Will the EU’s Austerity Prove as Radicalizing as the Washington Consensus?

By William K. Black

President Rafael Correa of Ecuador owes a triple debt to John Williamson, the economist who coined the term “the Washington Consensus” in a paper he first presented in 1989.  His paper is open about the focus of that consensus: Latin America.  Latin America was to be transformed through policies on which the United States Government, the International Monetary Fund (IMF), the World Bank, and the Washington “think tanks” had reached a consensus.  Those policies had four key components.

  • Require a sufficient stream of payments of interest by Latin American debtors to U.S. banks to ensure that the banks would not have to recognize large losses on their loans
  • Require Latin American nations to adopt austerity
  • Require substantial deregulation, and
  • Require substantial privatization

Austerity was the Paramount U.S. Policy Goal – to Bail-out U.S. Banks

Williamson’s opening paragraph sets out the first key component.

“No statement about how to deal with the debt crisis in Latin America would be complete without a call for the debtors to fulfill their part of the proposed bargain by ‘setting their houses in order,’ ‘undertaking policy reforms,’ or ‘submitting to strong conditionality.’ The question posed in this paper is what such phrases mean, and especially what they are generally interpreted as meaning in Washington. Thus the paper aims to set out what would be regarded in Washington as constituting a desirable set of economic policy reforms. An important purpose in doing this is to establish a baseline against which to measure the extent to which various countries have implemented the reforms being urged on them.”

Williamson states that the Consensus was designed “to deal with the debt crisis in Latin America.”  The supposed setting is a “proposed bargain” – but note that the paper does not note anything Latin American nations will receive from Washington as a result of this “bargain.”  This means that Williamson never describes the terms of the “proposed bargain.”  His paper addresses only what Washington has reached a consensus on as to what steps it will require Latin America to take. Williamson also, implicitly, makes it clear that whatever the (unstated) “proposed bargain” is it is the product of Washington’s demands – not a negotiating process among sovereign nations.  Washington comes to a consensus on the rules on how Latin American nations shall run their nations and Washington imposes those rules on Latin America.  The purpose of expressly formulating the Consensus is to create a “baseline” that will allow Washington “to measure the extent” to which Latin American nations have complied with our decrees on how they are to run their nations.

Arrogance, imperialism, and colonial mentality (Williamson was born and raised a Brit) suffuse the document, yet it is clear throughout that Williamson is tone deaf.  The phrase itself – “the Washington Consensus” – demonstrates that Williamson is another proof of our family rule that it is impossible to compete with unintentional self-parody.

Williamson displayed a sophisticated understanding of how Washington defined its key commercial interests – and the handy colonial rationalization (“it’s good for them”) – the key was not repayment of the debts to U.S. banks, but in the “continued receipt of debt service” on those debts.

“Political Washington is also, of course, concerned about the strategic and commercial interests of the United States, but the general belief is that these are best furthered by prosperity in the Latin countries. The most obvious possible exception to this perceived harmony of interests concerns the US national interest in continued receipt of debt service from Latin America. Some (but not all) believe this consideration to have been important in motivating Washington’s support for policies of austerity in Latin America during the 1980s.”

The U.S. did not want Latin American nations to promptly repay in full their debts to U.S. banks.  That would have been impossible because any effort to force such a repayment would have thrown Latin America as a whole into a Great Depression and caused it to default on its debts.  That would have required several U.S. banks, particularly Citi, to recognize massive losses.  The U.S. had gimmicked its accounting rules so that the banks did not have to recognize losses on bad debts as long as they were receiving “continued receipt of debt service” (fancy words for receiving interest payments) on those debts.  The U.S. banks made use of this gimmick to negotiate “troubled debt restructuring” (TDR) deals with Latin American debtors that often reduced the interest payments currently due.  The U.S. made larger payments to the IMF and the World Bank who passed them on to Latin American nations, which allowed this “extend and pretend” strategy.  The U.S. banks got to report (modest) positive income from their bad loans to Latin America instead of reporting losses.  Austerity in Latin America was the paramount U.S. demand and it was designed to ensure the “continued receipt of debt service” by U.S. banks from Latin American nations.

The S&L Debacle as a Deregulatory “Success”

Williamson was writing in 1989 – as President Reagan’s cover up of the scale of the savings and loan (S&L) debacle collapsed and the new President Bush announced that a massive bailout of the industry would be required due to an epidemic of “accounting control fraud” caused by President Reagan’s deregulation of the industry through the Garn-St Germain Act of 1982 (passed with strong bipartisan support).

Deregulation: “Another way of promoting competition is by deregulation. This was initiated within the United States by the Carter administration and carried forward by the Reagan administration. It is generally judged to have been successful within the United States, and it is generally assumed that it could bring similar benefits to other countries.”

The potential payoff from deregulation would seem to be much greater in Latin America….”

