Development

US Banks and the Washington Consensus

Tobias HESSENBERGER, (2016), The London School of Economics and Political Science, Msc in Political Economy of Late Development.

The Historical Context of the Washington Consensus:

Despite J. Williamson not conceding to the Washington consensus being the quintessential policy demands of a neo-classical economist, it does highlight a paradigm shift from inward to outward economic orientation which some regard as a success in its ideal but a failure in application[1]. It is the general consensus that the latter outweighs the former. In order to simplify the further explanations in this essay, structural adjustment policies will refer to the conditional adjustment demands made by the lenders of last resort which mostly related to encouraging the withdrawal of the state in the economy as well holding debt services as a main priority (at the cost of government expenditure)[2]. This paper will explain that the general view of failure for pro-market reforms in the 1980s is reflected in their application rather than taking the success in an ideal into account. In other words, SAPs were always going to fail due to their nature and it is through this that one can find success in an ideal but failure in application. In this case the ideal is a neo-liberal world of trade liberalization dependant by financial institutions in the West. This does suggest that much like how James Ferguson looks at development failures to find success in The Anti-Politics Machine; one must consider the success the SAPs merit[3].

In order to provide a comprehensible argument, a short contextual summary will be provided in relation to the period leading up to as well as after the Washington Consensus and SAPs. Leading up to 1980, it is important to remember that by 1950 the world was split between “first world” and “third world” countries.  This characterized third world countries with, on average, lower levels of health, education, infrastructure, and general living standards. This was on the back of an export-orientated economy specializing in primary commodities. Along with the growing consensus that global demand for those commodities was on the brink of stagnation developing countries were faced deteriorating terms of trade and a lack of foreign exchange from exports. At that time developing economies pursued capital accumulation to escape the export pessimism and build their own, internal, import substituted industrialized industries. Most notably, as OPEC oil prices experienced heavy increases after 1972, LDCs who were not exporters of oil faced higher import costs[4]. Foreign exchange generation failed to match these rises and international credit borrowing mediated effects of this. This era was labelled as “petrodollar recycling” in which revenues from oil exporters was deposited in US banks and then lent to LDCs such as Argentina or Brazil[5].  What came next is known to be the catalyst for the debt crisis as well as the Washington Consensus movement.

Inflation was upon the US and Volker raised interest rates in 1980 collapsing the LDCs system of paying debt back through export earnings and increasing interest payments (having been fixed to the LIBOR). This all accumulated to august 1, 1982 when Mexico announced its inability to cover its debt payments. The Washington Consensus found its purpose for countries like Mexico by providing SAP recommendations to increase economic stability in LDCs. The idea of being “a lender of last resort” was created along with conditional lending (conditional on reforms). These conditions targeted state funded inefficiencies and thus concentrated on rolling back government involvement, privatization, liberalization, and currency devaluation[6].

The Success in Ideal: Supporting the US banking system

With the growth of neo-liberal economics creating an ideal utopia encompassed around trade liberalization, the 1980s represented a time when SAPs were necessary to uphold that ideal. It was that ideal which was dependant on the survival of the US banking system. Moreover, limiting the success of SAPs from an ideal point of view infers that it was their nature to fail in application, which is why there is a widespread understanding of SAP failure during the 1980s.

When Williamson revisited his Washington Consensus policy prescription he seemed adamant that the policies were not a complete reflection of neo-liberal economics. In his 2002 paper, he objects less “to the agenda laid out” but more to the neoliberalism “that they interpret the term as implying”[7]. He argues that the consensus was limited to Washington and wasn’t for the discourse of development as that was attempted by the World Development Report[8]. From evidence, the link between the two papers is limited. But even if the Washington Consensus just reflected the views in Washington, they were still party of a neo-liberal movement that led to the creation of a neo-liberal ideal. The policies can even be deconstructed “as an application of the neo-conservatism of the Thatcher-Reagan era to development economics as a product of the neo-liberal ‘count-revolution’

It is important to reference some of the characteristics of this neo-liberal ideal which the Washington Consensus successfully upheld creating its inner nature of real world failure. The rise of neo-liberalism was based off the US model. This encompassed privatization, free trade, export-led growth, liberalization of international capital markets, deregulated labour markets, and policies of austerity. At the time this received a lot of theoretical backing underpinning the view that neo-liberalism was the next economic answer. The reasons behind this infant ideal came from views that “markets are best at maximizing social welfare”[10] and that state failures outweigh market failures[11] as state intervention led to previous rent seeking harming social welfare[12].

Now that we have established our argument, the neo-liberalism within the Washington Consensus, as well as the ideal of neo-liberalism, we can explore how the SAPs were always going to fail in order to support the ideal. Just to put this time into figures, by 1970, total outstanding global debt was $29 billion. This rose to $159 billion by 1978 and to $327 billion by 1982[13]. Within these loans, the nine largest banks in the US held 176 percent of their capital in Latin American debt[14]. These figures reflect a potential worldwide financial crisis had the US banking system not have been indirectly bailed out through the conditional loans. Shalden goes as far to say “the rescue package was obviously not a solution”, “The USA and others were simply lending money to Mexico that was used to repay the banks”[15]. This represented a time when the debt burden was transferred to the debtors through the discourse of development by The Baker and Brady plan. If there had been an alternative solution involving some sort of banking crisis (mainly in the US), the markets that the neo-liberal ideal holds at it core would have had an early exposure of it’s externality failures. Perhaps when Williamson held the Washington Consensus to just reflect the views in Washington, he was right and the policies reflected the worries in Washington about a potential banking system collapse?

