Whither the Washington Consensus

01 March 2000
Article

1.Whither the Washington Consensus? It is fair to say it is withering, with apologies to non-English speakers who may not follow this play on words. (Whither with an "h" asks where; wither without the "h" signifies decay). The Washington Consensus, however, is only in a very early state of fragmentation, a fraying of its force at the edges without really any significant challenge to its core principles, at least among opinion leaders and policy makers in the United States. Both major political parties support the consensus wholeheartedly. With rare exceptions, such as the former chief economist of the World Bank, Joseph Stiglitz, all those with access to the media and opinion formation look upon dissenters as strayers from the fold of free trade, closet protectionists at best, and at worst proponents of a return to some dreaded world that is characterized as revanchist, reactionary, and that most damning epithet of all: populist. Nevertheless, we can mark the century's turning as the beginning of the decline of the Washington Consensus.

2. What is the Washington Consensus? Or more precisely: How does the Washington Consensus differ from a more general deference to markets in an economy that predates this 1990s phrase? It differs in three ways.

First, it appears at the end of the Cold War and carries with it a sense of triumphalism that adds a dimension of hubris - a celebratory lap around the track after a victory in the marathon that lends an air of ideological certainty to what had previously been one of assurance but tempered by restraint.

Coupled with the apogee of globalization that had started some two decades before, the Washington Consensus secondly extended the affirmation of markets beyond the economy to a wider range of society's dimensions and to all societies, those in transition from central planning and to those in transition from etatist modes of economic organization. Markets became not just one of several instruments to achieve economic and social objectives but the only instrument. They became transcendent, over-riding boundaries established by the political process, answerable neither to a public through the political process nor to civil society. Markets set the rules and enforced them, as if a football match was played by the rules set by the players and the referees answered to the players not to an independent authority. It is this transcendence of markets, its application beyond what had previously been defined as the limits of its jurisdiction to non-economic aspects of society, and the absence of a "neutral" refereeing process that separates the 1990s version of markets from its predecessors.

Thirdly, the place where this appeared most aggressively, and in a form that can be described as bordering on revolutionary, was in the international economy of trade, investment, and finance. Here markets began to tear down what had been defined borders, regulated by states in a blend of market and political forces. The free trade argument directly and concretely challenged the authority of countries to regulate their borders, evoking a confrontation between nation states and markets, where the market position was represented by the Washington Consensus. It is not surprising, therefore, that the manifest clash between the Washington Consensus and its doubters has occurred in the World Trade Organization (WTO), precisely in this arena where a new globalization has organized the world economy around markets and by extension imposed that organization inside countries.

The newly framed argument of "free trade" - which differed from the way this term had been used since the first quarter of the nineteenth century - was used to pry loose from a blended regulation of markets and governments not only the movement of goods and services, but capital movements, intangible intellectual property such as patents and trademarks, and the movement of money and finance. Encouraged by technological transformations in information systems, communications, and transport, the carrying capacity of an open and publically unregulated global economy was offered as a solution to virtually every economic and social problem that existed and in virtually every type of economy, those in transition, newly industrializing economies, the poorest or the poor, as well as the most advanced industrial economies.

The Washington Consensus comprised all of these dimensions: a post-cold war organizing principal, its transcendent and exclusive reach into nearly all dimensions of economy and society, and its application in an open global economy to carry all the weight of economic reform and vitality.

3. Lest there be any doubt about my views on trade, let me say that I am a supporter of free trade in the historical use of this term and in its first principles. Indeed, as I will argue later, I assert that I am more of a free trader than those who have appropriated this concept, because I believe that all internal markets must be "free", including labor as well as capital markets, in order to obtain the optimal and equitable benefits from exchanges in external markets.

A large measure of the problem in the debate over free trade as presently conceived derives from the particular connotation given to the word "free," a specific meaning that goes beyond its original 19th century usage and that in vogue throughout most of this century. We suffer from a paucity of language. If one is not a free trader, you must be a protectionist. Not so. There are numerous shadings in between these polar positions in which supporters of trade legitimately reside. It would be useful if we could get beyond a rigid terminology that inhibits rather than stimulates debate. As a start I propose using open trade as a governing principal.

