Whither the Washington Consensus?

What does the ‘New Social Contract’ mean? What does ‘social protection’ mean? What is its relationship to poverty reduction?

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John Williamson passed away on 21 April 2021. He was the economist who neatly outlined and named the ‘Washington Consensus’, the policies the World Bank, the IMF, the US Federal Reserve Board and the US Treasury agreed to impose on debt-ridden countries of Latin America. At that moment, 1990, these ‘structural adjustment’ policies had already been applied for a decade with disastrous social consequences. Social expenditures were lowered almost everywhere, public services were privatised, labour markets were deregulated and millions of people lost their jobs. John Williamson emphasised that the Consensus did not cover any social policies.


The Washington Consensus has been declared dead on many occasions since then. But is it? Today, we simply call these policies ‘neoliberalism’ or ‘austerity’ which also implies another kind of State, with less scope and more strength, as Fukuyama described it.


However, things look different now. Freshly elected President Joe Biden of the US will spend trillions of dollars for economic recovery. US Treasury Secretary Janet Yellen calls for a global minimum tax rate. Finance Ministers of the G20 gave their support for a 'globally fair, sustainable and modern international tax system'. To solve the crisis caused by the COVID-19 virus, many scholarly voices are calling for a one-off wealth tax.


Moreover, the World Bank and many other international organisations are openly promoting social protection and a ‘New Social Contract’.


Could this be, finally, the real death of the Washington Consensus? Could it mean the return of counter-cyclical Keynesian politics with deficit spending and an important role for the State with Western-style welfare states?


In this contribution, I want to look briefly at this last element and analyse the ‘social’ proposals that are being made. What does the ‘New Social Contract’ mean? What does ‘social protection’ mean? What is its relationship to poverty reduction?


Since words can mean many different things for many different people, it is important, especially for social movements who are working on these topics, to exactly know what they are faced with and what policies they can support or have to resist. Is there really a fresh wind blowing from the Bretton Woods?


Poverty reduction against social rights


It was a real breakthrough when the World Bank dedicated its World Development Report of 1990 to poverty. This undeniably was a consequence of social protests against the harsh policies imposed on countries of the developing world.


However, analysing the programme, it soon became clear that absolutely nothing was changing in the policies that had been imposed up until then. Poverty was seen as a problem of people who had been excluded from growth and markets and who urgently had to participate in them. Poverty was said to be solved by freeing markets and trade or by deregulating labour markets. There was not one social policy measure among the proposals; on the contrary, minimum wages were said to be harmful for the poor. In fact, it was the Washington Consensus itself that was seen as the real anti-poverty mechanism.


UNDP, the Development Programme of the United Nations, had no fundamentally different proposals. It clearly declared its opposition to traditional social protection systems that were not considered apt for poor countries. Poverty reduction was for poor people and States should not do more than that. Non-poor people could buy a social insurance on the market.


Also, it must be remembered that poverty never was a matter of income for the World Bank or UNDP. It was said to be ‘multidimensional’, and poor people were not supposed to speak of money.


In short, poverty was not seen as a collective and social problem; it only concerned individuals that were excluded from market participation, mostly due to wrong government policies.


Risk management


Nevertheless, ten years later, the World Bank did propose its first social protection plan, now named ‘risk management’. Risks, it was said, could never be avoided but should be correctly managed by individuals and families, markets and governments.


In this scheme, a whole series of decisions that normally one would never dream of calling ‘social protection’ — such as migration or child labour — did find a place. These were inevitable measures taken in order to cope with real difficulties.


Nothing much happened with these proposals until ten years later when inequality was also put on the agenda. The World Bank proposal to fight inequality was to make the incomes of the 40 % poorest people grow faster than the national average of incomes. This was also introduced within the United Nations Sustainable Development Goals (SDG), adopted in 2015. However, inequality is much more important within the ten percent richest group than within the nine deciles below them which means this SDG cannot seriously change the global distribution of incomes.


Yet, when the World Development Report of 2019 came out and the Bank looked at the ‘world of work’ with a proposal for a new social contract, once again, hopes were high. The Report was followed by a White Paper with new ideas for social protection.


A New Social Contract


These documents are extremely interesting because they do contain many new ideas and concepts, though it is not sure they also lead to a new practice.


