Stabilise, liberalise, privatise
Poor countries are poor because prices are distorted by their own governments, so the sequence is to close the fiscal gap, let prices find their level, open to trade and investment, and get the state out of production.
John Williamson · Credits and sources ↓
What it says
Williamson's paper listed ten policy changes that the IMF, the World Bank, the US Treasury and the relevant think tanks agreed on in 1989: fiscal discipline, public spending redirected towards health, education and infrastructure, a broader tax base with lower marginal rates, market interest rates, a competitive exchange rate, trade liberalisation, openness to foreign direct investment, privatisation, deregulation, and secure property rights. He meant it as reportage.
The theory behind the list is that a poor country's problem is self-inflicted. Overvalued currencies tax exporters, licensing creates rents worth more than production, subsidised credit goes to whoever is politically connected, and loss-making public firms absorb the investment the private sector cannot get. None of this requires a colonial explanation or a structural one. It requires a government to stop.
The mechanism that made the list into policy was lending. Structural adjustment loans, introduced by the World Bank at the start of the 1980s and extended through the debt crisis, made finance conditional on the reforms, so a country that could not pay its creditors adopted the programme as the price of being able to. That is how a description of an intellectual agreement became a condition on the balance of payments of most of Latin America and Africa.
Two decades later the same institutions were writing about institutions, governance and sequencing, and Dani Rodrik counted the augmented list at around twenty items. The list had grown to include most of what a rich country has, which is another way of saying it had stopped being a policy programme.
Drawn one step at a time
The theory as a graph, revealed a layer at a time. Use the buttons, or the left and right arrow keys. Each step adds the boxes that step introduces and the arrows into them.
- Starting condition
- Mechanism
- Outcome or policy
Four placements, and the reason for each
The four scores are editorial. They run from -3 to +3, they were assigned by the ImpactMojo editorial team from the theory's own texts, and each theory page shows the sentence that justifies its placement so the placement can be argued with. They are a way of arranging a shelf, not a measurement.
As far towards markets as the shelf goes. The whole diagnosis is that allocation by administrative decision is the disease.
Growth first, with the safety net treated as a separate compensating instrument rather than as part of the growth strategy.
Absent entirely. The model has a representative agent facing prices, and caste, gender and race enter nowhere in the ten items.
Finance ministries, central banks and the international financial institutions, which is why the programme survived so many governments that had campaigned against it.
The theory against the record
Each entry takes one claim the theory makes and reports what the evidence says about it, with a named source and a year. This section is the reason the library exists; a catalogue of positions without it is a reading list.
The claim Countries that adopted the reforms grew faster.
William Easterly compared the two periods directly and found that median per capita growth in developing countries was around zero from 1980 to 1998, against roughly two and a half per cent from 1960 to 1979, and that this happened despite measurable improvement on the policy indicators the reforms targeted. His title called them the lost decades. The finding does not show the reforms caused the stagnation, since the debt crisis and the terms of trade were doing damage of their own, but it does rule out the strong version of the claim.
William Easterly, 'The Lost Decades', Journal of Economic Growth · 2001
The claim The list was the complete set of what a country needed.
By the mid-2000s the institutions had added financial regulation, corporate governance, anti-corruption, labour market flexibility, targeted poverty reduction, central bank independence and more. Dani Rodrik's count put the augmented list at about twenty items and made the obvious objection: a reform agenda that requires a country to already have the institutions of a rich country is not a route to becoming one.
Dani Rodrik, 'Goodbye Washington Consensus, Hello Washington Confusion?', Journal of Economic Literature · 2006
The claim India's growth acceleration came from the 1991 reforms.
Contested by the people best placed to know. Dani Rodrik and Arvind Subramanian dated the structural break in Indian growth to around 1980, more than a decade before the reforms, and attributed it to an earlier and quieter shift in the government's attitude towards existing business rather than to liberalisation. The reforms of 1991 were real and large, and the growth transition appears to have started before them.
Dani Rodrik and Arvind Subramanian, 'From "Hindu Growth" to Productivity Surge', IMF Staff Papers · 2005
The claim Openness produces labour-intensive export growth in a labour-abundant country.
Not in India. Manufacturing's share of employment did not rise appreciably after 1991, and India's export growth came disproportionately from services and from capital-intensive and skill-intensive goods rather than from the labour-intensive sectors the theory points to. The reason is disputed, with labour regulation, infrastructure, scale and the timing of China's entry all defended.
Annual Survey of Industries and Periodic Labour Force Survey, MoSPI · 2019
What this does not settle
Which item on the list did the work is still open, and it matters, because the list was adopted as a package and evaluated as a package. Macroeconomic stabilisation has held up well; almost nobody now defends an overvalued exchange rate or an unfinanced deficit. Rapid trade liberalisation and privatisation have held up much less well, and the sequencing question that Williamson's list did not address, what to open and in what order, is where the argument has moved. The strongest surviving claim is negative: the controls the reforms dismantled had generated constituencies that defended them long after their economic case had gone, which is a proposition Bardhan had made about India from the other side of the political argument.
How it landed here
India ran the programme in July 1991 under external duress, with reserves down to a few weeks of imports, and did it faster than the theory recommends in some parts and far slower in others. Industrial licensing went almost at once, the list of industries reserved for the public sector shrank, and tariffs came down over the decade. Labour law, land, agricultural markets and the public sector banks were not touched, which is why arguments about the reforms in India are usually arguments about the half that did not happen.
One that agrees, one that does not
Institutions as the fundamental cause
The successor argument inside the same institutions: when prices alone did not deliver, the explanation moved to the rules behind the prices.
Planning for the capital goods sector
The same country, the same instruments, opposite signs. Licensing, public ownership and import controls are what one built and the other dismantled.
Whose theory this is
John Williamson 1937–2021
British economist at the Institute for International Economics who wrote the list in 1989 as a description of what Washington already agreed on, and spent the next thirty years objecting that the phrase had been taken to mean something more doctrinaire than his ten items.
What ImpactMojo added
The causal diagram, the four placements and the notes justifying them, and the evidence section: what each claim predicted and what the record shows, with a named source and year for every entry.
ImpactMojo · content CC BY-NC-ND 4.0 · code MIT
Start with these
- John Williamson, What Washington Means by Policy Reform (1990). The ten items, in the author's words, with his own reservations already attached.
- Dani Rodrik, Goodbye Washington Consensus, Hello Washington Confusion? (2006). The review that counted the augmented list and asked what a twenty-item reform agenda is for.
- William Easterly, The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform (2001). The growth comparison, by an economist who was at the World Bank while it happened.
Open access, in Development Discourses:
- Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s — Dani Rodrik (2006)
- Economic Reform and the Process of Global Integration — Jeffrey D. Sachs, Andrew Warner (1995)
- Misallocation and Manufacturing TFP in China and India — Chang-Tai Hsieh, Peter J. Klenow (2009)