The Washington Consensus: Consensus is Not Consent

Earlier this year, the field of economics lost a rather significant figure. John Williamson was a highly regarded economist and senior fellow at the prestigious Peterson Institute for International Economics, but he’s best known as the author of the term Washington Consensus, our subject for today.

The Washington Consensus is one of those concepts that has been bouncing around policy circles since Williamson first presented it in 1989. We’ll unpack the details of it, as well as the thoughts behind it, but let me start by saying that in terms of Williamson’s career, the Washington Consensus is to him what Groundhog Day is to Steven Tobolowsky. (It’s me! Ned Ryerson! Old Needlenose Ned! Bing!)

You know that guy has 277 IMDb credits? He was in Deadwood, Memento, Thelma & Louise, Mississippi Burning, and yet he’ll always just be Ned Ryerson in our hearts.

Point being, Williamson was no one hit wonder. And he was neither a consensus economist nor a dogmatic one like Uncle Fuckbreath. But the term he coined, and the tenets behind it, were pretty important at the time and have been politicized and debated at great lengths in policy circles. Much like our discussions of neoliberalism and the free market monetarists that came out of the Chicago School, the Washington Consensus has deep meaning in the psyche of world leaders, policymakers and economists, and it has similarly fallen in and out of favor over the years.

We’re going to move through the points that comprise Williamson’s ideas and contextualize them within past conceits through to a more a modern framework that will help us understand certain decisions that were made by OECD countries, the changing role of central banks and why the most progressive economic policies should actually be regressive in the coming years.

Washington Consensus Explained

Last week, in our LGBTQ episode, we referenced the Stonewall Inn protest and talked about how it plays an important part in the LGBTQ movement. But also, that it’s equally important to note that this wasn’t the beginning of the movement, but a crescendo of sorts—the culmination of courageous advocacy and activism, and the moment that it burst into public consciousness. In economic policy circles, the Washington Consensus is viewed in similar terms. As though it was a new idea and statement of principles that itself caused a paradigm shift in economics.

In reality, it was an observational statement crafted by Williamson to reflect an already assumed consensus, and not one that needed to be achieved. In this, Williamson wasn’t advocating for a certain point of view as much as he was acknowledging what already existed.

Williamson’s paper was presented in 1989. The timing is crucial here. It was the beginning of the end of the Cold War. The Berlin Wall came down in November of that year. The United States was fully in the grip of the Chicago School policies that were adopted and expanded throughout Reagan’s term. Alan Greenspan was the Chair of the Federal Reserve. The EU wasn’t yet founded. NAFTA had yet to be enacted. China was still in the early stages of its quasi-market economy transition, the Russian empire was collapsing. Latin America was in what it termed its “lost decade.”

The new breed of capitalism proponents, with the fervor of the prevailing neoliberal dogma, had taken over. Keynes was dead. Milton was alive. The world, it seemed, was ours for the taking.

It was against this backdrop that Williamson dropped his paper, and the term Washington Consensus was entered into economic nomenclature. So let’s first walk through the top level points.

The very broad framework was to liberalize centrally planned economies by opening them to the free markets, privatizing public works and entities and cutting public spending. Basically, turning them into economic feeder systems for the United States under the auspices of economic liberalism and liberty.

Recall from our Fuck Milton Friedman episode that the Chicago economists such as Uncle Dicknoggin considered themselves liberal, so when we use that word in this context, that’s what we mean. Liberal, in their sense, meant free and open markets. And the subject in Williamson’s paper, by the way, is the whole of Latin America, which we’ll unpack a bit in a moment.

1. Lower borrowing to keep debt to GDP ratios low.

2. Move away from subsidies to long-term investments like education, healthcare and infrastructure.

3. Tax reform to broaden the tax base.

4. Allowing interest rates to be determined by the markets.

5. Allowing currency to float freely under a unified exchange rate.

6. Opening up trade by lifting restrictions and utilizing standard but nominal tariffs instead.

7. Allowing direct foreign investment.

8. Privatizing state owned and controlled enterprises.

9. Abolish regulations that restrict competition but allow for prudent oversight.

10. Develop and secure property rights.

So the first thing you probably noticed is that many of these are pretty solid ideas, even today. Broadening a tax base, keeping debt ratios relatively low (remember these are countries that don’t necessarily have the strength to consider MMT like developed sovereign currency nations) and allowing for competitive forces. Through a 1989 or 2021 lens, there is a lot here that makes sense. And if you are a fan of capitalism or market economies, then it all sounds pretty normal.

