The IMF and the Washington Consensus:
A Misunderstood and Poorly Implemented Development Strategy
The roots of the recent political upheaval in Bolivia, where months of crippling protests and roadblocks prompted the
ousting of President Carlos Mesa on June 6, were in large part economic. For the protestors, mostly indigenous Andean
miners, peasants and workers, their struggle was as much about regaining control over their previously privatized oil
and gas industries as it was securing fair government representation. In correlation with this struggle for
re-nationalization, a wave of discontent over the broad economic reforms carried out by the international finance
community, led by the Washington-based International Monetary Fund (IMF), has swept across the country. Such
disgruntlement is not limited to Bolivia. Over the last five years Latin America has been plagued by revolution,
sparking upheavals in Ecuador, Peru, Argentina and Chiapas, Mexico, where the IMF’s failed promises to promote economic
prosperity via the policy prescriptions of the “Washington Consensus” have often played an instigating role. Not
surprisingly, the Consensus has come to signify a hard-line, neoliberal set of policies emphasizing export-oriented
growth though rapid, sweeping economic reform. This was not the Consensus’ original intention. Nevertheless, the IMF’s
aggressive interpretation of its recommendations and history of repeated failure has hindered growth in Latin America
and tarnished the Washington Consensus’ otherwise defensible formula for promoting prosperity in developing countries.
The 1980s were a difficult period for Latin American economies. Years of significant economic growth had given way to a
staggering debt crisis, leaving the region in desperate need of economic reform and outside assistance. Simultaneously,
the long held importance of a nation’s inventory of natural and human resources was challenged by the concept that the
key to prosperity lay in the appropriate application of specific economic policies. Within this context, economist John
Williamson authored a paper in 1990 that outlined the prescriptions for economic development in emerging markets known
as the “Washington Consensus.” Drawing from a necessarily broad conglomerate of diverse notions of the best practices
espoused by the leading minds at the IMF, the World Bank, the Federal Reserve Bank and the U.S. Treasury, among others,
Williamson whittled the intellectual fray down to ten recommendations:
• Fiscal Discipline
• 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
• Tax reform (to lower marginal rates and broaden the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization
• Liberalization of inflows of foreign direct investment
• Privatization
• Deregulation (to abolish barriers to entry and exit)
• Secure property rights
In Williamson’s words, “the three big ideas here are macroeconomic discipline, a market economy, and openness to the
world (at least in respect of trade and FDI [foreign direct investment]).” These three concepts attempted to tackle the
specific challenges of Latin America, where the combined effects of spiraling debt, runaway inflation, corruption in
state controlled industry and stringent protectionism had left economies devastated. Belt-tightening macroeconomic
policies such as reduced government spending and higher interest rates were prescribed in order to reel in escalating
budget deficits and accompanying inflation. The transfer of most businesses from the public to the private sector and
the embracing of market principles were intended to reduce smothering state control of industry and the potential for
damaging government corruption. It was believed that opening Latin America through public sector deregulation and trade
and capital liberalization would attract foreign investment and increase healthy competition.
A Negative Reception
Given that the Consensus was published during a period when the vast majority of developed nations had already accepted
such reforms, Williamson understandably believed that his accord would meet only modest opposition. Ironically, the term
“Washington Consensus” quickly devolved into an infamous catch phrase associated with the neoliberal, imperialist,
market-fundamentalist agenda.
To a certain extent, the rapid intellectual devolution of the Washington Consensus was more a product of public
misconception than reasoned analysis, as the complexity and nuance of Williamson’s theory was often overlooked. For
example, critics denounced the Consensus’ disregard for social cohesion and institutional stability, conveniently
neglecting Williamson’s second recommendation calling for the reallocation of government tax revenue to support the
development of schools and hospitals.
However, a more comprehensive explanation as to why the Washington Consensus earned such a poor reputation is that
Williamson’s theory, though fundamentally sound, fell into ill regard at the IMF. Cornell Economics Professor Ravi
Kanbur has pointed out that, “It might be useful to start with the observation that the Washington Consensus became what
it did, not what it said.” Regardless of its architect’s intentions, the IMF systematically and universally applied the
most conservative interpretation of the Consensus’ principles, transforming it from a set of broad policy guidelines to
a rigid neoliberal development model.
