Does the post-1989 development of post-socialist spaces in transition support the contention that the (post-) Washington Consensus is the correct model for development?

Over the last two decades, it has been a safe assumption to proclaim that the World Bank, along with various Washington institutions, has been at the forefront of development. The practice of development is an international one; quintessentially it is the distribution of resources, the set-up of institutions, and the transformation of national economies and societies to, in essence, form a state from a less developed status to that of a more developed status. The Washington Consensus (WC) was a policy model that was designed to shift state-led ideology to market-oriented policies in post-socialist countries.

This paper discusses the trends of the WC and its shift to the (post-) Washington Consensus (PWC), bringing to attention the key characteristics of the two. It examines two examples of post-1989 development patterns in post-socialist areas and evaluates whether the PWC has successively improved the development of those areas. One of the countries is Hungary. One of the reasons why the countries of East Central Europe (ECE) undertook a series of transformations from state socialism in the late 1980s and early 1990s was the knowledge that the opening up of their markets would allow for greater prosperity and similar living standards of that experienced by Western economies. The final country that shall be evaluated is China. China adopted its own development plan prior to the collapse of the Soviet Union in 1989 which it then adapted using some parts of the WC. It would be interesting to compare these two countries to explore which ones had chosen the “right” development patterns as both have success stories to reveal.

With the collapse of the Soviet Empire and its counterpart communism, western governments were faced with a “vacuum” of space that could be utilized to promote development. The disengagement of socialist ideology and central planning, something that had reached far past the Soviet spheres of influence in Eastern Europe, fashioned the need to create an alternative set of ideas on how to organise economic and political life in favour of Western countries.

The term WC was originally coined by the economist John Williamson in 1989 for a list of ten policy recommendations for post-socialist countries to reform their economic policies (see table 1). This list was fabricated by leading Washington institutes such as the International Monetary Fund (IMF), World Bank, and the U.S Treasury Department. Williamson himself never identifies the WC as a development paradigm. He argued that the WC is a ``universal convergence,'' and that it represents ``the common core of wisdom embraced by all serious economists'' (Williamson, 1993: 1334). The structure of the WC and its revolutionary thinking is seen as the shift from state-led dirigisme to market-led oriented policies. As certain examples show however, the nature of this change in paradigm shift does not work entirely. Parachuting western style ideologies into post-socialist regions will not eliminate the continuity of socialist living as post-socialism is an ongoing process, not an outcome. Gore (2000) summarises these changes as the “partial globalization of development policy analysis” and that it is a shift from “historicism to ahistorical performance assessment” (Gore, 2000: 790). In essence, economists must no longer rely upon old development paradigms but seek for performance based objectives.

During the 1990s, the reliability of the WC policies began to be challenged. The success stories in the 1990s of the Asian Newly Industrializing Countries (NICs) gave way to the rethinking of the WC for a more neoliberal paradigm. These Asian NICs were successful because they were less protectionist. Countries that adopted the WC but kept some of its dirigist policies experienced slower rates of economic growth and higher income inequality. This limited their success in terms of economic expansion and poverty reduction (Onis, 2005). One stark contrast in the development gap between two geographical regions is that of Latin America and the Asian NICs. The countries of Latin America closely adhered to the WC without witnessing an increase in development. While the regions of Latin America had stagnant investment performance and experienced deindustrialization; the Asian NICs experienced high performances and a stable economy. Graph 1 summarises the comparison of inflation between the two regions based on unweighted regional averages from the World Development Indicator, 1997.

Table 1: Williamson’s 10 point Washington Consensus

Source: Williamson, J. (1990)

Graph 1: Inflation rates of Latin America and East Asia

Source: Stiglitz (1998).

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Source: Williamson, J. (1990)

Graph 1: Inflation rates of Latin America and East Asia

Source: Stiglitz (1998).

