[ World Bank and IMF ]

Beyond the Washington Consensus

Four years after Joseph Stiglitz left the World Bank, the former chief economist’s thinking still defines the rhetoric of his former employer. Even the International Monetary Fund (IMF), whose policies Stiglitz often attacked, now stresses the importance of effective institutions, sound governance and poverty reduction.

These are typical Stiglitz issues. According to the theory of the Nobel Prize winner of 2001, markets are often inefficient because not all the actors have the same information – and certainly not complete information. Consequent shortcomings need to be corrected by institutions, which spread the rule of law, fairness, market transparency and the likes. Ultimately, only governments can guarantee that these institutions work. Therefore, market and state are not diametrically opposed but rather complement one another. The liberal economic view, according to which state intervention only disrupts economic processes, is not compatible with the Stiglitz’s findings.

In the early 1990s, however, World Bank and IMF strategies were defined by economic liberalism. Among other things, they stressed budgetary discipline, low inflation, privatisation and free trade for goods. These issues were pillars of the “Washington Consensus”, a term originally coined by economist John Williamson of the Institute for International Economics in the US capital meant to identify a set principles uncontroversially accepted by the World Bank, the IMF and the US Treasury. Before long, however, the Washington Consensus came to be seen as a doctrine.

In its dogmatic version, the Washington Consensus contained an element – boundless freedom for speculative financial capital – that had not figured in Williamson’s original list in 1989. The Asian crisis and other turbulent events of the late 1990s showed the dire weaknesses of this approach. At a recent conference staged by InWEnt’s Development Policy Forum in Berlin, World Bank and IMF representatives stressed that they now advised clients to be cautious in the risky field of volatile financial capital. One World Bank official even wondered aloud whether middle-income countries hit by financial crisis – such as Turkey, for example – should enjoy debt relief to get back on their feet.

That view still provokes dissent – even from a government that might itself qualify for relief. Debts are painful, says State Secretary Luiz Pereira da Silva of the Brazilian Finance Ministry, but they have to be shouldered. Emerging economies cannot afford to put their credibility at risk, he points out, so macroeconomic stability remains vital. Progressive governments should restructure their budgets and reform the public sector to reduce poverty, according to Pereira da Silva.


The victims hurt

This view, widely held among economists, shows that Stiglitz’s thinking and macroeconomic stability are compatible. Today, non-governmental activists complain that the debate about weak institutions is a smokescreen, designed to obfuscate mistakes made in the past by the IMF and World Bank. Blame for the failure of the recipes applied, they say, is being laid at the door of the countries those very recipes hurt. After all, both World Bank and IMF had contributed to weakening state structures.

Creating sound institutions, however, is a long process that cannot be dictated from outside. So far, institution theory has had few visible implications for practical development policy. But InWEnt department director Heinrich Siegmann rejects criticism. The new emphasis on capacity building, he says, is evidence of real concern for the matter.

According to John Williamson, the core elements of the original, pragmatic Washington Consensus still apply. He concedes that a stable macroeconomic framework does not suffice for successful development policy and, accordingly, appreciates the fact that the World Bank and IMF are addressing the issues of institutions and poverty reduction. But as the US administration is not joining in, Williamson does not make out any new consensus in Washington.

Hans Dembowski