The Washington Consensus: Reports of its failure maybe greately exaggerated

A new paper revisits the pessimism surrounding the Washington Consensus reforms outcomes

They say success has many fathers but failure is an orphan. Not so in economics, it would seem. 

In a recent working paper for the National Bureau of Economic Research in Boston (In Search of Reforms for Growth: New Stylized Facts on Policy and Growth Outcomes, NBER Working Paper No. 26318) William Easterly, the guru of growth, has revived the discussion around the ‘Washington Consensus’. 

That term was shorthand for the World Bank-IMF 1990s prescription for reviving growth: liberalise, to make domestic markets more flexible; privatise, to use capital more efficiently and globalise, to access foreign savings.

Then, at the end of that decade, economists started casting doubts on this prescription. Now, two decades later, Easterly, in this paper, asks if the time has not come to revisit the debate. 

He starts by quoting the sceptics. “The ... Washington Consensus {has} not produced the desired results” (Rodrik).

“Repeated (structural) adjustment lending ...fails to show any positive effect on ... growth (Easterly).”

“The Lost Decades” for Latin America and Africa constituted disappointing “Stagnation in Spite of Policy Reform 1980-1998” (Easterly). 

“The real economic performance of countries that had recently adopted Washington consensus policies...was distinctly disappointing.” Paul Krugman. 

And so on. There was, says Easterly, an almost universal consensus that “advocacy for liberalising reforms was dead.”

But things have changed now. “This paper produces new stylised facts of further changes in reform outcomes that have happened since the sample period of the earlier literature. Both extremely bad and moderately bad policy outcomes were surprisingly common in the 1980s and early 1990s, while such outcomes have mostly disappeared since then.”

He says this “policy revolution has received little attention in the previous literature. Documenting it is one of the main contributions of this paper.” He then asks if the Washington Consensus advice had a delayed positive effect on reform. He is unable to say yes or no. 

Premature judgement

For me the key point in the paper is the politics of reform. This is that, “When new reforms are announced with as much fanfare as the Washington Consensus, there is pressure to evaluate the reforms as soon as possible. This can lead to… to premature pessimism about reform before the reform process is even complete and before enough post- reform growth is available. Later results may show this pessimism to be mistaken”.

The truth, says Easterly, is that the reforms of the Washington Consensus did deliver growth. 

“We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.”

But then he spoils is all by saying “None of these statements resolve causality.” 

Incomplete analysis 

After reading this paper I am left with the impression that Easterly is more worried about the degree of success than the fact of success itself, howsoever limited. The former is uneven, the latter pretty proven. 

Also, while the economics of reforms post-mortems may be robust, the analysis is always incomplete if the political structure and sociology of a country are taken as being exogenous and not considered while analysing the process of reform. India is perhaps the best (or worst) example of this. 

But political, sociological and administrative arrangements are crucial because they affect the speed, distribution and depth of the success of reforms. Indeed, they are the chief determinants of the degree of success. 

Or, if I may, the speed with which a Ferrari can move doesn’t depend as crucially on its design as on the potholes in the road.

Twitter: @tca_tca