The Washington Counterfactual: don’t believe the Washington Consensus resurrection

By Carolina Alves, Daniela Gabor and Ingrid Harvold Kvangraven

Decades of research have documented the devastating impacts of the Washington Consensus in the developing world. Yet revisionist accounts of this story have emerged in recent years. Remarkable amongst these, a recent blog post by the Peterson Institute for International Economics –  “Washington Consensus stands the test of time better than populist policies” – draws on research that is jaw-droppingly ideological and flawed. 

The revenge of the synthetic counterfactual

For decades,  mainstream and heterodox economists broadly agreed that the Washington Consensus failed (Stewart 1995, Krueger 2004, Mkandawire 2005). Debt-crisis ridden developing countries that implemented the reforms associated with privatization, liberalisation and deregulation in the 1980s and 1990s tended to see an increase in poverty along with worsening health and educational outcomes. This led to the 1980s and 1990s being dubbed the ‘lost decades’ of development (Easterly 2001) and ultimately paved the way for the the post-Washington Consensus and pro-poor policies (Saad-Filho 2011).

But this is about to change. New methods that ‘produce credible counterfactuals in case studies’, turn the conventional wisdom of the Washington Consensus failure on its head (Marrazzo and Terzi 2017, Absher et al. 2020, Grier and Grier 2021). Essentially, the counterfactual approach involves first creating fictitious or synthetic countries, whose policy makers chose the opposite policy trajectory, and then testing whether the Washington Consensus package works better than the alternative. The results, the PIIE blog informs us, stack up for the Washington Consensus: countries adopting WC policies are shown to (eventually) be better off in GDP per capita terms. In contrast, left-wing populists – of the Latin American pedigree – hurt their economies by throwing the Washington Consensus policies out with the neoliberal bathwater. 

The counterfactual revenge against the many critics of Washington Consensus reinforces an emerging revisionist literature (e.g. Easterly 2019, Archibong et al. 2021). It may offer tempting opportunities to rescue the memory of John Williamson, the PIIE fellow that coined the term “Washington Consensus” thirty years ago. But if one unpacks its mechanics carefully, the counterfactual approach turns out to be a thinly-veiled ideological attempt to whitewash the Washington Consensus, to resurrect its key tenets: that minimising the footprint of the state is the right policy choice in health or education, that macroeconomic policy should mean inflation targeting by central banks not active fiscal policy by elected politicians, that state-owned companies are all white elephants in urgent need of privatization, that trade unions harm labour markets. 

To understand the politics of the Washington Counterfactual, it is instructive to examine Nicaragua, one of the countries we are told would have done much better under Washington Consensus than its left-wing populist leader Daniel Ortega, at least during the Sandinista Revolution of 1979-1990. 

Unpacking the ‘counterfactual’: synthetic Nicaragua

The PIIE blog uses the findings of Absher et al. (2020) to argue that “left-wing populism made Venezuela, Nicaragua, and Bolivia 20 percent poorer relative to a plausible counterfactual. These countries did not experience reduced inequality or improved health outcomes that might have justified such a large sacrifice of income.” 

The paper elaborates the following history of the Sandinista Revolution: having defeated the Somoza dictatorship in 1979, Sandinistas under Daniel Ortega embraced ‘anti-market’ policies: nationalized banks, mining and fishing, and 20% of arable land that had been held by Somoza family and its supporters. Sandinistas also proved reluctant to enforce land property rights (a cardinal sin in the Washington Consensus world). Having initially flirted with anti-democratic politics, Ortega won the 1984 elections and oversaw a new Constitution in 1987. His time in office ended in 1990, when he lost elections.

In that same section, the paper compares Nicaragua under Ortega with a synthetic Nicaragua that would have followed the Washington Consensus prescriptions. It provides a stark picture of the economic costs of Ortega’s ‘strong state’ policy choices: by 1990, the average citizen of synthetic Nicaragua would have enjoyed a (roughly) 8.200 USD GDP/capita. In the real world, the GDP/capita under Ortega fell to around USD 3.000 USD. Even starker, 15 infants per each 1000 live births would have stayed alive in synthetic Nicaragua, or conversely, were killed by Ortega’s deviations from the Washington Consensus. 

For anyone familiar with Latin American politics, the ideological machinations behind this narrative are apparent on two levels. 

First, take the treatment of ‘real’ Nicaragua. The paper is silent on a well-known historical reality: the Ortega administration had to contend with a civil war waged by the Contras paramilitaries throughout the 1980s, with direct support from the CIA and the US under the Reagan Administration.  Why not examine instead Ortega’s return to power in 2007, far more consistent with the paper’s definition of ‘populism’? Could it be because the second Ortega regime has had a Washington Consensus, pro-market disposition in economic policies, despite rhetoric to the contrary, and does not fit easily the ‘left populist’ narrative, civil war aside?

Instead, the authors, US-based economists and political scientists, abstract from the US-sponsored civil war in the discussion of Nicaragua’s economic policy outcomes, although the Iran-Contras Affair – the US Administration selling arms to Iran in order to finance the Contras –  exploded into one of the most serious political scandals of the second Reagan Administration. After all, Ronald Reagan admitted in 1985 that he would stop pursuing regime change in Nicaragua “if the present government would turn around and say – all right – if they’d say ‘uncle’…” . Could it be that the Sandinista Revolution was distracted from growth outcomes by Ronald Reagan bombing them for refusing to say ‘yes uncle, mi patria tu patio’? 

Second, how does one empirically create a fictitious country? The synthetic control method predicts a  ‘no Ortega’ growth/infant mortality path by creating a pool of  ‘donor’ countries and calibrating their relative contribution to a synthetic Nicaragua such that the pre-Ortega growth or infant mortality path is close to actual Nicaragua. The Washington Counterfactual thus creates a  synthetic Nicaragua composed of 23% Chile, 54% Honduras, 9% Mexico, 8% Norway, and 7% the US. 

