The General Policy Setting

The policy environment after the Washington consensus has increasingly moved towards both consolidating and augmenting the first generation reforms (Kuczynski and Williamson 2003). As is well known, in 1989, John Williamson had dubbed a list of ten reforms in Latin America "the Washington consensus" (Williamson 1990). The appellation gained wide currency and some may say, even notoriety. It covered the following ten points:

1. Budget deficits … small enough to be financed without recourse to the inflation tax.
2. Public expenditures redirected from politically sensitive areas that receive more resources than their economic returns can justify… toward neglected fields with high economic returns and the potential to improve income distribution, such as primary education, health and infrastructure.
3. tax reform … so as to broaden the tax base and cut marginal tax rates.
4. Financial liberalization, involving an ultimate objective of market determined interest rates.
5. A unified exchange rate at a level sufficiently competitive to induce a rapid growth in nontraditional exports.
6. Quantitative trade restrictions to be rapidly replaced by tariffs, which would be progressively reduced until a uniform low rate in the range of 10 to 20 per cent was achieved.
7. Abolition of barriers that impede the entry of new firms or restrict competition.
8. Privatization of state-owned enterprises. Abolition of regulations that impede the entry of foreign direct investment.
9. The provision of secure property rights, especially to the informal sector.

As Williamson himself admits, "…from the start, the term "Washington Consensus" evoked controversy". Moreover the mixed results in the decade of the 1990s and the financial crises in Latin America, Asia and Russia led to some recent rethinking and a proposal from some economists for an "Augmented Washington Consensus" (Rodrik 2002). The augmented list includes as "second generation" reform agenda a wide range of items from social safety nets and poverty reduction to anti-corruption policies and legal and institutional reforms. Some have pointed out that the expanded list sometimes expresses hopes and goals rather than specific policies. There is some truth to this. However, the expanded list does put the task of poverty reduction squarely on the agenda and raises important questions regarding whether and how the program loans and the conditionalities attached to them would lead to increased poverty reduction in the developing world.³

As an ADB internal document points out:

In one sense program lending provides countries with external resources to ease the adjustment process in a situation in which absorption exceeds income; this is the ‘living beyond ones means’ scenario and program lending in this context is described as providing ‘general balance of payments support’ (where funds remain as reserves with the central bank) or 'support for the budget' (where the funds are sold to the private sector). Here the positive role of program lending is to allow a smoother and less destabilizing adjustment of expenditure to income and in particular to protect the real value of government expenditure that benefits the poor and vulnerable. This has been seen as a particularly important goal in economies in transition, where the government’s revenue base has been eroded substantially.

The document goes on to point out a second dimension:

The second dimension is the reform scenario in which program lending is designed to finance wide ranging policy reform at the level of individual sectors or the economy as a whole. Reform can embrace both adjustments to monetary variables – liberalizing prices as part of 'first generation reforms' - as well as institutional change under 'second generation reforms'.⁴

Program loans should in principle cover the costs of such reforms – both the costs of implementing change and of compensating those negatively affected. Insofar as good policy can be identified and implemented program loans can have wide-ranging positive effects through acceleration in economic growth.

The document recognizes that "….n practice this simple distinction between the two dimensions of program loans may be blurred. Since countries thinking of implementing major policy reforms are often suffering from macro imbalances and since government funds are fungible, it is possible for countries to accept a program loan, but implement its reform conditionality only partially using the program funds also to support government expenditure. The special evaluation study on program lending (ADB 2001, para 73) mentions that general balance of payments/fiscal support was 'frequently the primary interest to the DMC.' This may be one of a number of reasons why, as is discussed below, in terms of their impact most program loans have been found to be only partially successful".