The problem is that the real world implications of so many of these points have been somewhat disastrous, though it took years to understand why and how. Remember, as we moved away from direct interventions, economic intervention was the blanket that covered some of our more covert and sinister operations around the world.

We gave the example in our 9/11 episode of how Kissinger applied a tourniquet to the Chilean economy to bring about a “coup climate.” The Washington Consensus, though not a policy document, became the policy rationale to do some pretty terrible things, first in Latin American and then across the globe.

Before we jump ahead to understand how this policy statement was effectuated, let’s go back and talk about where the world was when we hit consensus, especially in Latin America.

Free Market v. Centrally Planned

We have an upcoming show planned on ISMs and all of the mystery that surrounds them. Socialism, communism, capitalism, neoliberalism, libertarianism, etc. But instead of talking about political structures and ideology, for this discussion, I think it’s more appropriate to boil it down to two systems of organization: The market economy versus the centrally planned economy.

Most of Latin America operated under centrally planned economies leading into the 1980s. Essentially, this is a very top down structure where a central authority plans and organizes the economy, everything from price and wage setting, allocation of goods and resources and interest rates. Decisions aren’t made based upon features such as supply and demand or prevailing rates, they’re made by setting deliberate targets.

Most economists will tell you that this is a lousy way to build an economy, and political agents have made careers out of savaging this approach, painting it as communism, socialism, authoritarianism, etc. They’re not entirely wrong, but like most topics we discuss, there’s more to it than just that. For example, Cuba is a centrally planned economy that has extremely high literacy rates and complete access to healthcare. I’m not making a judgement call for or against this system, merely pointing out that depending upon the measurements that are most meaningful to a society, economic output might not be the only concern.

Likewise, China had a centrally planned economy throughout its highest growth decades, and to a large extent it still does, though it’s moving through a slow market transition. Venezuela did as well, and found incredible success with anti-poverty programs, though it was entirely too dependent upon its fossil resources. Russia, same story. So you can exist in the world with this type of economy and, depending upon your scale of measurement, it works to varying degrees.

On the other side of the equation, you have market economies. These are the dominant economies in the world. North America, Europe, Japan, some African countries and even China, to an extent, all operate in a market system where consumers drive production, countries have access to global supply chains, and capital markets are rich and ever flowing.

For those Unf*ckers who have greater depth in this field, or Pitchf*ckers who joined us from Pitchfork Economics, you’ll know that there are no pure examples of either type of system. Just shades and degrees. For example, the U.S. likes to hold itself out as a pure free market economy, but it relies heavily on subsidies, price fixing and even military support for our economic gains. But this, too, is for another day.

The idea here is to set the table for what Latin America was like before the Washington Consensus years—the two decades between 1980 and 2000—to discuss its transition away from it in the past two decades and what we can learn from both periods. Essentially, each Latin American country was experiencing a transition during the 1970s and 80s from authoritarian rule under central military commands to outright dictatorships such as Perón in Argentina.

Like most countries, the 70s were fraught and raucous. Inflation was rampant due to the oil crisis, and several of the world’s biggest economies were struggling to recover from the shock of Nixon’s sudden withdrawal from Bretton Woods. It’s amazing, as we covered in Fuck Milton Friedman, how pivotal these years were. Even though it was brief, developed nations were really thrown for a loop when inflation and, in some cases, hyperinflation took hold.

It took decades to build the case for Keynesian policies and only a few short years to throw them out the window.

Rehabilitation or Exploitation? 

We’ve discussed at length the direction the U.S. moved during this period with the introduction of Reaganomics, which essentially melded together the philosophies of Milton Friedman and every high school bully. We know that the United States pushed its way through with monetary interventions, such as massive currency manipulation and high interest rates. But there was another less talked about aspect of our recovery in the 1980s through the 90s, and that’s the accumulation of resources and access to cheap labor. And Latin America was central to our exploits.

In a white paper titled The Washington Consensus: Assessing a Damaged Brand, by Nancy Birdsall, Augusto de la Torre and Felipe Valencia Caicedo, the authors detail the positive and negative impacts of our policy toward Latin America and the Caribbean. Here’s a passage that offers a terrific summary:

“The economic and social pain involved in the adjustment process of the 1980s was immense, so much so that the period became known as the Lost Decade. As capital inflows abruptly stopped and terms of trade deteriorated sharply, the region was forced to shift from an aggregate external current account deficit of almost $2 billion in 1981 to a surplus of more than $39 billion in 1984. This was induced by major currency devaluations and severe restrictions on imports, including vital capital and intermediate goods, which implied a dramatic erosion of real wages and living standards. To put the fiscal accounts in order, countries embarked on deep and highly disruptive expenditure cuts, which hit disproportionately social and infrastructure investment programs.”

