After the Washington Consensus: Restarting Growth and Reform in Latin America
An agenda paying attention to long term issues
Author : John Williamson & Pedro-Pablo Kuczynski ed.
“…antiglobalization movement of today has so far not provided a coherent alternative at all. The way forward is to complete, correct, and complement the reforms of a decade ago, not to reverse them.”
The region will never be able to “…escape from the treadmill of repeated crisis unless policymakers begin to pay more attention to long-term issues rather than being constantly mesmerized by the latest crisis (p.18).”
Table of content
John Williamson & Pedro-Pablo Kuczynski ed.
John Williamson is a senior fellow at the Institute for International Economics since 1981. He was project director for the UN High-Level Panel on Financing for Development (the Zedillo Report) in 2001; economics professor at Pontificia Universidade Católica do Rio de Janeiro, University of Warwick, Massachusetts Institute of Technology, University of York and Princeton University; adviser to the International Monetary Fund; and economic consultant to the UK Treasury. He is author, coauthor, editor, or coeditor of numerous studies on international monetary and developing-world debt issues.
Pedro-Pablo Kuczynski, former minister of economy and finance (2001-02) in Peru and former minister of energy and mines, has been president and chief executive officer of the Latin America Enterprise Fund LP since its inception in 1994. Kczynski has also been vice chairman of CAP SA, a steel and forest products company in Chile; chairman of First Boston International and managing director of First Boston Corporation; partner at Kuhn, Loeb & Company International; deputy director of the Peruvian Central Bank, and; president and chief executive officer of Halco Mining. He began his career at the World Bank in 1961 and held senior positions there and at the International Finance Corporation. He is the author of several books on the economics of Latin America. [from the Institute for International Economics website]
In the appendix, Williamson clarifies the “Washington Consensus”, a term he created in 1990 after a meeting had been held in Washington between Washington-based institutions and Latin American representatives deciding on a set of policies to be implemented in the region at the time. The Consensus consisted of ten points that were to be implemented in these countries in Latin America, based on their present economic situation. This term has since been erroneously used synonymously with neoliberalism and globalization and as an “…ideological agenda valid for all time that was supposedly being imposed on all countries.” The term has been used to describe the “…full conservative agenda of the Reagan and Thatcher administrations…” This mistake in its use seems to be why so many appear to have been so radically against it (p.326).
Williamson does not agree with the voices blaming such tragedies as the crisis in Argentina on the Washington Consensus. Instead, he explains, the reasons behind the crisis are those measures that countered the policies recommended through the Washington Consensus. Despite increased growth and fall in poverty during the first half of the 1990s, the past half-decade Latin America has experienced crisis with renewed slowed down growth and a poverty increase.
The authors suggest a new agenda with long-term solutions to be applied since such long-term instead of short-term solutions are needed for the region to get out of its crisis. Through its four major headings, the agenda verifies how to reduce the region’s vulnerability to crisis; identifies what needs still to be completed of the first-generation reforms introduced in the late 1980s and early 1990s; presents a second-generation of reforms, and focuses on a more egalitarian economy through an emphasis on income distribution and a social agenda.
By cautiously making use of periods of positive growth, debt levels can be lowered, this way making deficits feasible in rougher times. The suggested crisis proofing can “…be furthered by anticyclical fiscal policies, hard budget constraints on subnational governments, stabilization funds, flexible exchange rates, inflation targeting, further strengthening of fiscal positions and completion of pension reform so as to reduce dependence on foreign savings, and regional peer monitoring of Maastricht-like commitments to fiscal responsibility (p.320).”
A new regional body should be created to “…develop standards analogous to the European Union’s Maastricht criteria for fiscal discipline (p.8).” Apart from this, a monitoring body is needed that will make sure that rules are followed and that penalties are paid for those who break them. In order to “…reduce the vulnerability of the region’s countries to crisis… (p.7)” highest priority needs to be given to this first agenda.
Completion of first-generation reforms
There is an emphasis on liberalization and retraining of the labor market for increased flexibility and faster growth-rate. Many enterprises, including state-owned banks, still need to be privatized and trade reforms need to focus on the improvement of “…market access to industrial countries, via the FTAA and WTO (p.321).”
These reforms differ from case to case depending on the various needs between the countries in the region. The suggestions are however directed towards the political system and the role of the state; the civil service; the judiciary and the financial sector.
The state needs to create and maintain the “institutional infrastructure of a market economy” through the provision of public goods, internalization of externalities and correction of income distribution in order to look after the less privileged citizens (pp.11 & 309).
The government should create a business-friendly environment, but “…stay out of making business decisions – and leave those to the people who stand to gain if the decisions are good and lose if they are not… (p.12).”
For the financial sector, reforms include “…improving transparency, upgrading accountancy, strengthening the rights of minority shareholders, facilitating the recovery of assets pledged as collateral, and developing credit registries (p.13).”
Income distribution and the social sector
In order to decrease poverty, more attention needs to be given to poverty reduction.
The fiscal system needs to focus on property taxation, more efficient tax collection and measures to avoid ‘capital flight’ (p.16). Penal marginal tax rates however decrease incentives to productivity, something that has a negative impact on growth.
Since “…one of the things that money is good at buying is the ability to minimize tax obligation (p.309)” there needs to be a guarantee that this will not happen and that the increase in tax revenues instead focuses more on social safety, primary education, health care and mircrocredit programs with lower interest rates. “Poor people need to be empowered by giving them access to assets that will enable them to earn a decent living in a market economy: education, land, credit, and titling (p.321).”
Addressing possible criticism
Williamson and Kuczynski address possible criticism of their publication, acknowledging that policy choices from outside of the region do affect the region’s problems; that the proposed agenda will not answer questions on why Argentina and Brazil experienced crisis in 2002, still emphasizing that the region will never be able to “…escape from the treadmill of repeated crisis unless policymakers begin to pay more attention to long-term issues rather than being constantly mesmerized by the latest crisis (p.18).”
To the critics’ possible suggestion of this proposed agenda being too broad and including too many reforms, the authors respond that each country will need to implement the different reforms depending on the country’s prevailing situation. A larger concern of the authors is the possible lack of patience by the region’s leaders (p.19).
The agenda does not offer an “alternative model of development”, but does support the idea of globalization since the authors believe that there is no way to avoid it. The “…antiglobalization movement of today has so far not provided a coherent alternative at all. The way forward is to complete, correct, and complement the reforms of a decade ago, not to reverse them (p.18).”
Institute for International Economics, 2003