Much the same applies to globalization. I am a defender and supporter of what has come to be known as globalization, but not an unqualified one. Genuine discourse lies not in defending an extreme position, for or against globalization, but in working out the numerous and complex arrangements that govern such a far-reaching institutional transformation. The Washington Consensus, as a representative of globalization and open trade, likewise has considerable merits. One only has to live in an economy that has not become part of the international system to realize how limiting that arrangement can be. The problem lies in the added evangelical and missionary dimension that surrounds much of the Washington Consensus advocacy, a new secular orthodoxy which deflects attention from the merits and demerits of its case.

4. The Washington Consensus became controversial because it confronted the mid-20th century social contract in the advanced industrial countries and challenged autonomous paths to development in the Third World. This challenge was in part a set of conscious decisions but also was motivated by the technological and institutional changes that fall under the rubric of globalization. The extent to which it was independently driven by a new political ideology and the extent to which it responded to technological and institutional transformations can be legitimately debated. Rather than enter this debate, however, I prefer to say that the response by the political process to globalization could have taken many turns and was not predetermined.

Not only does globalization confront the mid-20th century social contract and autonomous paths to development, but it erodes the importance of the nation state, thereby taking on national systems of social organization and national culture. In this way it is a revolutionary process that evokes, understandably, sharp resistance. There is a tension between the unbounded global reach of markets and the bounded territorial jurisdiction of nation states. The new globalization in every way punctures the bounded space of the nation state and sets up a conflict over sovereignty. It establishes an alternative source of reference to that of the national governing political process. The Washington Consensus lent political muscle to market challenges to the nation state through international financial institutions and, most important of all, through the newly inaugurated World Trade Organization in the mid-1990s. It ratified events on the ground that had been forged out of institutional, structural, and technological transformative forces of the past quarter century.

The imagery that had been erected in the half millennium since the advent of the nation state is one of verticality, a series of vertical borders that figuratively separated one country form another. The essence of globalization is a set of horizontal functional intrusions that cut swaths through borders. First financial markets penetrated "vertical" borders, then increased trade fostered by a radical reduction in transportation costs, then foreign investment. Outside of the economic realm, culture was next, environmental and ecological overlaps, crime, the movement of larger numbers of people through legal and illegal immigration, information and telecommunications. In each of these realms the assault on national borders was nothing new. As Fernand Braudel and the Annales school argues all of this had been going on since the beginning of history. But what was new was the scale, the scope, the rapidity of movement, the shrinkage of time and space. It is as if a block of Swiss cheese stood in for the nation state and small holes previously had permeated its mass. The functional incursion of globalization makes the holes ever larger so that at the end they are much larger than the mass, threatening the stability and structural soundness of the mass itself. When that happens a threat of collapse and implosion is imminent. This is the fear that motivated an ill-formed language of dissent, one that tried to find a voice for saying enough, a pause is needed to take stock of where we are and what can be done to absorb and assimilate change.

5. The Washington Consensus predates the 1990s but emerges at that time with a clear and concise agenda. Its roots go back to the 1980s and the movements for deregulation and privatization, and earlier to the 1970s with the breakdown of the Bretton Woods system and its replacement by freely floating exchange rates and unregulated international financial markets. Applied to the Third World, the foreshadowing of structural adjustment can be found as early as the late-1970s experimentation by the IMF with conditional lending to cover emerging Third World debts.