So we weren’t alone in intervening, again to positive and negative degrees. The International Monetary Fund (IMF) was at the center of resolving the debt crisis and, in doing so, it exacted punitive measures in return for financing several Latin countries during the crisis. In order to qualify for relief from the IMF, nations had to essentially forego most of their domestic projects related to social welfare and infrastructure.

Though the IMF claims the opposite, because they also mandate funds be poured into higher education and healthcare—which they did—but these rarely worked as they were intended to. For example, the real benefit of funding education in a country where the population is disenfranchised, impoverished and illiterate is at the parochial level, and not higher ed. Early education programs are far more beneficial in the long-run than funding greater access to education among elites. That’s just one corollary that we’ve come to understand over time.

It wasn’t until the late 1980s when then-Secretary of the Treasury Nicholas Brady introduced a program that became known as the Brady Bonds. A faltering Latin America didn’t help anyone, and foreign investors were wary of picking up the slack the IMF couldn’t handle. So Brady introduced longer-term bonds, with pretty decent yields and backed by U.S. Treasuries. Investors flocked to the program, and it did allow several Latin American nations to refinance their debts, with the last of them being paid off in the early 2000s.

But even the Brady program was unveiled with the understanding that participating countries would continue on the path of market liberalization, thereby opening up the pathways to foreign investment into formerly privatized enterprises. As countries became more intent on paying down debt and less focused on building social welfare programs and infrastructure, they eventually reverted back into the growth traps that previously haunted them.

GDP Growth > Inequality

So let’s talk in broad strokes about what went right, what went wrong, how Latin America has fared in the post Washington Consensus era and finally what we can borrow from this period as we move forward.

Latin America is often pitted against the so-called Tiger economies in Southeast Asia, specifically South Korea, Vietnam, Hong Kong and Singapore. The rationale being that they were similarly situated coming out of the debt crisis, with the Tiger economies theoretically performing better over a period of decades.

Essentially, the Tiger economies had different suitors and less punitive extractions for support. Support for the Tiger countries came in the form of capital resources that were invested into manufacturing, distribution, technology, etc. Whereas Latin American countries imported luxury goods from the United States and were prohibited from directing the type of investments that would have promoted manufacturing growth over time.

So, during this period, there are a few very positive outcomes that gave the appearance of unquestionable neoliberal success. Most of the Latin American countries were able to beat back inflation and open their economies to free trade. Of course, so did most every other country on the planet. And countries like the Dominican Republic and Chile outperformed their counterparts for many, many years on key measures like GDP growth. Whether the two are correlated or not, it was also a period where most Latin American countries finally broke free of military-style dictatorships and authoritarian regimes.

Ultimately, however, this era also marked a protracted period of rising inequality, destruction of the middle class and loss of state owned enterprises able to keep high levels of capital within the system. Forced austerity further suppressed the poor and lower classes, all in service of beating back inflation and inviting foreign capital investments into newly privatized enterprises. In all, it was a solid rebuke of centrally planned economies, though it exacerbated the living conditions of so many at the bottom rungs of society.

According to the U.N. commission—the Economic Commission for Latin America and the Caribbean (ECLAC)—the period between 1980 and 2000, the bookends for the Washington Consensus period, saw an increase in the percentage of poor people in urban areas from 29% to 37% and an increase among rural poor from 59% to 63%. For persons living in what it terms “absolute poverty,” the percentages increased from 10% to 11.5% and 32% to 38% in these respective areas.

In his essay titled Neoliberal Meltdown and Social Protest, Carlos Vilas concludes:

“The accumulation of negative balances in foreign accounts fed into a growing under-valuation of the exchange rate, which in turn further contributed to the creation of larger external deficits. The exhaustion of the privatisation process marked the end of the period of steady inflows of foreign currency. Access to the amount of foreign exchange needed to feed the convertibility scheme relied on the capacity for further borrowing in capital markets that were only accessible at higher interest rates as the level of indebtedness steadily grew.”

There’s one big head fake the neoliberals point to during this period to prove their case that opening up Latin American and Caribbean economies was a good thing overall—the most widely accepted economic marker of progress or decline, and that’s GDP growth.

