This is the paper in which Williamson coined the term "Washington Consensus." The Washington Consensus are 10 economic policies central to neoliberalism. Although neoliberalism is - and should be - controversial, in the U.S. it became economic orthodoxy with the election of Reagan. When I took economics in business school, I was taught the tenets of neoliberalism simply as "the truth" without being told that the version of economics I was learning was simply one school of economics, and a controversial one at that. The most my professor actually acknowledged that there were alternatives to neoliberalism or that some people disagree with neoliberalism was when she gave us a list of arguments against neoliberalism and neoliberal counterarguments for why they were wrong. One facet of neoliberalism is that it is often depolicitized and presented as simply a technocratic solution to technical economic issues, as it was in my economics class. It took quite a bit of work on my part after graduation to figure out on my own why I strongly disagree with neoliberalism. David Harvey says that neoliberalism is essentially a set of economic policies designed to give a greater share of wealth to the one percent, and the economic justifications for it are more or less bullshit. Basically, he's saying that what is sold to us as "trickle down" economics is actually "trickle up."
Williamson begins referring to the debt crisis in Latin America, and to statements being made at the time about how Latin American nations in economic turmoil needed to "set their houses in order" or "undertake policy reforms." What is meant by that? Williamson's goal is to explain what is meant by that. He has 10 "policy instruments" that he believes both politicians in Washington and technocrats in Washington could all agree to, although in a few cases he has his own suggestions for improving them.
Williamson notes that Washington does not always practice what it preaches to foreigners. This point deserves unpacking. Neoliberal economic policies are painful and often politically unpopular. In Chile they were forced upon the population by a brutal, autocratic regime. In The Shock Doctrine, Naomi Klein speculates that the only way to inflict neoliberalism on a population is through repression, and that the Thatcher and Reagan implementations of neoliberalism were watered down because neither the UK or the US combined them with the brutal tactics that Pinochet used in Chile.
Here are the 10 policy instruments of the Washington Consensus:
- Fiscal discipline: Avoid budget deficits. Williamson declares that Keynesians who believe in a positive role for budget deficits are "almost extinct as a species." The differences that now exist, he believes, are over whether fiscal discipline requires a balanced budget or whether limited deficit spending is acceptable.
- Reducing Public Expenditures: This goes hand in hand with fiscal discipline. If a nation is aiming to balance its budget or reduce its deficit, it can either increase revenues or decrease spending. Williamson traces the preference for reducing spending to the supply-side economics of the Reagan era. Within the U.S. and particularly on the political right, cutting spending is preferred over raising taxes. Internationally, he believes the debate is more over finding the correct "composition of public expenditures." Often, international technocrats believe that decisions over military spending are the right of sovereign nations and thereby off-limits for international institutions to interfere with. There are three categories where Williamson believes everyone agrees: subsidies, education and health, and public investment. Subsidies should be reduced or ideally eliminated. Education and health expenditures, on the other hand, are seen as necessary. The question is what kind of spending on education and health. In developing nations, primary schools are seen as more necessary than universities, and primary health care (especially prevention) is more necessary than state of the art hospitals in the capital city. In general, the Washington Consensus calls for education and health spending that benefit the disadvantaged. In the case of public infrastructure investment, Williamson says that the belief that the public sector tends to be too large coexists with the view that spending on public infrastructure should be large. Therefore, he says, this adds up to a general belief that public spending should involve redirecting money from subsidies to education and health and public infrastructure. Williamson says his own belief is that there are circumstances in which carefully targeted subsidies can be beneficial, so he would like to see nations keep subsidies when they can find a "convincing explicit justification" for them.
- Tax Reform: The other way to cut a budget deficit is through raising taxes. Although politicians in Washington as well as right-wing think tanks are averse to raising taxes, the rest of "technocratic Washington" is OK with them provided they are done in what they believe is the right way. Williamson says the consensus is that the tax base should be broad and marginal tax rates should be moderate.
- Interest Rates: Interest rates should be determined by the market, and real interest rates should be positive to discourage capital fight and increase savings. Williamson adds he believes interest rates should be positive but moderate.
- Exchange Rates: For developing countries, Williamson believes the consensus is that "the real exchange rate needs to be sufficiently competitive to promote a rate of export growth that will allow the economy to grow at the maximum rate permitted by its supply-side potential, while keeping the current account deficit to a size that can be financed on a sustainable basis." In other words, if a nation is trying to promote export growth, then it wants its goods to be inexpensive compared to other nations. That means a relatively weak currency is better. The question is, how weak is optimal. Much of the rest of what Williamson says here aims to specify exactly that: How weak should your currency be to maximize exports without actually hurting your economy? (One flipside to a weak currency is that when exports are cheaper for foreign buyers, imports are more expensive for your own people.)
- Import Liberalization: In short, he's calling for free trade. Let all of the imports in. Get rid of tariffs. He offers two qualifications. First, infant industries "may merit substantial but strictly temporary protection." Second, it's unreasonable to dismantle all protectionist policies overnight. Therefore, a nation adopting free trade policies may do so gradually.
- Foreign Direct Investment: Don't limit foreign direct investment.
- Privatization: Neoliberals believe that private industry is more efficient than state enterprises (businesses owned and run by the state), and therefore the state should privatize as much as possible.
- Deregulation: In short, deregulation is good. Williamson does not mention safety or environmental regulation here. Instead he discusses price controls, restrictions on foreign investment and remittances, import barriers, limits on firing employees, etc. To a neoliberal, all of these represent market distortions.
- Property Rights: The state must protect private property rights.
In conclusion, Williamson says, "The economic policies that Washington urges on the rest of the world may be summarized as prudent macroeconomic policies, outward orientation, and free-market capitalism." What I find notable here is how depoliticized and technocratic he presents neoliberal policies as, when in fact they are nothing of the sort.