417) Williamson versus the Washington consensus?

Williamson versus the Washington consensus?
Submitted by John Williamson on Sun, 10/12/2008 - 21:35
Posted on Blog Growth and Development

It seems that the deliberations of the Spence Commission once again involved discussion of the merits of my child (her illegitimate brother, according to my daughter) the Washington consensus. It seems also that my intellectual position on three crucial policy issues put me at odds with a common conception of the Washington Consensus. The three issues are exchange rate policy, capital controls, and privatization.

On exchange rates, I have long favored intermediate regimes to fixed or floating rates, on the grounds that there are other objectives besides avoiding speculative crises, notably avoiding Dutch disease, and that one can tame capital movements by other techniques than allowing exchange rates to float. The Washington consensus has sometimes been interpreted as implying support for the bipolar position that one has to fix or float and cannot logically do anything in between: see, for example, Dani Rodrik’s augmented Washington consensus. So Williamson is against the Washington consensus, certainly in its augmented version.

One technique which one can hope to use to control capital movements without resorting to floating the exchange rate is to vary interest rates as in the original proposals for crawling pegs. An alternative is not to abandon capital controls while a country is still developing but to be prepared if necessary to discourage either inflows or outflows of capital (see the excellent quote by Pedro Pablo Kuczynski on p.52 of the Spence Commission report). But the Washington consensus has sometimes been interpreted as forbidding any government interferences in the free flow of capital, so Williamson was again a heretic. While I coined the phrase, it is commonly used in a sense other than that I had in mind.

On privatization, my paper said baldly that “state enterprises should be privatized”. One can interpret that as a dogmatic assertion that no state enterprise should be allowed to exist, and this doubtless seems to be a natural interpretation to those who regard the Washington consensus as stating a set of principles that apply always and everywhere. Or one can recognize that the paper I wrote was addressed to Latin America in 1989, and interpret it as asserting that every country in Latin America then had a range of enterprises under government management that would be better run in the private sector. Since there were many state enterprises in those days that were not utilities by any stretch of the imagination, this is consistent with recognition that in some utilities externalities or distributional concerns are important, and that the most efficient way of taking them into account may involve public ownership. If the Washington consensus is interpreted as adopting the first position and the second is Williamson’s, I am once again against the Washington consensus.

Of the four issues that are often regarded as constituting the acid tests dividing laissez-faire economists who are in favor of the Washington consensus from dirigistes who oppose it, it is only on industrial policy that my position is regarded as pro. Yes, I do believe that bureaucrats are capable of thought and that they should be encouraged to think, including what is in the interest of stimulating industrial growth, but I doubt if there are many circumstances in which their choices between investment options will be sounder than those who are risking their own money in a venture. So while I am all in favor of governments acting to make their countries attractive to innovation and private investment, I have little use for their “picking winners”.

But on three of the four critical issues my position is contrary to common views of what is recommended by the Washington consensus. The version that is apparently commonly held is closer to the version that Joe Stiglitz has propagated rather than the version I had in mind. Let me repress my discomfort at being vanquished, and my doubts as to whether a collective Washington ever believed all the things attributed to it in this interpretation, but I still wish to argue that this interpretation misunderstands what I was trying to assert.

The point I was trying to make in the original Washington consensus was not that Friedman, Hayek, Thatcher, and Reagan were really right and Stiglitz and his pals are really wrong. As a matter of fact I find it easy to name specific issues on which I differ sharply from Friedman et al—the impropriety of governmental attempts to influence income distribution, constant growth of some concept of the money supply, bipolar exchange rate regimes, etc. In contrast, there are rather few concrete issues on which I disagree with Stiglitz—only, to the best of my knowledge, his willingness to tolerate high inflation and his hostility to inflation targeting. The point I sought to make was, rather, that there was now a wide enough measure of agreement on certain basic issues and how to achieve them as to remove these topics from the need for active debate. We could all agree on the need for macroeconomic stability, integrating into the world economy, and using the market. It seems that I was wrong in thinking that this is widely held, but it was the belief that in the post-Berlin Wall age these were commonly shared values that motivated what I called the Washington consensus.

