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The IMF and the Washington Consensus: A Misunderstood and Poorly Implemented Development Strategy

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The roots of the recent political upheaval in Bolivia, where months of crippling protests and roadblocks prompted the ousting of President Carlos Mesa on June 6, were in large part economic. For the protestors, mostly indigenous Andean miners, peasants and workers, their struggle was as much about regaining control over their previously privatized oil and gas industries as it was securing fair government representation. In correlation with this struggle for re-nationalization, a wave of discontent over the broad economic reforms carried out by the international finance community, led by the Washington-based International Monetary Fund (IMF), has swept across the country. Such disgruntlement is not limited to Bolivia. Over the last five years Latin America has been plagued by revolution, sparking upheavals in Ecuador, Peru, Argentina and Chiapas, Mexico, where the IMF’s failed promises to promote economic prosperity via the policy prescriptions of the “Washington Consensus” have often played an instigating role. Not surprisingly, the Consensus has come to signify a hard-line, neoliberal set of policies emphasizing export-oriented growth though rapid, sweeping economic reform. This was not the Consensus’ original intention. Nevertheless, the IMF’s aggressive interpretation of its recommendations and history of repeated failure has hindered growth in Latin America and tarnished the Washington Consensus’ otherwise defensible formula for promoting prosperity in developing countries.

The 1980s were a difficult period for Latin American economies. Years of significant economic growth had given way to a staggering debt crisis, leaving the region in desperate need of economic reform and outside assistance. Simultaneously, the long held importance of a nation’s inventory of natural and human resources was challenged by the concept that the key to prosperity lay in the appropriate application of specific economic policies. Within this context, economist John Williamson authored a paper in 1990 that outlined the prescriptions for economic development in emerging markets known as the “Washington Consensus.” Drawing from a necessarily broad conglomerate of diverse notions of the best practices espoused by the leading minds at the IMF, the World Bank, the Federal Reserve Bank and the U.S. Treasury, among others, Williamson whittled the intellectual fray down to ten recommendations:

• Fiscal Discipline
• A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education and infrastructure
• Tax reform (to lower marginal rates and broaden the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization
• Liberalization of inflows of foreign direct investment
• Privatization
• Deregulation (to abolish barriers to entry and exit)
• Secure property rights

In Williamson’s words, “the three big ideas here are macroeconomic discipline, a market economy, and openness to the world (at least in respect of trade and FDI [foreign direct investment]).” These three concepts attempted to tackle the specific challenges of Latin America, where the combined effects of spiraling debt, runaway inflation, corruption in state controlled industry and stringent protectionism had left economies devastated. Belt-tightening macroeconomic policies such as reduced government spending and higher interest rates were prescribed in order to reel in escalating budget deficits and accompanying inflation. The transfer of most businesses from the public to the private sector and the embracing of market principles were intended to reduce smothering state control of industry and the potential for damaging government corruption. It was believed that opening Latin America through public sector deregulation and trade and capital liberalization would attract foreign investment and increase healthy competition.

A Negative Reception
Given that the Consensus was published during a period when the vast majority of developed nations had already accepted such reforms, Williamson understandably believed that his accord would meet only modest opposition. Ironically, the term “Washington Consensus” quickly devolved into an infamous catch phrase associated with the neoliberal, imperialist, market-fundamentalist agenda.

To a certain extent, the rapid intellectual devolution of the Washington Consensus was more a product of public misconception than reasoned analysis, as the complexity and nuance of Williamson’s theory was often overlooked. For example, critics denounced the Consensus’ disregard for social cohesion and institutional stability, conveniently neglecting Williamson’s second recommendation calling for the reallocation of government tax revenue to support the development of schools and hospitals.

However, a more comprehensive explanation as to why the Washington Consensus earned such a poor reputation is that Williamson’s theory, though fundamentally sound, fell into ill regard at the IMF. Cornell Economics Professor Ravi Kanbur has pointed out that, “It might be useful to start with the observation that the Washington Consensus became what it did, not what it said.” Regardless of its architect’s intentions, the IMF systematically and universally applied the most conservative interpretation of the Consensus’ principles, transforming it from a set of broad policy guidelines to a rigid neoliberal development model.

Staunch Opposition to the Consensus
Joseph Stiglitz, former chief economist of the World Bank and leading critic of the IMF, illustrates the flaws of the Washington Consensus. In his 2002 book, Globalization and its Discontents, Stiglitz takes issue with the main themes of the Consensus’ ten recommendations, highlighting the dangers of launching fiscal conservatism, broad trade liberalization and widespread privatization as a panacea for economic underdevelopment.

