Goodbye washington consensus, hello washington confusion?

GOODBYE WASHINGTON CONSENSUS, HELLO WASHINGTON CONFUSION? Dani Rodrik1 Harvard University January 2006

Introduction Life used to be relatively simple for the peddlers of policy advice in the tropics. Observing the endless list of policy follies to which poor nations had succumbed, any welltrained and well-intentioned economist could feel justified in uttering the obvious truths of theprofession: get your macro balances in order, take the state out of business, give markets free rein. “Stabilize, privatize, and liberalize” became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled. Codified in John Williamson’s (1990) well-known Washington Consensus, this advice inspired a wave of reforms in Latin Americaand Sub-Saharan Africa which fundamentally transformed the policy landscape in these developing areas. With the fall of the Berlin Wall and the collapse of the Soviet Union, former socialist countries similarly made a bold leap towards markets. There was more privatization, deregulation and trade liberalization in Latin America and Eastern Europe than probably anywhere else at any point ineconomic history. In SubSaharan Africa governments moved with less conviction and speed, but there too a substantial

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Paper prepared for the Journal of Economic Literature. I am grateful to Roger Gordon for his encouragement and comments, to Ricardo Hausmann, Lant Pritchett, and John Williamson for their reactions, and to Roberto Zagha for the many insights he has shared with me over the last fewyears. John Williamson reminded me that my title is far from original, having been used in almost identical form by Moises Naim (1999). In its present form, the title also makes allusion to the classic paper by Carlos Diaz-Alejandro (1985).

2 portion of the new policy agenda was adopted: state marketing boards were dismantled, inflation reduced, trade opened up, and significant amounts ofprivatization undertaken.2 Such was the enthusiasm for reform in many of these countries that Williamson’s original list of do’s and don’ts came to look remarkably tame and innocuous by comparison. In particular, financial liberalization and opening up to international capital flows went much farther than what Williamson had anticipated (or thought prudent) from the vantage point of the late 1980s.Williamson’s (2000) protestations notwithstanding, the reform agenda eventually came to be perceived, at least by its critics, as an overtly ideological effort to impose “neoliberalism” and “market fundamentalism” on developing nations. The one thing that is generally agreed on about the consequences of these reforms is that things have not quite worked out the way they were intended. Even theirmost ardent supporters now concede that growth has been below expectations in Latin America (and the “transition crisis” deeper and more sustained than expected in former socialist economies). Not only were success stories in Sub-Saharan Africa few and far in between, but the market-oriented reforms of the 1990s proved ill-suited to deal with the growing public health emergency in which thecontinent became embroiled. The critics, meanwhile, feel that the disappointing outcomes have vindicated their concerns about the inappropriateness of the standard reform agenda. While the lessons drawn by proponents and skeptics differ, it is fair to say that nobody really believes in the Washington Consensus anymore.3 The question now is not whether the Washington Consensus is dead or alive; it iswhat will replace it.

To cite just one example, fifty percent or more of the state-owned enterprises were divested during the 1990s in the Central African Republic, Cote d’Ivoire, Gambia, Ghana, Guinea-Bissau, Kenya, Mali, Tanzania, Togo, Uganda, and Zambia (Nellis 2003). On the extent of trade reform in Africa, see Ancharaz (2003). 3 In a book edited with Pedro-Pablo Kuczynski in 2003, John...