We’ve witnessed a revival of debates about the Washington Consensus and the future of neoliberalism in recent months. Recent increases in public spending have led several commentators to conclude, or lament, that decades of neoliberal consensus have been shattered. Much of this debate is misguided, rooted in a mistaken dichotomy between ‘states’ and ‘markets’, and a corresponding conception of neoliberalism as primarily involving a reduction in the role of the former. Efforts to rehabilitate the Washington Consensus, meanwhile, rely on flimsy and heavily ideological counterfactuals.
In this post, I want to take up another angle on this question, asking: what is ‘the market’ in practice? In particular, I take a closer look at the emergence of the idea that ‘interest rates should be market-determined’. This was a core tenet of the ‘Washington Consensus’ in John Williamson’s original formulation. It was also, historically, a key argument of neoliberal economists. From the early 1970s, several influential pieces (e.g. McKinnon 1973; Shaw 1973) urged the deregulation of interest rates, arguing that while usury caps were intended to assist small farmers, they wound up forcing banks to concentrate on relatively low-risk loans to government or large-scale industry.
In practice, though, the relatively simple proposition that ‘interest rates should be left to the market’ invited a whole range of difficult questions and political challenges.
In a recent article in New Political Economy tracing the history of World Bank agricultural credit programmes (Bernards 2021), I show how neoliberal approaches to development have never really involved ‘shrinking the state’ and unleashing markets so much as fraught and failure-prone efforts to figure out who and what should be governed by, and how to construct, markets.
Agricultural credit at the World Bank
Agricultural credit projects were loans made by the World Bank for on-lending to farmers, whether through state-owned development banks or more complex structures of intermediation meant to involve commercial banks. By the mid-1970s, agricultural credit took up more than half of the Bank’s lending for agricultural projects and merited extended discussion in the landmark Assault on World Poverty report (World Bank 1975).
The Bank understood credit as a key component of agricultural ‘modernization’ (see Bernstein 1990) — the adoption of new technologies, the marketization of input and output sales, and the commercialization of farming — as far back as the 1950s. The general unwillingness of commercial banks to lend for agricultural production, especially with respect to longer-term loans for capital investment, was thus seen as a significant obstacle to agricultural modernization. Agricultural credit projects, in essence, sought to resolve this impasse.
Initially the Bank’s agricultural credit programmes focused on lending for large, capital-intensive farms. In the 1970s, as the Bank under Robert McNamara increasingly emphasized poverty reduction, there was an increased emphasis on lending to smallholders. The Bank’s landmark Assault on World Poverty report framed access to agricultural credit as a key means of alleviating rural poverty by building effective markets for agricultural goods: ‘credit facilities are… an integral part of the commercialisation of the rural economy’.
Fixing interest rates
In practice, the Bank’s approach to building financial markets changed very slowly. Interest rates were a particular point of difficulty. Until the mid-1970s, the vast majority of projects included interest rates for final borrowers that were fixed in project documents. Frequently the Bank, concerned mainly about the financial viability of project partners, did push project partners to increase rates for farmers. But fixed rates remained the norm, and debates during project negotiations about interest rates largely focused on where rates should be fixed.
This started to change as the results of earlier projects showed a recurrent problem with fixed interest rates that turned out to be negative in real terms because of high inflation in project countries. This was a growing concern for Bank officials insofar as a number of projects seriously strained the finances of project participants, agricultural development banks which were generally meant to be self-financing. In Gujarat, India, for instance, a project evaluation concluded that, because the rate of inflation exceeded the rate of interest on project loans, the project had enabled borrowers to gain access to very cheap credit, while decapitalizing the project partner — the latter had ‘thus subsidized them, at the expense of its own balance sheet’. A major review of agricultural credit projects completed in 1976 concluded that in most projects ‘the structure of interest rates imposed by the program and by the financial system in which it operates not only subsidizes the farmer but threatens the viability of the channel and forces it to act in a manner contradictory to the purposes of the project’. The review, notably, was explicit in emphasizing, not so much the effect of subsidies on borrowers, ‘but the effect the interest rate and cost structure has on the participating institutions’.
Projects in the latter part of the 1970s initially sought to resolve this issue in one of two ways: by setting minimum interest rates, or by trying to predict inflation rates over the term of the project and set rates accordingly. In practice, neither route worked out very well. Simply raising fixed rates based on predictions of inflation was difficult because these projections often turned out wrong in unstable macroeconomic conditions. Interest rate floors didn’t work much better. Without specific criteria for when or how rates should be raised, resistance to raising rates from governments worried about the potential backlash often prevented credit prices being raised above the floors set in project documents.
