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By Carolina Alves, Daniela Gabor and Ingrid Harvold Kvangraven

Decades of research have documented the devastating impacts of the Washington Consensus in the developing world. Yet revisionist accounts of this story have emerged in recent years. Remarkable amongst these, a recent blog post by the Peterson Institute for International Economics –  鈥溾�� – draws on research that is jaw-droppingly ideological and flawed. 

The revenge of the synthetic counterfactual

For decades,  mainstream and heterodox economists broadly agreed that the Washington Consensus failed (, , ). Debt-crisis ridden developing countries that implemented the reforms associated with privatization, liberalisation and deregulation in the 1980s and 1990s tended to see an increase in poverty along with worsening health and educational outcomes. This led to the 1980s and 1990s being dubbed the 鈥榣ost decades鈥� of development () and ultimately paved the way for the the post-Washington Consensus and pro-poor policies ().

But this is about to change. New methods that 鈥榩roduce credible counterfactuals in case studies鈥�, turn the conventional wisdom of the Washington Consensus failure on its head (, , ). Essentially, the counterfactual approach involves first creating fictitious or synthetic countries, whose policy makers chose the opposite policy trajectory, and then testing whether the Washington Consensus package works better than the alternative. The results, the PIIE blog informs us, stack up for the Washington Consensus: countries adopting WC policies are to () be better off in GDP per capita terms. In contrast, left-wing populists – of the Latin American pedigree – hurt their economies by the Washington Consensus policies out with the neoliberal bathwater. 

The counterfactual revenge against the many critics of Washington Consensus reinforces an emerging revisionist literature (e.g. , ). It may offer tempting opportunities to rescue the memory of John Williamson, the PIIE fellow that coined the term 鈥溾�� thirty years ago. But if one unpacks its mechanics carefully, the counterfactual approach turns out to be a thinly-veiled ideological attempt to whitewash the Washington Consensus, to resurrect its key tenets: that minimising the footprint of the state is the right policy choice in health or education, that macroeconomic policy should mean inflation targeting by central banks not active fiscal policy by elected politicians, that state-owned companies are all white elephants in urgent need of privatization, that trade unions harm labour markets. 

To understand the politics of the Washington Counterfactual, it is instructive to examine Nicaragua, one of the countries would have done much better under Washington Consensus than its left-wing populist leader Daniel Ortega, at least during the Sandinista Revolution of 1979-1990. 

Unpacking the 鈥榗ounterfactual鈥�: synthetic Nicaragua

The PIIE blog uses the findings of to argue that 鈥渓eft-wing populism made Venezuela, Nicaragua, and Bolivia 20 percent poorer relative to a plausible counterfactual. These countries did not experience reduced inequality or improved health outcomes that might have justified such a large sacrifice of income.鈥� 

The paper elaborates the following history of the Sandinista Revolution: having defeated the Somoza dictatorship in 1979, Sandinistas under Daniel Ortega embraced 鈥榓nti-market鈥� policies: nationalized banks, mining and fishing, and 20% of arable land that had been held by Somoza family and its supporters. Sandinistas also proved reluctant to enforce land property rights (a cardinal sin in the Washington Consensus world). Having initially flirted with anti-democratic politics, Ortega won the 1984 elections and oversaw a new Constitution in 1987. His time in office ended in 1990, when he lost elections.

In that same section, the paper compares Nicaragua under Ortega with a synthetic Nicaragua that would have followed the Washington Consensus prescriptions. It provides a stark picture of the economic costs of Ortega鈥檚 鈥榮trong state鈥� policy choices: by 1990, the average citizen of synthetic Nicaragua would have enjoyed a (roughly) 8.200 USD GDP/capita. In the real world, the GDP/capita under Ortega fell to around USD 3.000 USD. Even starker, 15 infants per each 1000 live births would have stayed alive in synthetic Nicaragua, or conversely, were killed by Ortega鈥檚 deviations from the Washington Consensus. 

For anyone familiar with Latin American politics, the ideological machinations behind this narrative are apparent on two levels. 

First, take the treatment of 鈥榬eal鈥� Nicaragua. The paper is silent on a well-known historical reality: the Ortega administration had to contend with a civil war waged by the Contras paramilitaries throughout the 1980s, with direct support from the and the US under the Reagan Administration.  Why not examine instead Ortega’s return to power in 2007, far more consistent with the paper’s definition of 鈥榩opulism鈥�? Could it be because the second Ortega regime has had a Washington Consensus, pro-market disposition in economic policies, despite rhetoric to the contrary, and does not fit easily the 鈥榣eft populist鈥� narrative, civil war aside?

