The Washington Consensus: Duflo’s Warning Exemplified?

By Jan Minke Contreras

In Poor Economics, Esther Duflo and Abhijit Banerjee make a cutting statement: “even the most well-thought-out policies may not have an impact if they are not implemented correctly”. They draw a distinct line between policies and politics and exposes how the latter can affect the implementation certain policies. This blogpost will exemplify such scenario with the implementation of the Washington Consensus (WC) in Latin America during the 1980’s. Latin America was immersed in a severe debt crisis. Governments were defaulting on payments owed to the IMF and the United States. Convinced there was a huge problem, policy-makers from Washington and the IMF decided to draft a 10-point policy document that Latin American countries must follow if they wished to borrow more money in the future. The policies were supposedly also designed to stimulate growth in the region. 

As well-intentioned the idea might sound, the implementation of the WC had disastrous effects in many parts of Latin America. Ecuador was one of these countries. With the hopes of being able to pay off its debts to the IMF, Ecuador had no other option but to implement the WC. However, the implementation of these policies had horrendous consequences on the Ecuadorean economy. One of the 10 policies, for example, stipulated that government-owned companies should be privatised. When Ecuador did this, numerous politicians sold the companies to themselves, retaining control of vital sectors like energy or telecommunications. These, now private companies, went bankrupt because of the high corruption levels amongst the “new owners” and because of faulty allocation of funds. Ecuador saw such results from the WC implementation because, as Duflo mentions, the WC was unable to “sort out the political process” before actually implementing the policies.  The moral: policy should never be taken out of the political context.