More than 30 years ago, a group of policymakers, think-tankers and academic experts met in Washington to take stock of the policy response to the Latin American debt crisis. Most of the presentations were soon forgotten. The notorious exception was an essay written by the meeting’s lead organizer, an economist at the Institute for International Economics named John Williamson, who passed away earlier this week. In the last sentence of the concluding paragraph, Williamson referred in passing to a “Washington Consensus.”
Williamson’s Consensus gave name to the principles of free-market capitalism that the International Monetary Fund, the World Bank and the U.S. executive branch — “Washington” — urged Latin American and other developing-country governments to embrace in exchange for debt relief.
What did this mean, exactly? The trademark policies of the Washington Consensus involved structural adjustment programs, developed and administered by the IMF and World Bank. These policies required countries to impose fiscal belt-tightening (what critics dubbed “austerity programs”), open up to trade and foreign investment, deregulate economic activities, and privatize state-owned enterprises.
Taken as a whole, these Washington-mandated policies added up to fundamental overhauls of developing countries’ economic infrastructures. With the World Bank and IMF both conditioning loans on these same overhauls, and with private banks unwilling to negotiate with debtor governments without the IMF’s seal of approval, developing-country governments were under intense pressure to comply.
What happened to the Washington Consensus?
Williamson’s term unexpectedly caught on and became a successful buzzword. Opponents of this set of policies used the term to describe the scourge of neoliberalism that trapped countries in conditions of dependency and underdevelopment. It was “a clear effort to halt all discussion and debate about any economic ideas outside the free-market lockbox,” wrote journalist and activist Naomi Klein.
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Supporters, in contrast, treated the Washington Consensus as a shorthand for overhauls that all “serious economists” believed were essential for bringing prosperity to developing economies. In the short run, these changes were painful — but they would pave the way for sustained growth.
By the mid-1990s, however, these promised rewards had mostly failed to materialize — most notably in Latin America, where overhauls had been especially fervent. In response, the Washington Consensus was augmented to prescribe a longer list of changes, reflected in growing numbers of conditions attached to IMF and World Bank loans. Issues like judicial overhauls, central bank independence and labor laws became all targets of ambitious, Washington-mandated adjustments.
But sluggish growth, recurring fiscal crises and rising inequalities cast doubt on the merits of the entire enterprise, leaving the political brand of the Washington Consensus severely damaged. In the 2000s, a new crop of leftist governments emerged in Latin America, many of which campaigned with the agenda of overturning these policies.
Meanwhile, the rising power and prosperity of China, which had not played by Washington’s rules, detracted from the intellectual legitimacy of the Consensus. By the early 2000s, China was willing to ramp up lending to countries around the world, without the Washington-style policy conditions.
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Recognizing influential critiques and diminished demand for their services, international financial institutions that championed the Consensus jettisoned the form of past policies while retaining much of their essence. They discreetly renamed structural adjustment loans with more palatable terms such as “development policy” or “poverty reduction and growth” loans, and heavily advertised pioneering research on the adverse effects of inequality.
Yet many Washington Consensus assumptions survived undercover, without the overt triumphalism. New systems for numerically ranking country performance, for example, retained old biases. Designed to influence investor sentiment, World Bank rankings gave better grades to more-enthusiastic liberalizers and deregulators.
Is the Washington Consensus still a relevant term?
The decline of the Washington Consensus prompted a flurry of commentary on its growing irrelevance. Close observers, including economist Dani Rodrik, opined that “nobody really believes in the Washington Consensus anymore.” Others suggested that the world was entering a period of greater policy independence that would allow developing-country governments to chart their own developmental paths.
However, new financial crises in the 21st century brought international financial institutions and their policy conditions back to the forefront of policy discussions. Richer countries like Greece and Portugal found themselves required to implement free-market overhauls similar to those asked of Latin American countries in previous decades.
At the same time, governments in the Global South that were trying to reverse these kinds of changes found it exceedingly difficult, as economic deregulation and privatization had created their own self-enforcing dynamics. For example, in the late 2000s, Rafael Correa campaigned in Ecuador under the banner of renationalizing natural resources, but once in office pursued only modest contract renegotiations.
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The Washington Consensus didn’t just create enduring policies at the national level. It also passed its legacy on to the world’s most influential international organizations. During the 1980s and 1990s, the World Bank and IMF acquired more-expansive mandates, along with more-powerful tool kits for changing borrower policies. Today they use the tools more sparingly and less conspicuously than they used to — but maintain these tool kits ready to use when the need or the opportunity arises.
This was on display last year when World Bank President David Malpass explained that the Bank’s covid-19 support would be conditional on implementing “structural reforms” targeting areas such as “excessive regulations, subsidies, licensing regimes, trade protection or litigiousness.”
The tide might be turning. In last week’s IMF and World Bank Spring Meetings, the proposals for covid-19 recovery included swapping debt relief for green projects, raising taxes for corporations and the wealthy, and combating inequality — and none of these proposals seem compatible with the old Washington Consensus.
Yet experience suggests that these rhetorical flourishes may end up masking many of the same fundamental policies: mandated overhauls, leveraged by financial need, and including belt-tightening and market-freeing conditions. Whether the Washington Consensus outlives its original observer is still an open question.
Sarah Babb is professor of sociology at Boston College.
Alexander Kentikelenis (@Kentikelenis) is assistant professor of political economy and sociology at Bocconi University in Milan.