The trajectory of the development of a clearly defined position such as the Washington Consensus follows other long waves in the development of ideas that shape epochs. Looking back historically, there are long cycles in the development of ideas that typically lag technological and structural changes by perhaps as much as a quarter century. Technological and organization changes that emerged in the second half of the nineteenth century, for example, only found their ideological construction at the turn of the century. Economies became dominated by large scale enterprises - trusts in the United States and cartels in Europe - that organized capital markets on a national basis, from border to border. It took about a half century, in roughly 25-year intervals, for the evolution of the 20th century's economic and social theory to be framed for this structure and subsequently challenged. From the turn of the century onward about another quarter century was dominated by these ideas until challenges emerged. The period of the 1920s and 1930s produced sharp debates as between socialists of all shadings, reformers, and defenders of the existing systems. This period began to produce the development of the social contract that accommodated and absorbed the fin de siecle's transformations, attaining its apogee from around 1950 to 1975, about a century after the appearance of national capital in the form of oligopolies and cartels. After 1975 the social contract of the mid-20th century began to atrophy in the face of a challenge from a new set of organizing principles and ideas following on a globalization that began about that time. Capital markets extended beyond borders and became organized on a global stage. The characteristic feature of globalization is its organization supranationally, reaching beyond nation states and confronting the regulatory authority of governments. In approximately 25-year intervals, we are witnessing another evolution of ideas. Presently they are in the earliest phase of challenge and response.

The origins of globalization can be dated from 1971-1973 with the breakdown of the post-World War II Bretton Woods system and its replacement by free markets in exchange rates and international finance. Following on this, privatization and de-regulation became a second tranche in the challenge to the mid-20th century consensus. This produced a broader assault on etatism and was affirmed by the collapse of its most extreme form of central planning and the end of the Cold War. By the 1990s all of this could be cobbled together into what became known as the Washington Consensus and applied universally within countries and across nations. At its apogee at the end of about a quarter century, these ideas appeared to be impregnable just at the time when they had reached their crest and were open to debate. It was precisely at this juncture when the Washington Consensus was formed that it had actually began to peak. At its zenith is when it became open to challenges. However, its proponents mis-read the text and moved even more aggressively to assert its transcendence. This is where the Consensus began to run into trouble. At this quarter century crest is precisely when groupings formed to take on the radically new organizational structure of globalization.

6. The first fracture occurred in 1998 when the Multilateral Agreement on Investment (MAI) was defeated. This was a reach far beyond previous governing structures implanted to support globalization. It was launched some years earlier within the OECD when the euphoria of the end of the Cold War, the completion of the WTO agreement, and the infatuation with the new technologies of globalization appeared to be unbreachable. By 1998, however, conditions had changed. The MAI emerged from secrecy just at the moment when oppositional forces were forming. The MAI called for significant new intrusions into national sovereignty. It bound signatories to eliminate national laws that interfered with foreign investments, whether they be environmental, health and safety, labor, or whatever. This is consistent with the view that the unique attribute of globalization is its challenge to the sovereignty of the nation state and not merely greater quantitative movements of people, goods and services, and information as it is conventionally presented. It is where the challenge became clearly identified, sharply delineated, and evocative of a spontaneous response that was able to penetrate complex formulations to construct an easily understood contest among ideas.

Paradoxically, the vehicle for opposition was one of the signatures of the new global technology: the Internet. The confidential MAI draft agreement was obtained and sent over the Internet. NGOs that had been developing their capacities to communicate over this new technology pounced upon it and disseminated the document widely. Coalitions of new NGO groupings formed quickly and opened an Internet campaign that eventually was successful in forcing first Canada, then France, and subsequently the United States to pull the agreement off the table. In effect it was annulled before it could be introduced for ratification. The Financial Times called this the first Internet revolution. Not quite a revolution, I prefer to call it an Internet insurgency.

Most importantly, it was the signal moment in the struggle for ideas because it was the first outright defeat of a globalization proposal. Coming about a quarter century after the launch of globalization, it conforms to the long rhythm of the evolution of ideas, their initial hegemony, and then their contestibility. What follows next, of course, is another quarter century of debate and discourse, challenge and conflict, until some blend of organizational and conceptual forms emerge. But this takes us well beyond the scope of this period of time.

