Washington Consensus

The term Washington Consensus is commonly used to describe the neoliberal policy recommendations to developing countries, and Latin America in particular, that became popular during the 1980s. The Washington Consensus usually refers to the level of agreement between the International Monetary Fund (IMF), World Bank, and U.S. Treasury. All shared the view that the operation of the free market and the reduction of state involvement were crucial to development in the Global South.

With the onset of the third-world debt crisis in the early 1980s, the major Western powers, the United States in particular, decided that both the World Bank and the IMF should play a significant role in the management of this debt and in global development policy more broadly. When John Williamson, who later worked for the World Bank, first used the term Washington Consensus in 1989, he claimed he was actually referring to a list of reforms that he felt key players in Washington could all agree were needed in Latin America. However, much to his dismay, the term has become widely used in a pejorative way to describe the increasing harmonization of the policies recom mended by these institutions. It often refers to a dogmatic belief that developing countries should adopt market-led development strategies that will result in economic growth that will “trickle-down” to the benefit of all.

The World Bank and IMF were able to promote this view throughout the developing world by attaching policy conditions, known as stabilization and structural adjustment programs, to the loans they made. In very broad terms, the Washington Consensus reflects the set of policies that became their standard package of advice attached to loans. The first element was a set of policies designed to create economic stability by controlling inflation and reducing government budget deficits. Many developing countries, especially in Latin America, had suffered hyperinflation during the 1980s. Therefore, a monetarist approach was recom mended, whereby government spending is reduced and interest rates are raised to reduce the money supply. The second stage was the reform of trade and exchange rate policies so the country could be integrated into the global economy. This involved the lifting of state restrictions on imports and exports and often included the devaluation of the currency. The final stage was to allow market forces to operate freely [Page 1017]by removing subsidies and state controls and engaging in a program of privatization.

By the late 1990s, it was becoming clear that the results of the Washington Consensus were far from optimal. Increasing criticism led to a change in approach that shifted the focus away from a view of development as simply economic growth and toward poverty reduction and the need for participation of both developing country governments and civil society. This change of direction led to the term post–Washington Consensus.