Context:
– It is a newly proposed framework of economic principles for the 21st Century, developed as a progressive alternative to the Washington Consensus.
– Spearheaded by economists like Tim Besley, Irene Bucelli, Dani Rodrik and Andres Velasco at the London School of Economics.
– Currently, being supported by more than 55 leading international economists.
What is Washington Consensus?
In April 1990, the English economist John Williamson published a paper titled “What Washington Means by Policy Reform” where he listed 10 economic policy instruments that countries need to adopt and deploy in order to achieve sustainable growth.
10 Economic Policy Instruments
– Fiscal Discipline
– Prioritize Public Expenditure
– Tax Reform
– Market Determined Interest Rate
– Liberalization
– Privatization
– Allow FDI
– Deregulation
– Competitive Exchange Rates
– Uphold Property Rights
About Washington Consensus
– Remained dominant from the 1990s to the early 2000s.
– It gained wide credibility and traction, more so after the dissolution of the USSR and the fall of communism in Eastern Europe.
– Also contributed to the hyper-globalization that was witnessed between 1990 to 2008.
Major Challenges to Washington Consensus
– The global consensus came under threat since the global financial crisis of 2008 and the rise of China as an economic power.
– The challenge has come from the very countries whose policy makers were the strongest proponents of Williamson’s manifesto.
Challenges include:
– Overemphasis on macroeconomic stability → led to austerity and neglect of social equity.
– One-size-fits-all approach → ignored local contexts, institutional capacities and cultural diversity.
– Privatization pitfalls → resulted in crony capitalism, monopolies and loss of public accountability.
– Democratic deficits → policy conditionalities imposed by external institutions often bypassed democratic debate and local ownership, fueling populist backlash.
– Financial liberalization risks → capital account convertibility triggered financial crises and destabilized emerging economies.
– Rise of alternative models → emergence of concepts like economic justice, environmental justice, and state-led capitalism.
London Consensus
– Originated in May 2023 at the London School of Economics.
– It offers five core principles to guide policymaking, particularly in the light of new economic challenges arising from climate change, transformative technologies (like AI), authoritarian populism, and weakening support for liberal democracy even in the West.
Five Core Principles:
1. Focus on Wellbeing
- Go beyond GDP and money incomes.
- Incorporate self-worth, social status, and other non-materialistic conceptions of wellbeing.
- Government must not shy away from direct intervention if needed (public welfare).
2. Make Growth Matter
- Emphasis should be on where and how growth is happening: whether it is creating sufficient jobs and benefitting not just a select few.
3. Build Resilience
- Government should act as insurer of last resort to counter volatility not simply at a macroeconomic but also at an individual household level.
4. Put Politics First
- In today’s era of polarization and growth of populism, politics itself can become a source of economic shocks.
Hence, there is a need to get the politics right.
5. Invest in State Capacity
- State capacity building is essential not only for providing policing or basic social services but also for creating confidence among investors who risk their private and borrowed capital.
- It also ensures wellbeing and social equity.
Limitations of London Consensus
– Lack of operational specifics: offers no concrete policy tools or implementation roadmaps.
– Institutional limitations: existing global institutions like IMF and World Bank are largely structured around the Washington Consensus.
– Geopolitical fragmentation: U.S.–China rivalry, Trumponomics, rising protectionism, and other geopolitical divides.
– Measurement issues: how to measure social cohesion, trust, and institutional legitimacy; difficulty in cross-country comparisons.
– Not appealing enough to the Global South: concerns about Western academic dominance and prescriptive liberalism.
Way Forward
The London Consensus is a valuable guide towards holistic development but its success depends on:
a) Translating principles into scalable policy models.
b) Building coalitions of reforms across regions and institutions.
c) Ensuring local ownership and democratic legitimacy.
Question for Practice
“The London Consensus offers a multidimensional alternative to the Washington Consensus, emphasizing inclusive development and institutional resilience. Critically examine its relevance to India’s development strategy and Sustainable Development Goals (SDGs).”
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