Staunch Opposition to the Consensus
Joseph Stiglitz, former chief economist of the World Bank and leading critic of the IMF, illustrates the flaws of the
Washington Consensus. In his 2002 book, Globalization and its Discontents, Stiglitz takes issue with the main themes of
the Consensus’ ten recommendations, highlighting the dangers of launching fiscal conservatism, broad trade
liberalization and widespread privatization as a panacea for economic underdevelopment.
Stiglitz observes that one of the overarching themes of the Washington Consensus is the implementation of fiscally
conservative policies, i.e. hiking interest rates and cutting government spending. Ideally, he acknowledges, these
polices promote development by encouraging individual saving, filtering out unnecessary government programs and
strengthening the country’s exchange rate. In practice, however, the effects of both policies can be detrimental. High
interest rates can undermine banks in emerging markets by forcing them to honor loans based on a devalued currency. This
fiscal pressure, when applied in concert with banks’ attempts to recoup massive amounts of short-term debt, can cause
these vital financial institutions to collapse. Stiglitz references Keynesian thought to remind that government spending
in a developing nation is the only source of capital able to prevent market stagnation.
The Consensus also hails free trade and the opening up of domestic markets, presuming this liberalization allows a
country to find its niche in the global market. However, developing nations often have nascent, uncompetitive domestic
industries that are quickly overwhelmed by foreign competition, and forcing free trade on these countries only destroys
domestic industry before it is able to develop fully. Additionally, such foreign investment routinely fails to deliver
the promised influx of long-term capital. As Stiglitz observed in the Harvard International Review in the Spring of
2003, “Developing countries could attract firms to extract their natural wealth – provided they gave it away cheaply
enough…worse still, much of the money was speculative – hot money – coming in while the going was good, but fleeing the
moment matters looked less rosy.” When foreign investments disappear rapidly, nations exploited for their natural
resources are left unable to foster jobs or long-term prosperity on their own. Instead, they are subject to short
periods of extreme economic boom and long periods of economic slump.
Stiglitz also illustrates the dangers of rapid privatization of state industries, a transition he describes as ripe for
corruption. Often, state-controlled sectors are sold to the bureaucrats who run them or to their political cronies. This
practice is evident today in post-Communist Russia, where the intermingling of politics and business has led to
widespread corruption. Such fraudulent privatization eliminates the supposed benefit of competition and produces
windfall gains and gaping income disparity, the worst effects of capitalism. Additionally, evidence suggests that when a
nation transfers a large percentage of its commerce from the public to private sector, institutions must be established
to monitor new private businesses. In the U.S., a number of watchdog organizations, such as the SEC, FCC, IRS and
congressional oversight committees, ensure the integrity of financial transactions; when the reach of these
organizations was curtailed by the deregulation efforts that began with the Reagan administration, the major savings and
loans bank failures and the Enron corruption scandals of the period were made possible. When privatization proceeds in
the absence of similar institutions the result is financial anarchy, a lawless state where the wealthiest and most
ruthless break laws with impunity.
The IMF’s Conditional Loans
Stiglitz’s concerns were strikingly reflected in the experience of Latin American IMF debtors. In relentless pursuit of
the Consensus’ macroeconomic discipline, privatization and liberalization of trade and capital markets, originally
envisioned by Williams as a viable means to promote healthy growth, the IMF tacked on coercive reformatory mandates to
its loans without regard for the individual circumstances of the debtor country. The Washington Consensus’ principles
became the conditions without which the IMF would withhold funding. As such, the IMF forced central banks to steeply
raise interest rates, stripped states of their enterprises, recklessly opened the floodgates to foreign capital and
slashed protectionist tariffs, pushing Latin American economies into crisis one by one. Such a situation is reflected
today in Ecuador. A contributor to The London Observer explained on October 8, 2000, “While trying to meet the mountain
of IMF obligations, Ecuador foolishly liberalized its tiny financial market, cutting local banks loose from government
controls and letting private debt and interest rates explode.” The Ecuadorian administration did not want to implement
additional damaging reforms, yet the small country, desperately in need of IMF loans, had no choice.
