John Williamson, a prominent economist, passed away last month leaving a legacy that included a description of what has become the equivalent for economic policy of the Ten Commandments.
With its support for fiscal discipline, privatisation, and deregulation, the Washington Consensus enraged the left and its very title has meant its implementation came to be seen as an imposed foreign solution. Yet today the technocrats in most of the world’s central banks and finance departments see the Washington Consensus as sensible policy.
The Washington Consensus and South Africa
In post-1994 South Africa, until President Jacob Zuma came to power, the country was doing well on most of the ten points, although it never sought to deliberately pursue the Washington Consensus by name. Due to Reserve Bank independence, inflation targeting, and tough supervision, South Africa did well in adhering to the financial precepts of the Consensus.
Under President Cyril Ramaphosa, the signs are that priorities lie elsewhere. Trudi Makhaya, the President’s economic advisor, made it clear in an article in Business Day last week, without much in the way of definition or specifics, that the cornerstone of government economic policy are the principles of Ubuntu, and the President’s Economic Reconstruction and Recovery Plan, rather than Washington Consensus-type policies.
In his initial description, Williamson said that the World Bank, the International Monetary Fund, the economic think tanks based in Washington DC, and the US Treasury were largely agreed that Latin American countries should use ten policy tools to grow and develop.
These are the initial ten policy tools and an assessment of how South Africa has performed on them:
- Fiscal discipline with low budget deficits to prevent high inflation and balance of payments crises: In 2007/08, South Africa ran a government budget surplus. With the expansionary spending policies of President Jacob Zuma, fiscal discipline ended, and corruption, way-above-inflation pay settlements for public servants, bail-outs of failing state enterprises, and growing debt service has meant rising deficits. In any credible rating South Africa would currently receive a failing grade in this area.
- Public expenditure priorities to ensure pro-growth and pro-poor spending, along with basic health and education: This is met in principle, but not in practice. South Africa commits sizeable proportions of spending to health and education, but the outcomes in these areas are poor. As it is outcomes that matter, South Africa receives another failing grade.
- Tax reform to ensure a wide tax base at moderate marginal levels: A heavy burden falls on the wealthiest taxpayers in the country. In addition, taxpayers pay the double tax of having to spend additional amounts on health, education, and security due to poor public service. In the latest budget, taxes were not raised as the fiscus received a surprise windfall despite the lockdown. A C in this area would seem appropriate.
- The liberalisation of interest rates was Williamson’s initial label, but more broadly this was described as financial liberalization, in not overly restricting the activities and pricing of the banks, but all carried out with appropriate supervision: These functions largely fall under the Reserve Bank, and an A is deserved.
- A competitive exchange rate to ensure that it is not overvalued or undervalued through either a free float or occasional fixing: The Rand is free-floating and there has been no evidence of any direct intervention to support the Rand. The currency is undervalued on a purchasing power parity basis. On this, the Reserve Bank gets an A.
- Trade liberalisation to open markets: Almost immediately after 1994, the country lowered tariffs, but it seems that the Trade and Industry Minister, Ebrahim Patel, is intent on erecting trade barriers to build “localisation” of manufacturing activity in South Africa. So the country might be headed towards an F in this area, after a long period with an A.
- Liberalisation of inward direct investment as some Latin American countries placed restrictions on foreign ownership to prevent competition with local companies: South Africa has always sought to encourage foreign direct investment but has failed to become a global destination for this. This is partly due to the small size of the Southern African market, but also due to lack of competitiveness, skills shortages, militant unions, and perceptions of political risk. The country could do a lot more if it got other policies right, but its overall score would be in the range of a C.
- Privatisation of state-owned companies: Soon after 1994, the Mandela government considered privatisation, and sold off Telkom and a few small state-owned enterprises. No other sales have taken place since, and with endless bailouts, government receives an F on this.
- Deregulation to ease barriers to entry to firms: South African industry is still concentrated and large firms have considerable advantages over smaller ones wishing to gain market share. The Competition Commission has helped, but the demands of BEE make life difficult for small companies.
- Enforcement of property rights: Property rights are so basic for a private business to survive and thrive that the inclusion of this is a statement of the obvious. With increasing threats to private property through policies such as Expropriation without Compensation, the government will be heading toward an F on this.
Later versions
In later iterations of the consensus, Williamson added measures to better crisis-proof countries against financial crises by strengthening the banking system, building institutions, and creating jobs. The ‘Augmented’ Washington Consensus consists of:
- Corporate governance;
- Flexible labour markets;
- World Trade Organisation agreements;
- Financial Codes and Standards;
- Prudent capital account opening;
- Non-intermediate exchange rate regimes;
- Independent central banks/inflation targeting;
- Social safety nets; and
- Targeted poverty reduction
South Africa does well on most of these areas, but performs disastrously on labour market flexibility. This is due to wage settlements being imposed by big firms and unions on smaller firms who are then not in a position to take on more labour. High unemployment undermines poverty reduction and means more must be spent on social safety nets.
Williamson believed the criticism from the left was a perversion of what the Consensus was about and an underhand means of thwarting economic reform. He insisted the edicts were not about minimal government, low taxes, tight monetary policy and pointed out that the consensus did not include the ‘cranky’ right wing.
Countries need to own their own reform programs, and having Washington in the description of their policies does not help. The Washington Consensus gives a list of policy areas but says nothing about implementation. That is the tricky part left to technocrats and, crucially, politicians.
While success might have been slow in coming, those countries that pursued Washington Consensus policies have enjoyed far stronger growth and greater poverty reduction than countries which have failed to do so. One study found that countries that carried out reform in the period 1970 to 2015 had a 16 percent higher real per capital GDP after ten years, compared to countries pursuing populist policies. The populist countries of Latin America, such as Venezuela, Nicaragua, and Bolivia were, as a group, twenty percent poorer than reform countries. That is why the Washington Consensus won.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
If you like what you have just read, support the Daily Friend
Image by Malachi Witt from Pixabay