Williamson, of course, was familiar with the S&L debacle when he wrote these words.  Indeed, his original “Washington Consensus” paper makes a direct, albeit tangential, reference to the crisis.  At the time he wrote, the fact that the Garn-St Germain Act triggered a devastating deregulatory “race to the bottom” was well understood.  California and Texas “won” that race to the bottom – and those two states caused roughly 70% of total losses in the S&L debacle.  At the time Williamson was writing the S&L debacle was widely referred to as the worst financial scandal in U.S. history.

Williamson’s paper, however, ignored the direct and indirect (race to the bottom) effects of S&L deregulation in creating the criminogenic environment that proposed the epidemic of accounting control fraud that caused the bulk of S&L losses.  George Akerlof and Paul Romer wrote their classic article on “looting” in 1993, but they were describing events well known in 1989.

“The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (Akerlof & Romer 1993: 60).

Williamson proved that economists did not “know better” because they refused to “learn from experience.”  Instead, they redefined the deregulation that was “bound to produce looting” that was so “serious” that it would cause “the worst financial scandal in U.S. history” as “successful” deregulation.

While ignoring the substance and causes of the S&L debacle, Williamson’s original paper decried “a massive scandal” because it demonstrated “fraud.”

“Washington does not always practice what it preaches, as a moment’s reflection on the most embarrassing subject mentioned above—corruption—will surely reveal. This paper was, after all, written during the weeks when a massive scandal at the US Department of Housing and Urban Development came to light—a case involving fraud and irresponsibility on a scale large enough to erode the credibility of Washington’s preaching.”

To Williamson, HUD represented a “massive scandal” in which the “scale” of “fraud” was so “large” that it “erode[d] the credibility of Washington’s preaching, but the massively greater fraud S&L debacle represented another “successful” case of deregulation. The National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE) investigated the causes of the S&L debacle and reported:

“The typical large failure [grew] at an extremely rapid rate, achieving high concentrations of assets in risky ventures…. [E]very accounting trick available was used…. Evidence of fraud was invariably present as was the ability of the operators to ‘milk’ the organization” (NCFIRRE 1993).

The S&L frauds were notorious by 1989 when Williamson was writing his piece.  But the S&L frauds demonstrated that the financial deregulation he was pushing as central to the “Washington Consensus” was exceptionally criminogenic, so his narrative removed the S&L frauds and focused instead on a dramatically smaller HUD scandal.

Williamson’s Paper Takes a Second Whack for Austerity

Williamson’s cognitive dissonance was so extreme that the other U.S. practice he decried in his original paper was the federal deficit.  Williamson was at the Peterson Institute and Peterson is the Wall Street billionaire whose dream is to create a “moral panic” about deficits and convince the U.S. to privatize Social Security investments in order to create Wall Street’s greatest dream of trillions of dollars in deal flow.

It is no surprise therefore that Williamson’s Consensus reads like a rant by a deficit hawk that had gone off his psychotropic meds.

“Washington’s record is likewise imperfect in other areas discussed above. On the first criterion, that of controlling the fiscal deficit, the US record of the 1980s is poor. It is true that the federal deficit has been [falling] since 1985, especially as a proportion of GNP, and that the operational deficit is now only some 1 percent of GNP, which is within the range consistent with continued solvency of the public sector.”

Yes, you read that correctly.  The U.S., a nation with a sovereign currency, floating exchanges rates, and no non-dollar debt, deeply distressed Williamson because the operational budget deficit was one percent of GNP.  Oh, and that deficit was falling.  Williamson thinks the U.S. government is just like a household and becomes “[in]solven[t]” if it runs even a tiny deficit, so he is not someone that understands money.  Even he admits that the U.S. budget deficit in 1989 was so miniscule that it posed no threat to “solvency.”

Why then does Williamson cite the trivial, falling U.S. U.S. budget deficit in 1989 as a major failure?  Williamson views budget deficits as immoral, regardless of their economic impact.  It follows that budget surpluses are virtuous – and that even a budget surplus is not necessarily adequate from his perspective because the surplus could always be larger.  If federal budgetary surpluses are virtuous, then the policy proscription is to make them ever larger. Williamson claimed that budget deficits:

“[R]esult not from any rational calculation of expected economic benefits, but from a lack of the political courage or honesty to match public expenditures and the resources available to finance them. Unless the excess is being used to finance productive infrastructure investment, an operational budget deficit in excess of around 1 to 2 percent of GNP is prima facie evidence of policy failure. Moreover, a smaller deficit, or even a surplus, is not necessarily evidence of fiscal discipline: its adequacy needs to be examined in the light of the strength of demand and the availability of private savings.”

For Williamson, governments that run even minor deficits are “irrational,” “lack … courage,” and are “[dis]honest.”  He thinks that if the government runs large budget surpluses this somehow makes capital more available to private investments. Williamson claims that economically trivial (and typically desirable) budget deficits (“in excess of around 1 to 2 percent of GNP”) are “prima facie evidence of policy failure.”  There is a reason he was at the Peterson Institute.

Williamson’s tactic remains the anti-intellectual core tactic of the austerians – the claim that there is no alternative (TINA) to austerity.  He famously dismissed Keynesian economists (who represent the real economic consensus on macroeconomics) as a vanishing species.  “Left-wing believers in ‘Keynesian’ stimulation via large budget deficits are almost an extinct species.”

