A Post Keynesian View of the Washington Consensus and How to Improve It

John Williamson coined the term “Washington Consensus” in 1989. This term, however, means different things to different people1 — and apparently even different things to Williamson at different times. Williamson (2002) states that this consensus requires ten reforms: 1. Fiscal Discipline. This was in the context of a region where almost all the countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad. 2. Reordering Public Expenditure Priorities. ... from things like indiscriminate subsidies to basic health and education. 3. Tax reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates. 4. Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, and stressed that views differed on how fast it should be achieved.2 5. A Competitive Exchange Rate. I fear I indulged in wishful thinking in asserting that there was a consensus in favor of ensuring that the exchange rate would be competitive, which implies an intermediate regime; in fact Washington was already beginning to subscribe to the two-corner doctrine. (Williamson has championed the establishment of FEER [a Fundamental Equilibrium Exchange Rate] target zone for the exchange rate, i.e., a zone based on a fixed competitive rate plus or minus ten percent. He has argued that FEER would simultaneously achieve internal and external balance.3)