Latin America was definitely in big trouble at the beginning of the 1980s. Much of this stemmed from the Mexican Debt Crisis, which set off a wave of cascading crises in the Latin American debt markets. The net effect of this crisis that spread throughout Latin America was rapidly declining GDP worsened by dramatic inflationary pockets. So when GDP began to recover toward the late 80s and remained mostly positive into the 90s, it was seen as a clear victory for the free markets. Widen the lens a bit, and it shows that GDP recovered from the depths of the debt crisis; but over the next twenty years, it still never approached the growth rate of the 1970s, when most Latin American countries still existed under centrally planned economies.

In another great essay called The Harvest of Neoliberalism, authors Jose Bell Lara and Delia Luisa Lopez quote a study by Pablo Gonzalez Casanova that showed:

“Neoliberal policies have definitely contributed to increasing the transfers of surplus from the periphery to the centre, thanks to interest rates and debt payments, the declining terms of exchange, and the high level of profits remitted back to foreign capital investors. All of this has taken place at a far greater magnitude during the latest phase of capitalist globalisation. According to Gonzalez Casanova: The number of countries that transferred net assets to the developed countries rises to forty-one from Africa, twenty-three from Asia, nine from Central and Eastern Europe, ten from the Middle East and thirty-two from Latin America and the Caribbean.”

Blood Harvest

I like the idea of calling this a harvest. 

Because that’s exactly what it was, and the best way to look at this period of economic experimentation. Some good seeds were planted. Like the Brady Bonds to refinance sovereign debt. The expansion of markets and focus on trade infrastructure. Then there were invasive species that crept in, like foreign investors that sucked out profits, or the destruction of social welfare programs at the behest of lending bodies. Then there’s the greatest sin of harvest that any farmer will tell you. Overproduction and saturation. Every crop needs tending, and soil needs to recover. If you don’t care for these things, eventually the soil turns fallow and unproductive. And in many ways, that’s what happened in the 2000s. Profits were sucked out. Social institutions were ignored. Wealth accumulation occurred at the top but not at the bottom, and the middle class was squeezed.

Remnants of the Washington Consensus remain with us today, but mostly among conservative think tanks who are relying on an anachronistic playbook that is designed to feed American interests, primarily. And we’ve begun to move on, at least where Latin America is concerned. In fact, the past two decades have been a really interesting ride. Before we get to that and talk about the big a-ha moment that I had putting this together, I wanted to revisit the words of John Williamson, lest I leave the impression that he belongs in the Fuck Milton Friedman camp.

Upon his retirement, Williamson gave an address in which he spoke to the legacy of the Washington Consensus. I’m going to let his words do the work here for a minute.

“The Washington Consensus, as I originally formulated it, was not written as a policy prescription for development: it was a list of policies that I claimed were widely held in Washington to be widely desirable in Latin America as of the date the list was compiled, namely the second half of 1989.”

This reaffirms what we were talking about up top. Williamson wasn’t creating a policy prescription. He was reflecting what he believed to be the prevailing wisdom of the era. And, in this, I think he was spot on. When asked to reflect upon his feelings regarding those who did indeed take this as policy and not reflection, he takes issue with certain pathways and stands by others. Here he is again in his own words:

“The last decade has witnessed accumulation of substantial evidence confirming that financial liberalization can yield a real social benefit in terms of an improved allocation of investment, but also that it can be dangerous. The series of crises that have engulfed so many developing countries are testimony to that. This seems to me to imply that the objective of liberalization indeed makes sense, but that it needs to be qualified in two important ways. One is in delaying capital account liberalization until many other reforms have been successfully completed; since there was no call for capital account liberalization in my version of the Washington Consensus, I got that point right. Where I failed was in not emphasizing the need to accompany financial liberalization by the creation of appropriate supervisory institutions.

Now if we go aaaaalllll the way back to our Capitalism episode, Unf*ckers, you can find a deep parallel between what Williamson is describing and what Adam Smith regarded as a core tenet of the free market: A free market does not imply the absence of regulation; rather, it requires it to function properly, freely and competitively. By implementing favorable reforms to recently shattered central structures and forcing a market economy into nations that haven’t constructed central banks or an enforceable regulatory framework, we fostered an environment that was ripe for the taking. By us.