Instead, the authors, US-based economists and political scientists, abstract from the US-sponsored civil war in the discussion of Nicaragua鈥檚 economic policy outcomes, although the – the US Administration selling arms to Iran in order to finance the Contras –  exploded into one of the most serious political scandals of the second Reagan Administration. After all, Ronald Reagan in 1985 that he would stop pursuing regime change in Nicaragua 鈥渋f the present government would turn around and say 鈥� all right 鈥� if they鈥檇 say 鈥榰ncle鈥欌�︹�� . Could it be that the Sandinista Revolution was distracted from growth outcomes by Ronald Reagan bombing them for refusing to say 鈥榶es uncle, mi patria tu patio鈥�? 

Second, how does one empirically create a fictitious country? The synthetic control method predicts a  ‘no Ortega’ growth/infant mortality path by creating a pool of  鈥榙onor鈥� countries and calibrating their relative contribution to a synthetic Nicaragua such that the pre-Ortega growth or infant mortality path is close to actual Nicaragua. The Washington Counterfactual thus creates a  synthetic Nicaragua composed of 23% Chile, 54% Honduras, 9% Mexico, 8% Norway, and 7% the US. 

Or, to bring a historical touch to the method, synthetic Nicaragua, like a neoliberal Frankenstein, consist of 7% country bombing Nicaragua (US), 54% country used by the CIA/US to bomb Nicaragua (Honduras),  23% country where Washington Consensus was being implemented by Chicago Boys and a military dictatorship (Chile), 8% country never analytically paired with the Washington Consensus (Norway), and Mexico. It is this synthetic Nicaragua where per capita GDP would have been 5.000 USD dollars higher, a Nicaragua that the US empire does not bomb.

Poor scholarship? Poor method? It is tempting to answer yes to both. But in a discipline that is obsessed with objectivity and neutrality, the ideological intent is clear: the Washington Counterfactual produces fictitious countries in an attempt to restore the credibility of the Washington Consensus policies as 鈥榞ood policies鈥�. 

Not much has changed since the 1950s, it seems. Then, Gunnary Myrdal () noted that economists often smuggle in values from the beginning of their analysis, but that these only show up explicitly later on in the form of policy recommendations. To better understand the impacts of policies associated with the Washington Consensus, and to have open and meaningful debates about how these can be understood, we need research that is explicit about its ideological underpinnings and assumptions from the get-go. 

Beyond History: Why the Revisionist Account Matters

This is not just a debate about the past. Indeed, recent research demonstrates that the IMF has been actively conditioning its loans on the Washington Consensus staple policy of austerity over the past two decades ().

At a moment when are again turning to the IMF, forced by  COVID-induced economic crises, how we understand the impact of policies associated with the Washington Consensus matters. Policy-based 鈥榚vidence鈥� that the Washington Consensus works may allow the IMF to diffuse increasingly vocal that it abandons austerity and avoids 鈥榣ost decade鈥� of development. 

More broadly, revisionist accounts of the Washington Consensus matter because the pandemic has revived around the role that the state should play in the economy. Countries at risk of debt distress may be more willing to accept the Washington Consensus prescriptions when research tells them that short-term pain is worth the long-term gain. That long-term gain, it is argued at the of the World Bank and the IMF that are taking place this week, is the low-carbon transition without a large green developmental state. The World Bank鈥檚 new Climate Action Plan for a Green, Resilient and Inclusive Development () suggests that global finance can deliver where the fiscally-constrained state cannot, as long as concessional lending and scarce fiscal resources are directed to  private finance for development by de-risking development assets. Such plans retain Washington Consensus logic at its core, but go further in terms of actively promoting global private finance as the solution to financing gaps and development risks – the so-called Wall Street Consensus ().  

It should perhaps not be a surprise that authors from the Free Market Institute and the RAND Corporation will go to unusual, evidently ideological, lengths to produce 鈥榚vidence鈥� that left-wing governments produce less successful economic outcomes than neoliberal ones. But we would find it easier to swallow this classic example of academic gaslighting if  economists were not always insisting on the strong standards of objectivity in the discipline. If anything, this is a powerful reminder that all economics is political, however much some hide it behind new or 鈥榮ophisticated鈥� econometric techniques. 

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Carolina Alves is a Joan Robinson Research Fellow in Heterodox Economics at University of Cambridge, the U.K. She tweets at

Daniela Gabor is Professor of Economics and Macro-Finance at the University of the West of England, Bristol. She tweets at .

Ingrid Harvold Kvangraven聽is a Lecturer in International Development at the University of York.聽She tweets at .

Photo: Frankenstein by .