History of Washington Consensus

The Washington Consensus was initially designed by John Williamson. The Consensus consisted of a set of ten economic policies as listed below.

  1. It recommended the introduction of fiscal discipline among all the debt wrecked countries. The economy of the developing countries suffered largely because of the huge debts. This created huge deficits in the BOP of such countries, ultimately leading to inflation. Hence, it is extremely necessary to establish fiscal discipline.
  2. The consensus recommended in shifting the public expenditure from non-merit subsidies to the development of infrastructure of the basic requirements like health and education. The expenditure cuts that were recommended were meant to give the public sector an affordable size in these economies.
  3. There was a recommendation for the revision of the tax system. It aimed at making a tax system that will be a combination of moderate marginal tax rates and a broad tax base.
  4. It prescribed the liberalization of interest rates. The liberalization of interest rates will be done by allowing the interest rate to be determined by the market forces.
  5. It recommended the use of a competitive exchange rate. A sufficiently competitive level of the exchange rate is expected to encourage rapid growth in non-traditional exports.
  6. The most important recommendation was trade liberalization. The consensus expected that trade liberalization can be brought about by replacing the quantity barriers with lofty tariffs. The high tariffs will be collected as rent and will directly help the government. Secondly, this replacement will allow enhancement in the import quantities.
  7. Entry barriers for foreign investors should be encouraged. This will give way to the FDI in the economy of the developing countries. It is believed that the flow of FDI is more reliable and stable than bank loans and portfolio capital. Hence, investment incentives through foreign direct investment should prove economically healthy for the Asian crisis. &nbsp.