An Investigation into the Role of the World Bank in relation to the Privatisation of Public Services with respect to the Washington and Post-Washington Consensus

Table of Content

Abstract

Section I
1 Introducing the Washington Consensus
1.1 Criticism of the World Bank and the Washington Consensus
1.1.2 From the Washington to the Post-Washington Consensus

Section II
2 Privatisation Theory
2.1 World Bank’s Privatisation Strategies in times of the WC
2.1.1 World Bank’s Privatisation Strategies of the PWC
2.1.2 Privatisation in the Energy Sector
2.2 Competition and Regulation Theory
2.2.1 Risk and Uncertainty
2.3 Case Study: Chile

Section III
3 Conclusion

Bibliography

“[…] the self-confident advice of the ‘Washington Consensus’ – free up trade, practice sound money, and go home early […]”.

David Vines in an obituary for Susan Strange

Newsletter of the ESRC Programme on Global Economic Institutions (9), 1999

Abstract

It is claimed by the World Bank and other authors that Chile has been a success in privatising their public sector. This research paper shall analyse this claim with respect to Chile’s energy sector. Moreover, this paper investigates into the World Bank’s privatisation strategies during times of the Washington and Post-Washington Consensus, whereby criticism is expressed. Aspects of competition and regulation theory as well as risk are examined. The paper concludes that the Washington Consensus is merely reached by individual institutions and therefore, not representative for judging privatisation issues in general.

1. Introducing the Washington Consensus

The Washington Consensus (WC) is a set of policies by neoliberal economists to promote economic growth in reaction to the macroeconomic crisis of Latin America (LA) during the 1980s. At the same token it is considered as a brand and a name known worldwide and used as a pillared term in debates about trade and development. This brand is said to have filled an ideological vacuum. It was used as a goal-oriented tool and it had the institutional as well as the financial backup. This was in particular the case for the former Soviet-block and many developing countries in the late 1980s - 1990s, which required unconventional ideas in order to reorganise their political framework and economies. Fine (in Fine, Lapavitsas, Pincus, 2003, p. 3) sees in the Consensus the emergence of a neoliberal counterpart to the Reaganism and Thatcherism for developing countries.

The Consensus was first presented in 1989 by economist John Williamson as an attempt to reflect policy advice by Washington-based institutions including the International Monetary Fund (IMF), the World Bank (WB) and the US Treasury Department. The WB belongs besides the IMF to the 1944 established Bretton Woods institutions. The two institutions are backed by the US and other strong economic powers. It is said, that the Bank has turned into a virtual monopoly, if not in its lending then in its research work. The WB is made up of two development institutions: the International Bank for Reconstruction and Development and the International Development Association which support the Bank in their mission of reducing global poverty and improving living standards (www.worldbank.org). The Bank gives financial and technical assistance to developing countries and is affiliated with the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes.

At first the WC was designed to implement market-oriented economic reforms in particular in LA. The main ideas derived from the WC had a massive influence on the economic reforms of many countries, so Naim (1999, IMF Publication). Martin (2004, p. 192) points out the emergence of the WC discourse down to three types of ‘’reality constructing operations: (i) the classification of new countries as model nations for development, (ii) the definition of areas of intervention, and (iii) the definition of policy measures’’.

According to Williamson these policies (retrieved from the Centre for International Development at Harvard University) are:

1. To impose fiscal discipline - ‘don’t spend more than you have’.
2. Redirect public expenditure priorities to achieve high economic returns and improve income distribution.
3. Reforming the tax system towards lower marginal rates and a broadening of the tax base.
4. Interest rate liberalisation in order to attract foreign capital and prevent capital flight.
5. A competitive exchange rate to avoid distortion.
6. Trade liberalisation
7. Liberalisation of inflows of foreign direct investments
8. Privatisation
9. Deregulation in order to abolish barriers to entry and exit.
10. Secure property rights and ensure contracts are respected.

This paper focuses primarily at point eight. Privatisation necessitated a lot of support in Washington. Bayliss and Cramer (in Fine, Lapavitsas and Pincus, 2001, p. 52) consider privatisation as the most tangible manifestation by the WC and claim that circa 70 per cent of all structural adjustment loans made in the 1980s contained a privatisation component. From Washington it had been put on the international agenda by James Brady, Secretary of the US Treasury in 1985, so Williamson (1999, Institute for International Economics).

1.1 Criticism of the World Bank and the Washington Consensus

Critics of the Consensus from neo- and post- Keynesian league argue, that the underlining policies were incorrectly laid down and are too rigid in order to be successful. Also these reforms should be rather applied in times of rapid growth and not during crisis. Many economists regard the WC as a ‘suicidal policy’ if implemented when an economy is weak. Even advocates of the Consensus have been divided about the pace and sequence of these reforms, so in case for Stiglitz (2002, p. 87). The former chief economist and senior vice president of the World Bank (1997 until 2000) has the opinion that in some cases the WB and the IMF have unfairly taken the blame for the messages they deliver.

