The Washington consensus works: Causal effects of reform, 1970-2015

By Kevin B. Grier & Robin M. Grier. From Journal of Comparative Economics.

"Abstract

Traditional policy reforms of the type embodied in the Washington Consensus have been out of academic fashion for decades. However, we are not aware of a paper that convincingly rejects the efficacy of these reforms. In this paper, we define generalized reform as a discrete, sustained jump in an index of economic freedom, whose components map well onto the points of the old consensus. We identify 49 cases of generalized reform in our dataset that spans 141 countries from 1970 to 2015. The average treatment effect associated with these reforms is positive, sizeable, and significant over 5- and 10- year windows. The result is robust to different thresholds for defining reform and different estimation methods. We argue that the policy reform baby was prematurely thrown out with the neoliberal bathwater." 

Highlights

         Sustained economic reform significantly raises real GDP per capita over a 5- to 10-year horizon.

         Countries that had sustained reform were 16% richer 10 years later.  

        Despite the unpopularity of the Washington Consensus, its policies reliably raise average incomes."

Also see What is the “Washington Consensus?” by Douglas A. Irwin and Oliver Ward. Excerpt:

"The main Washington Consensus policies include maintaining fiscal discipline, reordering public spending priorities (from subsidies to health and education expenditures), reforming tax policy, allowing the market to determine interest rates, maintaining a competitive exchange rate, liberalizing trade, permitting inward foreign investment, privatizing state enterprises, deregulating barriers to entry and exit, and securing property rights."