Washington Consensus

The Washington Consensus is one prominent list of policy improvements proposed to address poor development, including macroeconomic stability, a smaller government sector, flexible exchange rates, capital-account liberalization, privatization, more efficient public services, and anticorruption measures. The book’s central criticism is not that each proposal is inherently unsound, but that external advice cannot by itself change the political incentives and constraints that sustain damaging policies. Where those institutions remain intact, reforms may be rejected, implemented only nominally, or redirected to serve existing interests.

Purpose and Prescriptions

The approach associated with the Washington Consensus begins from the view that poor development reflects bad economic policies and institutions, then offers a program of improvements that international organizations seek to induce governments to adopt. Its recommendations address both macroeconomic conditions and the organization of the state: stabilizing the economy, reducing government’s economic role, allowing exchange rates to adjust, opening capital accounts, privatizing, improving public-service efficiency, and fighting corruption.

The book treats many of these reforms as sensible in isolation. Its objection is to the theory of change behind the package: policy advice assumes that rulers can be persuaded to adopt measures that promote growth, without explaining why institutions that benefit from the existing arrangements would permit those measures to work. In this account, the obstacle is not simply a shortage of economic knowledge but the political incentives and constraints generated by a society’s institutions.

Political Constraints and Implementation

The experience of Ghana under Kofi Busia illustrates the gap between economic advice and political possibility. Faced with balance-of-payments crises and foreign-exchange shortages, Busia signed an agreement with the International Monetary Fund on December 27, 1971, accepting a major currency devaluation. International organizations and governments pressed for the reforms in the agreement, but the devaluation prompted mounting unrest in Accra. The military, led by Acheampong, overthrew Busia and immediately reversed the measure. The episode shows why a policy that appears economically corrective can carry political costs that threaten the government asked to implement it.

The book argues that externally promoted reforms often fail to account for such domestic political circumstances. In Latin America, economies stagnated through the 1980s and 1990s despite reforms ostensibly being implemented. Politics continued much as before: the intent of reforms was subverted, or politicians found other ways to blunt their effects. A reform’s formal presence therefore cannot establish that it has altered the distribution of power or the incentives governing policy.

Central-Bank Independence as a Test Case

Central-bank independence is presented as a particularly clear example of the difference between institutional form and effective constraint. The recommendation addresses a real problem: governments that spend beyond their tax revenues may pressure central banks to print money, producing inflation and uncertainty. An independent central bank is intended to resist that pressure. The book notes that such an arrangement could work, as it did in Germany’s Bundesbank, but only if political actors cannot simply circumvent it.

Zimbabwe’s formal declaration of central-bank independence in 1995 did not prevent inflation from escalating. It stood at around 20 percent before the declaration, reached 140 percent by 2002 and nearly 600 percent by 2003, then rose to 66,000 percent in 2007 and 230 million percent in 2008. The contrast between the legal declaration and the ensuing inflation illustrates the weakness of changing a rule on paper while leaving political control intact.

Argentina and Colombia provide a different version of the same institutional problem. Their central banks were made independent in the 1990s and did reduce inflation. But political elites, unable to use money creation in the same way, could still use other means to maintain their interests, reward supporters, and buy votes. In both countries, central-bank independence coincided with a large expansion of government spending, financed largely by borrowing. A constraint on one instrument did not eliminate the political purposes that had made the instrument useful.

The Wider Argument

The criticism of the Washington Consensus belongs to the book’s broader challenge to the idea that poverty can be engineered away through better technical advice alone. The approach is attractive to policymakers because it offers an actionable list; it is also attractive to rulers presiding over extractive institutions when the language of reform can legitimize growth without requiring them to surrender political control. Authoritarian growth may be possible where the state is centralized, but the book argues that growth under extractive political institutions is not sustainable.

The distinction is between prescribing a policy and changing the conditions under which it is made and enforced. A measure can be economically coherent yet fail to produce its intended result if officials have incentives to evade it, if political elites can substitute another route to the same ends, or if those responsible for implementation benefit from the problem. The Washington Consensus thus serves as a case in the book’s larger argument: prosperity cannot be secured by policy design alone when the political institutions that govern implementation remain unchanged.