7. The 1999 Seattle meetings of the WTO exposed the fault lines in the debate over globalization to a public that had been unaware of the brewing conflict. The birth of the WTO in the mid-1990s introduced the singular most important and first regulatory institution for the globalization epoch. It distinguished itself from the GATT, which had been in existence since 1948, precisely along globalizing lines. Material produced by the WTO described GATT as a regulatory regime that stopped at the borders of countries. The WTO inserted itself inside borders to open up trade and it trumpeted this in its presentation. GATT encouraged countries to lower tariff and non-tariff barriers to trade, allowing products to enter countries on equal terms with those produced inside the country. The WTO set up mechanisms for changing internal policies within countries that interfered with the entry of products and services, thereby establishing itself as a regulator of domestic policies that affect trade. This has been most clearly identified with patents, trademarks, and copyrights - aspects of intellectual property - that countries such as India have been required to alter to conform to WTO requirements. The WTO received vastly enhanced rule-making authority over an extended jurisdiction that had not been part of the GATT and included services, intellectual property, agriculture, and investment. The WTO became the first institution in the new global era to receive enforcement authority over its decisions.

The Washington Consensus was built around the WTO, and it became the touchstone for a successful export of ideas about the new global economy. It also became the point of opposition in the Third World against a globalizing structure which it saw as biased against its interests in autonomous paths to development and organization of economy and society. Two analytical points highlight the chasm that has developed between defenders of the Washington Consensus and their opponents, one that affects the Third World and another that impacts on the G7.

For the Third World there is both a timing and control problem with liberalizing markets and opening them to trade. Imports grow more rapidly than exports, creating first a problem of phasing in liberalization. Secondly and related, is the fact that import liberalization can be directly controlled but exports are a more elusive target, subject to the whims of competition and access, and therefore less responsive to market liberalization. Export markets take more time to develop and are less assured than import markets. For the G7 an unstated but principal objective of liberalization is capital mobility. NAFTA, the WTO, and other Washington Consensus goals are as much about capital export as product export. The real objective is access to low wage and regulatory-free markets in the Third World, not as places to sell products, but as places to produce products and sell them back to G7 consumers. This has led to the advocacy of introducing labor and environmental standards by NGOs in G7 countries.

The WTO represents the tension between a globalizing process at odds with the nation state and the interests of political constituencies within nation states that turn to the democratic political process for attention to their interests. If an international institution whose decisions are not transparent and open to review can render decisions at odds with laws passed by national legislatures, then where does sovereignty reside? With the established democratic procedures of the nation state? Or with a WTO whose procedures are understood by only a handful of decision-makers? This is the form in which the issue became joined in the G7 countries where an eruption of resistance emerged around issues different from - and at times diametrically at odds with - positions taken by Third World countries on the very same issues.

In the G7 countries two sets of concerns set off alarm bells following on the raising of awareness of sovereignty questions during the MAI Internet discussions of 1998. They concerned environmental and labor issues. The US lost decision after decision within the WTO to Third World countries that challenged American laws protecting animal species in the Tuna-Dolphin case with Mexico and the Shrimp-Turtle case with southeast Asian countries. It also lost an environmental case brought by Venezuela. Europe lost cases to the United States over beef hormone and bananas, the latter seen as much of a food quality concern as one that represented preferential treatment for a region that politically had been assigned special status through a legitimate parliamentary process.

The MAI debate awakened labor to the role the WTO could potentially play in placing it at an extreme disadvantage with Third World regimes that did not abide by minimum core ILO (International Labor Organization) labor standards. Labor had always been aware of competition from low wage Third World countries which it divided into two categories: Those that adhered to the ILO standards for which competition was legitimate and accepted and those that did not for which low wage competition was seen as prejudiced against labor. India, for instance, that adheres to most core labor standards, is in a different category from a country such as China that does not allow free trade unions to exist. This distinction is important because it has been represented in many Third World NGO circles that the US and Europe simply want to use labor standards as a Trojan horse for protection. Not so and every reputable representative of the labor rights viewpoint distinguishes between those countries that accept and attempt to apply core labor standards and those that do not.

