Washington Consensus – Definition and Criticism

Named by British economist John Williamson in 1989, the Washington Consensus recommended structural reforms, to help developing countries that faced economic crises, in exchange for immediate financial help. Some examples include free-floating exchange rates and free trade.

These policies were supported by prominent financial institutions such as the International Monetary Fund, the World Bank, and the U.S. Treasury.

Many defended the long-term positive impact of these ideas, but there were critics who felt the policies were unhelpful and imposed harsh conditions on the developing countries.

Here are the ten specific principles originally set out by John Williamson in 1989.

1. Low government borrowing. Avoidance of large fiscal deficits relative to GDP;
2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; Liberalization of inward foreign direct investment;
7. Privatization of state enterprises;
8. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
9. Legal security for property rights.

Useful Links

A Short History of the Washington Consensus

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