Commentary

What Changes Should Be Made to the Washington Consensus?

This article appeared in the Latin America Advisor on November 12, 2002.

Q: Economist John Williamson, who is credited by many with coming up with the Washington Consensus set of policy recommendations, is reportedly drafting a revised version which will address poverty and other social issues, and will include a proposal for making Latin American countries less vulnerable to crises. What changes would you suggest Williamson include in the new version?

Ian Vásquez: “The Washington Consensus — an unfortunate name for a set of policies that emanated from Latin America, not Washington — was always incomplete. Partially for that reason, it should not be confused with a laissez-faire policy agenda, which in any case was never adopted by any Latin American country. Furthermore, the region’s economic turmoil in recent years is largely due to a lack of adherence to the Washington Consensus itself. Undisciplined spending and debt mismanagement come most obviously to mind. A new approach should emphasize the following high-growth agenda.

First, countries need to consistently apply most of the original consensus points and discard the misconceived proposal to maintain a `competitively’ pegged exchange rate. If there is a consensus on exchange rates today, it is that they should be market consistent, not manipulated by governments.

Second, reform of rigid labor laws is necessary to benefit most workers, reduce unemployment, and provide economy-wide flexibility that does not now exist.

Third, taxes continue to be too high, especially in depressed economies. Argentina’s 21 percent value added tax and its combined payroll taxes are two to three times the equivalent tax rates in the United States.

The costs of bureaucratic regulation are also often higher than in rich countries and make running a small- and medium-size business prohibitively expensive. They should be dramatically reduced.

Fifth, institutional reform, including titling the property of the poor, needs more emphasis. The above measures will increase transparency and accountability, thus improving the rule of law.

Finally, the unreformed sectors of health, education and public security have continued to deteriorate despite in some cases having enjoyed increases in resources. They are prime candidates for reform.

By far, the most successful Latin American economy is that of Chile, the country that has come closest to applying the above points for the longest time. Chile dramatically reduced poverty, mostly because of high growth. And it did so without relying on Washington. As economist Juan Andrés Fontaine observes, the region needs a Santiago Consensus, not a Washington Consensus.”

Ian Vásquez is director of the Project on Global Economic Liberty at the Cato Institute. This commentary is taken from the Nov. 12 Q&A of the Latin America Advisor.