Sunday, April 12, 2009
Poor countries have decried it. Anti-globalization protesters have rallied against it. And at the G20 summit in London, British Prime Minister Gordon Brown declared it dead. But is the "Washington Consensus" really gone? Not if you ask John Williamson, the soft-spoken British economist who coined the term 20 years ago -- and has been under fire ever since. How did a wonky paper outlining 10 recommendations on fiscal discipline and open markets become such a lightning rod? Williamson, a senior fellow at the Peter G. Peterson Institute for International Economics, spoke last week with Outlook's Carlos Lozada about what caused the financial crisis and how, whatever Brown says, the Washington Consensus is alive and well -- just check out the G20 communique. Excerpts:
Where were you when Gordon Brown declared that your "old Washington Consensus is over"? Did you watch it on TV?
I was in the Galapagos. I did not watch it on TV; I did have Internet access in the Galapagos so I was able to read about it.
Were you angry? Amused?
People have been saying the Washington Consensus is dead for about twenty years now, ever since it was first created. My reaction was more amusement than anger, but it was a combination of the two.
So is Brown right?
It depends on what one means by the Washington Consensus. If one means the ten points that I tried to outline, then clearly it's not right. If one uses the interpretation that a number of people -- including Joe Stiglitz, most prominently -- have foisted on it, that it is a neoliberal tract, then I think it is right.
How would you summarize it?
[It] involved macroeconomic discipline, including fiscal discipline, which was a particular problem in Latin America. And then it involved using the market economy, not setting it up on a totem pole as some ideal that must never be interfered with, but recognizing that there were serious limitations on the market economy. And third was globalization, free trade, absorbing oneself into the global economy.
Is the Washington Consensus in any way to blame for the global financial crisis?
I think that would be pushing it. If you read the communique following the London summit, you'll find that three of the things they agreed on were very much the things I have used to summarize the Washington Consensus. It starts off with globalization, it also mentions the market economy. Fiscal discipline comes later; it's in paragraphs 10 and 11 rather than right at the beginning, because that's not the immediate problem.
If the Washington Consensus isn't to blame, what is?
I think it was a very bad system of regulation of the financial sector which made the crisis so deep. I think there would have been a crisis in any event. Capitalism has been characterized by ups and downs over the last two hundred years, so eventually there will come a down. What worries me about the present reform agenda is that I really don't see that they've yet decided on the form of regulation that they need. Simply applying the system of regulation that was there before to more institutions -- to big hedge funds -- is not going to alter things.
One of the ten points you promoted in the Washington Consensus was deregulation.
I was talking about abolishing barriers to entry and exit. People should be free to enter an industry or trade if they wanted to in the same way they could close an enterprise if they found it wasn't profitable.
Where did you get the idea for the Washington Consensus?
It came from testifying before Congress. There was a great disbelief among congressmen that there was any type of change happening in Latin America. And I think that did not do justice to a large number of countries which really were making the effort to change their economic policies in the direction that people in Washington had been urging. So I drew up what I called a "Washington Consensus" as background for a conference where I was going to discuss whether particular countries in Latin America had in fact changed their policies.
Since you wrote the Washington Consensus paper in 1989, the concept has been vilified as a market-fundamentalist manifesto that worsens the plight of the poor. When did you realize that you'd gone from think tank wonk to global whipping boy?
I suppose it was in a conference in Washington in the early 1990s, mainly with political scientists, when they began referring to "orthodox views." I asked what are the orthodox views, and I was told, "You are the orthodoxy!"
The other incident that I recall clearly occurred in Washington in 1993 but concerns a Brazilian, an ex-finance minister called Luiz-Carlos Bresser Pereira. He told me that just because I had invented the term, [that] did not give me the right to say what it meant. He still believes this and is still attacking it, as he told me two weeks ago when I was in Sao Paulo.
How did you conclude that there was a consensus in Washington on these issues? Did you do any polling?
I looked around. I thought there was a broad agreement in Washington that these were good policies. And then I relied on the three people I asked to be discussants that spanned the range of ideological views in Washington: Allan Meltzer, Richard Feinberg and Stan Fischer. The most important reservation I got was from Feinberg, who thought I had misnamed it, that it should have been called the "Universal Convergence."
What does that mean?
On the one hand, the phrase "Washington Consensus" was too restrictive in being just restricted to Washington. On the other hand it was too expansive in claiming a consensus where in fact what one saw was much more a convergence of views than a complete consensus.
Where did the term "Washington Consensus" come from?
I think I dreamt it up.
In the original paper, you wrote that "left-wing believers" in Keynesian stimulus are "almost an extinct species." They certainly don't seem extinct today. Has Washington or the world tilted left?
The world has changed. We are now in a Keynesian situation, which we weren't in 1989.
Do you think President Obama is a Washington Consensus-type guy?
I haven't become aware yet of any great contradiction.
But he has criticized the consensus as a "cookie-cutter model."
The assumption is that anyone who believes in the Washington Consensus felt that if you did those ten things you would solve all problems. That certainly wasn't my belief, and I don't think most people who accepted this as a useful guide would think that this solved all problems and that one should apply it in the same way to all situations.
If you had to identify one country that is implementing the Washington Consensus and benefiting from it, which would it be?
I think Chile has implemented that type of policy over the years, in a very non-dogmatic way since the return of democracy. Clearly those principles have been there, and it's done extremely well. I think Brazil, although the president would hate to be accused of following these policies, but substantively he has done so. It was a great credit to Lula that he didn't throw out all the policies of the previous administration but decided to maintain continuity where continuity was merited.
What did you make of his comment that the crisis can be blamed on white people with blue eyes?
Ha! I don't know about the blue eyes, but I think it is true that they were mostly white. . . . It's absolutely true that this crisis originated in the developed world, not the developing world, which everyone had come to assume was the natural epicenter of all crises. It certainly wasn't with this one, which is by far the biggest crisis.
Some people say that we live in a post-American world. Does it matter still what economic ideas hold consensus in Washington?
I think so. However much one believes that power is being dispersed and that there are several power centers around the world, clearly one of them is Washington. So what is believed here is important.
Is the Washington Consensus the most important thing you've written?
My work on exchange rates is what I've always regarded as my primary contribution. But the world ignores it.
Was writing the Washington Consensus worth all the trouble?
I've asked myself that question. The plus is that, of course, it's made me famous. The minus is that I'm not sure the phrase really was conducive to promoting reform, which was the object of the exercise. Certainly the word "Washington" did not help.
Did you vote for Gordon Brown?
No, I've not voted for him. I've always voted for the other party -- the Liberal Democrats.