The Washington Consensus was a starting point and remains valid today.
BY SUSAN K. PURCELL
MORE THAN A decade after the announcement of the so-called Washington Consensus, which laid out a series of liberal economic reforms that promised revived economic growth for Latin America, the debate over its validity continues to rage. This is understandable, given the economic crises of the late 1990s in the region and the low and even negative levels of economic growth that have characterized Latin America since then.
The Washington Consensus itself was a reaction to the earlier failure of the state-led, protectionist economic development strategy known as "import-substitution-industrialization" (ISI) that had been dominant in Latin America during the 1960s and 1970s, and had culminated in the debt crisis of the 1980s. The Washington Consensus rejected the idea, prevalent during the ISI years, that developing countries did not have to follow the economic rules that governed industrialized countries. It argued for fiscal discipline, tax reform, competitive exchange rates, privatization, deregulation of the economy, trade liberalization, foreign direct investment and enforcement of property rights.
Critics of the Washington Consensus now claim that the liberalization of the Latin American economies, the reduction of the state's role in the economy and the opening to global trade and investment are the main causes of the region's economic troubles. They point to Argentina, which they frequently refer to as "the poster child of the Washington Consensus," as a key example of a country whose economy was destroyed by its effort to follow Washington's advice. Finally, they cite Latin America's supposed turn to the left as evidence that their critique of the Washington Consensus is fast becoming the new consensus.
The fact that Latin America is facing difficult economic challenges is not necessarily proof that the Washington Consensus was wrong. The sad reality is that most countries, whether characterized by open or closed economies, are suffering economically. The main country that seems to be bucking this trend is China, which is in a class by itself because of its huge population. In addition, economic data concerning the state sector of the economy are neither reliable nor verifiable.
Within Latin America, however, there is no doubt that the most closed economy, Cuba, continues to deteriorate. And Venezuela, whose president rejects the Washington Consensus and is pursing a different development path, is also declining economically, despite unusually high oil prices. At the same time, Mexico and Chile, the most open economies in the region, have generally been the most successful in expanding trade and attracting foreign capital during the past several years. Brazil, principally because of its size but also because of recent advances in liberalizing its economy, has also met with considerable success. And the Dominican Republic has seen an impressive increase in its economic growth as a result of its more open economy.
Argentina, unfortunately, is the exception that proves the rule. Although it made notable progress in liberalizing its economy during the 1990s, it made three very big errors that call into question its designation as the "poster child" of the Washington Consensus. First, it did not maintain a competitive exchange rate; instead, it tied its currency to the dollar, which gravely impeded its ability to export. Second, although it tried to put its fiscal accounts in order by controlling the printing of money, it did not control the spending of money, particularly by the provinces. Third, it did not implement needed labor reforms. The resulting economic deterioration did not surprise advocates of the Washington Consensus.
Today, and contrary to the claims of those who celebrate the death of the Washington Consensus, most of the so-called leftist presidents in the region have not rejected the main recommendations of the Washington Consensus. President Lula da Silva of Brazil, President Gutierrez of Ecuador and President Toledo of Peru continue to seek foreign investment and trade expansion. They recognize the importance of fiscal discipline, which helped reduce inflation in Latin America from an average of 200 percent in 1994 to 9 percent in 1999. They also understand the necessity of cutting government expenditures, privatizing inefficient state companies, implementing tax reform, maintaining a competitive exchange rate, guaranteeing property rights, passing labor reforms and reducing government regulation of the economy. Their efforts have been and will continue to be resisted by vested interests and others who disagree with their goals. If they are less than successful, however, their failures will be due more to political realities than to fundamental flaws in the Washington Consensus.
The Washington Consensus, after all is said and done, is not a magical formula for solving all of Latin America's ills. It is a set of policy recommendations that reflects the thinking in Washington at the end of the 1980s following the Latin American debt crisis and the collapse of the import-substitution-industrialization development model. The Washington Consensus was offered as an alternative development strategy. Its focus was on helping Latin America to revive economic growth and productivity. It was never intended as the solution to all of Latin America's problems.
To solve the region's remaining problems, second and even third and fourth generations of reforms are required. These include fixing Latin America's legal and judicial systems, fighting corruption and ensuring that the benefits from the first generation of economic reforms are more equitably distributed. The Washington Consensus was merely offered as a starting point. It remains valid today as a way of creating a firm base, and only a base, upon which a modern, productive, equitable and democratic Latin America can be built.
Susan Kaufman Purcell is Vice President of the Americas Society and Council of the Americas.
Originally published February 2003