Stiglitz observes that one of the overarching themes of the Washington Consensus is the implementation of fiscally conservative policies, i.e. hiking interest rates and cutting government spending. Ideally, he acknowledges, these polices promote development by encouraging individual saving, filtering out unnecessary government programs and strengthening the country’s exchange rate. In practice, however, the effects of both policies can be detrimental. High interest rates can undermine banks in emerging markets by forcing them to honor loans based on a devalued currency. This fiscal pressure, when applied in concert with banks’ attempts to recoup massive amounts of short-term debt, can cause these vital financial institutions to collapse. Stiglitz references Keynesian thought to remind that government spending in a developing nation is the only source of capital able to prevent market stagnation.

The Consensus also hails free trade and the opening up of domestic markets, presuming this liberalization allows a country to find its niche in the global market. However, developing nations often have nascent, uncompetitive domestic industries that are quickly overwhelmed by foreign competition, and forcing free trade on these countries only destroys domestic industry before it is able to develop fully. Additionally, such foreign investment routinely fails to deliver the promised influx of long-term capital. As Stiglitz observed in the Harvard International Review in the Spring of 2003, “Developing countries could attract firms to extract their natural wealth – provided they gave it away cheaply enough…worse still, much of the money was speculative – hot money – coming in while the going was good, but fleeing the moment matters looked less rosy.” When foreign investments disappear rapidly, nations exploited for their natural resources are left unable to foster jobs or long-term prosperity on their own. Instead, they are subject to short periods of extreme economic boom and long periods of economic slump.

Stiglitz also illustrates the dangers of rapid privatization of state industries, a transition he describes as ripe for corruption. Often, state-controlled sectors are sold to the bureaucrats who run them or to their political cronies. This practice is evident today in post-Communist Russia, where the intermingling of politics and business has led to widespread corruption. Such fraudulent privatization eliminates the supposed benefit of competition and produces windfall gains and gaping income disparity, the worst effects of capitalism. Additionally, evidence suggests that when a nation transfers a large percentage of its commerce from the public to private sector, institutions must be established to monitor new private businesses. In the U.S., a number of watchdog organizations, such as the SEC, FCC, IRS and congressional oversight committees, ensure the integrity of financial transactions; when the reach of these organizations was curtailed by the deregulation efforts that began with the Reagan administration, the major savings and loans bank failures and the Enron corruption scandals of the period were made possible. When privatization proceeds in the absence of similar institutions the result is financial anarchy, a lawless state where the wealthiest and most ruthless break laws with impunity.

The IMF’s Conditional Loans
Stiglitz’s concerns were strikingly reflected in the experience of Latin American IMF debtors. In relentless pursuit of the Consensus’ macroeconomic discipline, privatization and liberalization of trade and capital markets, originally envisioned by Williams as a viable means to promote healthy growth, the IMF tacked on coercive reformatory mandates to its loans without regard for the individual circumstances of the debtor country. The Washington Consensus’ principles became the conditions without which the IMF would withhold funding. As such, the IMF forced central banks to steeply raise interest rates, stripped states of their enterprises, recklessly opened the floodgates to foreign capital and slashed protectionist tariffs, pushing Latin American economies into crisis one by one. Such a situation is reflected today in Ecuador. A contributor to The London Observer explained on October 8, 2000, “While trying to meet the mountain of IMF obligations, Ecuador foolishly liberalized its tiny financial market, cutting local banks loose from government controls and letting private debt and interest rates explode.” The Ecuadorian administration did not want to implement additional damaging reforms, yet the small country, desperately in need of IMF loans, had no choice.

After a decade of failed attempts to spur growth through its expropriated version of the Washington Consensus, the IMF left Latin America worse off than it had found it.

Stuck in Neoliberal Ideology
The IMF continues to charge forward with its basic guiding principles grounded in the ten commandments of the Consensus. Still, the collapse of the Mexican and Argentine economies motivated a few minor shifts in IMF ideology. For example, the dangers of rapidly opening emerging markets to capital inflows are now recognized, as is the fact that countries can effectively use fiscal policy to counteract potential crises (even if this contradicts the mandate to tighten the belt on government spending). Nonetheless, the heart of the Consensus remains intact. Fiscal discipline still reigns as a primary objective; in April of this year the IMF halted a $40 million loan to Nicaragua in reaction to a series of congressional budget changes that increased the deficit. The promotion of privatization, trade liberalization and foreign direct investment also remain at the top of the list in spite of their recurrent failure upon implementation, exemplified by their chaotic effects on Bolivia. In 2003, the IMF spearheaded the privatization of Bolivia’s oil and gas industries. Then, after it called on La Paz to cut its deficit, the IMF pressured the administration to tax the citizens (by raising the income tax) as opposed to the newly arrived gas and oil companies, citing concerns over maintaining an investment atmosphere which would prove appealing to foreign investors. The advice resulted in a monetary crisis and the eventual overthrow of the Bolivian government.

