Globalization and the World Economy

Development assistance, by definition, is the combination of money, advice, and conditions provided by rich nations and international financial institutions, such as the World Bank and International Monetary Fund (IMF), which is designed to achieve economic development in poor nations (Easterly, 328). This essay analyzes how the development assistance created by the Washington Consensus had limitations in assessing the economic situation in developing countries.

John Williamson, an economist at the World Bank, called the new approach development model — the Washington Consensus. The Washington Consensus encompassed a serious of policy reforms envisioned by the IMF, World Bank, and US Treasury Department. While initially derived from policy reforms in Latin America, the Washington Consensus quickly became the primary prescription for economic development around the world. As a matter of fact, the Consensus emphasizes macroeconomic discipline, a market economy, and openness to the world economy. At its center, the Consensus builds on the belief that if state enterprises are privatized, government regulation is reduced, inflation is kept in check, the money supply is kept tight (as part of controlling inflation), and prices are set free. Then foreign investment will flow in producing prosperity and creating economic development. More specifically, the Washington Consensus encompasses ten key elements, as originally outlined by Williamson in 1980; fiscal discipline, narrowing of public expenditures, tax reform, liberalization of interest rates, maintain a competitive exchange rate, liberalizing foreign direct investment, privatizing state enterprise, deregulating the economy, and securing private property rights.

One of the elements the Washington Consensus encompasses was to introduce more competitive exchange rates. Exchange refers to the value of one currency expressed in terms of another. In the context of the Consensus, competitive exchange rates usually meant lowering currency values in an effort to promote exports. The theory was that developed countries had historically overvalued their currencies in effort to make imports more expensive, thus fostering domestic economic activity. But the Washington Consensus argued for the opposite approach. Countries should devalue their currencies in an effort to be more competitive globally while reducing imports. If the cost of production is priced primarily in local currency term, devaluing your currency will make your exports cheaper in the global context, fuelling economic development. The challenge, though, is that the demand for many primary commodities was relatively inelastic. Price decreases do not always generate increased demand in the global market. Furthermore, as many developing countries were devaluing their currencies simultaneously, a general downward trend in the price for many of their primary commodities occurred, eliminating many of the supposed benefits of devaluation in the first place (Easterly, 142).

The final two elements of the Washington Consensus centered on the expansion and protection of private property rights. Privatization was probably the least popular element of the Washington Consensus, frequently generating protests. While it was intended to increase the efficiency of enterprises, privatization often increased prices and reduced coverage of services. In South Africa, for example, privatization of the electricity sector led to enormous disconnections. In Ecuador, privatization of water delivery led to neighborhoods being cut off from access to water. While the Washington Consensus emerged out of the experiences of Latin America, it quickly became the default model for development promoted by the International Monetary Fund through structural adjustment. Not surprisingly, it also generated considerable controversy and criticism. Some of the most powerful criticism came from inside the International Financial Institutions (IFI). The Nobel Prize winning economist Joseph Stiglitz, who served as chief economist of the World Bank from 1997 to 200 was particularly pointed out in his critiques. Stiglitz argued that the Washington Consensus was resented as a “one size fits all” solution that ignored local expertise on the ground and assumed that all countries faced the same problems. According to Stiglitz “When the IMF decides to assist a country, it dispatches a “mission” of economists. These economists frequently lack extensive experience in the country; they are more likely to have firsthand knowledge of its five-star hotels than of the villages that dot its countryside […] a little number-crunching for a few weeks rarely provides adequate insights into the development strategy for an entire nation.”

One of the criticisms of the Consensus was questioning whether or not it worked. While broad principles of the Consensus made sense in theory, in practice they often failed to deliver the promised economic growth. Across a wide range of Latin American countries that undertook the Washington-styled reforms, economic growth actually slowed after the model was adopted with exception of only Chile (Djankov, 5).

Although it is challenging to determine exactly what actions achieve development, it does not necessarily mean that foreign aid should be eliminated. Foreign aid could finance gradual steps aimed at accomplishing particular tasks for which there is clearly a huge demand to reduce malaria deaths, to provide more clean water, to build and maintain roads, to provide scholarships for talented but poor students, and so on. It could seek to create more opportunities for poor individuals, rather than try to transform poor societies. The knowledge and incentive problems for each such focused effort seem more solvable than that of “development assistance.” Fortunately, the inability of the experts and the aid donors to provide the answers for development has not stopped development from “just happening” on its own. Economic growth, without much influence by experts or much contribution by foreign aid, is happening around the world in countries like China, India, Chile, Botswana, Turkey, and Vietnam, generally involving gradual and domestically adjusted movement toward free markets. Even though some of these success stories could later come apart, history suggests their place will be taken by new permanent exits from poverty. This should be enough to reassure to have some hope about world poverty than worry.