If it still looks like a duck, swims like a duck, and quacks like a duck – then it probably still is a duck.
Recent years have witnessed a notable re-embrace of the state’s role in the economy, leading some to declare that the set of free market economic policy reforms widely known as the Washington Consensus has come to an end.
First popularized by U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher in the 1980s, the Washington Consensus policies offered a set of policy guidelines for developing countries, many of which were struggling with high debt and high inflation at the time. These free market reforms included trade and financial liberalization, privatization, deregulation, the removal of capital controls, fiscal austerity (cutting public spending) in order to achieve strict targets for maintaining low inflation and low fiscal deficits, the adoption of independent central banks, and deregulating restrictions on foreign investment, among others. Broadly speaking, the policies sought to roll back the role of the state in the economy and unshackle the animal spirits of the free market. In the 1980s, adopting the policies became binding conditions for developing countries to receive debt relief and new lending by the International Monetary Fund (IMF) and World Bank, in the 1990s, the policies served as the basis for World Trade Organization (WTO) membership rules – and ever since then, the policies have become a cornerstone of the curricula in economics departments at universities across the world.
In addition to diminishing the importance of the role of the state in development, one of the profound changes introduced with the Washington Consensus was to overturn the previous, long-standing notion that developing countries needed to adopt long-term national economic development strategies which sought to achieve structural transformation – i.e., shifting their economies over time from being based on primary commodities towards ones based more on manufacturing over time. The old idea was that countries would first develop their national economies and only later focus more on integrating into international markets. But the Washington Consensus inverted that logic, throwing out the focus on long-term development strategies and manufacturing and instead encouraging developing countries to integrate into the global economy right now, as they are, and to just stick with their current comparative advantages in primary commodities. Simply being successful commodity producers would be the new ticket to their development.
Despite the widespread acceptance of these ideas for the last four decades, recent years have seen the Washington Consensus grapple with new forms of state capitalism. And on the face of it, some of these trends appear to mark a significant departure from the Washington Consensus. For example, even before the Trump administration dramatically increased tariffs on major trading partners, there had been an increase in the number of new national development banks, sovereign wealth funds, and state-owned enterprises of various types in both advanced and emerging economies around the world. China, Russia and others appear to be promoting new types of hybrid state capitalism. Notably, the changes have occurred in the aftermath of 2008 global financial crisis, when free market enthusiasts were chastened by the failure of markets to “self-regulate” as promised, leading to the crash and nearly a decade of the state coming to the rescue with “extraordinary monetary policies” adopted by the world’s largest central banks.
Shortly after the IMF changed its official position on capital controls from “absolutely never” to “well, maybe sometimes,” the former IMF Managing Director, Christine Lagarde, sought to distance the fund from its notorious structural adjustment programs with loan conditions based on Washington Consensus policies. “Structural adjustments? That was before my time,” she replied to a press conference question. “I have no idea what it is. We do not do that anymore.”
In 2016, the IMF’s internal research department made a stunning admission: for decades, the institution had been overselling the benefits of two of its major policies on fiscal austerity during economic slowdowns and the deregulation of financial markets. It found that not only had the two policies “not delivered” the higher economic growth rates that had been promised, but they may have even done more harm than good by exacerbating economic inequality, which itself could become a drag on future economic growth rates.
Even before the COVID crisis struck in 2020, the IMF’s new chief economist, Gita Gopinath, sometimes sounded more like John Maynard Keynes than Milton Friedman as she questioned the conventional wisdom on capital account liberalization and openly championed the use of large fiscal deficits for fiscal stimulus (in the rich countries). The change in tone has also come from other unexpected free market stalwarts ranging from the The Economist to the president of the Inter-American Development Bank to Foreign Affairs, all of whom now say that “industrial policy” is back in fashion. Thomas Piketty’s book was a best-seller, resonating with growing concerns about widening economic inequality and making it acceptable to call for raising taxes on the rich. And now, with post-COVID fiscal policy let loose, central banks are funding massive fiscal stimuluses, deficits have been blown out of historic proportion, while very few seem worried about inflation. Even the IMF, as it doled out billions of dollars in emergency lending to developing countries in the wake of the COVID economic slowdown, seemed to accept the immense deficits being run up by its borrowing countries without its traditional consternation. All of these developments led Financial Times columnist Martin Sandbu to recently declare that the IMF and World Bank have undergone a remarkable “conversion” from free markets orthodoxy to now supporting the “activist state.”
