Supranational organizations have significant power and authority that they can use to shape political, social, economic, and cultural landscapes of global communities for decades. Since their establishment in the second half of the 20th century, supranational organizations such as the United Nations (UN), the World Bank, and International Monetary Fund (IMF) have played a critical role in influencing policies and developing standards in both developed and developing economies. These organizations have impacted politics through concessions and treaties that are ratified and adopted by their huge membership base. One such treaty is the Washington Consensus: a raft of economic policies with far-reaching socio-political and economic consequences especially in the developing countries.
First coined in the late 1980s, the Washington Consensus is a 10-point political and economic policy agenda that was aimed at arresting the worsening economic situation in Latin Americas in 1980s following failed Communist political and economic policies. It was primarily aimed at stabilizing the economic situation in the region and the Washington Consensus prescribed key economic ideologies and policies that radically transformed the political economy in Latin Americas for decades. Additionally, while the prescriptions were originally crafted for Latin Americas, they were extended to countries in other continents and regions battling with economic meltdowns. These standard economic prescriptions were crafted, championed for, and implemented by the U.S Treasury in collaboration with the World Bank and IMF (Williamson, 2002). The World Bank and IMF are among the most powerful Washington-based supranational organizations.
The three organizations came together and drafted what was conceived to be bare minimum structural reforms that the crisis-wracked economies had to implement. In exchange, the developing countries stood to benefit from financial help offered by the World Bank, IMF and the U.S. Treasury. One of the economic structural reforms that the Washington Consensus pushed for was the removal of stringent economic laws and policies that barred a significant portion of foreign direct investment. The relaxation of these laws would liberalize the economies in these developing countries and attract investors with the intention of spurring economic growth and development (Williamson, 2002). The consensus essentially sought to remove entry barriers into these economies for investors and businesses.
The Washington Consensus prescribed a free trade policy that would allow for increased importation of goods and services into these developing from overseas markets. The free trade prescription also came with deregulation and removal of trade barriers that were seen as hindrances to economic growth in these countries. These obstacles to trade included the high trade tariffs the governments in these countries had introduced on imports and foreign-based businesses operating in the country. The governments were also urged to remove the foreign trade quota system (Williamson, 2002). These reform agenda further aimed at liberalizing these economies in exchange for financial support.
Under the terms of the Washington Consensus, governments in the developing countries battling with worsening economic situations were required to reduce their fiscal deficits through reduced borrowing. This prescription would ensure that the fiscal deficits of these governments matched their gross domestic products (GDP). As a standard reform agenda, these governments were also required to increase their spending on long-term agenda such as infrastructural development, education, and healthcare as opposed on short-term spending on government subsidies.
Other reforms prescribed by the three Washington-based organizations include radical tax reforms marked a larger tax base. The state corporations and enterprises were to be privatized in exchange for donor funding. Moreover, the reforms touched in foreign currency exchange rates in these countries. The Washington Consensus held that the interest rates and foreign currency rates should be more liberated and determined, to a great extent, by the free market. Consensus also established property rights policy frameworks to be implemented to secure and protect foreign investors (Williamson, 2002). The move was in anticipation of the increased foreign trade and foreign direct investment and lax property laws in the developing countries. These standard reforms were part of a broader range of political economy policies that also touched on property rights.
The Washington Consensus has been criticized in some quarters, especially due to increased market deregulations prescribed. The globalization of these economies has suffered from a paradox; deregulation with the view of establishing free and global markets in these economies put them at a higher risk of suffering from the inherent volatility of free markets (Rodrik, 2011). History of global economies is awash with incidences of recessions and financial crises stemming from overly deregulated markets (Lopes, 2012; Stiglitz, n.d). Indeed, many global economies were crashed by the 2008/2009 global recession whose origins can be traced to the highly deregulated and volatile markets in the United States.
The opening of these economies to foreign investors through liberalized foreign direct investment and removal of tariffs is questionable. The reform agenda have underscored the historical and political relevance of this consensus. Moreover, developed countries have continued to exert significant political, social, and economic control in developing countries (Stiglitz,n.d). Trade deficits that favor developed countries are the norm. Most of the economies in developing countries rely significantly on trade and donor funding from these organizations and developed countries, which control over them. Developed countries such as China have taken a leading role in benefiting from the long-term projects prescribed by the Consensus (Lopes, 2012). Foreign investors make up a significant proportion of businesses in these countries while local industries and businesses have declined.
The Washington Consensus entered between the U.S. Treasury, the World, and the International Monetary Fund (IMF) is a classic example of power and authority that supranational organizations possess. The three Washington-based introduced sweeping political economy reform agendas that have shaped the economies of developing countries for decades. Despite the positives, the Consensus set the developing countries on a path of economic dominance by the developed countries.
Lopes, C. (2012). Economic growth and inequality: The new post-Washington Consensus. RCCS Annual Review, 4. Retrieved from: https://journals.openedition.org/rccsar/426#citedby
Peet, R. (2009).Chapter 1 in Unholy Trinity; the IMF, World Bank and WTO. 2nd ed. New York: Zed Books.
Rodrik, D. (2011). Chapters 1, 2, 3, 7 and 8 in The globalization paradox: Democracy and the future of the world economy. New York: Norton.
Stiglitz,J. E. (n.d). The post Washington Consensus consensus. The Initiative for Policy Dialogue (IPD). Retrieved from: http://policydialogue.org/files/events/Stiglitz_Post_Washington_Consensus_Paper.pdf
Williamson, J. (2002). What Washington Means by Policy Reform. Washington: Peterson Institute for International Economics. Retrieved from: https://www.piie.com/commentary/speeches-papers/what-washington-means-policy-reform