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From Washington to Post-Washington Consensus

This chapter takes up the story of the rise of neoliberalism in the Bank from 1981. It examines how neoliberalism becomes a set of hegemonic economic principles shared between the Bank, the IMF and the US government. John Williamson labelled these commitments and policies the ‘Washington Consensus’ in 1990 and they centre on commitment to macroeconomic stability, outward orientation and domestic liberalisation.1 So, the term Washington Consensus indicates the way neoliberalism translated to the policies and programs of the Bank and distinguishes this from the broader theoretical and political movement of neoliberalism outlined in the previous chapter.

Washington Consensus prescriptions dominated Bank lending and rhetoric remarkably quickly and were uncontested until the early 1990s. However, a more substantial move away from the Washington Consensus only occurred in mid-1990s as the Bank promoted its ‘human face’ under the new president, James Wolfensohn. Over time, the Bank’s new rhetoric formed an identifiable approach to development, which has been labelled the post-Washington Consensus (PWC) to indicate both its continuities and discontinuities with the Washington Consensus. To date, scholars have not outlined the development and components of the PWC systematically. This chapter attempts to do precisely this and to identify the elements that distinguish the PWC from the Washington Consensus.

The Washington Consensus in Full Swing

The Reagan Administration appointed A. W. Clausen as Bank President in mid-1981, at one level a return to the Bank’s traditional embrace of ex-bankers but more than that, he was: “…a representative of renewed capitalist doctrine concerning the limits of

1 Ibid, p. 132.

government and the virtues of flexible, self-adjusting markets.”2 He was influenced by neo-classical economics and the associated New Political Economy, which, as outlined in the previous chapter, were increasingly dominating development theory and policy.

His presidency was the death knell for the Bank focus on poverty, though its commitment was already on the wane prior to his arrival.3

Clausen made major changes to the Bank’s research department by replacing McNamara confidants with economists focused on a new research agenda centred on unquestioned faith in ‘free markets.’4 Anne Krueger, a NPE pioneer, was appointed as the Bank’s Chief Economist.5 However, staff changes were not sweeping, so the speed at which the new doctrines permeated the Bank is a little surprising. The foundations for a shift must have already been in place — and some are identifiable. Of the hundreds of economists hired during the McNamara reign most were neo-classically trained. A 1991 survey of staff in the Bank’s Policy, Research and External Affairs branch showed 55 per cent of staff had higher degrees in economics or finance and 80 per cent of staff were trained in a handful of British and US institutions.6 Stern and Ferreira noted that training in these institutions tends to be “uniform” and, it should be added, neoclassical.7 Kapur, Lewis and Webb pointed out that the Washington Consensus suited the operational departments for whom poverty lending had been administratively complex and often not overly successful.8 Ngaire Woods makes a similar point about institutional factors — the Washington Consensus provided staff in the IMF and World Bank with a template and:

[t]he template is necessary because it guides staff working in countries all over the world, permitting them to act with the full backing of their institution and to put agreements in place with a minimum of time and resources. Put another way, staff have no incentive to venture beyond what the institution, as a whole, will take responsibility for. The result

2 Kapur, Lewis and Webb, World Bank, p. 511.

3 Ibid, p. 333.

4 Joesph Stiglitz, Globalization and Its Discontents (London: Penguin Books, 2002), p. 13.

5 Krueger’s main competition for the job, Albert Fishlow, was attacked in the Wall Street Journal for his concerns about poverty, Kapur, Lewis and Webb, World Bank, p. 339.

6 Stern and Ferreira, "The World Bank As "Intellectual Actor"," pp. 586-587.

7 Ibid, pp. 587-588.

8 Kapur, Lewis and Webb, World Bank, p. 334.

is conformity, which is entrenched by the hierarchical way in which each institution is organized.9

But management also adopted coercive techniques to ensure Washington Consensus prescriptions were adopted and promoted. For example, Bank ‘editing’ of reports became much tighter; Krueger’s Economic Research Staff did not analyse poverty; and its research program was exclusively centred on showing economic liberalisation was good policy.10 By the mid-1980s the Bank and its research economists were “…seen to be leading the charge of the neoclassical resurgence.”11

So what where the policy prescriptions of the Washington Consensus? They certainly did not utilise all the ideas of neoliberal economics because, as Woods argued, the IMF and Bank have tended to ignore “economic theories or policy prescriptions which would require greater resources or a different expertise.”12 Michel Chossudovsky has provided a useful summary of the key policies of the Washington Consensus, which were carried out in two phases: first, short-term macroeconomic stabilisation carried out quickly via

‘big bang’ reforms; and second, long-term structural change via a range of detailed microeconomic reforms. 13 A brief outline of these policies follows.

