People First: Standing up to the Washington Consensus

September 25, 2007

During the last decade of the 20th century and the first years of the 21st, Latin America has managed to exemplify virtually every macroeconomic policy mistake imaginable. With few exceptions, policies implemented throughout the region promoted neither economic growth nor social equity. The latest “Latin America Social Overview” from the UN’s Economic Commission on Latin America and the Caribbean (ECLAC) presents a picture that is as stark as it is gloomy: 220 million or 43% of Latin Americans live in poverty, of whom at least 95 million suffer extreme poverty. According to ECLAC’s 2003 projections, these numbers are still on the rise, due in large part to the continuing lack of growth in per capita GDP.[1] And alongside growing poverty, considerable evidence suggests the vast inequalities that have long plagued Latin American economies are also getting worse. Just as troubling, the specter of external debt is once again looming over the region, this time coinciding with mounting levels of internal indebtedness in several countries.

While this dismal economic situation has increasingly eroded public confidence in democratic regimes, a new cohort of elected leaders seems willing to stand up to the international financial institutions that have driven the campaign to implement the neoliberal policies of the Washington Consensus. As a result, we are witnessing a long-overdue debate about the wisdom of the neoliberal agenda.

Latin America’s problems relate not only to economic performance; they encompass the broader question of how the region is addressing the overall challenge of development. That the region’s current economic recipes are being questioned at the governmental level is an essential first step, but we must go beyond that to forge comprehensive alternatives. Those alternatives must be concerned with economic performance in the narrow sense—concerns of GDP growth, macroeconomic stability, low inflation and so on—but priority must be assigned to a series of equally urgent tasks: confronting the power of global investors, promoting social equity, preserving natural resources and the environment, and strengthening corporate governance and democracy. The specific components of an alternative development strategy that can meet these objectives must be worked out over time, through processes of experimentation and adaptation, through trial and error. Hopefully, the seeds of an agenda that spells a transition toward a socially based development model are now being sown.

More than anywhere else in the world, Latin America’s current predicament shows the definitive failure of the Washington Consensus as an engine for sustainable development. Applied by both conservative and progressive administrations in virtually all Latin American countries for the last 25 years, the so-called Consensus encompassed the full range of market-oriented policies advocated by economic orthodoxy—liberalization of trade and financial flows, deregulation of market-based activity, and the privatization of industry and public services. China, India and parts of East Asia, in contrast, never accepted many of these key policy ingredients. The payoff has been evident not only in social outcomes, but also in such key economic indicators as low inflation and reduced government deficits. Asia’s experience stands out in marked contrast to Latin America’s anemic growth rates and stagnant levels of per capita income.[2]

As noted by several other contributors to this NACLA Report, it is important to remember that Latin America was not always an economic laggard. Even orthodox economists recognize that the region experienced a “Golden Age” between 1950 and 1980, when per capita annual income grew at a healthy 2.9%. That achievement is all the more impressive when contrasted with the annual decline of 0.1% suffered during the 1980s, and the still anemic increase of 1.3% achieved during the 1990s. Even then, the data for the 1990s are deceptive, since the latter half of the decade witnessed a marked slowdown in income growth, a trend that continues to the present.[3]

The question of what went wrong during the 1990s thus takes on paramount importance in the debate between orthodox and heterodox economists. The orthodox camp, the architects of the Washington Consensus and their followers, remains steadfast in defense of the status quo. British economist John Williamson, who coined the term “Washington Consensus,” and Peruvian Finance Minister Pedro-Pablo Kuczynski recently wrote: “[We] do not take the view that the liberalization reforms of the past decade and a half, or globalization, can be held responsible for the region’s renewed travails in recent years.”[4] Instead, they attribute poor performance to external factors, like the series of financial crises that erupted in Asia’s emerging markets and then spread to Latin American markets, raising the cost of servicing international debt and pressuring governments to maintain austerity in an effort to maintain the “confidence” of Wall Street. They assert that, if anything, the reforms were not “pushed far enough,” and additional time is needed for Latin American economies to reap the benefits of market-oriented policies.[5]

Yet even while ceding little ground with regard to the overall wisdom of the Washington Consensus, they do recognize that the main objective informing policy was excessively narrow: Economic growth took precedence over all other concerns, and little attention was given to income distribution and social policies. Similarly, Nancy Birdsall and Augusto de la Torre, two economists with close ties to the World Bank, observe that “Latin America suffers from a vicious circle in which low growth contributes to the persistence of poverty, particularly given high inequality, and high poverty and inequality contribute to low growth.” But in proposing new approaches to designing and implementing social policies, they, like Williamson and Kuczynski, advocate staying the neoliberal course—which means an emphasis on stability and market-oriented strategies at the expense of distributive concerns.

