As progressive governments take office in the Global South, now more than ever there is a burning need for a new development theory that can
In the 1990s, John Williamson, a British economist and senior fellow of the Peterson Institute for International Economics, coined the term Washington Consensus to describe the neoliberal agenda to privatise state-owned enterprises (SOEs), commodify public goods, and liberalise capital accounts and trade. These policy choices, driven by the IMF and World Bank in alignment with the US Treasury, find much of their theoretical justification in neoclassical economics and the works of thinkers like Friedrich Hayek and those associated with the neoliberal Mont Pelerin Society. The Washington Consensus paradigm is perhaps most famous for its role in the so-called structural adjustment programmes (SAPs), which led to a lost decade on the African continent.
For the past several decades, the IMF has enforced a combination of austerity (what they call a ‘balanced budget’ agenda), privatisation, and trade liberalisation on decolonising nations. This has stripped states in the Global South of the capacity to drive their development processes and protect their infant industries. In order to deal with the resulting imbalances, the IMF has frequently encouraged underdeveloped countries to borrow from private capital markets, leading to more debt traps. Meanwhile, the World Bank has historically followed an agenda of recommending anything but large-scale industrialisation for the Global South. In the early post-World War II era, this manifested in its recommendations for countries to stick to their ‘comparative advantage’ in exporting raw materials. By the 1990s, the World Bank was promoting ‘financial deepening’, code for encouraging financial deregulation as a panacea for mobilising resources for development. More recently, the World Bank has shifted its focus to promote development in the service sector and investment in small and medium-sized enterprises (SMEs), both recipes for continued debt bondage on the national and household level. The service sector is often dominated by multinational corporations (MNCs) with monopolistic structures, making states that focus their development on this sector susceptible to the whims of MNCs in the Global North. SMEs, which typically lack the resources (including government subsidies) to compete with MNCs and do not have the advantages of scale of MNCs, end up absorbed into these larger monopoly-dominated networks. Indeed, the combination of financial liberalisation and the promotion of SMEs locks countries into what Samir Amin called generalised monopoly capital, with both upstream (raw materials, technology, and capital) and downstream (distribution, marketing, and consumer access) networks of control.
One of the main outcomes of the Washington Consensus has been an almost religious belief in the power of foreign direct investment (FDI) to drive economic growth and structural transformation. The FDI mindset drives Global South states towards a narrow focus on opening up their labour and natural resource markets to Western monopolies, thereby linking their agendas to the rent-seeking needs of financiers rather than the developmental aspirations of their populations. Empirical evidence of FDI’s transformative capacity, however, is limited at best: this form of investment fails to promote integrative growth that could pave a pathway out of indebtedness and towards national sovereignty, instead promoting unproductive sectors of the economy. Three characteristics of FDI are important to note:
FDI flows are declining. FDI peaked in 2007, the year that the Third Great Depression took hold in the major capitalist countries, and has decreased in the years since. Indeed, according to the United Nations’ Conference on Trade and Development (UNCTAD), both FDI and project finance (long-term infrastructure or industrial funding) have experienced a gradual decline. From 2022 to 2023, for instance, developing countries saw a 7% decrease in FDI flows to developing countries.
FDI flows are non-productive. Over the past few years, UNCTAD’s annual investment reports have shown the changing character of FDI. While in the past it was concentrated in the manufacturing and industrial sectors as well as natural resource extraction, FDI has increasingly been channelled into the financial and service sectors, where it does not generate integrated or transformative development that could help transcend colonial underdevelopment.
FDI flows do not drive growth or investment. According to a 1999 UNCTAD report, large FDI inflows to developing countries in the 1990s had little impact on increasing investment patterns. More recent studies by UNCTAD have shown a clear divergence between FDI flows and GDP growth since the Third Great Depression. This means that economic growth is increasingly independent of FDI flows.
The Washington Consensus has only reinforced the colonial pattern of underdevelopment, producing debt burdens that cannot be easily serviced. With bondholders mercilessly seeking repayment and interest regardless of a country’s economic situation, the debt spiral eats into precious revenues that could otherwise be spent on health care, education, and productive industry and infrastructure. Countries borrow and go into debt. When they cannot repay their debt, they borrow more to pay off their existing debt, and the spiral continues. As Raghuram Rajan, the IMF’s chief economist from 2003 to 2007, wrote in his book Fault Lines (2010), the IMF’s policies are a ‘new form of financial colonialism’.
