The Washington Consensus stands test of time better than populist policies
Thirty years ago, the Peterson Institute’s John Williamson coined the term “Washington Consensus” to refer to a set of ten economic policies and reforms that received widespread support at the time. These policies included maintaining fiscal discipline, reordering public spending priorities (from subsidies to health and education expenditures), reforming tax policy, allowing the market to determine interest rates, maintaining a competitive exchange rate, liberalizing trade, permitting inward foreign investment, privatizing state enterprises, deregulating barriers to entry and exit, and securing property rights.
Williamson was writing in the context of Latin America as it was emerging from the debt crisis of the 1980s. His list of policies was not proscriptive but descriptive of what he thought various Washington-based institutions, such as the US Treasury, the International Monetary Fund, the World Bank, and various think tanks, agreed would stabilize and restore growth in the region.
Williamson’s paper appeared just as the Berlin Wall was falling and communism in Eastern Europe was collapsing. In the 1990s, the term “Washington Consensus” became widely used to describe the dramatic reforms that swept the world as many countries opted for less state control over the economy. The term stimulated an enormous debate in which two interpretations of what the Washington Consensus comprised were often conflated. Williamson’s original conception indicated the general direction in which policy should move, away from a heavily statist approach while retaining an important regulatory role for government. Another version came to represent an extreme market-fundamentalist neoliberal approach that simplified economic policy to “stabilize, liberalize, and privatize” with minimal government, all of which was far from Williamson’s original intent.
It did not take long for disenchantment to set in. The reform process was accompanied by considerable economic pain and hardship. Economic growth remained lackluster in many countries adopting structural reforms, and it was not clear that a tangible economic payoff was to be had. Critics charged that the Washington Consensus ignored the problems associated with rising inequality and even encouraged the weakening of social safety nets. In some cases, hasty or botched privatizations resulted in billionaire oligarchs who enriched themselves with monopoly privileges rather than having to compete in the market for the benefit of consumers. A series of financial crises—the tequila crisis in 1994–95, the Asian crisis in 1997–98, and the Russian crisis of 1998—further damaged the reputation of Washington Consensus–type policies. In the case of these crises, the matter of capital account openness, which was never a part of Williamson’s original list of consensus items, was at issue.
Although the International Monetary Fund and the World Bank touted the benefits of reform, other economists were skeptical. In the early 2000s, William Easterly, who had worked at the World Bank, and others concluded that systematic evidence that the policy reforms had produced any significant economic benefits was lacking. Others were quick to announce the death of the Consensus. Even Williamson was forced to ask whether the Washington Consensus had been a failure.
Now, with the benefit of three decades of hindsight, how does the Washington Consensus stand up? The passage of time has allowed researchers get a better look at the impact of these policies on economic outcomes—as well as illustrate the outcomes of at least one alternative: economic populism.
In his 2019 paper “In Search of Reforms for Growth: New Stylized Facts on Policy and Growth Outcomes,” Easterly updated his earlier research and reached a more positive assessment of the Washington Consensus. In contrast to the “lost decades” of the 1980s and 1990s, he found a positive correlation between “good” policy outcomes and economic growth into the 2000s, a finding that holds true even in Latin America and Africa. He concludes that the widely held agnosticism about whether some policies are related to good economic outcomes should be updated.
A true assessment of the Washington Consensus, however, requires a sharply formed counterfactual: Did countries that embraced policy reforms do better than those that either chose not to reform or chose a different path? Having a well-defined counterfactual is a necessary part of any ex post evaluation of a particular policy regime. Several recent studies attempt to do this.
In a recent article in the Journal of Comparative Economics, “The Washington Consensus Works: Causal Effects of Reform, 1970-2015,” Kevin Grier and Robin Grier find that countries undertaking sustained economic reform had a 16 percent higher real per capita GDP after 10 years, compared to other countries. Another recent paper, by Marco Marrazzo and Alessio Terzi, Structural Reform Waves and Economic Growth, finds that the benefits of structural reform are smaller (6 percent of GDP compared to a counterfactual) and appear after five years. Both papers explicitly consider a counterfactual. Grier and Grier compare countries undergoing large and sustained increases in an index of economic freedom (as well as those with large and sustained decreases) to countries undertaking few or no changes in policy stance. Marrazzo and Terzi use synthetic control methods to compare the growth trajectories of reforming and very similar non-reforming countries.
An alternative approach would be to consider the antithesis of Washington Consensus–type policies, such as those associated with economic populism. Such policies include economic nationalism (trade and investment protectionism), large expansions in fiscal deficit spending, and greater state control over industry. An October 2020 study by Manuel Funke, Moritz Schularick, and Christoph Trebesch on “Populist Leaders and the Economy” finds a huge economic cost to populist policies. Looking at the record of 50 populist leaders over the period 1900–2018, they find that real GDP per capita is 10 percent lower after 15 years compared to a plausible non-populist leader counterfactual. They also find that inequality fails to decline under populist rule. As they conclude: “Rising economic nationalism and protectionism, unsustainable macroeconomic policies, and institutional decay under populist rule do lasting damage to the economy.”
Similarly, in “The Economic Consequences of Durable Left-Populist Regimes in Latin America,” published in the September 2020 issue of the Journal of Economic Behavior and Organization, Samuel Absher, Kevin Grier, and Robin Grier find 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.
Of course, critics of the Washington Consensus usually did not argue that emerging markets should pursue policies of fiscal indiscipline, high inflation, financial repression, trade protectionism, overvalued exchange rates, more nationalization of business, and the like. Rather, they tended to argue that the original list of ten policies was incomplete and that additional policies were needed to improve economic performance. Williamson’s list was also very general, leaving ample room for debate as to how far to go in achieving those policy objectives.
But as we mark the thirtieth anniversary of John Williamson’s initial discussion of the Washington Consensus, it is important to recognize that a growing body of recent research suggests that the Consensus has produced tangible benefits while unorthodox populist policies have entailed significant economic costs. A key challenge for policymakers is to ensure that the benefits of economic reform are widely shared so that the divisions that lead to economic populism do not arise and erase those gains.
1. Williamson’s paper was published in a 1990 Peterson Institute for International Economics volume but was originally presented in November 1989.
2. Supposedly Williamson added the last item on property rights because a list of ten is better than a list of nine!
4. William Easterly, “The Lost Decades: Explaining Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998,” Journal of Economic Growth, 6 (June 2001): 135-157. William Easterly, “National Policies and Economic Growth: A Reappraisal,” Handbook of Economic Growth Vol. 1, Part A, Amsterdam: North-Holland, 2005.
5. Like Williamson and the term "Washington Consensus," Rudiger Dornbusch and Sebastian Edwards coined the phrase “macroeconomic populism” in the context of Latin America.