Arun Maira: The Washington Consensus has collapsed and it won’t be mourned

The harm that IMF’s structural reforms have caused are visible in many countries.  (AFP)
The harm that IMF’s structural reforms have caused are visible in many countries. (AFP)

Summary

  • The two institutions it promoted—of free-market capitalism and electoral democracy— didn’t combine to serve everyone equitably, as its advocates had promised. Fukuyama’s ‘end of history’ has therefore had to be pushed forward.

The US won the Cold War when the Soviet Union fell in 1991. The history of ideological conflict also ended, according to the American political scientist Francis Fukuyama. 

Electoral democracy had vanquished authoritarianism as the better way to govern a country, and free-market capitalism had defeated socialism as a better model for the economy.

Electoral democracy: The contest between electoral democracy with rival political parties on one hand and a one-party system of government on the other has not ended. 

The US is using its military power and hegemonic control of the global financial system to force Russia, China, Iran and Venezuela, which it claims are not democratic countries, into submission. This is ironic because citizens in the US are fed up with its system of democracy. 

A New York Times/Siena College poll in October 2024 revealed that 45% of Americans believe that US democracy doesn’t do a good job of representing the people, and as many as 76% believe it is under threat from internal corruption and inadequacies (as distinct from foreign interference).

Also read: The Washington Consensus is dead: Long live the new Berlin Declaration

Free-market capitalism: The imposition of free market reforms, the other leg of the Washington Consensus, has also stumbled. The International Monetary Fund (IMF), controlled by the US, has forced structural reforms upon governments as a condition for giving them loans. India had to comply with IMF conditions in 1991 when it needed emergency support. 

After 1991, market capitalism was the winning ideology everywhere. In 2008, the global financial crisis caused by US market failures exposed how little US-style capitalism cared for common citizens. 

Instead of a more equitable ‘new normal’ economy that economists said they would invent, the old inequitable system was put on steroids to bail out ‘too big to fail’ capitalist institutions. Common people protested, as seen in the ‘Occupy Wall Street’ movement, but the system did not change. 

After covid ruined the livelihoods of billions in 2020, stock markets broke records; wealth inequalities increased further between the top 10% and lower 50% of the economic pyramid.

Economic science is in a rut. For supporters of free markets, trouble in an economy is a sign that it has not ‘reformed’ enough, that it is too socialist, its government did not get out of the private sector’s way sufficiently, continued to nurture domestic industries and employment and kept delivering services to needy citizens rather than relying on private enterprise to uplift lives. 

The harm that IMF’s structural reforms have caused are visible in many countries. Very few governments have openly resisted. A socialist government elected in Greece after the 2008 financial crisis that did was pushed into submission by the IMF and European Central Bank, and it fell.

In the IMF’s World Economic Outlook Report (October 2024), the Fund has examined why many governments have been forced to dilute IMF-backed structural reforms and even backtrack. 

Also read: IPL cricket is a fine example of free-market capitalism

It concludes that stakeholders are not consulted sufficiently before policies are designed because experts think that common people do not understand their own problems as well as experts do. Consultations, if any, are pro forma and insincere. 

Unsurprisingly, reforms are resisted when they are imposed on people. These shortcomings could have been avoided if policymakers were willing to listen to the perspectives of all stakeholders, especially those most affected by the reforms.

In India, the government seems unable to find solutions for people’s difficulties in earning decent incomes with dignity. Pro-market reforms to open up labour, energy and agricultural markets have not made headway. 

Agriculture reforms were withdrawn when farmers protested that they were not consulted; shut out, they camped on highways around the capital for months. India’s new labour codes cannot be implemented because unions say they were not consulted adequately.

Muddling along: Populist, anti-elite movements on the Left and Right of the political spectrum are rising in many countries. Their big complaint is that common people have been left behind by the policies of capitalist ideologues ruling national and multilateral economic institutions. 

The political middle can muddle along supporting established ideas because the Left and Right, with their sharply differing visions of a good society, will not collaborate with each other.

The Washington Consensus is faltering on both legs. Democracy needs reforms in the US. It has been corrupted by wealth legally used to influence elections. Communication with voters is legitimate but costs a lot of money. 

The US Supreme Court opened the taps for billionaires to fund political parties with its Citizens’ United vs Federal Election Commission decision of 2020. Over $16 billion was spent by two parties in the recent US presidential election finally won by Donald Trump.

He who pays the piper calls the tune. Wealthy donors help fund think-tanks and universities that support their ideology. They pay lobbyists to influence lawmakers. Unsurprisingly, policies emerge that the wealthy want, not common people. 

Policymaking is no longer a democratic process. Government of the people is no longer by the people, as it should be. It is by the elite. There is little money to amplify common voices, so they take to the streets with placards and are often denied permission even for that. Meanwhile, the Establishment grinds on, convinced it knows best.

Also read: Capitalism varies across as well as within individual countries

The big flaw of the Washington Consensus is that electoral democracy and capitalism, the two institutions it has promoted, run on different principles. 

Capitalism operates on the principle of power in proportion to money, while in universal democracy, all human beings, billionaires or paupers, have an equal vote. A country cannot be governed effectively if these institutions combine in ways that deliver poor outcomes for people. 

They must both be reformed to ensure that the voices of common citizens count much more than the power of money in decisions that affect their lives.

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