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What Washington Means by Policy Reform

by John Williamson, Peterson Institute for International Economics Chapter 2 from Latin American Adjustment: How Much Has Happened? Edited by John Williamson. Published April 199 . !o"ember 2 2 Peterson Institute for International Economics !o statement about ho# to deal #ith the debt crisis in $atin America #ould be complete #ithout a call for the debtors to fulfill their part of the proposed bar%ain by &settin% their houses in order,& &underta'in% policy reforms,& or &submittin% to stron% conditionality.& (he )uestion posed in this paper is #hat such phrases mean, and especially #hat they are %enerally interpreted as meanin% in Washin%ton. (hus the paper aims to set out #hat #ould be re%arded in Washin%ton as constitutin% a desirable set of economic policy reforms. An important purpose in doin% this is to establish a baseline a%ainst #hich to measure the e*tent to #hich "arious countries ha"e implemented the reforms bein% ur%ed on them. (he paper identifies and discusses 1 policy instruments about #hose proper deployment Washin%ton can muster a reasonable de%ree of consensus. In each case an attempt is made to su%%est the breadth of the consensus, and in some cases I su%%est #ays in #hich I #ould #ish to see the consensus "ie# modified. (he paper is intended to elicit comment on both the e*tent to #hich the "ie#s identified do indeed command a consensus and on #hether they deser"e to command it. It is hoped that the country studies to be %uided by this bac'%round paper #ill comment on the e*tent to #hich the Washin%ton consensus is shared in the country in )uestion, as #ell as on the e*tent to #hich that consensus has been implemented and the results of its implementation +or nonimplementation,. (he Washin%ton of this paper is both the political Washin%ton of Con%ress and senior members of the administration and the technocratic Washin%ton of the international financial institutions, the economic a%encies of the -. %o"ernment, the /ederal 0eser"e 1oard, and the thin' tan's. (he Institute for International Economics made a contribution to codifyin% and propa%atin% se"eral aspects of the Washin%ton consensus in its publication Toward Renewed Economic rowth in Latin America +1alassa et al. 1923,. Washin%ton does not, of course, al#ays practice #hat it preaches to forei%ners. (he 1 topics around #hich the paper is or%ani4ed deal #ith polic! instruments rather than ob5ecti"es or outcomes. (hey are economic policy instruments that I percei"e &Washin%ton& to thin' important, as #ell as on #hich some consensus e*ists. It is %enerally assumed, at least in technocratic Washin%ton, that the standard economic ob5ecti"es of %ro#th, lo# inflation, a "iable balance of payments, and an e)uitable income distribution should determine the disposition of such policy instruments. (here is at least some a#areness of the need to ta'e into account the impact that some of the policy instruments in )uestion can ha"e on the e*tent of corruption. Corruption is percei"ed to be per"asi"e in $atin America and a ma5or cause of the re%ion6s poor performance in terms of both lo# %ro#th and ine%alitarian income distribution. (hese implications #ill be mentioned belo# #here they seem to be important. Washin%ton certainly has a number of other concerns in its relationship #ith its $atin nei%hbors +and, for that matter, #ith other countries, besides furtherin% their economic #ell7bein%. (hese include the promotion of democracy and human ri%hts, suppression of the dru% trade, preser"ation 1

of the en"ironment, and control of population %ro#th. /or better or #orse, ho#e"er, these broader ob5ecti"es play little role in determinin% Washin%ton6s attitude to#ard the economic policies it ur%es on $atin America. $imited sums of money may be offered to countries in return for specific acts to combat dru%s, to sa"e tropical forests, or +at least prior to the 0ea%an administration, to promote birth control, and sanctions may occasionally be imposed in support of democracy or human ri%hts, but there is little perception that the policies discussed belo# ha"e important implications for any of those ob5ecti"es. Political Washin%ton is also, of course, concerned about the strate%ic and commercial interests of the -nited .tates, but the %eneral belief is that these are best furthered by prosperity in the $atin countries. (he most ob"ious possible e*ception to this percei"ed harmony of interests concerns the -. national interest in continued receipt of debt ser"ice from $atin America. .ome +but not all, belie"e this consideration to ha"e been important in moti"atin% Washin%ton6s support for policies of austerity in $atin America durin% the 192 s. Fiscal Deficits Washin%ton belie"es in fiscal discipline. Con%ress enacted 8ramm70udman79ollin%s #ith a "ie# to restorin% a balanced bud%et by 199:. Presidential candidates deplore bud%et deficits before and after bein% elected. (he International ;onetary /und +I;/, has lon% made the restoration of fiscal discipline a central element of the