Development of economic thinking has been providing different policy guidance throughout the years formulated to cure problems of developing countries and most often these policy prescriptions have been used developed countries as a reference point. Policies that were offered reflected waves of economic thoughts and problems the world economy was facing. In 1776 Adam Smith’s invisible hand and market liberalism was followed by John Stuart Mill’s political economy problems and utilitarianism in 1848. Then these main ideas have been have been superseded by the theories of ‘the Big Push’, industrialization and structuralist approach in 1940-1960 after which there has been a shift from physical to human capital in 1970. But what is more important is the period since 1980 when the heyday of developmental economics brought shift to market liberalism, structural adjustment, institutional economics and the shift towards Washing Consensus. In the years of transition from command economies to market economies in 1990’s in many countries it was a tendency to implement policies supported by the framework of Washington Consensus and starting this millennium what has mostly been happening is the reaction to failures of Washington Consensus and ongoing experimentations that are targeted to find some answers to the everlasting problem of how to reduce poverty and enhance economic growth. Many of these one-fits-all policy prescriptions failed to prove their efficiency or that they are working at all and, moreover, it is not uncommon that they were even the causes of many financial crises or economics slowdowns in different counties. So in my work I want to face the theoretical analysis and empirical observations to shed the light on the importance, efficiency as well as the limitations of the phenomenon of Washington Consensus, which was called to be a triumph of the transition to market economy period as it provided, as was believed, a very sound economic policy advice.

To see the importance Washington Consensus presented at the times of transition we would need to see how and why it emerged and the center of our attention should be the practice of developing countries as it is a popular international concern to improve life in these countries. The agencies of the developing countries that are engaged in this process always receive support from richer countries, which disburse official development aid, as well as from non-government organizations that are concerned with channeling popular concerns and from intergovernmental organizations such as United Nations, which are set up to resolve various development problems. However, it mostly due to of the activities if the former that one could witness the tendency of governments to copy successful practice elsewhere, particularly in the developing countries. The ideas propagated by these international development agencies to guide the practice of development shifted the 1980’s thinking about the adoption and approach of the practice to be used by these countries and was called “Washington Consensus”. Charles Gore in his article says that “Propagated through the stabilization and structural adjustment policies of the International Monetary Fund (IMF) and World Bank, this has been the dominant approach to development from the early 1980s to the present”. The name “Washington Consensus” was coined by John Williamson and it was in his works where the clear summary of this approach was formulated, mostly referencing to the policy reforms in Latin America, which has been going through an economic and financial crisis in the 1980’ and John Williamson was trying to form the policies that solved problems of these countries by outlining a set of policies that were undertaken. Shift to Washington Consensus did not only bring the substantial differences in earlier approaches, but also the different world view.

The Washington Consensus has been designed as a universal template of reforms and it implied that to grow the economy certain conditions have to be met regardless of the country-specific conditions. This set of economic policy prescriptions John Williamson considered a “standard” reform package promoted for developing countries in crisis by Washington-based institutions such as International Monetary Fund (IMF), World Bank and the US Treasury Department. The original consensus included 10 relatively specific policy recommendations:
1) Fiscal discipline – large and sustained fiscal deficits contribute towards inflation and capital flight, therefore governments should keep them to a minimum.
2) Public expenditure priorities - a redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. Subsidies need to be lowered or eliminated.
3) Tax reform - tax base should be broad and marginal tax rates should be moderate
4) Interest rates - should be determined by financial markets, i.e. liberalized, because positive real interest rate discourages capital flight and increases savings.
5) Exchange rates – developing countries should apply a competitive exchange rate that would boost exports and make them cheaper to sell abroad.
6) Trade liberalization – tariffs should be minimized and shouldn’t be applied on intermediate goods that produce exports.
7) Foreign Direct Investment - should be encouraged as it brings capital and skills.
8) Privatization – private industries operates more effectively because managers either have a direct personal stake in the profits of an enterprise or accountable to those who do.
9) Deregulation – excess government regulation can lead to corruption and discrimination against small enterprise that have minimal access to the higher reaches of the bureaucracy.
10) Property rights – they must be enforced to reduce incentive to save and accumulate wealth as week laws and poor judicial systems do.
Now that I have outlined the emergence, importance, origins and framework of Washington Consensus, it is important to start analyzing the theoretical and empirical implications it had on the ideas of development practices and on the economic consequences of transitional East European countries that implemented this framework. At first I will look at the benefits of this theoretical idea, how it can help countries on their way to becoming more developed as well as limitations of this idea and then I will focus on the real usefulness of these recommendations and their use on the examples of different countries.

