The Washington Consensus and Its Critics

The market-oriented reforms promoted across Latin America after the debt crisis, what they achieved, and why they became so controversial.

After the debt crisis of the 1980s, many Latin American countries shifted sharply from state-led development toward markets. In 1989 the economist John Williamson summarised ten reforms that Washington-based institutions, such as the IMF, the World Bank and the U.S. Treasury, broadly agreed Latin America needed. He called them the Washington Consensus.

The ten reforms

Williamson’s list included:

Fiscal discipline, avoiding large budget deficits.
Redirecting public spending toward health, education and infrastructure.
Tax reform with broad tax bases and moderate rates.
Market-determined interest rates.
Competitive exchange rates.
Trade liberalisation, lowering tariffs.
Openness to foreign direct investment.
Privatisation of state-owned enterprises.
Deregulation to ease entry and competition.
Secure property rights.

What happened

During the 1990s, many countries adopted versions of these reforms. Inflation fell dramatically across the region, trade expanded and many state companies were sold. But growth was disappointing in much of the region, and a series of crises hit, including Mexico’s in 1994, Brazil’s in 1999 and Argentina’s severe crisis in 2001 and 2002.

The criticism

Critics, including Joseph Stiglitz, argued that reforms were applied too rigidly and quickly, without enough attention to institutions, social protection or the order in which reforms were made. Opening capital markets too fast made countries vulnerable to sudden outflows of money. Privatisation sometimes created private monopolies or was marred by corruption. Inequality remained high.

Williamson himself said the term came to be used for a more extreme free-market agenda than he had described.

Two sides of privatisation

When a state telephone company was privatised in one country, waiting times for new phone lines, which had been years, fell sharply as the new owners invested. But in other cases, privatised utilities raised prices steeply, sparking protests, as in the "water war" in Cochabamba, Bolivia, in 2000, when water privatisation led to mass demonstrations and was reversed.

Legacy

Today, many economists accept some Washington Consensus ideas, such as controlling inflation and avoiding unsustainable deficits, while stressing that good institutions, social policies and careful sequencing matter as much as market reforms.

Thinking the debate is simply markets versus the state

The real lessons concern how reforms are designed, sequenced and supported by institutions. Both extreme state control and hasty, one-size-fits-all market reforms produced disappointing results in parts of Latin America.

Key takeaways

The Washington Consensus was John Williamson's 1989 list of ten market-oriented reforms.
Reforms reduced inflation and expanded trade, but growth disappointed and crises followed.
Critics said reforms were too rigid and fast and neglected institutions and inequality.
Many economists now combine stable macroeconomics with attention to institutions and social policy.