hi%h7conditionality pro%rams it ne%otiates #ith its members that #ish to borro#. Amon% ri%ht7#in% thin' tan's there may be a fe# belie"ers in 0icardian e)ui"alence<the notion that indi"iduals ad5ust their sa"in% beha"ior to anticipate future ta*ation, so that #hether public e*penditure is financed by ta*ation or bonds has no impact on a%%re%ate demand<#ho are prepared to deny the dan%er of lar%e fiscal deficits, but they clearly stand outside the Washin%ton consensus. $eft7#in% belie"ers in &=eynesian& stimulation "ia lar%e bud%et deficits are almost an e*tinct species. >ifferences of "ie# e*ist, ho#e"er, as to #hether fiscal discipline need necessarily imply a balanced bud%et. ?ne "ie# is that a deficit is acceptable as lon% as it does not result in the debt7 8!P ratio risin%. An e"en more rela*ed criterion #ould net off that part of the increased debt that has a counterpart in producti"e public capital formation and simply see' to pre"ent an increase in the net liabilities of the public sector relati"e to 8!P. Another modification, #hich I find persuasi"e althou%h much of Washin%ton re%ards it as too &=eynesian& to endorse e*plicitly, ar%ues that a balanced bud%et +or at least a nonincreasin% debt78!P ratio, should be a minimal medium7run norm, but that short7run deficits and surpluses around that norm should be #elcomed insofar as they contribute to macroeconomic stabili4ation. +!ote that 8ramm70udman79ollin%s is automatically suspended if the -. economy %oes into recession., A "ariant of that "ie#, held in some )uarters #here &=eynesian& is re%arded as a term of abuse, is that pro%ress to#ard the medium7term %oal of a balanced bud%et should be sufficiently cautious to a"oid the ris' of precipitatin% a recession. (he bud%et deficit has traditionally been measured in nominal terms, as the e*cess of %o"ernment e*penditures o"er receipts. In 1922 1ra4il ar%ued #ith the I;/ that this #ay of measurin% the deficit is seriously misleadin% in a hi%h7inflation country, #here most of the nominal interest payments on %o"ernment debt are really accelerated amorti4ation of principal. (he I;/ has accepted this ar%ument +(an4i 1929,, if initially #ith some reluctance, and hence it sometimes no# pays attention to the &operational deficit,& #hich includes in e*penditure only the real component of interest paid on %o"ernment debt. +Political Washin%ton has not yet disco"ered this sensible inno"ation, #hich thus remains to be e*ploited as a means of rela*in% the 8ramm70udman7 9ollin%s constraints #hen these threaten to bite., Indeed, (an4i +1929, also indicates that in formulatin% pro%rams the /und has increasin%ly been usin% the &primary deficit,& #hich e*cludes all interest payments from the deficit, on the %round that this includes only items that are in principle directly controllable by the authorities. +(hat %oes too far for my taste, since real interest payments certainly ha"e implications for a%%re%ate demand and the e"olution of the real debt of the public sector., 2

(he e*a%%eration of bud%et deficits by inclusion of the inflationary component of interest on %o"ernment debt is not the only inade)uacy of public7sector accountin%. ;ost of the other )uestionable practices seem to in"ol"e understatement of the true deficit@ Contin%ent e*penditures, such as the %uarantees %i"en to sa"in%s and loan institutions in the -nited .tates, are rarely included in reported bud%et outlays. Interest subsidies and some other e*penditures are sometimes pro"ided by the central ban' rather than from the bud%et. Pri"ati4ation proceeds are sometimes recorded as re"enues rather than as a means of financin% a fiscal deficit. (he buildup of future liabilities of the social security system is not included in bud%et outlays. >espite the si%nificant differences in the interpretation of fiscal discipline, I #ould maintain that there is "ery broad a%reement in Washin%ton that lar%e and sustained fiscal deficits are a primary source of macroeconomic dislocation in the forms of inflation, payments deficits, and capital fli%ht. (hey result not from any rational calculation of e*pected economic benefits, but from a lac' of the political coura%e or honesty to match public e*penditures and the resources a"ailable to finance them. -nless the e*cess is bein% used to finance producti"e infrastructure in"estment, an operational bud%et deficit in e*cess of around 1 to 2 percent of 8!P1 is prima facie e"idence of policy failure. ;oreo"er, a smaller deficit, or e"en a surplus, is not necessarily e"idence of fiscal discipline@ its ade)uacy needs to be e*amined in the li%ht of the stren%th of demand and the a"ailability of pri"ate sa"in%s. Public Expenditure Priorities When a fiscal deficit needs to be cut, a choice arises as to #hether this should be accomplished by increasin% re"enues or by reducin% e*penditures. ?ne of the le%acies of the 0ea%an administration and its &supply7side& allies has been to create a preference in Washin%ton for reducin% e*penditures rather than increasin% ta* re"enues, althou%h it is not clear that this preference is "ery stron% outside of ri%ht7#in% political