Washington Consensus Policies Phase One: Economic Stabilisation

This phase of short-term macroeconomic stabilisation is designed to control balance of payments and budgetary deficits. Implemented predominately by the IMF, key policies prescriptions include:

i. Budgetary austerity to control deficits — this demands dramatic cuts in recurrent expenditure, in particular through cuts to public sector employment, social sector programs and often investment programs as well.

9 Woods, The Globalizers, p. 63.

10 Caufield, Masters of Illusion, pp. 144-145, Kapur, Lewis and Webb, World Bank, p. 339. Indeed, there was little toleration for alternative views in the Bank from the late 1970s on and this stance hardened in the 1980s, Stern and Ferreira, "The World Bank As "Intellectual Actor"," p. 598.

11 Ibid, p. 539.

12 Woods, The Globalizers, p. 63.

13 The following section is based on Michel Chossudovsky, The Globalisation of Poverty: Impacts of IMF and World Bank Reforms (London: Zed Books, 1997), pp. 55-67. See also Kapur, Lewis and Webb, World Bank, pp. 513-518 and Toussaint, Your Money or Your Life!, pp. 141-150. For good evaluations of the Washington Consensus policies see inter alia Rapley, Understanding Development, pp. 66-93 and Toye, Dilemmas of Development.

ii. Currency devaluation, often an end to currency controls or, at minimum, multiple exchange rate policies. Interestingly, the Bank tended to promote devaluation more than the IMF as it did not share the Fund’s level of concern regarding inflation.14

iii. Price liberalisation —often referred to as ‘getting prices right’, meaning ending subsidies and price controls. This generally affects areas such as staple foods and their production, whilst at the same time prices for energy, petroleum and other public utilities are set at or higher than world market prices. This is the so-called ‘dollarisation’ of domestic prices.

Washington Consensus Phase Two Policies: Structural Reform

The IMF and World Bank implement microeconomic reform policies jointly. Key aspects are:

i. Trade liberalisation — reduction and elimination of tariffs and quotas and encouragement of an export focus.

ii. Privatisation of state owned enterprises and utilities, often linked to a program of microeconomic reform in various sectors (e.g. power, water supply and sanitation, mining, health and education).

iii. Tax reform — promoted the introduction of value-added taxes that increase the tax burden on lower and middle classes and tax breaks for targeted investment.

iv. Land “reform” — a misnomer as this essentially referred to ensuring the security and stability of private land ownership.

v. Banking deregulation — this involved detailed changed to legislation, privatisation of state-owned banks and the setting up of independent central banks. The package of changes ultimately reduced central bank control over interest rates in favour of international markets.

vi. Liberalisation of capital movements, that is the removal of foreign exchange controls.

vii. A focus on poverty alleviation and social safety nets was added in the late 1980s, the focus was on cutting overall social expenditure and selectively

‘servicing’ the poorest (a supposedly low cost, efficient approach).

14 Kapur, Lewis and Webb, World Bank, p. 514.

viii. Good governance — in the 1980s, this essentially meant the holding of multiparty elections but, in the post-Washington consensus era, it has taken on a life of its own.

Implementing the Washington Consensus

The debt crisis provided the Bank (and Fund) with greater capacity to impose Washington Consensus policies on cash-strapped developing countries.15 The debt problem had been building for a number of years but it took the Mexican default of August 1982 and the others that followed shortly thereafter for the Bank and Fund to publicly acknowledge the extent of indebtedness and crisis. The Washington Consensus policies to address the debt crisis acted explicitly to reinforce pax americana. By promoting currency devaluation, outward orientation and financial liberalisation:

[t]hus did US rentiers get their debts paid, US industry got cheaper imports of the inputs needed for production, US companies could buy up assets including privatised utilities in the country concerned, and the capital account would be liberalised so that local stock markets could be played.16

The main mechanism for promoting Washington Consensus policies was conditionality on Structural Adjustment Loans. From the middle of the 1980s, the new Sectoral Adjustment Loans (SECALs) also became popular in the Bank. Their narrower (sectoral) focus made them more effective in facilitating the Washington Consensus’s second phase micro-economic reforms than SALs. And these reforms were the Bank’s responsibility in the division of labour between it and the IMF.17 SALs and SECALs also received significant and public critical attention, yet Bank investment loans remained the dominant form of lending and were, in fact, as important a vehicle in pursuing the Washington Consensus agenda. For example, privatisation of utilities was generally pursued through investment loans.

15 This is in contrast to how the oil shocks, via the recycling of petrodollars and the creation of new donor countries, undermined the Bank’s influence especially over middle income countries, see ibid, p. 475.