Although the most enthusiastic defenders of the market-oriented model are finally acknowledging its meager results, orthodox economists continue applying principles that, in light of outcomes observed over more than a decade, are simply unsustainable. A perfect illustration of this inflexibility is their continuing support for multilateral and bilateral Free Trade Agreements, despite accumulated evidence of the negative consequences of relying on external sources of revenue—exports and foreign investment—as the main drivers of economic growth. Trade liberalization has not been inconsequential; exports did increase in Latin America during the 1990s at an average rate of 8.3% annually. But experts generally agree that the impact of exports on the more relevant indicators of growth rates was far less significant, and one must also take into account the serious dislocations brought about by the excessively rapid exposure of domestic producers to competition from abroad.[6] Even Mexico, the poster-child for liberalization of trade and investment over the past ten years, has not been able to reduce the income gap with its chief partners, the United States and Canada.

It is in this context that the “heterodox,” frequently feminist, camp puts forth a more scathing critique of neoliberalism, and advocates far more radical changes in the prevailing model. What is called for, these dissenting critics insist, is an approach to development that really assigns equal importance to economic growth and equity; that draws on the history of Latin American development successes in the past; and that privileges good politics, alongside good economics, as essential features of effective governance. Unlike the orthodox camp, the heterodox economists recognize the critical role that the state plays in economic development, and argue that a more balanced and sophisticated political economy is needed.[7]

Increasing demands for alternatives come not only from dissenting economists, but also from many sectors inside the developing societies that have suffered the negative impacts of the deflationary bias of austerity policies.[8] Nobody questions that macroeconomic stability is a positive result, but stability alone does not bring about growth. Moreover, both economists and politicians have come to recognize that the decrease in public investment that accompanies deflationary policies has generated unacceptably high social costs. The challenge, then, is not to adjust the existing development framework, but rather to elaborate an alternative paradigm that can simultaneously yield economic growth and equity without losing macro-stability.[9]

Feminist economics offers crucial insights for understanding the failure of neoliberalism in Latin America, and it points the way to elements around which a new, socially based development model can be constructed. Gender analyses have established the fundamental premise that macroeconomic policies are not neutral. Nonetheless, even now, after nearly two decades of structural adjustment in Latin America, and when ample research has demonstrated differential impacts of specific policies on men and women, orthodox economists still disregard gender as a core analytical category. The macroeconomic adjustments and stabilization policies applied throughout the region in the wake of the debt crisis inevitably have different consequences for men and women, and in the process imply very real social outcomes that are typically not measured.

It is clear, for example, that when reductions in public expenditure curtail services traditionally provided by the state, women are called upon to fill the gap and receive no economic compensation for doing so. Whether the responsibility is taking care of children when schools are closed or looking after the old and infirm when health and social security services are cut, women’s work has limited the degree to which public sector cutbacks have affected such social indicators as infant mortality or life expectancy. Yet it is a serious mistake to interpret the relative stability of such indicators as evidence that neoliberal adjustment processes have been efficient. Such a conclusion is only possible if the increased burden on women is entirely ignored in calculations of cost.[10] There is an urgent need to acknowledge the “care economy,” in which work is typically unpaid and performed overwhelmingly by women, and to recognize its inextricable link to the broader fabric of economic life.

Feminist analysis also suggests new ways to relate macroeconomic and social issues. Even the World Bank and IMF have abandoned claims about the “trickle down” effect, which asserts economic growth will inexorably produce positive social outcomes. They have recognized that macro-strategy choices can have negative social consequences, but their response has been to recommend temporary social safety nets that transfer income to disadvantaged groups or ensure their access to basic necessities. Such an “adding-on social policy” approach is inadequate, as Diane Elson and Nilufer Cagatay have shown persuasively. Instead, they propose a “transformatory approach” to macroeconomics, whereby social policies are incorporated as a central feature of macroeconomic analysis so that any given macroeconomic policy will be assessed according to its impact on the distribution of power in society.[11]

This is of particular importance since excessive concentration of power is the underlying issue that tends not to be discussed in Latin America. The vast imbalances of power are significant not only for interpreting the current situation, but also for the design of new approaches to development. Rather than having to solve ex post the problems caused by misguided macro-policy decisions, an approach that begins with analysis of social impacts allows us to foresee negative impacts ex ante and to design policies accordingly. Feminist economists have emphasized that the full range of social groups affected by macroeconomic policies must be heard. Social dialogue around the design of macroeconomic policy can help to avoid implementation of measures that will undermine the power of already disadvantaged sectors. Only through such dialogue will it be possible to build societal trust.

In short, the search for a new development paradigm is not only about pursuing new strategies and policies, but also about changing the practices through which these are constructed. Under the current paradigm, faced with high levels of indebtedness, the foremost objective of Latin American governments has been to retain “credibility” among international creditors, thus disallowing sustained fiscal deficits. The result has been a deflationary bias that has hurt all sectors that once benefited from the public services that are now reduced in order to secure international approval for fresh financial resources. What’s worse, when health, education and social security are privatized, those with limited income are deprived of access to these services and are rendered even more powerless than they were at the outset. Only if these groups have a voice will the design and implementation of economic policies have a different social and economic content.