circles +includin% the ri%ht7#in% thin' tan's,. ;uch stron%er "ie#s are held, especially in the international institutions, about the composition of public e*penditures. ;ilitary e*penditures are sometimes pri"ately deplored, but in %eneral they are re%arded as the ultimate prero%ati"e of so"erei%n %o"ernments and accordin%ly off limits to international technocrats. E*penditures on public administration are reco%ni4ed as necessary, althou%h sometimes they are belie"ed to be unnecessarily bloated, especially #here corruption is out of hand. 1ut there are three ma5or e*penditure cate%ories on #hich "ie#s are stron%ly held@ subsidies, education and health, and public in"estment. .ubsidies, especially indiscriminate subsidies +includin% subsidies to co"er the losses of state enterprises, are re%arded as prime candidates for reduction or preferably elimination. E"eryone has horror stories about countries #here subsidi4ed %asoline is cheaper than drin'in% #ater, or #here subsidi4ed bread is so cheap that it is fed to pi%s, or #here telephone calls cost a cent or so because someone for%ot +or lac'ed the coura%e, to raise prices to 'eep pace #ith inflation, or #here subsidi4ed &a%ricultural credit& is desi%ned to buy the support of po#erful lando#ners, #ho promptly recycle the funds to buy %o"ernment paper. (he result is not 5ust a drain on the bud%et but also much #aste and resource misallocation, #ith little reason to e*pect any offset from systematically fa"orable effects on income distribution, at least #here indiscriminate subsidies are concerned. Education and health, in contrast, are re%arded as )uintessentially proper ob5ects of %o"ernment e*penditure +1alassa et al. 1923, chapter A,. (hey ha"e the character of in"estment +in human capital, as #ell as consumption. ;oreo"er, they tend to help the disad"anta%ed. (his is an ob5ecti"e :

that fell under a cloud in the early years of the 0ea%an administration, but that has reco"ered its standin% of the 19B s +&basic needs&, in the late 192 s, aided by the proddin% of -!ICE/ +Cornia, Jolly, and .te#art 192B,. (hus, the ;ana%in% >irector of the I;/, ;ichel Camdessus, has declared the /und to ha"e a concern about the impact of its pro%rams on the poor, and more recently 1arber Conable, President of the World 1an', has reasserted the 1an'6s commitment to see'in% to end po"erty.2 Just ho# much help e*penditures on education and health in fact pro"ide to the disad"anta%ed depends on their composition as #ell as their le"el. Primary education is "astly more rele"ant than uni"ersity education, and primary health care +especially pre"enti"e treatment, more beneficial to the poor than hospitals in the capital city stuffed #ith all the latest hi%h7tech medical %ad%ets. (his is not to say that there is no need for uni"ersities or state7of7the7art hospitals@ de"elopin% countries need to train and retain an educated elite as #ell as to raise the standards of the masses and the poorest. 1ut it is to assert that many in Washin%ton belie"e that e*penditures need to be redirected to#ard education and health in %eneral, and most especially in a #ay that #ill benefit the disad"anta%ed. (he other area of public e*penditure that Washin%ton re%ards as producti"e is public infrastructure in"estment. (here is of course a "ie# that the public sector tends to be too lar%e +see the section on pri"ati4ation belo#,. 9o#e"er, that "ie# coe*ists #ith the "ie# that spendin% on infrastructure that is properly #ithin the public sector needs to be lar%e +and also that an industry should not be star"ed of in"estment 5ust because it is, ho#e"er inad"isedly, #ithin the public sector,. Policy reform #ith re%ard to public e*penditure is thus percei"ed to consist of s#itchin% e*penditure from subsidies to#ard education and health +especially to benefit the disad"anta%ed, and infrastructure in"estment. I #ould add that, for my taste, the hostility to#ard subsidies tends to be too %eneral. I fully sympathi4e #ith the hostility to#ard indiscriminate subsidies, but I also belie"e that there are circumstances in #hich carefully tar%eted subsidies can be a useful instrument. (hus, my o#n test of a country6s policies #ould not be #hether it had abolished all subsidies, but #hether it could pro"ide a con"incin% e*plicit 5ustification for those that remain in terms of impro"in% either resource allocation or income distribution. Tax Reform Increased ta* re"enues are the alternati"e to decreased public e*penditures as a remedy for a fiscal deficit. ;ost of political Washin%ton re%ards them as an inferior alternati"e. ;uch of technocratic Washin%ton +#ith the e*ception of the ri%ht7#in% thin' tan's, finds political Washin%ton6s a"ersion to ta* increases irresponsible and incomprehensible. >espite this contrast in attitudes to#ard the merits of increasin% ta* re"enue, there is a "ery #ide consensus about the most desirable method of raisin% #hate"er le"el of ta* re"enue is 5ud%ed to be needed. (he principle is that the ta* base should be broad and mar%inal ta* rates should be moderate. (his principle, the basis of the 1923 reform of the -. income ta*, #as promoted #ith e)ual enthusiasm by the late Joseph A. Pechman of the 1roo'in%s Institution and .enator 1ill 1radley +>7!J, and by the &supply7siders& in Con%ress and the ri%ht7#in% thin' tan's. A particular issue that arises in the $atin American conte*t is #hether an attempt should be made to include #ithin the ta* base interest income on assets held abroad +&fli%ht capital&,. 