No Consensus On the Washington Consensus pt. 1

Has the Washington Consensus failed in Latin America?

To answer that question, we first need to define what we mean by Washington Consensus. Some observers in the region have interpreted it as a series of economic policy obligations imposed by multilateral organizations, especially the International Monetary Fund. Other observers defined the consensus as a neoliberal manifesto complete with ills ranging from the Chicago boys’ monetary policy to an obsession with lesser government and refusal to improve income distribution.

But in truth, a careful review of the policies first suggested by Washington economist John Williamson in 1990 and then redefined in his 2003 publication After the Washington Consensus: Restarting Growth and Reform in Latin America – co-edited with Pedro Pablo Kuczynski – would bring more supporters. These reforms include: prudent fiscal policy with a role for anti-cyclical spending; a competitive exchange rate; open economies; and second-generation reforms of the justice, political, civil service and financial systems; accompanied by property taxes and spending focused on improving income distribution.

Even accepting that the decade of the 1990s was mediocre in terms of economic growth for the region, it is clear that Chile, which closely adhered to the Washington Consensus, turned in a better economic performance than the rest of the countries.

Still, instead of arguing about definitions I prefer to reflect on what the current crisis teaches us and on the still unresolved big issues.
The first lesson is that greater fiscal control, including the accumulation of foreign reserves, and exchange rate flexibility have given some countries the ability to cushion the negative impact of the worst economic crisis in the Western world since 1930. Although it has been impossible to prevent an economic recession, we have avoided the kind of catastrophe that occurred in the past.

The second lesson is that populism is harmful. The improvement in the terms of trade that followed the spectacular hike in commodity prices – and 60 percent of the region’s exports are commodities – was spent without hesitation in cases such as Argentina and Venezuela and saved in others, Chile, for instance. Populism, nevertheless, has worsened the distribution of income, as attested by the upsurge in Argentina’s inflation rate beyond what the official data are hiding. Poverty has returned to the levels of the 1990s, despite the strong economic growth in the country until 2008.
The key issues still awaiting resolution include improving the efficiency of government spending and reducing poverty. With the government’s share of the economy averaging 30 percent in the region (higher than the government’s share in emerging countries in Asia), the eight largest countries in Latin America perform poorly in tests measuring the quality of education, have large informal economies and in general do not submit public investment projects to cost-benefit analysis to avoid the construction of white elephants. Besides being inefficient, public spending is often regressive; for instance when the government funds public education for all and not just for the offspring of low-income families.

Improving efficiency and targeted spending will require extensive reforms to civil service rules as well as introducing incentives and competition wherever possible. The problem is that public sector trade unions oppose these reforms, while the political leadership has scant incentives to invest current political capital to try to improve the future.

So beyond a discussion of the Washington Consensus – whose policies are just as valid today as 20 years ago, in my opinion – what we need is an extensive debate about how to improve the relatively high public spending and how to create institutions that protect our citizens (especially the poor) from the “alleged benefits” of populism.