Or, to bring a historical touch to the method, synthetic Nicaragua, like a neoliberal Frankenstein, consist of 7% country bombing Nicaragua (US), 54% country used by the CIA/US to bomb Nicaragua (Honduras),  23% country where Washington Consensus was being implemented by Chicago Boys and a military dictatorship (Chile), 8% country never analytically paired with the Washington Consensus (Norway), and Mexico. It is this synthetic Nicaragua where per capita GDP would have been 5.000 USD dollars higher, a Nicaragua that the US empire does not bomb.

Poor scholarship? Poor method? It is tempting to answer yes to both. But in a discipline that is obsessed with objectivity and neutrality, the ideological intent is clear: the Washington Counterfactual produces fictitious countries in an attempt to restore the credibility of the Washington Consensus policies as ‘good policies’. 

Not much has changed since the 1950s, it seems. Then, Gunnary Myrdal (1954) noted that economists often smuggle in values from the beginning of their analysis, but that these only show up explicitly later on in the form of policy recommendations. To better understand the impacts of policies associated with the Washington Consensus, and to have open and meaningful debates about how these can be understood, we need research that is explicit about its ideological underpinnings and assumptions from the get-go. 

Beyond History: Why the Revisionist Account Matters

This is not just a debate about the past. Indeed, recent research demonstrates that the IMF has been actively conditioning its loans on the Washington Consensus staple policy of austerity over the past two decades (Ray et al. 2020).

At a moment when more than 100 countries are again turning to the IMF, forced by  COVID-induced economic crises, how we understand the impact of policies associated with the Washington Consensus matters. Policy-based ‘evidence’ that the Washington Consensus works may allow the IMF to diffuse increasingly vocal demands that it abandons austerity and avoids another ‘lost decade’ of development. 

More broadly, revisionist accounts of the Washington Consensus matter because the pandemic has revived the debate around the role that the state should play in the economy. Countries at risk of debt distress may be more willing to accept the Washington Consensus prescriptions when research tells them that short-term pain is worth the long-term gain. That long-term gain, it is argued at the 2021 Spring Meetings of the World Bank and the IMF that are taking place this week, is the low-carbon transition without a large green developmental state. The World Bank’s new Climate Action Plan for a Green, Resilient and Inclusive Development (GRID) suggests that global finance can deliver where the fiscally-constrained state cannot, as long as concessional lending and scarce fiscal resources are directed to  mobilise private finance for development by de-risking development assets. Such plans retain Washington Consensus logic at its core, but go further in terms of actively promoting global private finance as the solution to financing gaps and development risks – the so-called Wall Street Consensus (Gabor 2021).  

It should perhaps not be a surprise that authors from the Free Market Institute and the RAND Corporation will go to unusual, evidently ideological, lengths to produce ‘evidence’ that left-wing governments produce less successful economic outcomes than neoliberal ones. But we would find it easier to swallow this classic example of academic gaslighting if  economists were not always insisting on the strong standards of objectivity in the discipline. If anything, this is a powerful reminder that all economics is political, however much some hide it behind new or ‘sophisticated’ econometric techniques. 

Bibliography

Absher, S., K. Grier  and R. Grier. (2020). The economic consequences of durable left-populist regimes in Latin America. Journal of Economic Behavior & Organization, 177, 787–817.

Archibong, B., B. S. Coulibaly and N. Okonjo-Iweala. (2021). Washington Consensus reforms and economic performance in sub-Saharan Africa Lessons from the past four decades. AGI Working Paper, February 27th, 2021.

Easterly, W. (2001). The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980–1998. Journal of Economic Growth 6: 135–157.

Easterly, W. (2019). In Search of Reforms for Growth: New Stylized Facts on Policy and Growth Outcomes NBER Working Paper 26318.

Gabor, D. (2021) The Wall Street Consensus. Development and Change.

Grier, K. and R. Grier. (2021). The Washington consensus works: Causal effects of reform, 1970-2015. Journal of Comparative Economics, 49, 59–72.

Krueger, A. (2004). Meant Well, Tried Little, Failed Much: Policy Reforms in Emerging Market Economies. IMF Speech, New York, March 23, 2004. 

Marrazzo, M. and A. Terzi. (2017). Structural Reform Waves and Economic Growth (SSRN Scholarly Paper 3071545

Mkandawire, T. (2005). Maladjusted African economies and globalisation. Africa Development 30 (1 & 2): 1-33. 

Myrdal, G. (1954). The Political Element in the Development of Economic Theory. New York: Routledge.

Ray, R., K.P. Gallagher and W. Kring. (2020). IMF Austerity Since the Global Financial Crisis: New Data, Same Trend, and Similar Determinants. GEGI WORKING PAPER 11/2020.

Saad-Filho, Alfredo. (2010). Growth, Poverty and Inequality: From Washington Consensus to Inclusive Growth. DESA Working Paper ST/ESA/2010/DWP/100. 

Steward, Frances. (1995). Adjustment and Poverty Options and Choices. London: Routledge.

Williamson, J. (1990). What Washington Means by Policy Reform. In J. Williamson (Ed.), Latin American Adjustment: How Much Has Happened? Washington, D. C.: Institute for International Economics.

Carolina Alves is a Joan Robinson Research Fellow in Heterodox Economics at University of Cambridge, the U.K. She tweets at @cacrisalves.

Daniela Gabor is Professor of Economics and Macro-Finance at the University of the West of England, Bristol. She tweets at @DanielaGabor.

Ingrid Harvold Kvangraven is a Lecturer in International Development at the University of York. She tweets at @ingridharvold.

Photo: Frankenstein by Bob Bekian.

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