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Lecture

The Washington Consensus


Department
Political Science
Course Code
POL201Y1
Professor
Sophia Moreau

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Politics of Development: Week 11 t November 22, 2010
The Washington Consensus
- Neo-liberalism: The belief in the importance of individual freedom
o Classical liberals believed that liberalism implied a limit on the sphere of government,
individual freedom was understood to be about limiting the extent in which government
could interfere in the lives of individuals
Negative freedoms are concern (freedom from rather than freedom to)
Freedom is a pre-existing condition, individuals automatically have, securing
freedom means non-interference by the state
o Modern liberals believe freedom is not pre-existing, that it needs to be produced
Wealthy people have more freedom that poor people, inequality in freedom
distribution
Require government intervention in order to produce freedom or provide equal
access to freedom
Usually support pluralism and affirmative action
- Adam Smith, individuals could structure moral and economic rights without intervention from
the state, laissez-faire economics, market would naturally regulate itself, government should
take on tasks that could not be taken care of by the profit motive, securing the rule of law and
other so-called public goods
o Limited role for the state
- Neo-liberalism is a restatement of the economic liberal theories of Adam Smith minus some
outdated principles
o Term was first coined in 1938
o Market would behave rationally if left alone
- Keynesianism, private sector, market decisions sometimes lead to inefficient macroeconomic
outcomes
o Role of government
o Falls into disrepute in 1980s in favour of free market economic policies
o 2008, global financial crisis, governments around the world implement Keynesian
economic policies
- Post-2008 economic world, Keynesianism is back, idea that governments need to intervene
through tax policy, monetary policy, etc...
ZWhat Washington Means by Policy Reform[
- 1940s-50s, global economic boom, Green Revolution (started in 1948), research and
development in agriculture that revolutionized food production through technological change
o Positive: increased production
o Negative: decrease in the price of agricultural products, leads to declining terms of trade
between core and periphery countries
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o Agricultural producers in poor parts of the world get forced out of the market as unable
to compete with large agricultural businesses
o In 1943 Mexico imported half the wheat it consumed, 1956 Mexico self-sufficient, 1964
Mexico exporting half a million tonnes of wheat every year, leap in production
- 1950s and 1960s, many countries go through decolonization and adopt ISI strategy
- 1970s, OPEC created to control oil prices, price of oil goes sky high and rising oil prices force
many countries that import oil (oil-consuming countries) to turn to the IMF for loans because
ZÇv[ovÇuv, run into enormous debts
- 1981, OPEC falls apart, oil producing countries in trouble, price of oil drops suddenly, forced to
turn to IMF and the World Bank
- 1982-1985, most developing countries either currently taking loans or have taken loans from the
international financial institutions
o In exchange for loans, countries are forced to accept conditionality agreements or
structural adjustment programs
Starting in 1970s and 1980s many developing countries suddenly saw room to
improve their own economic and political situations drastically reduced, scope
of sovereignty no longer includes deciding their own economic policy
- IMF conditionality/structural adjustment programs:
o 1. Democracy
Governments forced to undertake political reforms
o 2. Free Market
Economic reforms
Washington Consensus
- The Washington Consensus components:
o 1. Fiscal discipline
A balanced budget where there is room for short-run deficits that contribute to
macroeconomic stabilization (e.g. injecting money into economy when country
heading into recession in order to keep markets afloat)
Fiscal deficits produce inflation, payment deficits, capitol flight
o 2. Public expenditure priorities
Can reduce a fiscal deficit by increasing your revenue or decreasing your
expenditures
Main way to increase revenue is by raising taxes, Washington in general against
this as it moves money from the private sector to the public sector
x Money more productive in private sector
x Priority given to cutting spending instead of raising taxes
Governments required to cut spending in subsidies (many developing countries
subsidize basic goods consumed mainly by the poor) as making the case for
privatization, basic necessities properly produced by the market
x Often produces food crisis as without subsidies an enormous portion of
Z}µo]}vv[((}rd food, drop below the poverty line
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