Copyrighted Material of resources through privatization, trade and capital account liberalization, and domestic market dereg- ulation. The prescription to stabilize, privatize, and liberalize had gained traction among many policy- makers in developing countries since the 1980s as Washington consensus import substitution and interventionist policies had The term Washington consensus was coined by John led to bloated bureaucracies, grossly inefficient state- Williamson (1990) to encapsulate the set of policy owned enterprises, unsustainable public indebted- reforms advocated with a reasonable degree of con- ness, inflation, and slow or even negative growth. sensus by international financial institutions, the The collapse of the Soviet bloc and the success of U.S. government, the Federal Reserve Board, and the countries, such as Chile, that had already experi- leading think tanks based in Washington. Those mented with the new policies, contributed to their policies were deemed necessary to achieve growth, acceptance in the early 1990s. The limited role of low inflation, a viable balance of payments, and eq- government and the expanded role of markets have uitable income distribution in the developing world led some to refer to Washington consensus policies as at large, and especially in Latin America, which was ‘‘neoliberal’’ or based on ‘‘market fundamentalism,’’ still recovering from the debt crisis that erupted in anexpression thatdoes notdo justice tothe scope and 1982. The policies that defined the Washington richness of the policies, especially those originally consensus included (1) fiscal discipline, (2) increased listed by Williamson (1990). This entry adopts the public expenditure on social services and infrastruc- more recent and more widely used meaning of ture, (3) tax reform to broaden tax bases and reduce Washington consensus policies, in spite of its partial marginal tax rates, (4) market-determined interest overlap with Williamson’s list. rates, (5) unified and competitive exchange rates, (6) The Set of Policies For convenience, Washing- import liberalization, (7) openness to foreign direct ton consensus policies can be divided into macroeco- investment, (8) privatization, (9) deregulation, and nomic and microeconomic, or structural, policies. (10) secure property rights. The macroeconomic policies are mostly concerned As the term evolved in the 1990s, it became syn- with achieving price stability (more strictly, low in- onymous with the main policies promoted consen- flation rates) and preventing foreign exchange or sually by the International Monetary Fund (IMF), public debt crises. The cornerstone of macroeco- the World Bank, and the U.S. Treasury, with an nomic stability is fiscal discipline. This need not emphasison macroeconomicstabilitythroughsound imply a balanced budget, but rather a fiscal position fiscal and monetary policies, and a wider role for that does not lead to a rising debt to gross domes- markets in relation to governments in the allocation tic product (GDP) ratio, loss of international 1169 Copyrighted Material Washington consensus currency reserves, or (unacceptably high or rising) terprises and opening to private investment indus- inflation (caused by monetary financing of the defi- tries previously controlled by the public sector, such cit), and therefore is ‘‘sustainable’’ without major as telecommunications, electricity, or mining ( pri- policy adjustments. vatization); reducing bank reserve requirements and Monetary discipline, a second key element of dismantling interest rate controls, subsidized loan macroeconomic stability, is best achieved when programs, and directed credit systems (financial lib- monetary policy instruments (the intervention in- eralization); simplifying the tax code, lowering tax terest rate, open market operations, etc.) are aimed at rates, and widening tax bases (tax reform); facilitating controlling the supply of money and/or the price labor hiring and firing, eliminating wage controls, level and not at reaching other objectives such as simplifyingthe labor code,andreducingpayrolltaxes accelerating growth or reducing unemployment. (labor deregulation); and lifting price controls and Central bank independence from government and license requirements, and easing the procedures for other sources of political interference is additionally entry and exit of firms ( goods markets deregulation). seen as facilitating monetary discipline. The Extent of Policy Reform Little reform had Though no consensus exists in regard to the ex- taken place in the developing world before 1989, but change rate regime most conducive to macroeco- the launch of the Brady Plan by the U.S. government nomic stability, it is well established that fixed or (an initiative to convert the nonperforming bank pegged exchange rate systems make monetary policy debts of the developing countries into long-term instruments ineffective in an environment of inter- bonds to restore access by those countries to inter- national capital mobility. Furthermore, fixed ex- national finance) and the fall of the Berlin Wall that change rates insufficiently backed by international year signaled the beginning of ambitious macroeco- reserves may induce speculative attacks that often nomic and structural reforms in Latin America, lead to abrupt exchange rate corrections. None- Eastern Europe, and the former Soviet Union. theless, fully floating exchange rates are seldom de- The extent of macroeconomic reforms in the sirable, as central banks cannot allow exchange rates following decade and their degree of success were to freely fluctuate when a large portion of govern- remarkable. The incidence of high inflation rates ment or private sector debts are denominated in among developing countries declined sharply, foreign currency and therefore exposed to exchange and median inflation rates among medium-income rate risks, as is the case in most Latin American countries declined from 16 percent in 1990 to 6 countries (an attitude known as ‘‘fear of floating’’). percent a decade later. The overall fiscal deficit of Thus international financial institutions often ad- developing countries, which had reached 7 percent of vocate for strong international reserve positions and GDP in the early 1980s,hasremained approximately limited reliance on external finance as precautionary 2–3 percent of GDP since 1990. By the end of the measures to weather potential external shocks. 1990s, the median developing country posted a Given a sound macroeconomic framework, primary surplus (the fiscal balance excluding inter- structuralpolicies are primarily intended to stimulate est payments). In addition, the volatility of key and sustain growth by facilitating the functioning of macroeconomic variables such as economic growth markets and minimizing government interference in and real exchange rates declined in the 1990s, economic agents’ decisions regarding investment, though partially in response to a more stable external saving, consumption, and work. This entails lifting environment. tariff barriers and other restrictions on international The extent of microeconomic, or structural, re- trade (trade liberalization); eliminating restrictions form since the late 1980s has also been substantial, on foreign direct investment and on the free move- especially in Latin America and the countries of the ment of funds in and out of the country (capital former Soviet bloc, although the effects of this reform account liberalization); privatizing state-owned en- remain a matter of intense debate. Aside from Chile, 1170 Copyrighted Material which slashed import tariffs and lifted other restric- economies offered the former Soviet bloc countries Washington consensus tions on international trade, liberalized the financial ample opportunities for privatization, the reform sector, privatized many state-owned enterprises, and indexes available suggest that only a handful of streamlined the tax and labor codes under the Pi- countries (Armenia, Bulgaria, the Czech Republic, nochet dictatorship (1973–90), no other country in Hungary, Macedonia, and Slovakia) have privatized Latin America had fully embraced structural reform the vast majority of their economic activity. As of until the late 1980s, when the Brady Plan created the 2001, the process had barely progressed in Slovenia opportunity of attracting much-needed external and Turkmenistan and had suffered drastic reversals capital by adopting the ‘‘right’’ set of policies in the in Russia and Uzbekistan. view of international financial institutions and in- The processofmicroeconomic reformvaried even vestors. According to reform indexes computed for more across time, country, and area of reform among Latin America, trade and financial liberalization took the African countries. In the area of financial liber- off first and advanced furthest in the majority of alization, Africa went from a completely dirigiste countries. Privatization and tax reforms were more stance in the mid-1980s to freely moving interest uneven in depth and timing, while labor reform was rates and greater flexibility in bank operations in the timid and erratic. Argentina, Bolivia, and Peru were late 1990s. State-owned financial institutions still among the most aggressive reformers, while Costa intermediated a sizable portion of domestic credit, Rica, Ecuador, Mexico, Uruguay, and Venezuela however, and restrictions on the allocation of credit undertook more cautious but nonetheless substantial abounded. Trade liberalization also advanced sub- reforms. Reform lost momentum