by Paul Volcker who was the chairman of the US Federal Reserve board, proved to be a pressure on the developing countries. This policy was implemented in the US in 1979 and later promoted further by the Thatcher government which meant the high-interest rates. This caused the developing countries to pay the triple on the same level of debts. Such bad economic performances and previous paybacks of loans hindered the privatization of the market of the developing countries and then threw them badly in the IMF loans
This shows that economic development and debt crisis are not separate phenomena but they should study within the logic and dynamics of the world capitalization systems.
3.2 Rise of Policy
On the basis of facts and arguments provided in this section, it gets concluded that the Washington consensus has proved a potential source of development of those countries that were facing harsh threats as it is a pure market-oriented approach, this is because of the three main focusing reasons that are ideological, political and economic.
The aforementioned factors can be easily described and found in the period of strong economic and political disturbance that lasted from the 1970s to 1980s. And the oil shock in 1970, as mentioned in the above section, proved a trigger of change that acted as a catalyst to decrease the Keynesian economics and escalate the neoclassical economics.
The new reform of classical economics was completely based on the new liberal approach that was not just centered on the domestic market but it also entailed the external liberalization. By 1980 the neoliberalism got more acceptance with the collapse of the Soviet Union.
It was claimed by the Naim in 1999 that the developing countries that faced the debt crisis practice the unaffordable luxury. He said that such a debt crisis is the results of the government policies. Next, he said that the Washington Consensus was an easy reform for the politician to interpret and explain to the general public. According to the support of prestigious institutes, it was the contributing factor that promises to attract foreign…
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