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The Washington Consensus: An Economic Policy Prescription for Public Policy Analysis

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Added on  2020-01-07

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Economics for public policy analysis The Washington Consensus is a set of 10 economic policy prescriptions that is considered to constitute the standard of reform package which is promoted for crisis wracked developing countries by Washington D.C (Munda, 2016). Washington Consensus refers to set of broadly free market economic ideas which are supported by international organizations such as IMF, the World Bank and the US. It has been observed that the Washington Consensus advocates free trade, floating exchange rates, free markets and macroeconomic stability.

The Washington Consensus: An Economic Policy Prescription for Public Policy Analysis

   Added on 2020-01-07

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ECONOMICSFORPUBLICPOLICYANALYSIS1
The Washington Consensus: An Economic Policy Prescription for Public Policy Analysis_1
The Washington Consensus is a set of 10 economic policy prescriptions that isconsidered to constitute the standard of reform package which is promoted for crisis wrackeddeveloping countries by Washington D.C (Munda, 2016). The prescriptions encompassespolicies in such areas as macroeconomic stabilization, economic opening with respect to bothtrade and investment. It also focuses on the expansion of market forces within the domesticeconomy. Washington Consensus refers to set of broadly free market economic ideas which aresupported by international organizations such as IMF, the World Bank and the US. It has beenobserved that the Washington Consensus advocates free trade, floating exchange rates, freemarkets and macroeconomic stability. During the past few years, the American economy hasdemonstrated impressive resiliency which has improved (The Paradox of Neoliberalism: ACritique of the Washington Consensus in the Age of Globalization. 2006) America’s economicperformance substantially. This has also reduced the percentage of inflation from 13 to 4%. However, the rise in unemployment was an inevitable consequence of the acceleratinginflation of the later 1970s which has retreated just a fraction of seven percent. The GNP hasamended more than 12% in the two years since the recovery began (What are the main concernsand criticism about the World Bank and IMF. 2005). Thus, it has also been witnessed that muchof the progress has been mirrored in other industrial countries. Inflation level has been reducedthroughout Western Europe; hence this has raised the real GNP level. But, even after thatunemployment rates remain extremely high in this domain. The experience the past few yearshas underlined the interdependence of the world economy (Ahonen, 2016). Changes have alsobeen observed in international trade, capital flows and in exchange rates and that further affectedall the major economies. The rise in real interest rates depicts that there is a close link amongcapital markets. In this regard, U.S budget deficit has been the dominant influence on the worldeconomy during the past two years. This also denotes that the coming resolution of America’sfiscal imbalance will have profound effects during the years ahead (Dolan and Fujiwara, 2016). The United States is witnessing economic disaster from several grounds and most of thepeople are unaware about the signs of emerging crisis. America’s economic policy makers havesome of the hardest and most important jobs in the world because they have to take actions toboost the economy to the most powerful economy in the world (Taylor-Gooby, 2016). Economiccapacity of America is the powerful engine of economic growth across the globe that assists in2
The Washington Consensus: An Economic Policy Prescription for Public Policy Analysis_2
reducing issues and constraints. Maintaining a health U.S economy is a prerequisite aspect thatimproves the living standard and quality of life, not only of Americans, but also other individualsthe world over. There are several challenges arise at the time of maintaining a healthy economyand this may also impede the economy in many ways (What happened to the WashingtonConsensus? The evolution of international development policy. 2008.). Globalization is one suchaspect that brings both opportunity and change; hence policy makers have to combat unfair tradepractices from other countries for the purpose of ensuring that the global economy continues torun smoothly. Consensus does not argue for high inflation as it is less focused on socialism; hence itdoes not make any promising aspect for strategic intervention. This may be another aspect forclosing economy and all the democratic governments were destabilised by crisis (WhatWashington Means by Policy Reform. 2002). The stability of the government has been changingbecause of international financial crisis and this has also spread in Latin America. Further,instability in the economy can also spread to the political situation through the weaknesses ofgovernment. Political instability can also impact economic conditions through markets. This, itcan be said that the circular patterns of increasing instability has four major phases. Washington believes in fiscal discipline; hence for such purpose the government hasrestored a balanced budget (Teutsch, Glied and Roy, 2016). In this respect, The InternationalMonetary Fund has made the restoration of fiscal discipline which is a central element of thehigh conditionality program. It also negotiates with its members to borrow financial funds (Didthe Washington Consensus Fail. 2002). The budget deficit has traditionally been measured innominal terms due to the increase of government expenditure over the actual receipts. In the year1982, Brail argued with the IMF that this way of measuring the deficit is misleading in a high-inflation country because most of the nominal interest payments on government debts areaccelerated amortisation of principal. Further, IMF has accepted with some reluctance; thuslooking towards this concern, changes has been made to operational deficit. This includes onlythose expenditure which is the actual component of interest paid on government debt (Fleurbaey,2016). Washington Consensus was imperative to determine policy towards economicdevelopment in Latin America, South East Asia and other countries. 3
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The major implication of Washington Consensus can be seen in the area of IMF bailoutsthat tends to involve in free market reforms as a condition of receiving money. This may changethe developing economies; hence they might have to stick to their primary products and servicescorrespondingly (The Washington Consensus as Policy Prescription for Development. 2004).This has been majorly criticized through strategic trade theory in which some economists arguethat free trade is not always in the best interest of developing economies and a stern adoption offree trade and comparative advantage can leave developing economies producing low incomegrowth and volatile priced products and services. Further, implementing fiscal rules can also leadto unwanted economic hardship especially during the period when government diminishes thespending in inappropriate expenditure (Tietenberg and Lewis, 2016). For instance- fiscalconsolidation during recession has led to low growth rates and it has also caused failure to reducedebt to GDP ratios. Hence, in this regard, it has been identified that if government is pressurizedto cut down the spending; then it can help in supporting welfare programs. But at the same time, American budget deficit has raised real interest rates in the worldcapital marker; thus it has also persuaded European ruling bodies to develop different monetaryand fiscal policies (Ling, Osman, Muhammad, Yeng and Jin, 2016). That further needs to befocused on offsetting the inflationary pressure that is being caused by the reduced value of thecurrency. It can also be said that the poor performance of European investment and employmenthas increases due to small part of investment in budget deficits in the United States (Washingtonconsensus – definition and criticism. 2013). Henceforth, drastic action is needed to restore theeconomic and financial interdependence and the economy must begin to rebuild differentindustries to strengthen employment capabilities. It is also vital for the government to ensure thatit is once profitable to produce most goods and services in American factories. This is anunderlying process which can bring employment opportunities for American workers. Thus,looking towards this concern government of United States must establish policies that canprevent other countries to enhance trade relations with American industries (Ehrenberg andSmith, 2016). Hence, all such reforms could persuade the economic prosperity of the nation. Contingent expenditure such as the guarantee given to savings and loan institutions in theUnited Stated are sometimes involved in reported budget outlays. Thus, it has also been observedthat interest subsidies and some other expenditure are provided by central bank rather than from4
The Washington Consensus: An Economic Policy Prescription for Public Policy Analysis_4

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