1y itself a sin%le country6s la# sub5ectin% such income to ta*ation may not ha"e much impact because of the problem of enforcement, but a country is not e"en in a position to start discussions on enforcement #ith ha"en countries until it has le%islated to impose ta*es on the interest from fli%ht capital +$essard and Williamson 192B,. Achie"in% effecti"e ta*ation of the income from fli%ht capital is bound to ta'e a lon% time, but it #ould be interestin% to 'no# #hether any countries ha"e embar'ed on the effort.

Interest Rates (#o %eneral principles about the le"el of interest rates #ould seem to command considerable support in Washin%ton. ?ne is that interest rates should be mar'et7determined. (he ob5ecti"e of this is to a"oid the resource misallocation that results from bureaucrats rationin% credit accordin% to arbitrary criteria +Pola' 1929,. (he other principle is that real interest rates should be positi"e, so as to discoura%e capital fli%ht and, accordin% to some, increase sa"in%s. ;any, includin% myself, #ould )ualify this statement to say that interest rates should be positi"e but moderate, so as to promote producti"e in"estment and a"oid the threat of an e*plosion in %o"ernment debt. (he )uestion ob"iously arises as to #hether these t#o principles are mutually consistent. -nder noncrisis conditions, I see little reason to anticipate a contradictionC one e*pects mar'et7determined interest rates to be positi"e but moderate in real terms, althou%h hi%h international interest rates may ma'e it difficult to hold rates )uite as moderate as mi%ht be desired. -nder the sort of crisis conditions that much of $atin America has e*perienced for most of the 192 s, ho#e"er, it is all too easy to belie"e that mar'et7determined interest rates may be e*tremely hi%h. it is then of interest to e*amine #hether either principle has been follo#ed or #hat sort of compromise bet#een the t#o may ha"e been achie"ed. In particular, it is still of interest to e*amine #hether the credit mar'et is se%mented and channelin% lo#7cost funds to &priority& sectors and, if so, #hat those sectors are and #hether their selection has any economic rationale. (he suspicion is that such se%mented credit mar'ets pro"ide a prime en"ironment for corruption to flourish. The Exchange Rate $i'e interest rates, e*chan%e rates may be determined by mar'et forces, or their appropriateness may be 5ud%ed on the basis of #hether their le"el seems consistent #ith macroeconomic ob5ecti"es. Althou%h there is some support in Washin%ton for re%ardin% the former principle as the more important +a "ie# held in particular by those #ho deny the possibility of estimatin% e)uilibrium e*chan%e rates,, the dominant "ie# is that achie"in% a &competiti"e& e*chan%e rate is more important than ho# the rate is determined. In particular, there is relati"ely little support for the notion that liberali4ation of international capital flo#s is a priority ob5ecti"e for a country that should be a capital importer and ou%ht to be retainin% its o#n sa"in%s for domestic in"estment. (he test of #hether an e*chan%e rate is appropriate is #hether it is consistent in the medium run #ith macroeconomic ob5ecti"es +as in my concept of the &fundamental e)uilibrium e*chan%e rate,& or /EE0C see Williamson 192D,. In the case of a de"elopin% country, the real e*chan%e rate needs to be sufficiently competiti"e to promote a rate of e*port %ro#th that #ill allo# the economy to %ro# at the ma*imum rate permitted by its supply7side potential, #hile 'eepin% the current account deficit to a si4e that can be financed on a sustainable basis. (he e*chan%e rate should not be more competiti"e than that, because that #ould produce unnecessary inflationary pressures and also limit the resources a"ailable for domestic in"estment, and hence curb the %ro#th of supply7side potential. 8ro#th of nontraditional e*ports is dependent not 5ust on a competiti"e e*chan%e rate at a particular point in time, but also on pri"ate7sector confidence that the rate #ill remain sufficiently competiti"e in the future to 5ustify in"estment in potential e*port industries +for recent e"idence, see Paredes 1929,. (hus, it is important to assess the stability of the real e*chan%e rate as #ell as its le"el. A competiti"e real e*chan%e rate is the first essential element of an &out#ard7oriented& economic policy, #here the balance of payments constraint is o"ercome primarily by e*port %ro#th rather than by import substitution. (here is a "ery stron%ly held con"iction in Washin%ton that out#ard orientation and e*pandin% e*ports<essentially %ro#th in nontraditional e"ports<7are necessary for $atin American reco"ery +see, for e*ample, 1alassa et al. 1923,.

