Demise of The Washington Consensus

Before the Asia crisis in 1997, most technocrats and businessmen in Thailand believed that the country's economy should be relatively open. This openness provides access to technology and capital. Technocrats have long believed that increasing openness is needed to force Thai companies to become more efficient and to break down old monopolies. Hence liberalization and privatization had been staples of economic policy since the mid-1980s.[11]

The 1997 Asian crisis brought this view into question, along with a number of related conventional wisdoms of the time, the most notable being the so-called Washington Consensus, an agreement of outlook among the multilateral agencies in Washington—the World Bank and the International Monetary Fund (IMF)—on a set of free market policies that formed the basis for the conditions under which those agencies lent to developing countries.

Under the Consensus, countries were encouraged to promote liberalization by reducing barriers against imports with a view to eventually achieving free trade. Privatization of state owned enterprises and financial deregulation were also key elements in Washington Consensus policies. In short, governments were expected to withdraw from economic activity and intervene as little as possible. Free market prices were seen as the most important factor in promoting successful development.

In the 1990s these policies began to be questioned, not only by academic writers but also by the World Bank itself. The double-digit annual Gross Domestic Product (GDP) growth in China since the start of its economic reform program in 1978 has not been achieved by universal free markets, free trade or widespread privatizations. The Chinese experience suggested that the state can promote development by intervention in the economy. Looking back on the Asian Crisis it is also apparent that its cause was not the result of too much government intervention, but of too little—a failure to regulate financial markets. Pasuk and Baker's[12] analysis of the 1997 Thai crisis goes even further, arguing that the transformation of Thai institutional structures to conform to the mandates of the Washington Consensus on limited state economic intervention are precisely what caused the crisis.

Increasingly, throughout Asia a post-Washington Consensus outlook is emerging which stresses that markets can fail—especially financial markets and markets for technology— and that governments should intervene to promote domestic competition, regulate financial transactions, promote education and stimulate the inward transfer of technology.[13] This particular view of government intervention has become one of the key elements of Thaksinomics.