Washington Consensus became very popular during the late 1980’s mostly because of the fall of the USSR and the worldwide shift towards market-orientated policies, which it was advocating. At the time of the restructuring process there hasn’t been any framework that would be of a help to countries it transition and that is why there has been a thirst for such a universal framework, an alternative set of ideas on how to reorganize political and economic activity and which would be able to create a pattern of reforms for these countries to follow. However, Washington Consensus has been creating more uncertainties and questions over time because, although many of these ideas had great impact on different countries, it is hard to say that this consensus was implemented and interpreted in the way that John Williamson initially meant as all of his policies can be perceived in more vague sense – one of interpretations of the Washington Consensus had a meaning of market fundamentalism or neoliberalism referring to laissez faire Reaganomics for example. This has caused a problem of a very compressed consensus being in use, an easy model that had a hint of the initial Washington Consensus, but had different outcomes in different countries. The phrase itself became more like a brand name used separately from what it was intended for and, although Williamson tried to fix this distortion, the worldwide popularity of this unclear and blurred meaning and the misuse of the term was not possible to stop. However, the major criticism of this term is that how is it actually possible to establish particular policies that countries should adopt to become more successful? Can one ultimate framework be used to make countries more prosperous? Robust opinions that many scholars or policy-makers give can be a good enough reason to believe it is not so. In the Moises Naim article “Washington consensus or Washington confusion?” he makes an argument that there was no 'consensus' in the first place. He has argued that there are and have been major differences between economists over what is the 'correct economic policy', hence the idea of there being a consensus was also flawed.

Following political revolution Soviet Union and many east European countries were moving towards market economies, which implied change of incentives, shift towards profit motive, private property rights, cost efficiency, competition. Moreover it meant replacing socialist monopolies with sellers and buyers’ market, reallocation of resources implying surviving of old firms and creation of new markets as well as and changing the system of control, involving investors and changing institutions. Budget balances, external balances and inflation is what needed attention and improvement as well. There were 3 main components of reforms:
-Liberalization (microeconomic liberalization of prices, elimination of price controls), Currency convertibility and removal of all major quantitative restrictions on foreign trade, removal of external barriers to trade), removal of internal barriers to entry (developing and setting up new enterprises)
-Second-stage institutional reforms (changes in existing institutions, privatization of state enterprise, reorganizing state administration, reforms of the tax system and financial reform)
-Macroeconomic stabilization policies. Many Washington Consensus reforms such as privatization, liberalization and macroeconomic stability have been implemented in Poland during 1990s. Most banks and state-owned enterprise have been privatized and the trade structure has been liberalized, although the implementation of these policies was very slow in Poland. The “shock therapy” implemented had the purpose of eliminating large imbalances and increasing efficiency of the economy. For example, the privatization process in Poland was connected to Soft Budget Constraint, which decreased the budget deficit, inflation and interest rates and increased incentives for more efficient production as under new financial arrangements privatized companies can no longer turn to the state for loans. Between 1991 and 1998, Poland share of GDP increased from 42% to 70%. The short-term effect of these reforms were successful, however the long term effects can be questioned. It has been argued that Polish government has been interpreting Washington Consensus too narrowly and for this reason couldn’t fully benefit from the transition. In case of Russia, the IMF claims that Washington Consensus reforms haven’t been thoroughly implemented and thus prevented the country to transform into genuine stable market economy and the financial catastrophe of 1998 was one of the proofs. Russian transition process started from price liberalization and voucher privatization program in 1992. During this year the command system of resource allocation was dismantled, entrepreneurial activity obstacles were removed and state monopoly was gone as well as market institutions improvement has been undertaken, creating a two-tier banking system, a foreign-exchange market. The adaptation of the legislation regulating economic activity has started its operation, but in 1992 the cost of reforms has turned out to be very high and a deep recession occurred (GDP dropped by 14.5% in 1992), experiencing high inflation levels (consumer prices increased by 26.1 times) and living standards decreased dramatically with 31.6% decrease in household expenditures. During 1992-1996 the GDP fell by around 30%, capital investment decreased by 50% and the losses from the Washington consensus reforms implementation were very obvious.

Overall, it can be argued that the reforms in many ex-Soviet countries failed to bring expected benefits because the timing of these reforms matters as well as the reforms themselves. We can determine some influencing the speed of reform factors such as initial conditions (initial level of development and structural characteristics, geography, history), initial political set-up around the time reforms were attempted or initial transition policies. Also, some components of the reforms are easy to implement while others can take time, for example, liberalization policies are easier to enforce, while second stage institutional reforms may take longer to come into effect. Thus it can be said that poor results from the reform, which most transitional countries experienced, may be the result of slow effect of reforms on the economies or it may be the result of incorrect policies timing cancelling the anticipated improvement. Furthermore, other factors that may have blocked reforms in these countries were sectoral composition or natural resource endowment Francis Fukuyama called Washington Consensus “the end point of mankind’s ideational evolution and the universalization of Western liberal democracy as the final form of human government”, but is it really so? Washington Consensus has been perceived as a benchmark political reforms framework in 1990s when the Collapse of the USSR evoked a thirst for a new set of political ideas ought to bring countries economic development. However, although either partially or fully implemented in different ex-Soviet economies, it became quickly perceived as “set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery”. To evaluate whether Washington Consensus provides sound economic advice, we need to remember that this framework has a rather vague and generalized set of policies, thus creating a difficulty to assess the performance of countries as many policy implementation can be interpreted as Washington Consensus. Nevertheless, it is hard to say whether Washington Consensus provides sound economic policies for ex-Soviet countries as most countries with very few exceptions experienced economic slowdown in 1990s, but this may be due to the fact that initial conditions of the countries implementing these reforms have a big effect. As Washington Consensus primarily emerged as a helping hand for Latin American countries, it may be that it has been designed according to their country-specific features in particular. Another difficulty that makes it hard to assess the impact of Washington Consensus is the fact that in the long term some countries like Czech Republic actually reached many benchmarks set by IMF and has reached economic prosperity while countries like Ukraine still struggle with high corruption levels, poor democracy and fluctuating economy.

