Washington consensus and financial liberalization

Abstract

The aim of this contribution is not to assess the overall performance of the Washington Consensus. It is, rather, to look critically at the Washington Consensus from the point of view of interest rate liberalization. Not only is the theoretical angle of financial liberalization discussed in this contribution, but the empirical side will also be appraised. The paper argues that from this perspective, the Washington Consensus has been a failure. Based on this assessment, the paper also evaluates the "revised" Washington Consensus, always from the financial liberalization perspective. The latter argues for completing the "first-generation" liberalizing reforms, which, of course, include the financial liberalization point of view. In this regard, the paper concludes that both the Washington Consensus and the "revised" Washington Consensus are not very promising. This conclusion is pertinent despite the concession by the Washington Consensus/"revised" Washington Consensus supporters that two important prerequisites of "early"--that is, the 1970s--financial liberalization attempts were not mentioned initially when proposing the initial "ten commandments" of the Washington Consensus. These two prerequisites were: sequencing in financial liberalization policies, where capital flows should follow the establishment of liberalized and robust domestic financial systems, and institutional preconditions, where sound financial institutions should be in place before financial liberalization is introduced. As shown in this contribution, the problematic nature of the financial liberalization aspect of Washington Consensus/"revised" Washington Consensus is by far deeper and more serious than the two preconditions alluded to in Williamson (2004-5). In fact, the evidence of the past 30 years or so demonstrates that the implementation of the 10 commandments of the Washington Consensus has proved to be a disaster for developing and other countries that pursue the Washington Consensus-type of policies. Our critique, therefore, of the Washington Consensus/"revised" Washington Consensus is based both on the theoretical underpinnings of the financial liberalization thesis and on the experience with the implementation of these policies in a number of countries.