Labor and environmental interests argued for inclusion of these markets within the WTO regulatory system. They had been left out of the several thousand pages that gave birth to the WTO. If there is to be a WTO that regulates markets across and within borders so as to optimize trade, then two critical markets such as labor and the environment cannot be left out, according to this argument. If they are not part of the system, then in fact trade is not free because the price in a market such as labor is set by the state and not free. What is different from a government setting a subsidized price for a finished product or service, which is forbidden by the WTO, and setting hthe price for labor, or establishing conditions that prevent its increase, which by default is sanctioned by the WTO? For trade to be open, therefore, all important markets must be open. This applies to labor and environmental markets the same as it applies to intellectual property or product and service markets. The appeal here is for one of consistency and completeness. Partially opened markets fall short of free trade, which is why I assert I am more a free trader than its most passionate advocates. This point of view does not address those constituencies that want to abolish the WTO. It is a case for a consistent WTO if there is to be a global regulatory regime built for international trade.

8. A curious alliance developed in the Third World between G7 multinationals and NGOs normally at odds with multinationals. The most articulate critics on the left became the most forceful opponents of labor and environmental standards, making the same argument as their usual foes, the G7 multinationals. I find their argument difficult to accept. Labor and environmental standards complete the WTO system. The labor standards are the minimal core worked out by the ILO governing child labor, freedom of association to form trade unions, prison and bonded labor, and discrimination. In short, the core principles of the mid-20th century social contract that is under siege by globalization. Wouldn't it be better to extend these principles by incorporating them into the WTO instead of contributing to their weakness in an alliance with multinationals if you were a progressive Third World NGO? The low wage path goes nowhere while a higher wage path to development has the potential for a breakout from the cycle of poverty. Adopting core labor standards would protect and advantage those Third World countries that adhere to them and pressure others to meet higher standards. It would penalize those violators of human rights and assist those with better human rights records. So the labor standards case has benefits for both the G7 and for those Third World countries trying to advance human rights in their own countries, while isolating the violators of core labor standards. It would reinforce comparative advantages associated with lower wages while preventing a race to the bottom that will only force wages to decline as gross violators of labor standards impose their wages on Third World countries trying to adhere to labor rights.

There is considerable disinformation about the consequences of introducing labor rights standards into the WTO. Wage levels would not be set and would not even be on the table for discussion. All that would be mandated would be compliance with the minimal ILO standards that require countries to make progress toward their implementation. Trade unions would not be required, only that free association be permitted so that trade unions and collective bargaining have the possibility of seeing the light of day and states do not stop the process from occurring. What is at stake is the extension of an open market for labor, as understood by late 20th century norms, so that all markets have the potential for transparent competition in an open trading system.

Other voices in the Third World are heard less often but support the inclusion of core labor rights in the WTO. There is support among the most democratic and dynamic trade unions in countries such as South Africa, Brazil, Malaysia, and such countries in transition as the Czech Republic. Over 50 union leaders from Third World countries took part in the Seattle representations. The President of the International Confederation of Free Trade Unions - the largest organization of labor in the world - is Leroy Trotman from Barbados who has led the organization in support of including core labor standards in the WTO. In 1997 over 100 countries reaffirmed their commitment to these labor standards at the ILO. We are not asking for the moon, remarked G. Rajasekaran, general secretary of the Malaysian Trade Union Congress, but very basic things. Worker rights that are already universally endorsed, but simply not enforced. (1)

The ingredients for a negotiated resolution of the differences between the Washington Consensus surrounding the WTO, Third World concerns, and the pressure for including labor and environmental markets are not terribly difficult to imagine. Labor and environmental markets could be introduced into the WTO structure in return for three points made by the Third World:

  • a renegotiation of the textile section of the WTO that accelerates the removal of quotas and binds the G7 to their compliance
  • an opening of agricultural markets beyond existing WTO agreements and binds the G7 to their compliance
  • additional time to implement changes in intellectual property and other internal changes in the legal systems in Third World countries

9. The next theater for contention will arise shortly over the accession of China to the WTO. China is a massive country and the most egregious violator of labor and environmental standards. Its entrance into the WTO will severely affect other Third World economies that compete with China. If China is given the preferential treatment that admission to the WTO implies, without the WTO having adopted labor or environmental standards, other Third World economies will see a serious depletion in their markets for such key exports as textiles, toys, and lower end consumer products. They will be forced to match China's low wage and environmental degradation in a destructive competition to see who can be most impoverished, and all of this built on China's disregard for human dignity and its environment. Notwithstanding this prospect, the Third World is united behind membership for China in the WTO.