Word Count: 2469

Bibliography:

1. Justin Yifu Lin, David Rosenblatt “Shifting patterns of economic growth and rethinking development”, Journal of Economic Policy Reform 15:3, 171-194 2. Joseph E. Stiglitz “Rethinking Development Economics”, The World Bank Research Observer, vol. 26, no.2 (August 2011) 3. Dani Rodrik “Goodbye Washington Consensus, Hello Washington Confusion? A review of the World Bank’s Economic Growth in the 1990: Learning from a Decade of Reform”, Journal of Economic Literature, Vol. XLIV (December 2006) 4. Dani Rodrik “The Future of Economic Convergence”, NBER Working Paper No. 17400 5. John Williamson “What Should the World Bank Think about the Washington Consensus?”, The World Bank Research Observer, Vol. 15, No. 2 (Aug., 2000), pp. 251-264 6. Charles Gore, “The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries”, World Development Vol. 28, No. 5, pp. 789-804, 2000. 7. Moisés Naím, “Washington Consensus or Washington Confusion?”, Foreign Policy Magazine, Spring 2000. 8. Ravi Kanbur, “The Co-Evolution of the Washington Consensus and the Economic Development Discourse”, Macalester International Round Table, Macalester College, St. Paul, Minnesota, October 2-4, 2008. 9. Nauro F. Campos, Fabrizio Coricelli, “Growth in Transition: What We Know, What We Don’t, and What We Should”, Journal of Economic Literature, vol. XL (September 2002), p.793-836 10. J. Barkley Rosser, Jr., Marina Vcherashnaya Rosser, “Another Failure of the Washington Consensus on Transition Countries: Inequality and Underground Economies” Challenge, vol. 44, no. 2, March/April 2001, pp. 39-50. 11. Tomasz Mickiewicz, “Economics of Institutional Change: Central and Eastern Europe Revised”, Palgrave Macmillan, 2010, Chapter 3. 12. Maria Aggestam, Hans Falck, “Poland in a Post-Washington Consensus Perspective”, 12/05/2000. 13. Alexander Nekipelov, “The Washington Consensus and Russian Economic Policy”, International Social Science Journal, Volume 52, Issue 166. 14. Yasheng Huang, “Debating China’s Economic Growth: The Beijing Consensus or The Washington Consensus”, Academy of Management Perspectives, 2010, p 31-47. 15. John Williamson, “Did the Washington Consensus Fail?”, Outline of speech at the Center for Strategic & International Studies, Washington DC, November 6, 2002

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[ 1 ]. J. Yifu Lin, David Rosenblatt “Shifting patterns of economic growth and rethinking development”, Journal of Economic Policy Reform 15:3, p.184
[ 2 ]. C. Gore, “The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries”, World Development Vol. 28, No. 5, 2000 p.790
[ 3 ]. M. Naím, “Washington Consensus or Washington Confusion?”, Foreign Policy Magazine, Spring 2000, p.89
[ 4 ]. M. Naím, “Washington Consensus or Washington Confusion?”, Foreign Policy Magazine, Spring 2000, p.95
[ 5 ]. Tomasz Mickiewicz, “Economics of Institutional Change: Central and Eastern Europe Revised”, Palgrave Macmillan, 2010, Chapter 3, p.38
[ 6 ]. Maria Aggestam, Hans Falck, “Poland in a Post-Washington Consensus Perspective”, 12/05/2000.
[ 7 ]. Alexander Nekipelov, “The Washington Consensus and Russian Economic Policy”, International Social Science Journal, Volume 52, Issue 166.
[ 8 ]. Tomasz Mickiewicz, “Economics of Institutional Change: Central and Eastern Europe Revised”, Palgrave Macmillan, 2010, Chapter 3, p.46-47
[ 9 ]. Yasheng Huang, “Debating China’s Economic Growth: The Beijing Consensus or The Washington Consensus”, Academy of Management Perspectives, 2010.
[ 10 ]. John Williamson, “Did the Washington Consensus Fail?”, Outline of speech at the Center for Strategic & International Studies, Washington DC, November 6, 2002