In terms of the post-Consensus period, the 2000s were pretty interesting. It’s amazing how many sources one can dig up on how poorly the Latin American economies have performed in the past two decades. But once again, it all depends upon your preferred measurement. For example, a report issued just last month titled Poverty in Latin America cited that the overall poverty headcount ratio throughout Latin America went down from 42.4% in 2003 to 29.7% in 2009. On the whole, Latin American countries—excluding Central America for a moment—broke free of the shackles of the United States and began working cooperatively amongst one another and expanded trade outside of just the United States.

Now, it has to be said that it’s largely a fool’s errand to track data holistically in Latin America because the circumstances in Bolivia barely correspond to those of the Dominican Republic or Guatemala. So on the whole, GDP growth slowed down in the 2010s, but no more significantly than the United States, and largely due to the same issues related to the financial crisis—the cold we spread throughout the world. And, on balance, most Latin American nations were able to reduce inequality and improve conditions among the poorest inhabitants. 

We have future episodes planned on Central America and the Caribbean, but I thought it was important to review a little history where the major South American economies are concerned. They’re going to be interesting to watch, particularly in response to the global pandemic and the ever increasing threat of right wing extremism that Brazil is experiencing under Bolsonaro.

Regressing to Progress

And now for the a-ha moment that I had putting this together. And why I fucking love doing this show with you, Unf*ckers.

When it comes to economic matters, I’m no Pollyanna. Don’t think for a second that China, as an example, hasn’t learned from our successes and mistakes. It’s why they have a strong foothold in the African continent, are developing even stronger ties in the vacuum we’re leaving in the Middle East, and how they’ve established their dominance in East Asia. I’m sure we’ll be unpacking the Beijing Consensus in years to come.

Right now, the American political class would have you believe that China’s growth and ever increasing support in other nations is the single largest threat to our economic prowess and, somehow, even our liberty. It’s not. As we worked through in our Climate Industrial Complex episode, the real economic threat is doing nothing to create a resilient infrastructure that can endure extreme changes to weather patterns, failing to meet a net zero carbon future well in advance of what we originally thought was required and failing to foster a warlike competitiveness with our so-called adversaries to do the same. In case you’ve missed the reports that have been released even since the IPCC report we covered, the situation is way worse than we thought. And the IPCC report just fucking came out.

The a-ha moment is that a free market economy cannot do any of this. For all of the progress we’ve made, for all the technological advances and globalization, the market economy structure is wholly insufficient to tackle the threats we face. Brazil and Mexico are the largest producers of carbon dioxide emissions in Latin America, but they still rank well behind the top 10 producers. As the low wage manufacturing center for the United States, thanks to NAFTA, Mexico makes sense.

Brazil, on the other, hand has done a singularly poor job at maintaining and preserving its natural resources for the better part of the last 50 years. Once held up as the poster child of democratization and progress, Brazil has regressed dangerously on almost every important measure required to slow the effects of climate change. Ironically, the reversion to more central controls, environmental stewardship and reduction of inequality by focusing on people, rather than narrowly focusing on GDP growth, has placed several Latin American countries in a far better position than their developed counterparts to save the planet. Of course, our sins become everyone’s problem.

And that’s the big takeaway. U.N. Secretary General António Guterres recently lauded many of the Latin American and Caribbean nations for their leadership on climate initiatives, saying the world should heed their example. If China, the United States, Russia, Canada and India don’t get their shit together, we’re fucked. And, as we pointed out in the Climate episode, the brunt will be born mostly by nations that had little to do with it.

I’m also not Pollyanna-ish, by the way, when it comes to the economies today of Latin America. Most of them were hammered by the pandemic and are struggling to get back on their feet, highlighting the fragility of a region that has yet to find the right economic playbook to fit the various cultures, natural resources and opportunities that exist. But again, it all depends on what measurements you value. If slower growth, less inequality and less harm to the environment are something to value, then maybe—spoiler alert—maybe we don’t have all of the answers.

In order to battle climate change, we might have to go back in time and learn from the centrally planned economies. The only possible way that we have a chance to move the needle is to consider massive intervention into our own economy through stringent regulations, clean energy subsidization and, dare I say it, nationalizing key elements of our energy infrastructure to move away from the 7,000 independent utility operations in this country. A preposterous situation literally replicated by no other country on the planet.

We’ve been sucked in by the allure of free markets, free trade and free will for so long we can’t see how much we’ve been imprisoned by them. Turns out, some things aren’t meant to be free.

Fuck Milton Friedman. RIP John Williamson. Change our measures of success.

Here endeth the lesson.