The Washington Consensus

I am a fan of the Washington Consensus. The name conjures up horrible free-association images. And so the term has come to be used in a negative light in a context that has nothing to do with the original intent. The truth is quite refreshing: it is 10 points that the economist John Williamson came up with for what he viewed as the standard, uncontroversial consensus of economic policy.

1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
10. Legal security for property rights.

Even when people know what it is, it can be viewed negatively. Admittedly, Williamson probably should have called it something else, the name insinuates that these are the edicts put forth and forced on the rest of the world from the United States. The target audience was Latin American governments, it was a strategy for escaping the middle-income trap that many of them had fallen into. But we would be much better off if we followed this advice too.

Point 9 is the most open to misunderstanding these days. Williamson explicitly states that deregulation should occur towards artificial barriers governments place on competition, and there is the obvious cut out for trying to avoid financial crises. If you are concerned about inequality, the influence of large corporations and the effects of large profits this kind of deregulation is for you. A competitive business will be more productive and less profitable. A competitive industry will produce goods at lower prices while employing more people.