John Williamson (economist)

Much of Williamson's early career focused on developing a theory of the crawling peg. He has since stated that his primary contribution to the discipline has been his research on exchange rates.[7] The system entailed gradual devaluations of the currency, changing expectations that the currency will devalue and interest rates would be sufficiently high to compensate bondholders. His proposal contrasted with the existing adjustable peg, in which the rate is pegged in the short run. His theories on the crawling peg were well received among economists. Sir Roy Harrod of Christ Church, Oxford University offered him a prestigious post, which Williamson declined.[3] During the early 1970s, Williamson was involved in working with the Committee of Twenty for devising the IMF's strategy to comprehensive systemic reforms.[5] He has continued to modify his theories of intermediate exchange rates with new proposals on monitoring bands and reference rates.

During the 1980s, while working at the Institute for International Economics, Williamson began exploring theories on target zones. He argued that these targets should be based on estimates of the real exchange rate, which would accommodate secular trends in productivity growth, real shocks to the economy, and new information.[8] The main mechanism of adjustment was monetary policy, supported by direct exchange-rate intervention. He worked with Fred Bergsten, then the institute's Director, on ways of helping Latin American countries stabilize their currencies through this process. He argued that intermediate exchange-rate regimes maintain competitiveness in increasingly globalized economies, while also being politically favorable. Beginning in 1985, Williamson worked with Deputy Secretary of the Treasury Richard Darman to develop a comprehensive system of optimal exchange rates ("target zones"). At the 1987 Louvre Accord, the G-5 industrialized nations adopted a system of reference exchange rates that was influenced by proposals of C. Fred Bergsten and John Williamson for a target zone system.[9] Research has shown that Williamson was largely correct in his assessment of altering expectations through his proposal of post-Louvre target zones.[10] Shortly thereafter, however, the target zones were replaced due to the belief that free-floating exchange rates would have been preferred. Williamson challenged this notion through his theories on intermediate exchange rates.

For much of his academic career, he worked on a theory of "intermediate" exchange rates as an intermediate between fixed exchange rates and floating exchange rates.[11] He was a critic of capital liberalization and the bipolar exchange rate.[12] Rüdiger Dornbusch (MIT) summarized this proposal as a "BBC" (band, basket, and crawl).[13] Williamson further coined the concept of “fundamental equilibrium exchange rate” (FEER) in Estimating Equilibrium Exchange Rates (1994) to describe how exchange-rate misalignments resulted in balance-of-payments crises. The IMF began using FEERs as the basis of its exchange-rate policies. There were also adoptions of FEERs in the private sector, most notably the Goldman Sachs desirable effective exchange rates (GSDEERs).

In the 1990s, Williamson continued his policy-oriented contributions. In 1996, Williamson became Chief Economist for South Asia, World Bank. He was invited by the United Nations Secretary General Kofi Annan to assess policy reform in Latin America. The project, headed by President of Mexico Ernesto Zedillo, involved assessing options for expanding the roles of the World Trade Organization and the International Labour Organization. The findings of the report, the Report of the High-level Panel on Financing for Development (2001) were discussed at a subsequent conference. The panel found that to secure economic growth and equity, developing countries needed to achieve balanced budgets, ensure macroeconomic discipline, and support human capital investments.[14] This Zedillo Report also recommended that the United Nations organize a series of climate-change conferences. In 2018, he stated that climate change was the number one concern facing economics. Following his retirement, Williamson wrote a book on growth-linked securities. It argues that, instead of fixed interest rates, certain securities should bear an interest rate that positively correlated with the growth of a country. Such an instrument would allow investors to have a vested interest in the economic growth.

In 1989, he coined the term "Washington Consensus" to describe policy reforms that the International Monetary Fund, World Bank, and U.S. Treasury advocated for emerging-market economies. The term arose from a publication, “What Washington Means by Policy Reform” (1990) that described what countries should do according to the convictions of Washington-based institutions. It became more widely known after a conference at the Institute for International Economics. Many of those who attended, including Allan Meltzer, Richard Feinberg, and Stanley Fischer, were receptive to the idea. The proposal notably received pushback from Rudi Dornbusch, who proclaimed "Williamson surrendered to Washington."

The term gained popularity and continues to be used today, both as Williamson described and in its current-day form.[13] Critics of the Washington Consensus argue that it endorses complete free movements of capital. However, Williamson's 1989 conceptualization of the consensus only included foreign direct investment. He connected these policy recommendations to his advocacy of target zones and limited exchange-rate fluctuations. The list of ten policies involved broad policy recommendations for economic stabilization: liberalization of foreign direct investment (FDI), legal security for property rights, and trade liberalization, among others.

Since the term entered public discourse, it has been misinterpreted and distorted from its original meaning.[15] Williamson claimed that the guidelines were meant to establish economic stability through stable institutions and cooperation. His policies had also been connected to the neoliberal policies of Ronald Reagan and Margaret Thatcher, whom he disliked.[16] Instead, Williamson argued that these were a series of recommendations—not requirements—for Latin American countries. Some politicians, notably the former finance minister of Brazil Luiz Carlos Bresser-Pereira, recognized that the term had been used outside of the original context. He also felt that advocacy for economic stabilization through his policies were not necessarily neoliberal. He later included an updated set of policy proposals to the Washington Consensus in “What Should the World Bank Think about the Washington Consensus?” (2000).[3] Joseph Stiglitz, former Chief Economist of the World Bank and Chair of the Council of Economic Advisers, did not object to the Washington Consensus per se, but to the neoliberal policies that policymakers have adopted.[17] He noted, at the time, that the policies were appropriate for some Latin American countries, but not for many others.[18] More recently, economists have recognized that the term was misconstrued from its original meaning, notably with regard to the opening of the capital account.[19] Williamson et al. argued for prudential capital controls for developing countries through international coordination efforts.[20] As Narcís Serra, Shari Spiegel, and Joseph E. Stiglitz, noted "the Washington Consensus has come to be associated with ‘market fundamentalism,’ the view that markets solve most, if not all, economic problems by themselves—views from which Williamson has carefully distanced himself."[21]

In 2012, scholars debated over a new term to describe China's economic growth. Business executive Joshua Cooper Ramo coined the term Beijing Consensus to frame China's economic development as an alternative to the Washington Consensus. The three guidelines he proposed were: 1. a commitment to innovation, 2. emphasis on sustainable growth through measures alongside GDP, and 3. a policy of self-determination. In turn, Williamson argued that the Beijing Consensus comprised five major points: 1. incremental reform, 2. innovation, 3. export-led growth, 4. state capitalism, and 5. authoritarianism.[22] In light of this change, Williamson argued Western countries should modify their policies through export-led growth, prudential capital controls, and fiscal policies.[23]

In 2006, Williamson published an article describing the benefits of bonds linked to the growth of a country's gross domestic product (GDP).[24] These refer to securities where the issuer (a government) promises to pay the investor returns based on the changes to that country's GDP. In other words, the investor obtains a stake in a country's growth through this "equity-like" feature. Williamson argued that these bonds would help countries obtain stability from capital flight.[25] The idea was also developed by other distinguished economists, including Nobel Prize Laureates Robert Shiller and Joseph Stiglitz.[26] Williamson built on the research conducted by Shiller to discuss how, in the wake of the global financial crisis of 2007–9 and the European debt crisis of 2010, economic stability has become all the more important.[27]