Josef Stiglitz (1998) pioneered the lead for a policy model that was not directed by those in Washington; but for a development paradigm owned by developing countries. Stiglitz argued that the WC only focused on two areas for improving macro-economic stability, trade liberalisation and privatisation, and that reducing inflation is not always essential. Stiglitz continues to state that these instruments for development must be complemented by effective regulation and competition policies. In further contradictions, Stiglitz praised the success of the Asian NICs for their important role played by the state. The new consensus should not only focus on achieving economic development, it should also strive for equitable development, sustainable development, and democratic development. Williamson (2004) summarises some of the fundamental instruments that needed to be embodied into the WC to achieve further development:

It should aim at stabilizing the real economy as well as inflation.
It should attempt to improve the regulatory framework of the financial system, rather than assume that liberalization is the only game in town.
It should include a competition policy.
It should consider various possible mechanisms for improving the efficiency of government, rather than seeking to minimize government’s role.
It should focus on improving human capital formation.
It should seek to increase the transfer of technology to developing countries. (Williamson, 2004: 14)

One other contributor in challenging the WC was Dani Rodrik (2002). He argued that the WC needed an alternative set of “policy guidelines” for sustaining development without creating a universal blueprint that supports all countries at all times. Rodrik continues to demonstrate that a further ten point policy reforms, in addition to the WC, is necessary for developing countries (see Table 2). This he coined the “Augmented Washington Consensus” (AWC).

Table 2: The “Augmented Washington Consensus”

Source: Rorick (2002).

Rodrick declares that the AWC is by no means an improved version of the WC. He was critical of the AWC quoting that “it is an impossibly broad, undifferentiated agenda of institutional reform” (Rodrick, 2002: 1). Like his peers, Rodrick noted that the PWC should implement these new reforms where and when needed to accommodate for local context and needs, and providing for a practical, feasible path of getting there.

The collapse of the soviet-union led way to major transitions in ECE economies. Hungary was one of those that found itself in the midst of a changing process of changing society from that of a centrally planned economy into a market economy. The WC, like in many other post-socialist countries, was implemented as a way for western style economies. This process of transition affected the Hungarian regions in many ways. Market liberalisation implied changes which turned earlier monopolies of the regions into comparative disadvantages. Lorentzen (1996) claims that as of 1995 “72.1% of the exports and 70% of the imports are directed to the OECD countries, whereas the share of the former Soviet Union has dropped to 15% of both exports and imports” (Lorentzen, 1996: 260). Privatization changed the relationship between public and private enterprises, mainly in favour for the latter. The privatisation of enterprises started in 1990, with almost 2000 large-scale businesses implemented. By mid-1994, 400 had been liquidated and 167 reduced to a minority share. Only 569 remain fully privately owned (Lorentzen, 1996). The distribution of development was also not equal. The west of Hungary, with its close proximity to Austria and Germany, had more appeal for Western commerce. Enterprises of theses western regions became acquitted with Western standards through import-export relations, whereas the eastern regions prevailed. The outcome of this saw Gyor to become the most prosperous town in Hungary. This style of development classically portrays the WC paradigm models. Furthermore, privatisation generated corruption. People who had significant amounts of money, or who were well-connected often bribed officials to gain easy access to state property. Corruption was embodied in the highest order: infiltrating public administration, healthcare, education, judicial system, the police and politics (Berend, 2007).

The need for a more home-grown style of development became apparent. The WC saw the abolition of many formal institutions and incentives which had existed throughout the years of communism. These former institutions recognised local requirements for production, labour-supply, and the relations between enterprises and state agencies. In addition to, they also supplied incentives for planners, workers, managers, and students. It was understood that the market would be the only institution and incentives for renewed growth and wealth. The Poland and Hungary Action on Reconstructing the Economy (Phare) was initiated in 1989. This was one of the few government institutions in action. Noticing the requirement for local-led policies, Phare established the Local Enterprise Agency (LEA) in 1991. The LEA worked close to the local population and produced services for individuals and enterprises. The tasks set by the LEA were narrow and specific (Lorentzen, 1996). The adaptation of the WC, taking into the considerations of the PWC, did witness an increase in development. It was estimated during 1991 that the northern ECE countries would not regain 1989 output levels until 1996. It was not until the year 2000 however that Hungary had regained its 1989 levels of outputs (Meurs, 2003).