The Bank now prefers to speak about ‘risk sharing’, and the bulk of what this White Paper is about is a ‘guaranteed minimum’ of transfers and subsidized premiums. Next to that, there is a system of ‘social insurance’ with obligatory contributions to a ‘risk sharing pool’. However, the World Bank remains strongly opposed to obligatory contributions burdening the wage bill and hopes to minimize them thanks to the first ‘guaranteed minimum package’ and a consequential reduction of the redistribution element.


Even if the Bank is now speaking of universalism, prevention, and a managing role for the State, it is constantly blowing hot and cold. Core labour standards are accepted, but one should ‘avoid regulatory extremes’. The Bank is not in favour of minimum wages that risk being ‘distortionary’ and ‘redistributive’. Severance pays or unemployment benefits can be ‘inefficient and unreliable’ and can be replaced by mandatory saving accounts. Flexible jobs are better than no jobs, so labour contracts should not be regulated. Fixed working time with possible overtime to be paid is not recommended.


The World Bank, then, is not against workers’ voices, not against social dialogue, not against trade unions and tripartite relationships, but all these mechanisms, such as formulas of shared ownership, seem to be insufficient and can better be replaced by totally new ones, so it says.


The World Bank does not want better labour market regulations, and it does not want better protection for people; it wants more competitiveness. It is still focusing on the poor. It is fair to say that the main objective of this whole exercise is not a ‘social contract’ for all. It is not more social justice or more social citizenship for the whole of society but rather, it is a shifting away of responsibilities from corporations to the State. Social protection is mainly at the service of the economy.


A macro-critical social protection


As for the IMF, it now recognizes that social protection can also be ‘macro-critical’ for reasons of social and political stability. However, it warns that it will not follow the rights-based and universal approach of the International Labour Organisation (ILO). If some social policy is accepted today by the IMF, it is only to the extent that it contributes to stability and that it avoids social protest and ‘reputational risk’. If the IMF is now concerned about inequality, it is because its research department pointed out that it hampers growth.


A European social model?


Something very similar has been happening in the European Union (EU) from the start of the internal market in 1992 up until today. In spite of a charter on the rights of workers, a charter of fundamental rights, and many positive treaty changes, the so-called ‘European social model’ of welfare states based on social citizenship has slowly been eroded. Although the EU has no competence for social security, it does influence national policies by way of its internal market and economic governance rules.


What happened was basically a slow changing of the objectives of social protection: from ‘guaranteeing standards of living’, it became ‘making work pay’ and finally ‘social investment, social protection and stability of the economy’. In other words, very similar to what the World Bank is doing, there is mainly a shift away from protection of people towards protection of markets and corporations. Social protection is now a factor of production.


Today, there is a hopeful and new ‘Pillar of Social Rights’ with an action plan that potentially can play a positive role.


Dualised societies of rich and poor


The paradoxical situation today is that, while never before has social protection been so high on the international agenda, never before has it been so seriously threatened. It has been made compatible with neoliberal policies.


The current COVID-19 crisis has made the need for a very broad social protection crystal clear. People do not only need doctors and hospitals, they need decent housing, clean water and clean air, income security and a whole range of services.


Also, it is far from enough simply to focus on poor people who need help: they are not alone. In many countries, huge middle classes are today economically and socially threatened by the crisis and a changing economy. They are also in need of social protection and income security. This is where the real prevention should happen, since it is rather weird to allow poverty to be created and then to try to solve it. We should stop focusing on poverty. The only good social protection is a universal social protection, with income guarantees as well as labour regulations and public services. This is what the Washington Consensus tried to unravel. Isabel Ortiz, Director of the Global Social Justice Programme, just published an interesting paper in which she warns of upcoming post-COVID new austerity and a renewed Washington Consensus.


International organisations have changed their discourse but not their practice. They seemingly defend social protection, but this social protection no longer means what it meant before. It is not about economic and social human rights, it is not about social citizenship as T.H. Marshall defined it. And there is hardly any resistance, except from the ILO and international trade unions, both bound to look for compromises and with a limited innovative potential. An interesting recent book by Minouche Shafik from the London School of Economics clearly shows how very difficult it has become to defend and promote economic and social rights; the book is about ethical and humanist values, certainly very important but lacking a rights-based approach.


In a remarkable book from the 1980s, Claus Offe stated that capitalism did not want any social protection while knowing it could not survive without it. This certainly helps us to understand what is going on right now.


Maybe the Washington Consensus is not as dead as we seem to believe. Radical resistance may be needed.


22 July 2021


- Francine Mestrum has a PhD in Social Sciences from the Université Libre de Bruxelles, Belgium. She worked at the European institutions and several Belgian universities.





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