Reshaping the Consensus
If the IMF, instead of applying a formulaic, rigid Consensus to developing economies, acknowledged the unique social forces at work in Latin America, it would have more successfully realized its objectives. For one, Latin American economies are interdependent, which complicates the implementation of macroeconomic policy. For example, in 1997, Argentina’s struggling peso cracked, after Brazil, Argentina’s biggest trading partner, devalued the real. Inflation and unemployment soared, and the aftershocks of Argentina’s collapse were felt all over Latin America. Importantly, the similarly inter-related countries of Europe coordinate their monetary policy through the European Central Bank, while the Latin American countries employ no such common tool; their economic policies are largely independent and self-serving. This unique characteristic of Latin American economies underlines the fact that the IMF has not been capable of bilaterally addressing individual countries’ problems in the region. Instead, it must better coordinate its economic efforts throughout the region to ensure that one nation’s policy does not compromise another nation’s development.

Furthermore, in countries such as Mexico, Venezuela and Argentina, highly organized, powerful labor unions can stand in the way of market reform. As Maria Murillo observes in Labor Unions, Partisan Coalitions and Market Reforms in Latin America, “Trade liberalization increases differences among workers across and within sectors, making it harder to organize labor unions based on horizontal solidarity…international competition and privatization also provoke labor restructuring and layoffs in sectors that had been among the most highly unionized in the past.” Given the traditional strength of many Latin American labor unions, if they are dissatisfied with developmental policy it appears that they have enough power to compromise it entirely at a moment of their own choosing. Murillo cites Venezuela, where the Venezuelan Workers’ Confederation halted activities in the entire country after President Carlos Perez instituted neoliberal reforms.

In addition, many Latin American populations are divided between the industrial “haves” and the agrarian, mostly indigenous “have-nots.” Income disparity between these two groups creates a great deal of social tension that often spills over into the economic and political realms. In Bolivia, pressure from indigenous Andean groups upset over the level of wealthy foreign multilateral investment in the natural gas sector forced then President Carlos Mesa to enact a protectionist tax on such groups in May 2005, and as was mentioned, their continued protests eventually lead to his ousting only a month later.

A New Developmental Strategy Based on Individuality
The Washington Consensus should not have spawned the contempt oft associated with its name; the advisory document is guilty only by association with the IMF. To truly aid emerging markets and break Latin America’s economic stagnancy, the Consensus, at worst, needs to be restricted to its founder’s intentions as a set of non-rigid guidelines. The IMF should revise its emerging markets developmental strategy so that it may adapt to the necessities of each nation on a case-by-case basis. If it does not, the recent Bolivian case will likely be only one in a continuing string of development failures which could bring on the IMF’s self-immolation.

This analysis was prepared by COHA Research Associates Teddy Chestnut and Anita Joseph.

July 17, 2005

For More Information:

Akkerman, Age and Teunissen Jan J. Diversity in Development: Reconsidering the Washington Consensus. Forum on Debt and Devlopment, 2004.

Bhagwati, Jagdish. In Defense of Globalization. Toronto: Oxford University Press, 2004.

Davis, Bob. “IMF Wants Further Economic Liberalization in Latin America.” Wall Street Journal. 9 February 2005.

International Monetary Fund. Common Criticisms of the IMF.
Available from Accessed 20 June 2005.

International Monetary Fund. Transcript of an Economic Forum: In Defense of Globalization.
Available from Accessed 14 June 2005.

Kanbur, Ravi. “The Strange Case of the Washington Consensus; A Brief Note on John Williamson’s ‘What Should the World Bank Think About the Washington Consensus?’” Ithaca; July 1999

Murillo, Maria Victoria. Labor Unions, Partisan Coalitions and Market Reforms in Latin America. Edinburgh: Cambridge University Press, 2001.

The Observer. Failure of the 20th Century: See Under IMF.
Available from Accessed 26 June 2005.

Scott, Alwyn. “IMF Policies Seen Firsthand in Bolivia.” The Seattle Times. 9 April 2005.

Shultz, Jim. “Deadly Consequences: The International Monetary Fund and Bolivia’s ‘Black February.’” Report from The Democracy Center. April 2005.

Stiglitz, Joseph. “Dealing with Debt: How to Reform the Global Financial System.” Harvard International Review (Spring 2003).

Stliglitz, Joseph E. Globalization and its Discontents. New York, NY: W. W. Norton and Company, 2002.

Williamson, John. “The Washington Consensus as Policy Prescription for Development.” Speech to the Practitioners of Development Seminar Series. 13 January 2004.

Williamson, John. “What Should the World Bank Think About the Washington Consensus?” Background paper to World Bank’s World Development Report 2000. July 1999.
Available from

Williamson, John. “The Washington Consensus as Policy Prescription for Development.” Speech to the Practitioners of Development Seminar Series. 13 January 2004.
Available from

Williamson, John. “What Washington Means by Policy Reform.” From Latin American Adjustment: How Much Has Happened? John Williamson, ed. Institute for International Economics. 1 March 1990. Available from

Wise, Carol and Roett, Riordan. Post-stabilization Politics in Latin America: Competition, Transition, Collapse. Washington, Brookings Institution Press, 2003.