The Washington Consensus Radicalizes Latin America

The first debt Correa owes to Williamson was his formulation of the Washington Consensus because its colonial policies discredited the Latin American leaders who embraced it.  The Washington Consensus had four effects that proved toxic for its Latin American supporters.  Constant austerity is so economically illiterate that it is certain to slow growth and make recessions last longer and inflict much more severe harm.

Financial deregulation often proved criminogenic and produced the epidemics of accounting control fraud that are the most common cause of severe financial crises.  Williamson may have thought the S&L debacle was “successful,” but Latin Americans thought the “looting” that deregulation was “bound” to produce (Akerlof & Romer 1993) represented a terrible failure.

Privatization was certain to produce scandals in which Latin American oligarchs and foreigners were made even wealthier when Latin American nations sold their “crown jewels” to favored purchasers at scandalously low prices.  Privatization greatly increased inequality, which was already extreme in Latin America, but it also created extreme market power that is the enemy of “free competition.”

Fourth, the Washington Consensus treatment of Latin American debt ensured that Latin American nations continued to have very high dollar debt to U.S. banks.  A nation that borrows in a foreign currency, even it has a sovereign currency, is subject to extortion from the international “bond vigilantes.”  The debt overhang combined with austerity meant that Latin American nations frequently cut vital public services when they were most needed in serious recessions.

These four substantive problems were compounded by the over selling of the Washington Consensus.  Theoclassical economists claimed that the Washington Consensus would lead to dramatically greater growth.  The combination of terrible substantive policies and hype meant that hundreds of millions of people in Latin America came to detest the Washington Consensus and the local politicians they viewed as betraying the nation through their embrace of its strategy of returning to colonialism.

Correa’s Dissertation

Correa’s second debt to Williamson is that his Consensus led to Correa’s dissertation.  Correa became one of the world’s top experts on the Washington Consensus just as that Consensus was becoming politically toxic throughout Latin America.  The combination made Correa the right scholar at the right time and in the right place to explain what was wrong with the Consensus and what policies needed to be adopted to restore Latin American sovereignty, economies, and social solidarity.  Most scholars, of course, lack the political skills essential to be an effective national leader, but Correa proved to be exceptional as a leader.

Correa’s Third Debt to Williamson: the Consensus Praises His Policies

Correa’s signature policy initiative was doubling expenditures on health, education, and infrastructure.  Williamson’s Consensus policies were a prescription for slow growth, financial crises, corruption, and severe inequality.  Many Latin Americans assume that everything Williamson wrote must be nonsense.  Fortunately, Correa is an economist and an expert on Williamson’s paper.  There are several sensible policy ideas in Williamson’s paper proclaiming the Washington Consensus – and Correa’s policies made real those sensible ideas.

“Education and health … are regarded as quintessentially proper objects of government expenditure…. They have the character of investment (in human capital) as well as consumption. Moreover, they tend to help the disadvantaged.

[M]any in Washington believe that expenditures need to be redirected toward education and health in general, and most especially in a way that will benefit the disadvantaged.

The other area of public expenditure that Washington regards as productive is public infrastructure investment….”

Correa has consistently confounded his critics due to his economic expertise and his pragmatism.

Will Spain, Italy, and Greece be Radicalized by Austerity?

News coverage of the recent EU voting has emphasized the success of the ultra-right, but in the periphery the left showed strong gains in Spain and Greece.  In Spain, the newly created Podemos (“we can”) movement was a great success.  The Spanish movement rejects austerity and demands the restoration of national sovereignty.

In Greece, the Syriza party was the largest vote getter in the recent elections.  Syriza’s primary policies are opposition to austerity and the restoration of Greek sovereignty.

Syriza has realistic prospects of coming to power soon in Greece.  Podemos is only the fourth-largest vote getter in the recent elections – but it was formed only four months before those elections.  The conservative party remains dominant at this point in Spain, but it is deeply unpopular with very large number of people in Spain.


It took years for the Washington Consensus to lead to the mass movement in Latin America that arose in opposition to its failed return to colonialism. Hugo Rafael Chávez Frías was elected as President of Venezuela in 1999 – a full decade after Williamson’s announcement of and praise for the Washington Consensus.  Latin America’s initial political reaction to the Washington Consensus was frequently the election of hard-right politicians who championed the Consensus.  The troika imposed austerity on the EU periphery in 2009 – only five years ago.  It would be a great mistake to assume that the EU political reaction to austerity will continue to favor the hard right over the longer term.  The longer-term reaction in the EU to austerity is unknowable at this juncture and it does not make sense to assume that Latin America’s reaction to austerity will predict the EU’s reaction.  Bad policies that degrade sovereignty and cause long-term suffering to tens of millions of people do, however, tend to produce strong political reactions.  We should follow carefully developments in Spain and Greece to see if Latin America’s experience will translate to the EU periphery.

5 responses to “Will the EU’s Austerity Prove as Radicalizing as the Washington Consensus?

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