In fact, it seems to me that these ideas are overwhelmingly held by economists. To take a recent example, Dani Rodrik (who is not noted for his enthusiastic espousal of the Washington consensus) wrote

…successful economies...all engage in the global economy, maintain macroeconomic stability, stimulate saving and investment, provide market-oriented incentives, and are reasonably well governed.

The first thing about which everyone agrees is engagement in the global economy. What I named in my original espousal of the Washington consensus as agreed policies for engaging in the global economy did not include capital account liberalization, but covered trade liberalization, the removal of barriers to the entry of FDI, and the maintenance of a competitive exchange rate. As conceded above, to believe the latter was uncontroversial was wrong (though Dani Rodrik himself might agree with it), but does he really think there would nowadays be a lot of controversy about the desirability of liberalizing rather than restricting trade? Does he think this would have been agreed by the architects of India’s import substitution policies, or by the average cepalista economist of the 1960s, even if one adds all sorts of qualifications about the speed of liberalization? Has there, in other words, not been a revolution in economic thought in this area, of which he is part?

Dani Rodrik says that all successful economies maintain macroeconomic stability. Reflecting the position in Latin America in 1989, I wrote in the Washington consensus of the need to maintain fiscal discipline, and to emphasize that this did not necessarily imply cutting expenditure I mentioned also the desirability of tax reform and of spending more wisely. If I had been writing the timeless piece that seems to have dominated the mind of critics, I would have been bound to write about monetary policy too, but the problems of Latin America in 1989 did not seem to me to stem primarily from inadequate monetary policies. But did the influential apologists for inflation known as the Latin American structuralist school regard it as distastefully as Rodrik evidently does? I know little of Turkish economic history, but presumably Turkey’s frequent bursts of sharp inflation occurred because some of his kin disagreed also with Rodrik’s judgment of the importance of macroeconomic stability. His view is the modern one, not one that has always dominated development economics.

I did not put high saving and investment in the Washington consensus for the same reason that I omitted monetary policy: that I did not regard past erroneous beliefs about them as being at the core of Latin America’s problems in 1989. Obviously I agree that they matter too. In fact, my view is that the danger here is the opposite to that discussed above: that people will take to an extreme recent comments downplaying the importance of high investment in fueling high growth. To recognize that there are other factors involved should not entitle one to dismiss the importance of high savings and investment.

Several elements of my version of the Washington consensus were directed at providing market-oriented incentives: financial liberalization, trade liberalization (again), deregulation, and privatization. Dani Rodrik would, I think, argue that one can advocate the end without endorsing the particular means that I identified. In principle he may be right, but I find it difficult to envisage a market-oriented system in which loans are given to those endorsed by the state, imports require a quota, entry is limited to those who get approval, and the state is itself a competitor. It seems to me that once one joins him in recognizing a need for market-oriented incentives then one is pretty much committed to endorsing the means that I identified. Once again, market-oriented incentives were not a central feature of recommendations made by an earlier generation of development economists: we used to think it quaint of Peter Bauer to argue that peasants would respond to market incentives. We were wrong; Dani Rodrik is right; and the original version of the Washington consensus recognized this change in our outlook.

I confess that I did not incorporate much about the need for reasonably good governance in my 1989-vintage attempt to identify the measure of agreement on what was good for development. Maybe it should have been obvious in 1989, but it was only in the 1990s that this became a part of common discourse.

The Washington consensus sounded right wingbecause it criticize policies of inward orientation, macroeconomic sloppiness, and state intervention which had become associated with the left. These policies are ill suited to advance the interests of the underprivileged, which is in my view the abiding cause of the left, but appearances were, for better or worse, decisive. The Washington consensus was not right wing in the sense that it advocated policies that would have jeopardized the interests of the poor. If it is now regarded in the way that many people appear to do then it inevitably will be a far more political manifesto than was intended. But that is no excuse for denying that the original consensus recognized a profound change in views of what was calculated to promote development. The irony is that critics like Stiglitz and Rodrik agree with the change of views but, for whatever reason, deny any change.

John Williamson Blog