Suppose a minister preaches thrift, honesty, sobriety and hard work. Then he is seen knocking down shots with some floozy at a horse-track bar after losing the Sunday collection on the fifth race.
His flock may think him a hypocrite. But that doesn’t mean their lives will improve if they all quit their jobs, empty their 401(k)s and pick up a couple of cases of Scotch on their way to a casino.
Similarly, the “Washington Consensus” on sound economic policies for developing countries is taking a beating lately as the United States, in frantic efforts to stem a financial crisis, has violated many of its recommendations.
This doesn’t mean the consensus is a set of bad ideas. Rather, it shows even wealthy nations get into trouble when they forsake good sense.
The term “Washington Consensus” goes back to 1989, when John Williamson, an economist at the Institute for International Economics, coined the term to refer to a set of economic policies recommended by the U.S. Treasury, the International Monetary Fund and the World Bank.
These recommendations, aimed particularly at developing countries, included balanced budgets, moderate growth of the money supply to limit inflation, lower trade barriers, market-determined exchange rates and little government ownership of industry or banking.
Some saw them as a reaction to chronic problems in Latin America that brought Mexico, Brazil, Argentina, Peru and other nations hyperinflation and to the brink of economic collapse.
No international organization has the authority to tell nations how to run their economies. But lenders always can place conditions on granting loans. So nations that approached the World Bank for development assistance or the IMF for emergency aid during financial crises had to toe the line, even though the United States and Europe frequently ignored the very policies they recommended to others.
Developing nations complained that most rich nations let their own money supplies grow too fast, causing inflation during the 1970s, and pointed to enormous budget deficits during the Reagan and George H.W. Bush administrations. They also pointed to ways the big nations had colluded to influence exchange rates, and they correctly noted that U.S. and European agricultural subsidies distorted trade as much as their own import restrictions.
Things came to a head in 1997 as several Asian nations experiencing financial crises sought help from the IMF and the United States. The IMF made help conditional on recipients adopting policies that pretty much followed the “consensus,” including government spending cuts, even where budget problems were not to blame.
Criticism of this approach came from many sides, but Joseph Stiglitz, then chief economist at the World Bank, was particularly outspoken. (Stiglitz would win the Nobel Prize in 2001 and now is a prominent supporter of president-elect Barack Obama.) His dissent led to his effective dismissal in 1999.
But the crisis ebbed, and the debate died away — at least until the global financial meltdown of recent weeks.
With the United States and other nations nationalizing banks and institutions like Fannie Mae while their central banks bulldozed money out the door, and the U.S. federal budget deficit exploding, criticism from leaders of countries who were forced to toe the line a decade ago has become a swelling chorus.
The criticism largely is misdirected. Yes, some distorted the Washington Consensus into free-market fundamentalism. Yes, the U.S., the United Kingdom, the Netherlands and other wealthy nations are hypocrites.
But that does not mean, for example, that huge increases to the national debt and the money supply are good ideas. Our country is in crisis precisely because we did these stupid things. The depth and duration of the crisis will be driven in large part by how long we persist in our stupidity.
Moreover, Fed and Treasury measures to stem the crisis are by no means good policy. They are bad policies that may cause long-term problems. But they probably are less bad than doing nothing.
When the United States and European Union emerge from this debacle, they should be sadder and wiser. That should include admitting that prudence in economic policy applies to themselves as well as others. It should not mean an agreement to reject prudence altogether.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.