Trade Policy (he second element of an out#ard7oriented economic policy is import liberali4ation. Access to imports of intermediate inputs at competiti"e prices is re%arded as important to e*port promotion, #hile a policy of protectin% domestic industries a%ainst forei%n competition is "ie#ed as creatin% costly distortions that end up penali4in% e*ports and impo"erishin% the domestic economy. (he ideal is a situation in #hich the domestic resource cost of %eneratin% or sa"in% a unit of forei%n e*chan%e is e)uali4ed bet#een and amon% e*port and import7competin% industries. (he #orst form of protection is considered to be import licensin%, #ith its massi"e potential for creatin% opportunities for corruption. (o the e*tent that there has to be protection, let it be pro"ided by tariffs, so that at least the public purse %ets the rents. And 'eep distortions to a minimum by limitin% tariff dispersion and e*emptin% from tariffs imports of intermediate %oods needed to produce e*ports. (he free trade ideal is %enerally +althou%h perhaps not uni"ersally, conceded to be sub5ect to t#o )ualifications. (he first concerns infant industries, #hich may merit substantial but strictly temporary protection. /urthermore, a moderate %eneral tariff +in the ran%e of 1 percent to 2 percent, #ith little dispersion, mi%ht be accepted as a mechanism to pro"ide a bias to#ard di"ersifyin% the industrial base #ithout threatenin% serious costs. (he second )ualification concerns timin%. A hi%hly protected economy is not e*pected to dismantle all protection o"erni%ht. Eie#s differ, ho#e"er, on #hether import liberali4ation should proceed accordin% to a predetermined timetable +the World 1an' "ie#, embodied in many structural ad5ustment loans, or #hether the speed of liberali4ation should "ary endo%enously, dependin% on ho# much the state of the balance of payments can tolerate +my o#n "ie#, based on recollection of ho# Europe liberali4ed successfully in the 19D s,. Foreign Direct Investment As noted abo"e, liberali4ation of forei%n financial flo#s is not re%arded as a hi%h priority. In contrast, a restricti"e attitude limitin% the entry of forei%n direct in"estment +/>I, is re%arded as foolish. .uch in"estment can brin% needed capital, s'ills, and 'no#7ho#, either producin% %oods needed for the domestic mar'et: or contributin% ne# e*ports. (he main moti"ation for restrictin% />I is economic nationalism, #hich Washin%ton disappro"es of, at least #hen practiced by countries other than the -nited .tates. />I can be promoted by debt7e)uity s#aps. Parts of Washin%ton, perhaps most notably the -. (reasury, the Institute of International /inance, and the International /inance Corporation, are stron%ly in fa"or of debtor countries facilitatin% debt7e)uity s#aps, on the ar%ument that this can simultaneously further the t#in ob5ecti"es of promotin% />I and reducin% debt. ?ther parts of Washin%ton, notably the I;/, are much more s'eptical. (hey )uestion #hether />I should be subsidi4edC they as' #hether the subsidi4ed in"estment #ill be additionalC they ar%ue that, if it is not, the debtor loses by ha"in% its forei%n debt reduced rather than %ainin% free forei%n e*chan%eC and abo"e all they #orry about the inflationary implications of addin% to domestic monetary e*pansion. Privati ation >ebt7e)uity s#aps in"ol"e no monetary pressure #hen the e)uity purchased by the forei%n in"estor is bou%ht from the %o"ernment, in the course of an enterprise bein% pri"ati4ed. (his is one attraction seen in pri"ati4ation. ;ore %enerally, pri"ati4ation may help relie"e the pressure on the %o"ernment bud%et, both in the short run by the re"enue produced by the sale of the enterprise and in the lon%er run inasmuch as in"estment need no lon%er be financed by the %o"ernment. 9o#e"er, the main rationale for pri"ati4ation is the belief that pri"ate industry is mana%ed more 3

