Economic policy
Dani Rodrik (1957–)
Daron Acemogğlu (1967–)
1989 British economist John Williamson uses the term “Washington Consensus” for the first time.
2000 South African economist Nicolas van de Walle documents the failure of IMF-backed “structural adjustment” reforms in Africa.
2009 US economists Douglass North, John Wallis, and Barry Weingast propose a new approach to reform based on societies’ responses to the problem of violence.
2011 Reform packages in Europe following the 2008 financial crisis run into opposition.
Reform is designed to kick-start an economy and benefit a whole population through the transformation of institutions. One might think that reforms that benefit the economy would be welcomed and carried through. However, sometimes there is substantial resistance to reform, even from those who might eventually benefit. In order to “fix” an economy and return it to growth, it is necessary to remove the inefficiencies within the economic system. This can be difficult if the country is run by an unaccountable political class for its own benefit, as is often the case in the developing world.
Turkish economists Dani Rodrik and Daron Acemoğlu have pointed out that when powerful groups expect to see their privilege disappear as a result of economic reform, they may use their influence to introduce economic policies that redistribute income or power to themselves. Alternatively, they may distort policies so that measures are not implemented effectively. Acemoğlu has argued that this often happens when political elites are highly unaccountable, so there are limited checks and balances on their actions. Reforms typically fail in these cases because they tend not to address these deeper political constraints. However, in countries with highly accountable leaders, the benefits of reforms may already have been reaped. For these reasons reforms are most effective in “intermediate countries,” where reforms are likely to have significant and positive results, and at the same time the political elites are not dominant enough to derail them.
"Policies that work do become popular, but the time lag can be long enough for the relationship not to be exploitable by… reformers."
Dani Rodrik
However, there are also problems when introducing reform into intermediate societies. When economic reform is proposed, it is often not clear who the winners and losers of the reform will be. This discourages people from accepting the measures, even where there would ultimately be more winners than losers. There may be a bias toward maintaining the status quo; individuals like to protect what they already have and minimize the risk of losing out.
If a beneficial economic reform is proposed but shelved due to lack of popular support, politicians and economists may later propose it again in the belief that it will benefit the economy and society. However, without new, supportive information a society may well reject the measure again. On the other hand if beneficial reform is implemented despite a lack of popular support and goes on to create more winners than losers, it often goes on to gain popular support and is not repealed.
Most attempts at reform focus on measures designed to change “formal” institutions such as courts and voting systems. Their success depends on whether underlying “informal” institutions and surrounding politics support them. Without this, reforms of laws and constitutions are unlikely to change much.
Sani Abacha seized power in Nigeria in 1994. His corrupt dictatorship was above the jurisdiction of the courts, which allowed his family to appropriate more than $2.2 billion from state funds.
The term Washington Consensus was first coined in 1989 by British economist John Williamson to refer to the package of free market economic reforms prescribed to developing countries in crisis during the 1980s.
These policies aimed to move the state-run economies of Latin America and post-socialist Eastern Europe toward the privatized free market. They focused on privatization of state enterprises, liberalization of domestic and international trade, the introduction of competitive exchange rates, and balanced fiscal (tax) policies.
The Washington Consensus was discredited in the 1990s. Reforms were said to have been implemented with little sensitivity to the differing political constraints evident in such a diverse group of countries. In Africa, in particular, dynamic markets raise the poorest out of poverty.