Although output levels did not stabilise until the early 2000s, development increased. To examine development we look at GDI, GDP, and variable in infrastructure. Changes in railroads are measured in passenger kilometres per million U.S. dollars of GDP, in purchasing power parity Telephone availability is measured in telephone lines per one thousand people. Change in availability will capture positive infrastructure flows that the PWC consists of, along with post-socialist reforms. As table 3 shows, transition economies show a broad diversity in outcomes with Hungary’s average GDP rising by $705. Similarly, telephone access rose uniformly, with 212 lines per thousand. The main decrease comes from the passenger railway per million dollars of GDP, with a loss of 58,876. A reason for this is because of an increase in car ownership, which relates to the increase of GDP.

Table 3: The change in development indicators

Source: Meurs (2003).

Table 4: Changes in school enrolments and life expectancy

Source: Meurs (2003).

Table 5: HDI rankings

Source: Meurs (2003).

Human development indicators show that life expectancy and enrolments into school had increased (Table 4). Primary, secondary, and tertiary education had all shown signs of improvement. A rise in tertiary education may be a sign of responsiveness to the needs of restructuring. Combined with the rise of secondary education, a prerequisite for tertiary, this shows the way for sustainable development. Life expectancy also shows a positive increase, showing an increase in health care and a better standard of living.

The inclusion of GDP, health, education, and infrastructure parameters can transfused into a single, comparative index (Table 5). The Human Development Index (HDI) shows an overall backward slippage in rank from 1989 to 1998. What is clear from table 5 is that even though the rank has decreased of Hungary, it has still faired better off than its surrounding neighbours. One factor for the decrease of rank can simply be from the fact that other countries outside the reach of communism are doing better than those who felt its collapse in 1989. These other countries initially had not had their economies in a transition that was decided by the WC.

Contrary to the WC and the PWC development models, China has one of the fastest growing economies in global terms. China itself is still governed in a Communist manner: its political ideology is still similar to the former USSR. China has adapted communism in a way that it has been able to survive economically where its counterpart had failed. On total GDP terms, in 1988, China was less than half of Russia but ten years later Russia was less than half of China (Qian, 2002). China itself did not adopt the WC and neo-liberal reforms to survive, whereas most other post-socialist regions had.

One reason to China’s success lies in its early agricultural reforms from the early 1980s. Developing countries rely on agriculture as a main source of GDP until it can shift to industrial and then later tertiary. During the 1970s, over 70% of China’s population were employed in agricultural compared to that by 2000 when that percentage was down to less than 50%. For a country to develop economically and lose its main source of capital can only be explained for having growth outside of agriculture. Table 6 recapitulates China’s growth from 1979 through to 1995. China and its economy achieved this state of transition through four economic reforms: liberalization through a “dual track” approach, local government ownership and rural Township-Village Enterprises (TVEs), fiscal federalist productivity, and government constraints to protect private incentives.

As the WC, and later the PWC, was been implanted throughout post-socialist areas, market liberalisation was tackled by one standard approach: prices are freed in one stroke and are determined solely by the market. China adopted its own style of market liberalization that was known as the dual-track approach. One side of this dual-track approach follows closely to communist ideologies; that markets are fixed to planned quantities and prices. The second half sees that if certain quotas and obligations are sustained then economic agents can participate in the free market at free market prices. Qian (2002) clarifies that market prices were essentially “liberalized at the margin while inframarginal plan prices and quotas were maintained for some time before being phased out” (Qian, 2002: 15). This approach differs from that experienced by Hungary. Not only does the dual-track economy contain real market prices like Hungary, it continues with certain elements of communism, something that the PWC does not. Due to the political clash of communism and the democratic system, the PWC (or chiefly Washington) would not include communist ideologies.