16 Gowan, The Global Gamble, pp. 42 and 56-47.

17 The Bank had, virtually since its inception, included macroeconomic policy concerns in its project loans to countries. However, its real influence was often limited and its interests in policy conditionality actually declined in the 1950s in favour of a focus on projects before increasing again from the mid-1960s and substantially from the mid-1970s.On the development of policy linked lending see, Kapur, Lewis and Webb, World Bank, Chapters Nine and Ten and Mason and Asher, World Bank since Bretton Woods, Chapter Six.

SALs and SECALS disburse quickly and can be used for balance of payments difficulties or for meeting debt repayments (an area that had previously been the domain of the IMF). For those countries willing to accept adjustment loans (or with few other options), the Bank’s influence was significantly expanded and deepened.18 In 1981, SALs were around six per cent of Bank lending, by 1987-90 adjustment lending (SALs and SECALs) accounted for almost 30 per cent of lending. In 1991-93, it dropped to 20 per cent of Bank lending.19 The number of conditions on adjustment lending increased from an average of 34 in 1980-82 to 56 in 1987-90.20 At the same time as adjustment lending was increasing, overall Bank lending increased. Average annual Bank commitments grew from $5.3 billion in the period 1970-79 to $15.69 billion in 1980-89.21 This reinforced increased Bank leverage over borrowing countries.

The Reagan Administration had a quite turbulent relationship with the Bank. They were ideologically antagonistic to it yet they had appointed Clausen whose strong neoliberal views they applauded and a 1982 report they commissioned from the US Treasury on the Bank concluded that the Bank had been “…most effective in furthering our [US]

global economic and financial objectives, and thereby also serving our long-term political/ strategic objectives.”22 Nevertheless, in 1984, they decided to cut their IDA replenishment for 1985-87 by 35 per cent on the previous one. According to Bello, the Reagan Administration felt this cut would ‘encourage’ the Bank to change the eligibility for restricted IDA funding from a basis of need to one of rewarding those progressing economic restructuring.23 Despite this hardline approach, they decided to replace Clausen when his five-year term expired. His dogmatic neoliberal approach provoked such strong criticism from both NGOs and borrowers that the Bank’s capacity to play a role in promoting pax americana was reduced.24 Amongst NGOs, environmental campaigners were particularly vocal and their capacity to document Bank projects doing significant environmental harm proved quite damaging to the Bank.

18 Bello, Dark Victory, p. 27. It must be noted that non-compliance with conditions is relatively common and the Bank has not often punished it.

19 Kapur, Lewis and Webb, World Bank, pp. 517-521. In the 1970s, program lending (the forerunner of SALs) averaged 6 per cent of Bank commitments, Kapur, Lewis and Webb, World Bank, p. 487.

20 Kapur, Lewis and Webb, World Bank, p. 521.

21 Ibid, p. 6. The increase in real terms was equally substantial.

22 Cited in Bello, Kinley and Elinson, Development Debacle, p. 33.

23 Bello, Dark Victory.

24 Gowan, The Global Gamble, p. 32.

Clausen was replaced in July 1986 with veteran Republican Congressman Barber B.

Conable. His agenda was largely set by the Reagan Administration who followed their IDA funding cut with a vote against the Bank’s 1987 budget, arguing that the Bank’s bureaucracy was bloated and needed a change of direction. Clausen formed a committee to oversee a Bank reorganisation. It reported back that:

[f]irst, effective macroeconomic management and a sound policy environment have come to be, and will remain, at the heart of the development challenge… Second, successful economic development increasingly depends on being able to deal with the interdependence of problems and on the effective integration of macroeconomic and sectoral issues.”25

As George and Sabelli point out, the first point reaffirms the centrality of structural adjustment and the second point states that structural adjustment needs to occur in all sectors. In order that all of the Bank’s projects line up with adjustment programs, the report recommended reorganisation of the Bank around country programs and abandonment of some of the old cross-sectoral departments such as water or energy.26 The report also repeatedly emphasised regaining and retaining “intellectual leadership”

and thus concluded that there were not enough economists in Bank.27 The reorganisation resulted in a ten per cent reduction in staff numbers achieved by a spill of all positions. Staff selection was from the top down, which “fostered a rampant cronyism in the Bank.”28 This was a coercive project to shift the Bank’s intellectual terrain and operations towards the Washington Consensus.

