The Washington Consensus was created by British economist John Williamson in 1989 for a background paper mean to be used at a conference dedicated to examining the extent to which the old ideas for economic development in Latin America have been changed by new ideas being introduced by the OECD. In order to make the topics more clear, Williamson created a list of ten economic policies that he believed most everyone in Washington would agree were necessary for economic development specifically in Latin America especially after having faced a drastic debt crisis in the 1980s. These policies promoted ideas such as free-floating exchange rates and free trade. The International Monetary Fund, World Bank, and the U.S. Department of the Treasury have a common agreement on these policy recommendations because they support the promotion of a free market. The policies suggested by Williamson in the Washington Consensus are as follows:
1. Fiscal Discipline: This policy hoped to lower government borrowing in order to avoid fiscal deficits which would save government revenue.
2. Reordering Public Expenditure Policies: This policy suggested that the government reorder the way in which they spend their money and give subsidies. Promoting a “propoor” government means investing in services such as health, education, and infrastructure for the benefit of more poor people.
3. Tax Reform: This policy meant to broaden the tax base and adopt moderate tax rates by increasing rates leading to fiscal surplus for the government.
4. Liberalizing Interest Rates: This policy suggests that interest rates be determined by the market where lenders negotiate with clients. Doing this would encourage more firms to enter the market.
5. A Competitive Exchange Rate: This policy suggested that the currency exchange rate for foreign currency be determined by the free market as opposed to government.
6. Trade Liberalization: This policy meant to reduce the tariffs, quotas, and any other trade barriers. This mean the liberalization of imports and less restrictions such as licenses. This would increase competition, lower consumer rates, and would benefit each party involved.
7. Liberalization of Foreign Direct Investment: This policy suggests the liberalization of foreigners going to different countries and setting up businesses. This would decrease unemployment by hiring locals and would lead to more production for the country.
8. Privatization: This policy suggested that businesses take charge of themselves rather than continue to be controlled by the government. Privatization gives businesses incentive to want to work hard in order to reap the benefits for themselves. This increases competition in the marker and in turn improvement of productivity and quality of goods.
9. Deregulation: This policy promotes the abolition of regulations that restrict entry to a market and competition. This could be done through the removal of barriers in trade as suggested in Trade Liberalization. Doing this would introduce new businesses to the market and promote competition.
10. Property Rights: This policy meant to provide legal security for the property rights of the people who make up the informal sector (self-employed) at acceptable costs.
The policies suggested above come with many implications and have been criticized by many economists. In some cases, implementing these suggestions could leave developing economies at a disadvantage because they would have to play catch up with countries who could adapts to these new regulations much more easily. Many argue that free trade or free markets are not the best for these countries because they need the protection of subsidies and tariffs for imports. This among other criticisms suggest that the Washington Consensus could potentially impede long-term growth for developing economies.
One example of a country that might have not seen the possible benefits of the Washington Consensus is Mexico. As these ten economic policies were created to encourage the growth of Latin American countries, Mexico along with other countries from the rest of the continent adopted them in the 1980s. This paper will analyze the implications of Mexico’s decision to implement neoliberalist ideas into their economy and offer an explanation as to why Mexico continues to be one of the slowest growing economies in Latin America.
At the time of the Carlos Salinas de Gortari’s presidency, Mexico began to take action in changing their economic decisions in three steps in efforts to stabilize the economy. The first step taken was the implementation of the Pact, a program which relied on an exchange-rate policy and offered tax breaks and financial incentives in an effort to reduce inflation. The Pact was extremely successful, it led inflation to fall in 1987 from 159% to 51/7% in 1988 and it continued to fall until reaching a low of 8% in 1993.
A second way in which Salinas de Gortari adopted the Consensus was by renegotiating foreign debt which allowed them to reduce interest payments. In addition, through free access of foreign investment they were able to finance their account imbalance and resume inflation control. It was believed that investing in foreign savings would promote their market by modernizing it and making it more competitive. In turn, foreign investors will increase investment and the economy will grow with it. Starting with growth at the top would eventually reach the rest of the country through a decrease in unemployment and an increase in wages.
The third step Salinas de Gortari adopted the neoliberal suggestions of Washington Consensus was through the North American Free Trade Agreement (NAFTA) in 1994. This free trade agreement granted trade liberalization through the removal of tariffs and all trade restrictions between Canada, the U.S., and Mexico and was probably the biggest neoliberal approach the country took. This treaty maximized the profits of each country and raised their competitiveness in comparison to other world economies. The U.S. took advantage of Mexico’s low wages and lax environmental rules and used them as an export “power” (Guillen, 62). The odd thing was however, even with this huge increase in exportation, from $40.711USD in 1990 to $349.676USD in 2011, Mexico’s economy remained stagnant. As a matter of fact, employment remained unchanged and migration to the U.S. was growing more and more. This is happening because all of Mexico’s companies that have high productivity levels directly export to countries like the U.S. This does not do much for the Mexican economy itself especially because typical Mexican businesses are much smaller and have no incentive to grow within their own parameters, this ultimately sets the slow growth rate of the economy.
The problem with the policies suggested by the Washington Consensus is that they would definitely be able to be implemented successfully in developed countries but, would only offer short term growth for developing countries, not a steady long-term growth. As explained before, these neoliberal ideas did offer some relief for countries like Mexico after the debt crisis that struck Latin America in 1982. But, even with these new policies Mexico still continues to be one of the slowest growing economies at an average of 2.1% GDP growth annually.
To conclude, there is no denying that the policies suggested by Williamson are necessary for the growth of economies, control of inflation, and successful GDPs of countries. However, if they were to be applied to developing countries such as China, India, Mexico, there would need
to be a balance of what gets implemented and not. A free market is not always the best option because it makes it hard to control big firms that might overshadow smaller ones. This could create monopolies, increase poverty, unemployment, and many other consequences. There are times were government control is necessary, especially in developing countries that do not have equal distributions of wealth. So, the perfect application of the Washington Consensus would be one that carefully selects which policies would best suit each respective economy. Doing this would surely lead to economic growth in both developed and developing countries.