How have the Washington Consensus reforms affected economic performance in sub-Saharan Africa?

Addis Ababa city, 14 July 2018, Ethiopia

Economist John Williamson coined the term “Washington Consensus” in 1989, in reference to a set of 10 market-oriented policies that were popular among Washington-based policy institutions, as policy prescriptions for improving economic performance in Latin American countries. These policies centered around fiscal discipline, market-oriented domestic reforms, and openness to trade and investment. In African countries, the Washington Consensus inspired market-based reforms prescribed by international financial institutions (IFIs) like the World Bank and the International Monetary Fund (IMF), under “structural adjustment programs” (SAP), often as prerequisites for financial assistance.

The socioeconomic effect of these policies remains widely debated to this day. Most early literature found that they failed to improve socioeconomic conditions in African countries for several reasons due to, among others, the failure to account for political economy within countries, and the politics of conditionality and reforms that did not adequately emphasize the role of local ownership in domestic economic policy. Over three decades after the initial reforms, in a new paper, we revisit the evidence of the links between the adoption of these Washington Consensus policies and economic performance in sub-Saharan Africa.

We find that following initial declines in per capita economic growth over the 1980s and 1990s, the countries that adopted the reforms experienced notable increases in per capita real GDP growth in the post-2000 period. We complement the aggregate analysis with four country case studies that highlight important lessons for effective reform. Notably, the ability to implement pro-poor policies alongside market-oriented reforms played a central role in successful policy performance. The findings of this paper could offer a useful guide to policymakers as they ramp up the structural reform agendas to build back better post-COVID economies.

The ability to implement pro-poor policies alongside market-oriented reforms played a central role in successful policy performance.

The Washington Consensus reforms and socioeconomic performance

Some of the key policy reforms of the Washington Consensus/SAP period of the 1980s and 1990s included privatization, fiscal discipline, and trade openness, that were introduced by IFIs as conditions for debt relief to highly indebted, economically constrained African countries. The expectation was that market-oriented reforms would correct domestic policy-induced distortions in prices, such as overvalued exchange rates, subsidies that led to artificially low agricultural commodity prices, high wage rates, low interest rates, and subsidized agricultural input prices, which introduced inefficiencies in resource allocation, worsening shortages and reducing economic output. Several African countries adopted these policies, often under conditionality, in the 1980s and 1990s. Most early literature finds that the policies failed to improve economic conditions in these countries as the politics of IFI conditionality worked to undermine the role of local ownership in shaping domestic economic policy. In addition, reductions in government spending often reduced spending on pro-poor programs, and the removal of agricultural subsidies made it difficult for African farmers to compete on international markets. The results were increased unemployment and sociopolitical unrest in several African countries over this period. More recent literature has highlighted that reforms were successful in improving economic growth when policymakers had the state capacity to implement them, and when, crucially, reforms were paired with pro-poor policies, spearheaded by governments.

A stable government and sociopolitical environment with a focus on pro-poor policies was an essential ingredient in implementing successful reforms.

With the benefit of more recent data, we revisit market-oriented reforms of the 1980s and 1990s, notably privatization, fiscal discipline, and trade openness. Between 2000 and 2019, African economies experienced remarkable improvements in economic growth, with median country real GDP per capita growth rising from 0.2 percent per year on average in the 1980s and 1990s, when many of the reforms were first implemented, to 1.6 percent over 2000 to 2019. Inflation rates in the region have also declined from double digits in the 1980s and 1990s to stabilize at around 5 percent in the past two decades.

Comparing the reform countries to non-reform countries, we find that during the initial reform years, economic performance was worse for reformers, with average per capita real GDP growth declining in the 1980s and 1990s. In contrast, non-reform adopters experienced positive growth over this period, consistent with the earlier literature showing that the reforms failed to bring about short-run economic growth. Between 2000 and 2019, average per capita GDP was higher than during the 1980s and 1990s for both reformers and non-reformers. However, the increase in growth was even higher for reform adopters. When we examine these comparative statistics by reform category, the difference in performance between reformers and non-reformers is largely driven by the adoption of fiscal discipline and domestic market-oriented reforms. While it is difficult to draw definitive conclusions, the results point to a reversal of the economic fortunes of reform adopters in the last two decades, following their initial dismal economic performance during the 1980s and 1990s.

To enrich the aggregate analysis, we conduct four case studies for Ethiopia, Nigeria, Uganda, and Senegal, which allow for a more granular and nuanced assessment of the effect of the reforms. Overall, the case studies support the aggregate findings and reveal some useful lessons on the correlates of successful reform implementation. A stable government and sociopolitical environment with a focus on pro-poor policies was an essential ingredient in implementing successful reforms. Crucially, concurrent efforts to minimize the potential negative welfare impacts of macroeconomic reforms on domestic populations are important to increase needed public support for reforms.

Key lessons from the Washington Consensus reforms in Africa

The speed with which many of the reforms were carried out initially, especially domestic reforms like privatization of state-owned enterprises, without careful consideration of the environment of incomplete markets and the institutional challenges faced by African governments, affected the initial effectiveness of policy implementation and contributed to lower growth rates during the 1980 to 1999 reform period.

The Washington Consensus framework contained some caveats that were subsequently lost in policy design.

The Washington Consensus framework contained some caveats that were subsequently lost in policy design, creating wedges between the theory of policy reform and the realities of implementation. It cautioned against capital account liberalization and, importantly, warned that privatization should occur with strict regulation only in competitive markets. They also advocated for pro-poor fiscal expenditures and advised against abolishing deregulation designed for safety or environmental reasons. In practice, African governments seeking immediate debt relief were often under significant pressure to quickly meet IFI policy measures under debt conditionality. The weakening of state apparatuses essential in implementing effective reform further reduced the ability of African governments to effectively regulate the pace of policy adoption, with sometimes detrimental consequences for their populations in the initial reform period.

Even though there is no panacea when it comes to economic reforms, the following lessons provide a useful general guide going forward: First, while market-oriented reforms can be beneficial for growth, each reform policy needs to be carefully considered in the institutional contexts, initial conditions of development and sociopolitical environment, among others. Second, ownership of the reform agenda by local government with stakeholder buy-in is important to encourage support for the reforms and increase the likelihood of success. Third, the negative spillovers of reform policies need to be minimized. Investment in social safety nets is a crucial part of reforms to protect the most vulnerable populations within the countries. Fourth, where reforms aim to achieve macroeconomic stability, they should not trade away social investment in human capital like education and health. Finally, reforms should be a process of continuous reevaluation, adjustment, and recalibration over the reform period. There is not and will never be a one-size-fits-all approach when it comes to economic development, and the reform agenda should be approached carefully and with flexibility.