Brazil is facing a financial crisis as the October presidential elections approach. Argentina has already gone down in smoke. Colombia is in the throes of civil unrest. Venezuela is governed by a populist with his own peculiar views on economics. Indeed, there are really only two countries – Chile and Mexico – which can be said to have succeeded in free market reforms. Each had the ‘benefit’ of being run until quite recently by powerful autocrats whose word was law. But the immediate conclusion drawn by many, that the Washington Consensus of free market reforms are a dead letter, is wrong for two simple reasons.
To begin with, the Washington Consensus is nothing more than sound economics. It is a fact that government controls, a large public sector and protectionist trade policies raise living standards slowly, are inefficient and spread corruption. Latin America, which indulged in such “import substitution” policies in the second half of the 20th century, had to abandon these plans when governments ran out of money to keep subsidizing their wasteful industrialization programs. Free markets, sound regulation, low taxes, effective health and education policies and free trade have been proved time and again to be the best way to erase poverty and deliver high growth rates. That is why Chile, once so backward is now a wealthier country than neighboring Argentina, which was once so rich.
So why has growth and development been so disappointing in recent years as country after country adopted free market policies? Governments generally did well in the first phase of reforms, but faltered later. Politicians liked privatizations because they generated lots of money to fund spending and allowed them to skim some of the money from sales into their pockets. Little was done on less glamorous second and third generation reforms, which are harder and less popular to execute. These include improving the quality and effectiveness of public spending, deregulation and the creation of independent regulatory agencies for privatized utilities, new rules for the labor market and capital market reforms, not to mention a general overhaul of the civil service and judiciary.
It is a long list and no country anywhere has completed all stages satisfactorily. Those that have advanced the most, and have ensured policy continuity over the years and decades, have succeeded brilliantly in raising millions of people out of abject poverty. Long Live the Washington Consensus!