efficiently than state enterprises, because of the more direct incenti"es faced by a mana%er #ho either has a direct personal sta'e in the profits of an enterprise or else is accountable to those #ho do. At the "ery least, the threat of ban'ruptcy places a floor under the inefficiency of pri"ate enterprises, #hereas many state enterprises seem to ha"e unlimited access to subsidies. (his belief in the superior efficiency of the pri"ate sector has lon% been an article of faith in Washin%ton +thou%h perhaps not held )uite as fer"ently as in the rest of the -nited .tates,, but it #as only #ith the enunciation of the 1a'er Plan in 192D that it became official -. policy to promote forei%n pri"ati4ation. (he I;/ and the World 1an' ha"e duly encoura%ed pri"ati4ation in $atin America and else#here since. (he lac' of a stron% indi%enous pri"ate sector is one reason that has moti"ated some countries to promote state enterprises. (his is a%ain a nationalistic moti"ation and hence commands little respect in Washin%ton. ;y o#n "ie# is that pri"ati4ation can be "ery constructi"e #here it results in increased competition, and useful #here it eases fiscal pressures, but I am not persuaded that public ser"ice is al#ays inferior to pri"ate ac)uisiti"eness as a moti"atin% force. -nder certain circumstances, such as #here mar%inal costs are less than a"era%e costs +for e*ample, in public transport, or in the presence of en"ironmental spillo"ers too comple* to be easily compensated by re%ulation +for e*ample, in the case of #ater supply,, I continue to belie"e public o#nership to be preferable to pri"ate enterprise. 1ut this "ie# is not typical of Washin%ton. Deregulation Another #ay of promotin% competition is by dere%ulation. (his #as initiated #ithin the -nited .tates by the Carter administration and carried for#ard by the 0ea%an administration. It is %enerally 5ud%ed to ha"e been successful #ithin the -nited .tates, and it is %enerally assumed that it could brin% similar benefits to other countries. (he potential payoff from dere%ulation #ould seem to be much %reater in $atin America, to 5ud%e from the assessment in 1alassa et al. +1923, 1: ,@ ;ost of the lar%er $atin American countries are amon% the #orld6s most re%ulated mar'et economies, at least on paper. Amon% the most important economic re%ulatory mechanisms are controls on the establishment of firms and on ne# in"estments, restrictions on inflo#s of forei%n in"estment and outflo#s of profit remittance, price controls, import barriers, discriminatory credit allocation, hi%h corporate income ta* rates combined #ith discretionary ta*7reduction mechanisms, as #ell as limits on firin% of employees.... In a number of $atin American countries, the #eb of re%ulation is administered by underpaid administrators. (he potential for corruption is therefore %reat. Producti"e acti"ity may be re%ulated by le%islation, by %o"ernment decrees, and case7 by7case decision ma'in%. (his latter practice is #idespread and pernicious in $atin America as it creates considerable uncertainty and pro"ides opportunities for corruption. It also discriminates a%ainst small and medium7si4ed businesses #hich, althou%h important creators of employment, seldom ha"e access to the hi%her reaches of the bureaucracy. Property Rights In the -nited .tates property ri%hts are so #ell entrenched that their fundamental importance for the satisfactory operation of the capitalist system is easily o"erloo'ed. I suspect, ho#e"er, that #hen Washin%ton brin%s itself to thin' about the sub5ect, there is %eneral acceptance that property ri%hts B

do indeed matter. (here is also a %eneral perception that property ri%hts are hi%hly insecure in $atin America +see, for e*ample, 1alassa et al. 1923, chapter A,. Washington!s Practice Washin%ton does not al#ays practice #hat it preaches, as a moment6s reflection on the most embarrassin% sub5ect mentioned abo"e<corruption<#ill surely re"eal. (his paper #as, after all, #ritten durin% the #ee's #hen a massi"e scandal at the -. >epartment of 9ousin% and -rban >e"elopment came to li%ht<a case in"ol"in% fraud and irresponsibility on a scale lar%e enou%h to erode the credibility of Washin%ton6s preachin%. (hat #ould be true, at least, if Washin%ton6s ad"ice #ere a moral admonition to purity. 