Within a few years, the Bank thus started to insist much more strongly on ‘market’ based interest rates. In practice, this typically involved indexing the rates paid by farmers either to inflation or to average cost of funds in the commercial financial sector. While this shift to market-based means of pricing credit undoubtedly reflected the preferences of neoliberal economists, the Bank’s move towards these mechanisms was driven as much by pragmatic concerns as by any ideological preference for ‘market’ rates. In the first instance, then, the turn to ‘market’-like forms of credit pricing — while it took place alongside the broader period of structural adjustment — was tentative, contested, and driven by longstanding practical concerns as much as any broader ideological shift.
Moreover, by the late 1980s, the pre-occupation of the Bank with interest rates itself started to come in for criticism in internal project evaluations. In Thailand, the evaluation of a 1980 project noted that the Bank’s strong emphasis on raising rates as a way of ensuring the financial sustainability and expanded lending capacity of the partner bank had ‘reduced any incentives’ to either government on the Thai Bank for Agriculture and Agricultural Credit ‘to encourage growth in domestic deposits’ as well as inhibiting wider financial sector reforms.
In short, the move to more explicitly ‘market-based’ rates — whether negotiated between lenders and borrowers or indexed to inflation or cost of funds — reflected as much these operational concerns as it did an ideological preference for markets. It was not always consistently followed through in practice by governments with competing political imperatives, which contributed to the Bank’s growing emphasis through the decade on wider ‘structural’ reforms, and increasingly reforms to governance into the 1990s.
Equally, neoliberal development in practice rarely involved shrinking the state and growing the market so much as trying — at times with considerable difficulty — to coax the private sector into doing developmentally desirable things (like lending to small farmers) or to make public institutions operate on a more expressly commercial basis.
Why does this matter?
Placing the Bank’s halting, troublesome experiments with agricultural credit alongside the rise of the Washington Consensus shows how even institutions at the heart of the neoliberal project were decidedly ambivalent about how to actually carry out that project in practice. Marketizing development often did not involve shrinking the state, as many contemporary takes on the ‘end’ of neoliberalism seem to assume, so much as changing how state institutions work in an effort to conjure markets. The Bank sought, by trial and error, to sort out how credit should be delivered to support marketized, commodified agricultural systems. Could state-backed agricultural banks be reformed to operate on commercial terms? If not, could commercial banks be coaxed into lending to small farmers? In practice, the answer was ‘no’, or ‘not without considerable difficulty’.
The central contradiction reflected here is a deep-rooted problem for neoliberal approaches to development, one which is clearly reflected in contemporary approaches to development as well. In short, mobilizing private capital, or ‘building markets’, to deliver development outcomes involves trying to coax capital into doing things that are risky and unlikely to prove profitable. We can read recent efforts to ‘de-risk’ or ‘escort’ capital into the global south (Gabor 2021; Tan 2021), and indeed the shifting role of the state as ‘promoter, supervisor and owner’ of capital in global development (Alami et al. 2021) as responding to much the same problem.
The Washington Consensus was always in no small part a fantasy. Behind a simple-seeming proposition like ‘interest rates should be market-determined’ lay a whole range of fraught and failure-prone attempts to actually conjure those markets in practice, or at least to approximate them. Our efforts to make sense of the contemporary direction of neoliberalism would benefit from taking seriously the deep-rooted contradictions with which neoliberal development strategies have historically grappled with.
Alami, I., A.D. Dixon, E. Mawdsley (2021) ‘State capitalism and the new D/development regime’, Antipode, DOI: 10.1111/anti.12725.
Bernards, N. (2021) ‘The World Bank, agricultural credit, and the rise of neoliberalism in global development’, New Political Economy, DOI: 10.1080/13563467.2021.1926955.
Bernstein, H. (1990) ‘Agricultural “modernisation” and the era of structural adjustment: Observations on sub-Saharan Africa’, Journal of Peasant Studies 18 (1): 3-35.
Gabor, D. (2021) ‘The Wall Street consensus’, Development and Change, DOI: 10.1111/dech.12645.
McKinnon, R.I. (1973) Money and capital in economic development, Washington: Brookings Institute.
Shaw, E.S. (1973) Financial deepening in economic development, Oxford: Oxford University Press.
Tan, C. (2021) ‘Audit as accountability: Technical authority and expertise in the governance of private financing for development’, Social and Legal Studies, DOI: 10.1177/0964663921992100.
World Bank (1975) The assault on world poverty, Washington: World Bank Group.