Discussions of the feasibility of effecting a transition to socially based development bring out sharp differences among economists over how best to revive economic growth in Latin America. The persistent area of disagreement concerns the degree of freedom available to Latin American governments facing high levels of international indebtedness. Under present circumstances, the international financial institutions remain key players because agreements with the IMF determine countries’ access to international financial markets, and external funding is critical for most countries. Until recently, it has been extremely difficult for governments to diverge significantly from the narrow set of policies imposed by the IMF and the World Bank, and governments have avoided forcing the issue.

But amid the growing criticism of neoliberalism, some Latin American political leaders are articulating new priorities, even if an entirely different paradigm has yet to emerge. This process of moving away from the Washington Consensus can be understood in terms of a transition toward growth-oriented policies designed to promote positive and immediate improvements in the social situation. Alongside the insistence that social and distributive concerns must top the economic growth agenda, some governments in the region are demanding change in the international political sphere: They emphasize the importance of respect for the autonomy and dignity of developing countries in the process of negotiating agreements with the international financial institutions.

Both the economic and political components of this transition are evident in Brazil and Argentina, where elected leaders insist on departing from the status quo. The process started with President Luiz Inácio Lula da Silva in Brazil who made the “Zero Hunger” strategy a priority despite the serious fiscal restrictions that made structural adjustments necessary. Prudently, the IMF chose to recognize the priority that the Brazilian government attached to this social concern, and though it did not alter its demands significantly, its willingness to admit the need for such an initiative stimulated renewed optimism among governments across Latin America.

More recently, Argentina was able to make further progress in effecting a transition from neoliberalism to a socially focused approach to development. Its recent agreement with the IMF was a significant step, departing fundamentally from key tenets of the Washington Consensus. Argentina refused to budge from its position that economic growth had to be the main priority, so the agreement with the IMF did not include policies—such as increased utility rates—that slow recovery. Moreover, the country’s debt was restructured in a way that provides the government with room to maneuver, allowing it to spur growth while encouraging social development. New lines of credit were announced for public enterprises, and funds were set aside for investment in infrastructural public works programs that aim to reduce the country’s devastating levels of unemployment.[12]

Significantly, it was Argentina’s President Néstor Kirchner, rather than the Minister of Finance, who led the negotiations with the IMF. Kirchner clearly recognized that this was a political battle more than a technocratic one. It was good politics, embodying the will of a democratically elected leadership to advance national priorities, that made an agreement possible—an agreement that has the potential to influence future strategies of both the IMF and developing country governments. Not coincidentally, “dignity” was the term that Kirchner used to characterize the tenor of his discussions with the IMF.

The most important lesson for the developing world is that after two decades of imposing structural adjustments and of ignoring their social and political consequences, the IMF has accepted that a certain amount of flexibility is possible. This is the most encouraging element of the “transition” now taking place; for that “transition” requires a different IMF, one that defends macroeconomic stability, but one that assigns priority to the interests of a country’s citizens, rather than international creditors and investors.

Cecilia López Montaño is president of Fundación Agenda Colombia, an advocacy institution for economic, social and cultural issues. She served as Colombia’s Ambassador to the Netherlands and was Minister of Environment, of Agriculture and of Planning from 1994-1998.

1. ECLAC, The Social Panorama (Santiago de Chile, 2003).
2. Stiglitz, Joseph, El Malestar de la Globalización (Bogotá: Santillana Ediciones Generales, 2002).
3. See John Williamson’s “Overview: An Agenda for Restarting Growth and Reform,” in After the Washington Consensus: Restarting Growth and Reform in Latin America, Pedro-Pablo Kuczynski and John Williamson, Eds. (Washington: Institute For International Economics, 2003).
4. See Pedro-Pablo Kuczynski and John Williamson, Eds. After the Washington Consensus: Restarting Growth and Reform in Latin America (Washington: Institute For International Economics, 2003).
5. Williamson, John, 2003. See #3 above.
6. ECLAC, 2003. See #1 above.
7. Chang, Ha-Joon, “The Market, the State and Institutions,” in Rethinking Development Economics (Anthen Press London, 2003).
8. Elson, Diane and Nilufer Cagatay, “The Social Content of Macroeconomic Policies,” World Development, Vol. 28, No. 7, July 2000.
9. Comments by Ricardo French-Davis when he introduced After the Washington Consensus: Restarting Growth and Reform in Latin America at ECLAC.
10. Cagatay, Nilufer, “Incorporación del Género en la Macroeconomía,” Macroeconomía Género y Estado (Departamento Nacional de Planeación. Tercer Mundo Editores, Bogotá 1998).
11. Elson, Diane and Nilufer Cagatay, 2000. See #8 above.
12. La Nación Online, “El Gobierno pagó hoy los US$ 2.900 millones,” .

Tags: washington consensus, neoliberalism, development, economics, democratization

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