1ut that is not in fact the #ay it is %enerally percei"ed. 0ather, the ad"ice is intended to further the self7interest of the countries to #hom it is directed +althou%h not necessarily #ith a #ei%htin% of the interests of the constituent classes identical to that of the rulin% elite in those countries,. (he fact that the -nited .tates also suffers from fraud and corruption does not ma'e those practices any less detrimental in $atin countries, especially to those e*cluded from the elite. ?n the contrary, the %reater per"asi"eness of corruption in many $atin countries su%%ests that the dama%e it does is much %reater. Washin%ton6s record is li'e#ise imperfect in other areas discussed abo"e. ?n the first criterion, that of controllin% the fiscal deficit, the -. record of the 192 s is poor. It is true that the federal deficit has been failin% since 192D, especially as a proportion of 8!P, and that the operational deficit is no# only some I percent of 8!P, #hich is #ithin the ran%e consistent #ith continued sol"ency of the public sector. 9o#e"er, the fiscal deficit remains too lar%e for macroeconomic balance, %i"en the lo# pri"ate sa"in% rate in the -nited .tates. (he e*cessi"ely hi%h fiscal deficit results in the maintenance of hi%h real interest rates and an unsustainably lar%e current account deficit, #ith conse)uential burdens on debtors, discoura%ement of in"estment, nurturin% of protectionist sentiment, and the continuin% threat of a &hard landin%.& (he other areas #here Washin%ton6s practice lea"es much to be desired are e*chan%e rate policy, #here the ill effects of the dollar6s "ast o"er"aluation of the mid7192 s still lin%er e"en thou%h the misali%nment itself has been lar%ely corrected, and trade policy, #hich has made discoura%in% lurches to#ard protection despite all the pled%es to the contrary. in most of the microeconomic areas <notably ta* reform, />I +so far, at least,, dere%ulation, and property ri%hts<Washin%ton6s actions are consistent #ith its rhetoric. "oncluding Remar#s (he economic policies that Washin%ton ur%es on the rest of the #orld may be summari4ed as prudent macroeconomic policies, out#ard orientation, and free7mar'et capitalism. It practices the last of these #ith more consistency than the first t#o, but that should not be ta'en to imply that they are less important. ;ost of technocratic Washin%ton belie"es that the failure to practice #hat is preached hurts the -nited .tates as #ell as the rest of the #orld. It is not at all clear that the policy reforms currently sou%ht by Washin%ton ade)uately address all of the critical current problems of $atin America. Consider, for e*ample, the transitional problems of inflation stabili4ation. /iscal discipline is certainly a precondition for masterin% inflation. 1ut some #ould ar%ue that it needs to be supplemented by price and #a%e free4es and a fi*ed e*chan%e rate +on the ;e*ican model,, #hereas others mi%ht #ell #ish to add price liberali4ation to the list of policy initiati"es that Washin%ton should be ur%in% on $atin America. (here is no consensus "ie# on this topic, e"en thou%h some policy on price control +perhaps differin% by country, may be critical to successful stabili4ation. As a second e*ample, >ornbusch +1929a, has recently raised the )uestion of #hether the 2

Washin%ton a%enda described abo"e can be relied on to restore %ro#th once stabili4ation has been achie"ed. 9e points to the disappointin% e*periences of 1oli"ia and ;e*ico, #here determined and effecti"e stabili4ation has not yet resulted in a resumption of %ro#th. If he is ri%ht in his contention that entrepreneurs may adopt a #ait7and7see policy after stabili4ation rather than promptly committin% themsel"es to the ris's in"ol"ed in ne# in"estment, the important )uestion arises as to #hat must be added to Washin%ton6s policy ad"ice in order to restore %ro#th. A third important issue concerns capital fli%ht. /iscal discipline, positi"e real interest rates, a competiti"e e*chan%e rate, and more secure property ri%hts are all important for re"ersin% capital fli%ht. 1ut it is doubtful #hether all those reforms to%ether #ould lead to a prompt return of fli%ht capital. Elimination of the current ta* incenti"e to 'eep money abroad #ould surely help too +$essard and Williamson 192B,, but this is certainly not a policy on #hich Washin%ton has yet reached a consensus, nor is it clear that addin% it #ould be enou%h to do the tric'.A E"en thou%h the Washin%ton consensus may not be sufficient to resol"e all the ma5or $atin problems, it is surely of interest to as'@ Is the consensus shared in $atin AmericaF 9a"e the recommended policies been implemented in $atin AmericaF What results ha"e been achie"ed #here