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Politics Notes Politics of International Development Notes

The Washington Consensus Developmental State Notes

Updated The Washington Consensus Developmental State Notes

Politics of International Development Notes

Politics of International Development

Approximately 13 pages

Development; post-development; poverty pornography; Orientalism Washington Consensus; structural adjustment; market fundamentalism; neo-colonialism; global benchmarking; social reproduction; developmental state; embedded autonomy Sustainable development; Rob Nixon; slow violence; environmentalism of the poor; developmental refugee; writer activists Conditional cash transfers; health; private optimum; social optimum; tobacco industry interference; conditionality...

The following is a more accessible plain text extract of the PDF sample above, taken from our Politics of International Development Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

THE WASHINGTON CONSENSUS & DEVELOPMENTAL STATE

QUESTIONS

  1. How did neoliberalism go global?

Is neoliberalism the orthodoxy for contemporary development thinking? [2014]

  1. Why have the World Bank and the International Monetary Fund attempted to structurally adjust the economies of poor countries? [2014]

Is the World Bank adequately meeting its goal of reducing global poverty? [2013]

  1. What made the ‘East Asian miracle’ so controversial in development theory? [2015]

Is neo-statist development theory relevant only in the context of East Asia? [2013]

  1. Why did the post-Washington Consensus emerge? [2016]

What is the difference between the Washington Consensus and the Post-Washington Consensus [2013]

How has the World Bank changed since its inception in 1944? [2015]

CONTEXT

  • In the late 1970s, many developing countries – especially Brazil, Argentina, Mexico – were faced with the dual burden of skyrocketing oil prices and plummeting commodity prices. They subsequently began borrowing heavily from private international banks to reduce fiscal imbalance. However, these banks had accumulated surplus holdings of dollars and thus actively pursued loan agreements with the developing world, at the expense of long-term sustainability.

  • The orgy of borrowing that ensued, coupled with existing policies of import substitution and economic interventionism, triggered a debt crisis. This was characterized by bloated bureaucracies, grossly inefficient state-owned enterprises, inflation and over-indebtedness to European and North American banks.

  • Between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4% from US$75 billion to over $315 billion (or 50% of the region’s GDP).

  • Recognizing that standard austerity programs weren’t enough, the IMF and World Bank began pipelining billions of dollars to debt-stricken states with conditionality clauses attached. The continued release of ‘structural adjustment’ loans (SAPs) depended on the successful implementation of certain policies.

  • With both institutions seeking to impose mutually reinforcing cross-conditionality restrictions on lending, they became embroiled in far closer association that previous years. This rapprochement gave rise to the ‘Washington Consensus’.

THE ‘WASHINGTON CONSENSUS’

  • Coined by John Williamson in 1989, the ‘Washington Consensus’ is a cocktail of monetarist policy prescriptions that constitute the ‘standard’ recovery package promoted by Washington-based IFIs (e.g. IMF, World Bank, US Treasury) for crisis-wracked countries in the global South.

  • Williamson claimed that the Washington Consensus was a ‘universal convergence’ which formed ‘the common core of wisdom embraced by all serious economists’.

  • Accorded priority to economic ‘fundamentals’: ‘prudent macroeconomic policies, outward orientation and free-market capitalism’ [Williamson].

  1. Fiscal policy discipline – avoidance of large fiscal deficits relative to GDP (which contribute to inflation and capital flight);

  2. Shifting public expenditure priorities from (indiscriminate) subsidies to investment in key pro-growth, pro-poor services like primary education, healthcare and infrastructure development;

  3. Tax reform – broadening the tax base and adopting moderate marginal tax rates (incurred on each additional dollar of income);

  4. Interests rates that are market-determined and positive in real terms;

  5. Competitive exchange rates that bolster exports by making them cheaper abroad

  6. Trade liberalization – removal of quantitative restrictions (licensing, quotas); any trade protection is provided by low and relatively uniform tariffs.

  7. Liberalization of inward foreign direct investment

  8. Privatization of state-owned enterprises

  9. Deregulation – abolition of regulations that impede market entry or restrict competition, notwithstanding those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions.

  10. Legal security for property rights creates incentive to save and accumulate wealth.

While the emphasis of structural adjustment was on long-term economic growth, these reforms were also intended to ensure debt repayment and restore the integrity of the international credit system.

CRITIQUE

Strengths All 10 principles have considerable economic validity, especially infrastructure development. Timing, strategy (e.g. targeted economic diversification) and infrastructure are key determining factors of success.
Limitations
  • Excessive belief in market fundamentalism

Although macroeconomic stability vastly improved in the developing world during the 1990s, it failed to reach ‘developed-country’ standards, and countries remained vulnerable to extreme macroeconomic events such as banking crises, currency crashes or ‘sudden stops’.

  • From 2001-2002, Argentina experienced a severe economic crisis where exchange rates were devalued by over 300%, the government defaulted on its debt obligations and employment was moribund.

  • There is no consensus on whether capital controls are effective in moderating/stabilizing capital flows, or whether financial systems insulated from international competition can be adequately regulated. When fiscal sustainability is jeopardized, raised interest rates and public expenditure cuts may prove necessary to prevent further capital outflows, currency depreciation and inflation.

  • Neo-colonialism*

Although Williamson insists that the ‘Washington Consensus’ referred to ‘a list of ten specific policy reforms which I felt were widely agreed in Washington to be desired in Latin America, as of 1989’; some felt that implied cultural homogenization and American hegemony* to the detriment of public/social sector initiatives.

  • Critics charged that the Washington Consensus reflected a one-size-fits-all approach that ignored extensive variations among countries, emphasized the value of large industrialization projects that...

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