The weaknesses of the WC: it is too general and does not take economic and cultural differences between countries into account. There are discrepancies between the WC and actual policies. Also it is noted that WB literature on privatisation is highly selective and one-sided, therefore reaching an objective judgement is difficult.

The following critics shall reflect the broad range of opinions. Pieper and Tayler (1998, p. 37) debate, that many actions and ‘recommendations’ to governments are intellectually ill-founded and counterproductive in practice of the WB and the IMF. Naim (1999, IMF Publication) claims, that in fact no such consensus existed, that changes in the international economic, political environment and so-called ‘new domestic realities’ in the reforming countries created problems the WC did neither envision nor encompass. In fairness to Williamson, the editor of Foreign Policy believes that he was an ‘innocent victim of the success of his very useful summary’. Williamson (1999, IIE) argues that his phrase became the notion of mankind where he was not entitled to dictate its meaning. Besides he thinks that instead of phrasing it WC it would have been better if we used the terms of Richard Feinberg’s ‘universal convergence’ or Jean Waelbroeck’s ‘one-world consensus’.

Critics of the WB and the IMF come particularly from anti-globalisation and anti-trade liberalisation actors who argue that, the Consensus’ neoliberal policies are imposed on economically vulnerable countries. Their argument goes further by saying that the WC had rather a negative impact, that it led to severe economic crises and the accumulation of external debts. Reforms such as the privatisation of state industries are criticised as mechanisms for ensuring that a small local elite in the Third World will rise to political power and who have an interest in maintaining the local status quo of labour exploitation.

Socialist political leaders in LA such as the Brazilian President Luiz Inacio Lula da Silva (2003 – present) are known for their critic of the WC. Brazil’s economy was closely aligned to the principles of the WC when Lula took power.

Tamayo (2003, Global Policy Organization) argues that the consensus is very restrictive and it was never the subject of general debate and neither submitted to a vote nor formally ratified by the countries it was imposed on. Moreover, he claims that LA is the principal victim of the WC, i.e. debt grew and energy supply were cut and handed over to US and European corporations. Whether that was really the case shall be examined with a case study in section 2.3 on the privatisation of the energy sector in Chile. In 1998 the LA Region launched a policy document which argued for going beyond the WC - a second generation reform agenda (Burki and Perry, 1998, World Bank Paper). To overcome external debt accumulation and increasing interest rates, the IMF and the WB began with their structural adjustment policy (SAP) programme in the early 1980s. As economic crisis were recurrent in LA their guiding principles of development policies were questioned. The WC was understood as an economic doctrine in support of SAP (Hayami, 2003, p. 60). Doubts on the validity of the WC approach led to a contrasting paradigm and a progression to a new consensus - the Post-Washington Consensus (PWC) in the mid 1990s, as described in the following section.

1.1.2 From the Washington to the Post-Washington Consensus

This new paradigm is based on the WC, emphasising the necessity for different institutions in different economies and recognising the case in which government market interventions can be positive, as outlined by Hayami (2003, pp. 43). The PWC seeks to employ the notion of social capital, whereby its focus is on poverty reduction, improving the quality of life of the poor through redistribution of social income through governments and civil society whereby services in education and health care shall be delivered to the poor. The identification of poverty reduction is the major pillar of the PWC. Stiglitz is said to be linked with the launching of the PWC (Fine, Lapavitsas, Pincus, 2003, p. 17).

According to Williamson (in Martin, 2004, p. 209) on the issue of privatisation of public enterprises he suggests for the ‘’New’’ WC the creation of strategic institutions i.e. autonomous central banks, strong budget commissions, an independent judiciary that cannot be corrupted and entities that advocate productivity.

The WC recognised the importance of supplying social services such as education, which is known to be important to increase the capacity of the poor to participate in the economy. The PWC went even further by perceiving the viability of government corruption and collusion that the poor would be excluded from these services. The shifting view on poverty of the WB can also be seen by looking at the subtitles of the World Development Reports (WDR) of 1990 and 2000. In 1990 the WDR was subtitled by ‘poverty’, whereas the WDR of 2000 named it ‘attacking poverty’. The shift of the WB towards the PWC was officially approved by the president of the WB Group, James Wolfensohn, so it is stated by Hayami (2003, p. 61). To summarise the move from a WC to a PWC it can be said, that the WC emerged as an anti-thesis to the import substitution industrialisation strategy and the PWC came into view as an anti-thesis to SAP.

Furthermore, the PWC is an attempt to link privatisation with regulation and competition policies; however it does not necessarily take up on the WC criticism. The analytical basis for the PWC is ‘’extremely narrow and weak, especially from the perspective of anyone not wedded to mainstream economics’’, so Fine (in Fine, Lapavitsas, Pincus, 2003, p. 7). WC policies emphasised on privatisation, therefore, the next section shall investigate privatisation in general and in WB terms under WC and PWC.

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