The abandonment of the Washington Consensus

The Washington Consensus {stabilization and structural adjustment programs (SAPs)} came into force at the start of the 1980s when countries mostly in the developing world especially those in Latin America and Africa were not able to repay their external debts thereby threatening the stability of the international financial system.

In order to receive financial help, the debtor countries had to accept conditions or conditionality from the international lenders including the International Monetary Fund (IMF) and the World Bank. The conditionality included reducing government expenditures especially on education and health which were considered to be non-productive in the short term and retrenching public servants; removing government involvement from economic activities to permit the full reign of the market forces; introducing user fees in education and health care and removing subsidies; decontrolling prices and devaluing the currency; cutting or containing wages; privatizing state-owned enterprises; introducing free trade and thereby eliminating protection of the domestic market against foreign competition and removing restrictions on the operations of foreign investors; and promoting and diversifying exports to earn more foreign currency to repay external debt. In short, the overall objective was to protect financial stability through low inflation and balanced budget; and to promote economic growth through competition and increased exports.

Controlling inflation was conducted through reducing the amount of money in circulation by raising interest rates and reducing government expenditure through inter alia staff retrenchment, low spending on infrastructure and institutions. In pursuing these goals the architects of SAPs neglected those aspects that determine whether growth was equitable, sustained, sustainable and inclusive.

The National Resistance Movement (NRM) government avoided the Washington Consensus for fifteen months because the Movement while still in the bush had pointed out that Obote’s government was performing poorly economically and socially because it had accepted all the conditions demanded by the IMF and the World Bank. However, with strong advice largely from Linda Chalker, then minister in Margaret Thatcher’s government in Britain, the NRM government carved in and accepted the terms and conditions of the IMF in May 1987.

In order to control inflation, a key factor in macroeconomic stability, the government set a target of five percent per annum, raised and maintained a high interest rate which now stands at over twenty percent per annum. The high interest rate has discouraged borrowing by small and medium-scale enterprises that have the potential for creating jobs. This development together with government retrenchment of public servants and unwillingness to engage in public works has resulted in high levels of unemployment and under-employment which are contributing to widening income gaps and high levels of poverty especially in rural areas where some 90 percent of the population live. Unemployment has reduced effective demand for goods and services and helped to keep inflation low. The importation of used goods such as vehicles and clothes has had a similar effect.

But unemployment has led to the development of social challenges that are tearing apart Uganda’s cultural and social fabric and threatening peace and stability. Expanding police, prison and judicial services will not end these problems which are essentially economic.

Further, because of the high interest rate and inadequate flow of direct foreign investment occasioned largely by uncertainties and supply constraints, Uganda’s economy which grew very fast reaching 10 percent per annum in part because of excess capacity and the temporary presence of foreign troops in Uganda has since declined and stagnated at an average rate of 6 percent per annum similar to what obtained in the 1960s. To revamp the economy and society, new policies and strategic state intervention are inescapable.

Fiscal and monetary tightening and a sharp increase in interest rates in order to control inflation under John Major’s premiership in Britain contributed to the weakening of the economy.

While acknowledging the necessity to control inflation, some commentators had stressed that caution ought to be taken when the fight against inflation was done with tools that depress economic activity, slow down investments and increase unemployment. They further advised that controlling inflation had to be balanced between monetary and fiscal instruments and to take direct action against structural rigidities and imbalances in the economy.

The encouragement of export-led economic growth has also had unintended consequences. In the case of Uganda, the government introduced a policy of export-led growth and encouraged an increase in the production of traditional commodities of coffee, cotton, tea and tobacco as well as non-traditional exports of nutritious foodstuffs such as beans, millet and fish traditionally produced for domestic consumption. The shortage in the domestic market of these foodstuffs has raised prices beyond the means of many low-income families. As a result, the food intake in amount, variety and frequency has been considerably reduced and has resulted in high levels of under-nutrition especially among children and mothers. Child stunting stands at 38 percent and infants born with low birth weight is twelve percent, indicating that their mothers are severely under-nourished. In 1959, just before independence, child stunting stood at 30 percent.

The focus on export-led economic growth as required under the Washington Consensus has also raised concerns about environmental implications. In Kenya, for example, structural adjustment strategy has led to serious ecological degradation. Agricultural programs were designed to increase production without considering their impact on biological diversity. The application of high levels of pesticide use has led to pollution of soil and water. Further, the expansion of agriculture in areas previously reserved for wildlife has had an adverse impact.

In Uganda, the expansion of traditional and non-traditional export commodities has likewise contributed to massive ecosystem degradation with serious thermal and hydrological consequences. The dry season has become longer and hotter and rainfall irregular in amount, timing and duration. Water tables are dropping, lakes are shrinking and many once perennial rivers are now seasonal or have disappeared completely.

In Chile, the fist country to undertake structural adjustment programs with a focus on export-led economic growth, the ecosystem and human health have suffered considerably. The production of fruits, fish and forestry products emerged as the new engine of growth. The use of chemicals, some of them highly toxic, in horticulture has increased pollution of soil and water and reduced biodiversity. The health of workers who handle these chemicals has been adversely affected. Exposure to chemicals has been linked, inter alia, to cancer, birth defects and reproductive problems.

One of the major problems is that the Washington Consensus did not contain regulatory mechanisms because it relied on market forces to solve all problems as they occurred. Besides, the architects of the Consensus were suspicious of any form of state intervention in and control of the economy.

Because of adverse environmental consequences and the absence of corrective measures, the World Bank devoted its 1992 World Development Report to “Development and Environment”, signaling that structural adjustment had become a recipe for biological crisis.

In addition, the failure of the Washington Consensus to raise and sustain high levels of economic growth, improve social conditions of the majority of populations and integrate developing countries into the global economy in a beneficial manner contributed to its demise. However, some governments including the one in Uganda have clung to the strategy of low inflation, export-led economic growth and free trade even when the signs of failure are obvious: low and stagnant economic growth below the level required to meet the Millennium Development Goals by 2015; rising unemployment, widening income gaps by classes and regions; worsening social conditions particularly rising unemployment and mushrooming slums; and deteriorating ecosystems and the associated adverse thermal and hydrological changes. The time has come to recast this strategy before it is too late. The market forces and free trade alone will not turn the tide.