the recommended policies ha"e been implementedF (hose are the )uestions that the country studies are bein% as'ed to address. Ans#erin% them #ill at least help to clear the %round for e*aminin% #hat additional policies may be needed to limit the transitional costs of inflation stabili4ation, to restore %ro#th, and to re"erse capital fli%ht. ?ne final reflection@ A stri'in% fact about the list of policies on #hich Washin%ton does ha"e a collecti"e "ie# is that they all stem from classical mainstream economic theory, at least if one is allo#ed to count =eynes as a classic by no#. !one of the ideas spa#ned by the de"elopment literature<such as the bi% push, balanced or unbalanced %ro#th, surplus labor, or e"en the t#o7%ap model<plays any essential role in moti"atin% the Washin%ton consensus +althou%h I #ould fortify my preference for "aryin% the pace of import liberali4ation dependin% on the a"ailability of forei%n e*chan%e by appeal to the t#o7%ap model,. (his raises the )uestion as to #hether Washin%ton is correct in its implicit dismissal of the de"elopment literature as a di"ersion from the harsh realities of the dismal science.D ?r is the Washin%ton consensus, or my interpretation of it, missin% somethin%F References 1elassa, 1ela, 8erado ;. 1ueno, Pedo7Pablo =uc4yns'i, and ;ario 9enri)ue .imonsen. 1923. Toward Renewed Economic rowth in Latin America. ;e*ico City@ El ColG%io de ;e*icoC 0io de Janeiro@ /undaHIo 8etJlio Ear%as. Washin%ton@ Institute for International Economics. 1recher, 0ichard A., and Carlos /. >Ka4 Ale5andro. 19BB. &(ariffs, /orei%n Capital, and Immiseri4in% 8ro#th.& #ournal of International Economics +!o"ember,. Cornia, 8io"anni Andrea, 0ichard Jolly, and /rances .te#art. 192B. Adjustment with a Human $ace. ?*ford@ Clarendon Press on behalf of -!ICE/. >ornbrusch, 0udi%er, and .ebastian Ed#ards. 1929. &;acroeconomic Populism in $atin America.& %&ER 'or(in) Paper *+,-. Cambrid%e, ;A@ !ational 1ureau of Economic 0esearch. $essard, >onard 0., and John Williamson, eds. 192B. .apital $li)ht and Third 'orld /e0t. Washin%ton@ Institute for International Economics. Paredes, Carlos. 1929. & E*chan%e 0ate 0e%imes, the 0eal E*chan%e 0ate, and E*port Performance 9

in $atin America.& Washin%ton@ 1roo'in%s Institution. Pola', Jac)ues J. 1929. /inancial Policies and >e"elopment. Paris@ ?r%ani4ation for Economic Cooperation and >e"elopment. .hleifer, Andrei. 1929. &Preconditions !ecessary for the 0eco"er of $atin America6s 8ro#th.& Presented at a conference on (he Economic 0econstruction of $atin America at the /undaHIo 8etJlio Ear%as, 0io de Janeiro +B72 Au%ust,. (an4i, Eito. 1929. &/iscal Policy and Economic 0estructurin% in $atin America.& Presented at a conference on (he Economic 0econstruction of $atin America at the /undaHIo 8etJlio Ear%as, 0io de Janeiro +B72 Au%ust,. Williamson, John. 192D. The E"chan)e Rate 1!stem. Policy Analyses in International Economics D. Washin%ton@ Institute for International Economics. $otes 1. (his fi%ure assumes a desire to stabili4e the debt78!P ratio, /23, at no more than .A. Assume a real %ro#th rate, ?323, of . A. (hen ?/2/ L ?323 M implies ?/23 M 323 * /23 N . A * .A N . 13. 2. .ee, for e*ample, Camdessus6 address to the -nited !ations Economic and .ocial Council in 8ene"a on 23 June 192B +IM$ 1ur4e!, 29 June 192B, and the inter"ie# #ith Conable in Istanbul on 19 ;ay 1929. :. An e*ception to the case for #elcomin% />I can arise if the domestic mar'et in )uestion is hea"ily protected, #hen the %ro#th produced by forei%n in"estment can be immiseri4in%@ see 1recher and >Ka4 Ale5andro +19BB,. A. .ome mi%ht #ant to add the debt issue as a fourth topic on #hich it is not clear that the Washin%ton a%enda suffices to resol"e the current problem, but this seems to me unfair. (he 1rady Plan is based on the premise that official help in achie"in% debt reduction should be %i"en to those countries that ha"e &put their houses in order,& #hich implies that the latter alone is not e*pected to achie"e a resolution of the debt problem. D. Ironically, Washin%ton seems to ha"e reached this position 5ust as Chica%o theorists ha"e redisco"ered the old ideas of e*ternalities that underlay the de"elopment literature@ see .hleifer +1929, for a sur"ey of the ne# literature on the theory of de"elopment.