After a decade of failed attempts to spur growth through its expropriated version of the Washington Consensus, the IMF
left Latin America worse off than it had found it.
Stuck in Neoliberal Ideology
The IMF continues to charge forward with its basic guiding principles grounded in the ten commandments of the Consensus.
Still, the collapse of the Mexican and Argentine economies motivated a few minor shifts in IMF ideology. For example,
the dangers of rapidly opening emerging markets to capital inflows are now recognized, as is the fact that countries can
effectively use fiscal policy to counteract potential crises (even if this contradicts the mandate to tighten the belt
on government spending). Nonetheless, the heart of the Consensus remains intact. Fiscal discipline still reigns as a
primary objective; in April of this year the IMF halted a $40 million loan to Nicaragua in reaction to a series of
congressional budget changes that increased the deficit. The promotion of privatization, trade liberalization and
foreign direct investment also remain at the top of the list in spite of their recurrent failure upon implementation,
exemplified by their chaotic effects on Bolivia. In 2003, the IMF spearheaded the privatization of Bolivia’s oil and gas
industries. Then, after it called on La Paz to cut its deficit, the IMF pressured the administration to tax the citizens
(by raising the income tax) as opposed to the newly arrived gas and oil companies, citing concerns over maintaining an
investment atmosphere which would prove appealing to foreign investors. The advice resulted in a monetary crisis and the
eventual overthrow of the Bolivian government.
Reshaping the Consensus
If the IMF, instead of applying a formulaic, rigid Consensus to developing economies, acknowledged the unique social
forces at work in Latin America, it would have more successfully realized its objectives. For one, Latin American
economies are interdependent, which complicates the implementation of macroeconomic policy. For example, in 1997,
Argentina’s struggling peso cracked, after Brazil, Argentina’s biggest trading partner, devalued the real. Inflation and
unemployment soared, and the aftershocks of Argentina’s collapse were felt all over Latin America. Importantly, the
similarly inter-related countries of Europe coordinate their monetary policy through the European Central Bank, while
the Latin American countries employ no such common tool; their economic policies are largely independent and
self-serving. This unique characteristic of Latin American economies underlines the fact that the IMF has not been
capable of bilaterally addressing individual countries’ problems in the region. Instead, it must better coordinate its
economic efforts throughout the region to ensure that one nation’s policy does not compromise another nation’s
development.
Furthermore, in countries such as Mexico, Venezuela and Argentina, highly organized, powerful labor unions can stand in
the way of market reform. As Maria Murillo observes in Labor Unions, Partisan Coalitions and Market Reforms in Latin
America, “Trade liberalization increases differences among workers across and within sectors, making it harder to
organize labor unions based on horizontal solidarity…international competition and privatization also provoke labor
restructuring and layoffs in sectors that had been among the most highly unionized in the past.” Given the traditional
strength of many Latin American labor unions, if they are dissatisfied with developmental policy it appears that they
have enough power to compromise it entirely at a moment of their own choosing. Murillo cites Venezuela, where the
Venezuelan Workers’ Confederation halted activities in the entire country after President Carlos Perez instituted
neoliberal reforms.
In addition, many Latin American populations are divided between the industrial “haves” and the agrarian, mostly
indigenous “have-nots.” Income disparity between these two groups creates a great deal of social tension that often
spills over into the economic and political realms. In Bolivia, pressure from indigenous Andean groups upset over the
level of wealthy foreign multilateral investment in the natural gas sector forced then President Carlos Mesa to enact a
protectionist tax on such groups in May 2005, and as was mentioned, their continued protests eventually lead to his
ousting only a month later.
A New Developmental Strategy Based on Individuality
The Washington Consensus should not have spawned the contempt oft associated with its name; the advisory document is
guilty only by association with the IMF. To truly aid emerging markets and break Latin America’s economic stagnancy, the
Consensus, at worst, needs to be restricted to its founder’s intentions as a set of non-rigid guidelines. The IMF should
revise its emerging markets developmental strategy so that it may adapt to the necessities of each nation on a
case-by-case basis. If it does not, the recent Bolivian case will likely be only one in a continuing string of
development failures which could bring on the IMF’s self-immolation.
This analysis was prepared by COHA Research Associates Teddy Chestnut and Anita Joseph.