The Washington Consensus is a list of ten economic policy reforms that, according to economist John Williamson, commanded broad agreement among Washington-based institutions in the late 1980s as the right prescription for Latin American countries recovering from the debt crisis. Williamson, of the Institute for International Economics (now the Peterson Institute), coined the phrase in a paper prepared for a 1989 conference. The reforms emphasized fiscal discipline, open trade, market prices and a smaller role for the state in production.
The "Washington" referred to the International Monetary Fund, the World Bank, the US Treasury and think tanks in the city. Over time the phrase came to stand, especially for critics, for a broader agenda of neoliberalism and rapid economic liberalization, tied to the lending conditions of structural adjustment programs. Williamson repeatedly said that this wider usage went beyond what he had written.
The Washington Consensus in plain terms
Think of a household that has run up big credit-card bills and keeps borrowing to pay them. A financial adviser offers a standard checklist: spend less than you earn, stop wasting money on things you don't need, shop around for the best prices, stop protecting a failing family business, and sell assets you cannot manage well.
The Washington Consensus was that kind of checklist for countries. Lenders and advisers in Washington broadly agreed on what struggling economies should do: get government finances under control, let markets set prices, open up to trade and investment, and reduce the state's direct role in business.
The ten reforms
- Fiscal discipline. Keep budget deficits small enough to avoid inflation and unsustainable debt.
- Reordering public spending. Shift spending away from untargeted subsidies toward health, education and infrastructure.
- Tax reform. Broaden the tax base and keep marginal rates moderate.
- Interest rate liberalization. Let market forces set interest rates, which should be positive in real terms.
- A competitive exchange rate. Avoid an overvalued exchange rate that hurts exporters.
- Trade liberalization. Replace import quotas with low, uniform tariffs.
- Openness to inward foreign direct investment.
- Privatization of state enterprises.
- Deregulation of barriers to entry and exit, while keeping safety, environmental and prudential rules.
- Secure property rights, including for the informal sector.
Notably, the list did not include full liberalization of the capital account; Williamson's original paper endorsed freeing only foreign direct investment.
Application in the 1990s
Many Latin American countries, including Mexico, Argentina and Peru, adopted much of the agenda in the late 1980s and 1990s, as did post-communist economies in Eastern Europe and the former Soviet Union and several countries in Africa and Asia. Inflation fell sharply across Latin America, and trade and investment flows grew. Results on growth were more disappointing: per capita growth in Latin America in the 1990s was modest, and the decade saw the Mexican peso crisis of 1994–95, the 1997 Asian crisis, Russia's 1998 default and Argentina's collapse in 2001–02, when its currency board broke down.
Criticism and later revisions
Critics from development economics, including Joseph Stiglitz, then chief economist of the World Bank, argued in 1998 that the consensus ignored institutions, financial regulation and inequality, and called for a "post-Washington consensus." Dani Rodrik of Harvard argued that successful developers such as China, South Korea and Taiwan followed heterodox paths, with industrial policy and gradual opening, and that a one-size-fits-all list ignored local constraints. Critics on the left saw the agenda as imposed on borrowers in exchange for loans and blamed it for job losses, cuts in public services and austerity. Some critics on the right argued the reforms were often only partly implemented, so failures reflected weak follow-through rather than wrong policies.
Supporters reply that macroeconomic stability, low inflation and open trade are now widely accepted as preconditions for growth, and that many crises stemmed from rigid exchange-rate pegs and premature opening to hot money, which the original list did not recommend. The IMF itself shifted in 2012 to an institutional view that accepts capital flow management measures in some circumstances. Williamson later proposed an expanded agenda adding institutional reform, social spending and crisis-proofing.
The phrase also took on a life of its own in politics. In Latin America, the backlash against market reforms helped bring left-leaning governments to power in the 2000s in countries such as Venezuela, Bolivia and Argentina, while others, such as Chile, Peru and Colombia, kept broadly market-oriented frameworks. In the 2020s, renewed use of industrial policy and trade protection by the United States and other advanced economies led some commentators to describe the consensus as having been abandoned by the very governments that once promoted it.