The washington consensus

Essentially, the economic policies and recommendations adopted by the financial institution are aimed at a free market in the identified countries. They consensus run on the ideology that for an economy to recover from depression and start developing again, state intervention should be reduced or eliminated. Furthermore, many of the developing countries are faced with huge debts crisis. For instance, during 1980s many countries had plunged into the debt crisis, and therefore, the United States and other western countries decided the IMF and World Bank should be involved in developing the global economic policies. Although the key players were from the United States and this explains why it was referred to as the “Washington consensus” in spite of its broad economic approach to uplift the developing countries.

com, 2019). Other who belong to a different school of thought about the scope believe that even the policies imposed may seem harsh but in the long run, creates an avenue for economic development unlike if the policies were absent. The IMF scope comprises of ten principles or pillar that guide policy formulation and implementation towards the achievement of the free market in developing countries (Stiglitz, 1998). These principles form the key pillars of the consensus, and they help the IMF to create free markets in developing countries through trade liberalization hence appropriate. They include; Reduced borrowing by the government – most Latina American countries had huge price instability that had been undermined by the high budget deficits in the respective countries. Therefore, to attain liberalization, the economy should let the market forces to resolve the intertie rates instead of the government determining the people who get credit and what interest rates.

Promotion of competitive exchange – trade liberalization needs to start by the elimination of quantitative restrictions and replacing them with tariffs to channel the rent to the government coffers instead of the pockets of the importers. Besides, it allows an expansion of quantities to be imported whenever a need for more products arises. Essentially, the consensus eliminates tariffs and replaces them with uniformly low tariffs of between 10% to 20% Implementation of free trade policies – the overall consensus aim is to create a free economy; one that is not governed by government intervention of restrictions. Hence to achieve this, the country needs to abolish all policies and regulations that hinder free trade. Economic analysts allege that the depression occurred due to wrong application of the Washington consensus developed by the financial institution based in the United States.

Among the countries that have adopted the Washington consensus pillars, Argentina tops the list in terms of devastation that the IMF scope caused (Rodrik, 2006). The deputy foreign ministers when interviewed later in 2005 accused the financial institution of having confused in the country rather than the consensus that would have brought about economic recovery. The results of the consensus form from Argentina made many nations in the northern hemisphere to reconsider their stand on the best economic model that spurs growth and development in the economy. They wanted a model that could create employment and generate wealth for the nation, and evidently, the consensus was not going to provide that. The crisis enables the consensus to make reforms in its policies, regulations, and procedure that govern the implementation of its key principles.

The changes done were in areas like crisis management, the process of decision making, surveillance and design of the program. Argentina’s former president, Nestor Kirchner made significant success in the economy by adopting the use of Washington consensus. However, he relied on an administrative measure like price controls that were not in line with the spirit of the consensus. His regime ran on extremely tight fiscal controls and also maintained floating highly competitive exchange rates. Thus, the IMF only came in to help mitigate the crisis and in the end shouldered the crisis results which were a consequence of the economic disorder that it came in to solve (Lin, 2015). Reports indicate that the highest loss in output experienced in the country happened before 1994 when the Washington consensus entered the country.

In essence, many of the misfortunes that happened in the country cannot be blamed on the IMF intervention. The demonetization of the economy occurred from 1992 to 1993 causing the demand for money decrease and the money stocks to collapse significantly (Kolodko, 1999). This was due to the introduction of the monetary and fiscal policies that were lax. All the challenges were structural and pervasive hence macroeconomic policies advocated by IMF could not adequately solve them as per the expectation. Theoretical analysis of the AD-AS Model In the developing countries, the international monetary fund steps in to intervene when the economy is collapsing. The collapse is usually as a result of fiscal; and lax monetary policies, the level of output decreasing tremendously, lack of effective resource employment to achieve growth and increased demand for products.

Therefore, the increased aggregate demand for products and services exceeds the aggregate supply of the same (Romer, 2000). The situation results in demand-pull inflation in the economy whereby the rate of inflation is very high. The reforms were basically in areas like trade taxation, foreign exchange rates, labour, liberalization, and privatization of government institutions (Birdsall, Caicedo and De la Torre, 2010). Notably, these structural reforms lost their meaning and momentum at the beginning of 2000. The main aim of the reforms was economic stabilization, and it was measured on a scale or 0 to 9 as shown below. Figure 1: Latin America reforms index. During this period the countries witnessed success in the monetary reforms in fiscal reforms. Figure 5: Latin America Capital Reforms implementation The figure above represents how the reforms relied much on capital inflows from foreign markets that had appreciation pressures.

The situation undermined competitions in exports that did not involve exports. Furthermore, modernized supervisory and regulatory for the markets adversely affected liberalization resulted in systemic vulnerability. Macro indicators In an economy that is characterized by demand-pull inflation, there various macroeconomic indicators that usually in play. First, the exchange rate, a reduction in the exchange rates of the nation causes a rise in import prices hence reduces the export prices. Essentially, the perceived failure of the Consensus is due to the economic disorders in the alleged countries that existed before the IMF ventured into the country. Conclusion In conclusion, the Washington consensus represents the dominant ideas used by the international monetary fund to drive economic development in those countries. It runs on three key aspects that support its ten pillars; market economy, discipline and openness of the country to the world.

However, one policy fits all strategy has proved disastrous since the IMF has failed miserably to infuse development in some of the counties, for instance, Argentina, Mexico, Russia, and Brazil. The failure has led some countries to believe that emerging economies need to formulate their development policies to foster growth in the economy. Rev. Am. , 15, p. Gore, C. The rise and fall of the Washington Consensus as a paradigm for developing countries.  Institute for International Economics. Williamson, J. Democracy and the "Washington consensus. " World development, 21(8), pp. Kolodko, G.  Review of International Political Economy, 21(1), pp. Plehwe, D. Transnational discourse coalitions and monetary policy: Argentina and the limited powers of the ‘Washington Consensus’.  Critical Policy Studies, 5(2), pp. Jilberto, A. The Initiative for Policy Dialogue, pp.