Thus, there is some legitimacy behind upholding the Washington Consensus as necessary. But it is important to remember why? It was necessary to uphold the neo-liberal ideal and the promotion of financial liberalization, which made the policies fail in the goal of development.

The Failure in Application: Implementation and Policy

With upholding the ideal of neo-liberal liberalization, it was within the nature of the Washington Consensus policies to fail. This established the common view of failure in application.  Since any set of recommendations were always going to fail in relation to the expected success, both policy and implementation criticisms are significant and are incorporated into the phrase of “application”. It was then through the lack of individual application that the nature to fail was exaggerated. This exaggeration underlines the consensus of failure. This is to say that through less rigid application, the failure of the SAPs could have been mitigated in a more economically social and successful way.

Some believe that the reforms did not go far enough in application. Krueger reflects the IMF stand point that the “reforms were uneven and incomplete” as they were “not aiming high enough at the outset”[16]. One of these aims was to reduce public rent seeking that is a detriment to market efficiencies[17]. However, the whole implementation of SAPs seemed to try and short cut a route to development. But this short cut ignored context, such as a colonial past[18], which provided a lack of understanding for the domestic institutions, which in some cases replaced public rent seeking with private rent seeking. It is through examples like this that The World Bank has come to recognize that economic success through liberalization can be attained in different ways. At least in a different way to how “rigid in timing and execution” Williamson concedes the SAPs were[19].

To further this exaggeration of failure from the application of SAPs, this paper will now draw on Logan and Mengisteab’s example of the implementations of these policies in Sub-Saharan Africa. They underlined the misconception that these transformative economic policies were only dealing with the formal economy when such under-developed states ran largely on an informal, sometime Kinship, based economy. This puts grave importance on understanding the domestic environment, as “international trade reform, multilateral and bilateral debt restructuring and relief, and domestic socioeconomic reform must all be seen as different fronts of the same economic battle”[20]. Sub-Saharan Africa exemplifies this mistake to overlook the political economy governing society which led to a restriction in being able to service the general mass’ reduced purchasing power from inflationary pressures. This was reflected in the wage gap increasing from 2:1 in 1983 to 6:1 in 1989[21].

Taking all this into account, the disappointment many associate with the Washington Consensus originates from the failure in application of the SAPs, which were always going to fail in nature to do their success in upholding the neo-liberal ideal through saving the US banking system.

Further Thoughts

The overall policies constituting trade liberalization and the need to wreak the benefit from increasing competition is still seen today, perhaps underlining the lack of ability to attain that ideal in developing countries. Continued use of SAPs in countries such as Greece implies otherwise: Neo-Liberal ideals are still attainable, despite little tweaks for social welfare.

References

[1] Williamson, J.. (2004). A Short History of The Washington Consensus. . – (-), 1-14.

[2] World Health Organization. (-). Structural Adjustment Programmes (SAPs)

[3] James Ferguson. (1994). The Anti-Politics Machine. The Ecologist. 24 (5), 176-181.

[4] Bhagwati, Krueger, “Exchange Control, Liberalization and Economic Development” American Economic Review,vol.63, no.1. May 1973

[5] Bhagwati, Krueger, “Exchange Control, Liberalization and Economic Development” American Economic Review,vol.63, no.1. May 1973

[6] Bhagwati, Krueger, “Exchange Control, Liberalization and Economic Development” American Economic Review,vol.63, no.1. May 1973

[7] Williamson, J.. (2004). A Short History of The Washington Consensus. . – (-), 1-14.

[8] “World Bank. 1991. World Development Report 1991 : The Challenge of Development. New York: Oxford University Press. © World Bank. https://openknowledge.worldbank.org/handle/10986/5974 License: CC BY 3.0 IGO.”

[9] Machiko Nissanke. (2001). The Neo-Liberal Doctrine and The Africa Crisis. United Nations Research Institute for Social Development. – (-), 1-18.

[10] Deepak Lal (1997). The Poverty of Development Economics. London: The Institute of Economic Affairs. 236.

[11] Bauer, P.T. (1969) ‘Dissent on Development’ Scottish Journal of Political Economy , Volume 16, Issue 3, pages 75 – 94.

[12] Anne O. Krueger. (1974). The Political Economy of the Rent-Seeking Society. The American Economic Review. 64 (3), 291-303.

[13] Federal Deposit Insurance Corporation. (1997). 1997 Annual Report. FDIC. – (-), -.

[14] Jeffrey Sachs. (1987). U.S. Commercial Banks and The Developing Country Debt Crisis. National Bureau of Economic Research. – (-), 1-58.

[15] Shadlen, Kenneth C. (2005) Debt, finance and the IMF: three decades of debt crises in Latin America. In: Europa Publications, (corp. ed.) South America, Central America and the Caribbean 2004. Regional surveys of the world.12th ed., Routledge, London, UK, pp. 8-12.

[16] Krueger, A. (2004) ‘ Meant well, tried little, failed much”: policy reform in emerging market economies’, IMF speech in NYC.

[17] Khandelwal et al. (2012). Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters. . – (-), 1-54.

[18] Robert H Bates (1981). Markets and States in Tropical Africa: The Political Base of Agricultural Policies. Berkeley: University of California Press. 1-178.

[19] Williamson, J.. (2004). A Short History of The Washington Consensus. . – (-), 1-14.

[20] Ikubolajeh Bernard Logan and Kidane Mengisteab. (1993). IMF-World Bank Adjustment and Structural Transformation in Sub-Saharan Africa. Economic Geography. 69 (1), 1-24.

[21] Ikubolajeh Bernard Logan and Kidane Mengisteab. (1993). IMF-World Bank Adjustment and Structural Transformation in Sub-Saharan Africa. Economic Geography. 69 (1), 1-24.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s