Does Washington Consensus Provide Sound Economic Advice?

2882 words - 12 pages

Development of economic thinking has been providing different policy guidance throughout the years formulated to cure problems of developing countries and most often these policy prescriptions have been used developed countries as a reference point. Policies that were offered reflected waves of economic thoughts and problems the world economy was facing. In 1776 Adam Smith’s invisible hand and market liberalism was followed by John Stuart Mill’s political economy problems and utilitarianism in 1848. Then these main ideas have been have been superseded by the theories of ‘the Big Push’, industrialization and structuralist approach in 1940-1960 after which there has been a shift from physical ...view middle of the document...

To see the importance Washington Consensus presented at the times of transition we would need to see how and why it emerged and the center of our attention should be the practice of developing countries as it is a popular international concern to improve life in these countries. The agencies of the developing countries that are engaged in this process always receive support from richer countries, which disburse official development aid, as well as from non-government organizations that are concerned with channeling popular concerns and from intergovernmental organizations such as United Nations, which are set up to resolve various development problems. However, it mostly due to of the activities if the former that one could witness the tendency of governments to copy successful practice elsewhere, particularly in the developing countries. The ideas propagated by these international development agencies to guide the practice of development shifted the 1980’s thinking about the adoption and approach of the practice to be used by these countries and was called “Washington Consensus”. Charles Gore in his article says that “Propagated through the stabilization and structural adjustment policies of the International Monetary Fund (IMF) and World Bank, this has been the dominant approach to development from the early 1980s to the present”. The name “Washington Consensus” was coined by John Williamson and it was in his works where the clear summary of this approach was formulated, mostly referencing to the policy reforms in Latin America, which has been going through an economic and financial crisis in the 1980’ and John Williamson was trying to form the policies that solved problems of these countries by outlining a set of policies that were undertaken. Shift to Washington Consensus did not only bring the substantial differences in earlier approaches, but also the different world view.

The Washington Consensus has been designed as a universal template of reforms and it implied that to grow the economy certain conditions have to be met regardless of the country-specific conditions. This set of economic policy prescriptions John Williamson considered a “standard” reform package promoted for developing countries in crisis by Washington-based institutions such as International Monetary Fund (IMF), World Bank and the US Treasury Department. The original consensus included 10 relatively specific policy recommendations:
1) Fiscal discipline – large and sustained fiscal deficits contribute towards inflation and capital flight, therefore governments should keep them to a minimum.
2) Public expenditure priorities - a redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. Subsidies need to be lowered or eliminated.
3) Tax reform - tax base should be broad and marginal tax rates should be...

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