But is it all really so?
While the IMF has certainly talked a good game on its new flexibility during the COVID crisis, an independent analysis of expenditure projections in the IMF’s October 2020 World Economic Outlook database shows that austerity cuts are expected in 154 countries in 2021, and as many as 159 countries in 2022, with the trend continuing for an average of 139 countries per year through 2025 – not exactly a striking departure from its traditional predilection for austerity.
But beyond the issue of the IMF’s fiscal austerity, the policies of the Washington Consensus are collectively much farther-ranging and have often had a critical impact on the shape of the economic development strategies of developing countries. In order to believe the consensus has really ended, we would need to ask many more questions about the policy challenges still faced by developing countries that are struggling with integrating into the global economy. For example, if the IMF and World Bank have truly renounced the Washington Consensus, have they changed their position on trade liberalization for developing countries, or what critics would call premature trade liberalization, i.e. lowering tariffs before domestic industries have become competitive in international markets? (In contrast, rich countries tended to do the opposite, by keeping tariffs high until industries were competitive in global markets, and only then lowering tariffs). Have the institutions called on the WTO to alter its membership rules that require premature trade liberalization of its developing country members?
Similarly, have the IMF and World Bank called on the WTO to undo its restrictions on a host of critical “activist state” industrial policies that had been used historically by rich countries to build up their manufacturing sectors over time? Rather than discouraging industrial policies and telling countries to just focus on their current (static) comparative advantages in primary commodities, are the institutions now really advising countries to adopt ambitious industrial policies that defy their current comparative advantages and seek to develop higher valued-added manufacturing industries over time? Have they called on developing countries to renegotiate their many international investment agreements and free trade agreements that contain similar restrictions on industrial policies?
Have the IMF and World Bank advocated for the re-regulation of FDI in developing countries to ensure that it supports domestic industry and the pursuit of strategic priorities of long-term national development strategies? On labor issues, has the Bank finally stopped giving countries higher scores on its coveted annual Doing Business rankings if they lower wages and quash labor rights? On monetary policy, has the IMF renounced its fixation with raising interest rates in order to keep inflation at unnecessarily low levels, a practice that can end up blocking needed increases in public investment? Is the IMF now advising countries to abandon tight fiscal and monetary policies in favor of more expansionary ones to support increased public investment, employment and GDP growth? And to enable this, is the fund now suggesting that countries bring their “independent central banks” back under the direction of their finance ministries?
Has the World Bank abandoned its recent efforts to seek additional infrastructure financing from private capital markets through the securitization of loans and instead begun promoting the reestablishment of public development banks for infrastructure financing? After decades of advising the privatization or commercialization of public health and education services, are the IMF and World Bank really now suddenly promoting publicly financed and provided healthcare and education services with universal access? Are the institutions today calling for the remunicipalization of the public services and utilities they once insisted be privatized?
And at the broadest level, are the Bretton Woods institutions actually now rethinking the need for developing economies to “integrate into the global economy” first, and worry about national economic development later? Are they instead now encouraging such countries to focus first on building up their national economies through long-term national economic development strategies to build up the domestic manufacturing sector, and worry about global integration later?
Since the answer to all of these questions is “presumedly not,” it is safe to say that not a whole has changed yet.
While it’s easy to be swayed by the institutions’ fashionable new lingo on gender, inequality, green investment and Covid stimulus, we would do better to look at the institutions’ full body of current policy advice on development strategy and the actual loan conditions to see how the nuts and bolts of the Washington Consensus remain quite intact.