Despite the strictures put on Conable’s presidency, he did re-dedicate the Bank to the fight against poverty in 1987 and the second half of the decade saw some shift back towards lending in social sectors. However, the reasons for social sector engagement were new, as even the Bank’s official history acknowledges:

[b]y engaging in social sector projects, the Bank found that, instead of simply pressing for blanket spending cuts, it was in a position to

25 Cited in George and Sabelli, Faith and Credit, p. 126, emphasis in original.

26 Ibid.

27 Ibid, p. 127.

28 Caufield, Masters of Illusion, p. 179. Further, the “…reduction in staff was short-lived: Within four years of the reorganization, the workforce was back up to six thousand,” ibid, p. 180.

discuss with and persuade sector officials of the importance of finding alternative ways to finance, allocate, and deliver those services. Social projects thus became a friendlier and more constructive way to lead borrowers by the hand towards austerity…”29

Moreover, expanding the social agenda allowed the Bank to respond to growing public pressure and critique without actually changing doctrine.30

During Conable’s tenure the debt crisis, which was a catalyst for the implementation of Washington Consensus policies, worsened — Third World debt rose from $785 billion in 1982 to $1.3 trillion in 1992. The composition also changed, with a larger portion owed to the international financial institutions than private sources.31 This change in composition was partly due to an initiative on debt from US Treasury Secretary James Baker III in 1985. The Baker Plan did not involve debt relief, rather it pushed the IMF, the World Bank and private banks to provide additional resources to debtor countries and combined this with a requirement for enhanced structural adjustment measures.32 In other words, it was a continuation, by using coercive tactics, of the Nixon Administration’s plan to ensure that US private financial operators dominated the international market.33

The 1989 Brady Plan also enhanced the Bank’s role in debt relief. This plan, proposed by Baker’s replacement Nicholas Brady, did involve some debt forgiveness. Under it, the US issued new bonds (called Brady Bonds) to be purchased by debtor countries using a combination of resources from the IMF, the World Bank, private banks and domestic resources. The Brady bonds were issued either with a discount to the original value of the loan or with a discount on the interest rates. Participation in the Plan was also conditional on further structural adjustment measures.34 In the end, only twelve countries participated in the first round of the scheme because an interest rate reduction eased the pressure on many indebted countries.35 Nevertheless, the Brady Plan

29 Kapur, Lewis and Webb, World Bank, p. 348.

30 Ibid, p. 369.

31 Bello, Dark Victory, p. 69.

32 See Christine A. Bogdanowicz-Bindert, "The Debt Crisis: The Baker Plan Revisited," Journal of Interamerican Studies and World Affairs, Vol. 28, No. 3 (1986) and Woods, The Globalizers, pp. 49-50.

33 Gowan, The Global Gamble, pp. 19-23.

34 Woods, The Globalizers, p. 52.

35 Kapur, Lewis and Webb, World Bank, pp. 657-658.

reinforced the Bank’s role in adjustment and significantly enhanced its ongoing role in debt management.36 At the same time, it expanded the Bank’s links and reliance on the US Treasury and improved US support — in other words it was a less coercively-based approach to shoring up the Bank’s role in pax americana.37

A strong neoliberal World Bank provided the US with an alternative to the UN. It helped facilitate its multi-pronged attack on the UN system, which involved weakening the overall UN system by pressure, budgetary constraints and mandate changes. In the development agencies it pushed to change the development agenda and re-focus agencies on issues of traditional concern to the North; it even pressured agencies such as the United Nations Conference on Trade, Aid and Development (UNCTAD) to wind up having “…outlived their purpose” or others such as the United Nations Development Program (UNDP) to conform to the World Bank model.38 According to Branislav Gosovic, this program was successful in removing sources of intellectual and policy challenge to the North-controlled hegemonic institutions and agenda, leaving the World Bank, by the time of the Asian Financial Crisis, the “last man standing.”39

Lewis T. Preston took over the Bank in late 1991, he was another ex-banker and was more committed to the core Washington Consensus agenda than Conable had been.40 Soon after his arrival, controversy around the Bank exploded. In December 1991, a memo from Lawrence H. Summers, Chief Economist and Vice-President for Development, was leaked. The memo commented on the 1992 edition of the Bank’s Global Economic Prospects report and the controversial comments were on section dealing with ‘dirty industries.’ In it Summers asked: “[j]ust between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the LDCs [less developed countries]?” 41 He gave three reasons: lost earnings from

“morbidity and mortality” are less in developing countries; the air quality in LDCs is

“underpolluted”; and those with most money are more choosey about their air quality

36 George and Sabelli, Faith and Credit, p. 22.

37 Gwin, "U.S. Relations with the World Bank." The US increased its IDA replenishment after a large cut in the early 1980s and it supported a proposal to double the IBRD’s capital, with the requirement that the US veto be maintained, Peet, Unholy Trinity, p. 126. This resulted in an amendment to the Bank’s articles, which was discussed in Chapter Two.

38 Gosovic, "Global Intellectual Hegemony," pp. 453-454.

39 Ibid, p. 448.

40 Kapur, Lewis and Webb, World Bank, p. 371.

41 Cited in George and Sabelli, Faith and Credit, p. 98, emphasis in original.