The debate especially in the United States will be sharp over China's accession. Because of a peculiar by-product of legislation originally aimed at the Soviet Union at the height of the Cold War, the Congress must grant China a specific exception that will allow it admission into the WTO. This will be the next stage on which the globalization debate will be conducted with far-reaching consequences for its outcome.

10. All of the forces that massed in Seattle will be present once again in Washington, D.C. in mid-April at the annual mid-year joint meetings of the IMF and World Bank. Whether this moment will see an advance in the movement toward a comprehensive discourse over globalization and its discontents or a repeat of what amounts to a form of drive-by road rage remains to be seen.


References

1. Robert L. Borosage
Who Speaks for the Third World?
American Prospect, 17 January 2000

After Seattle, the free trade establishment has launched a furious counteroffensive to regain the moral high ground. "The Real Losers from Seattle", reads The Economist's cover, which displays a picture of an impoverished child. Developing countries, we're told, bitterly opposed the president's attempt to force worker rights and environmental protections into the trading system, knowing that, as Fareed Zakaria declared in Newsweek, these protectionist ploys would "crush the hopes of much poorer Third World workers". The true motives of the protesters are revealed, writes Jagdish Bhagwati, a leading free trade academic, by their insidious focus on labor abuses like child labor that affect the South and not the North.

Class politics, pace Dr. Johnson, is becoming the last refuge of scoundrels. Not surprisingly, the conservative globalists get it wrong, precisely because they ignore the reality of the debate in most of the developing world.

In fact, the only representatives of workers across the developing world-independent, free trade unions-are virtually unanimous in their support for enforcing core worker rights and environmental protections in WTO trade accords. More than 200 national trade union centers from 143 countries representing over 124 million workers across the worldendorsed the call for a WTO working group on labor rights, the first step toward enforcing worker rights. This includes the most democratic and dynamic unions of the developing world from South Africa, Brazil, Malaysia, and the Czech Republic. Over 50 union leaders from developing countries joined the protests in Seattle. As Leroy Trotman, the Barbados trade union leader who is president of the International Confederation of Free Trade Unions, said at the union rally on November 30, "This isn't North against South, or privileged workers against the poor. It is the workers of the world standing together to call on the WTO for justice".

Contrary to Bhagwati, core worker rights are not Western impositions-unlike US patent and copyright laws that were forced down the throats of the developing nations in the last round of trade negotiations. At the International Labour Organization two years ago, over 100 countries reaffirmed their commitment to core labor rights-the prohibitions on child labor, forced labor and discrimination, and the protection of the right to organize and bargain collectively. "We are not asking for the moon", noted G. Rajasekaran, general secretary of the Malaysian Trades Union Congress, "but very basic things. Worker rights that are already universally endorsed, butsimply not enforced".

Workers and elites divide on these questions in the developing world, just as they do in the North. Where you standdepends on where you sit. WTO trade delegates from thedeveloping world tend to be comfortable members of the global elite that make out well under the current global rules. Dressed to please the foreign investors they must woo, they have neither the clout nor the desire to challenge the corporate and financial interests that cut the deals and set the rules at the WTO.

Developing countries' workers, on the other hand, find themselves caught in the proverbial race to the bottom. The United Nations reports that globalization hasincreased inequality between and within nations. Thus as Zwelinzima Vavi, general secretary of the respected South African trade union confederation COSATU,argues, we want to "link worker rights to trade rules to change the balance of forces for workers in the developing countries".

You don't need a program to get the sides right. The argument about worker rights isn't North against South, rich workers against poor workers, but North and South elites lined up against workers across the world. It isn't about charity for the poor; it is about justice and power.

Prepared for a lecture at the Institute for Social Studies, The Hague, March 2000

Copyright 2000 American Prospect