Table 6: China’s growth rates of GDP

Source: Adapted from China Statistical Yearbook

China’s second model for economic reform derives from local led initiatives and ownership. These TVEs were controlled and owned by local governments as opposed to being state or privately owned. These TVEs began to be privatised after the 1990s, but by then they already had a strong foundation and China’s economy was growing. The TVEs worked in two ways: providing incentives and ensuring greater control over the markets. Local governments can offer larger incentives to enterprises and by providing public goods that a market-led or national enterprise because their ownership rights to the TVEs could almost guarantee future revenue. Furthermore, the protection of local-government owned firms is more secure that those that would be privately owned. The make-up of China’s political system means that rural community governments do not vote or elect the national government. Support for the national government comes from providing for local needs and amenities such as maintaining order, building roads, and providing water and irrigation systems (Qian, 2002). Providing local amenities by the national government raises public opinion, which in turn is beneficial to local business development. This style of locally led agencies is contrasting to PWC style reforms. As experienced by Hungary prior to the 1990s, not having a locally led initiative leads to confusion and under development. After 1990 saw the mass privatisation of state enterprises without local needs and necessities being addressed. This ultimately led to corruption and reform failure, and did not see development regain output levels similar to that of 1989 until a decade later.

Another one of China’s policy reforms was centred on fiscal development concerning the local governments. Qian justifies the need for fiscal reforms by quoting that “before the reform, the shares of local government expenditure in total government expenditure were 46 percent during 1971-75 and 50 percent during 1976-80. After the reform, the shares were 51 percent during 1981-85 and 60 percent during 1986-90. After excluding price subsidies during 1986-90 to make the data comparable to previous periods, the shares of local spending came down to about 50 percent”(Qian 2002: 26). Qian continues to state that local-spending ratio was the same as before the reform but the spending does not characterise its importance. The key aspect of the fiscal reforms allowed local regions to decide on their own fiscal arrangements and that local governments had authority to structure their own expenditures set by guidelines from the central government. The demarcation of central and local revenue sources meant that they could be specified, such as the rates and base of central, local, and shared taxes. In addition to this, tax administration was recentralised so that the centre established its own revenue collection body to collect central and shared taxes, leaving the local tax service in charge of local tax collection only (Liu, 2006). Decentralized decision-making would better suit the preferences of local residents and make the incentives of sub national governments compatible with the centres, thus reducing enforcement costs. By redefining the fiscal reforms, local and central governments now have little space to manoeuvre, almost forcing them to work within the local business sector.

The foundations of the neoliberal orthodoxy that was implemented by the IMF and World Bank have rocked the very context of the 1990s. Regions that suffered the most were those that relied heavily on socialism. With the collapse of the Soviet Union, western style governance had free reign over these post-socialist regions. The process of restructuring these transition economies has been associated with weak growth performance, persistent poverty, rising inequality and endemic crises with costly ramifications (Onis, 2005). Those countries that have performed better than pre-1989 are those in East Asia that have managed to deviate from the rigid neoliberal reforms. Post-1989 Hungary witnessed the general institutions of a centrally planned economy collapse, with neo-liberalism paving the way for the aggressive expansion of private ownership and intensified economic relations with the West. The economically unbalanced state of flux that the WC left in its wake turned regions of Hungary into an east-west disparity. The WC had failed to familiarize itself with local requirements. By the time that the PWC had been recognised as a continuation of the WC, it was a case of too little too late. Local counties, governments and ministries were still weak a decade after the fall of socialism. There were some success stories of the PWC however. Politically, Hungary has a fully democratic institution with general elections held every five years. As of 2004, Hungary became the 21st country to join the European Union (Butler, 2007). To gain this Hungary had to pass certain standards, such as a good level of human rights.

On contrary to this, China can be Hungary’s complete opposite. China used a different approach to its policy reforms, almost disregarding the PWC altogether. China’s reform experience is unique in its own respect among developing and transition economies. Its combination of communist and western markets allowed for its progressive economic expansion, something that it can still achieve given the current economic climate we are experiencing in 2009. This approach to China’s transitional reforms has even been coined the “Beijing Consensus” by Joshua Cooper. However, China still has a long way to go with its human rights. Where China has failed on improving development, Hungary has excelled.

The PWC is not the correct model for development. Neither is the “Beijing Consensus”. Hungary has proven herself as the one of the most developed ECE countries, but it still has a long way to go economically compared to China. Likewise, China still has its contested human rights to evaluate before it can develop in human terms. A good development model should extract the successes of both regions and then only use it a blueprint, for development requires a sound historical and cultural knowledge of said place before decisions can be made.

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