It was a received wisdom that was probably never widely enough shared to deserve the term consensus, even though most governments in most parts of the world put its precepts into practice throughout the 1990s. But since the financial crisis of last summer, the Washington consensus has looked a bit threadbare. The tigers of South-east Asia had embraced it wholeheartedly and yet many of them still plunged into crisis.
A new World Bank publication has ridden to the rescue. Called "Beyond the Washington Consensus: Institutions Matter", it concludes that the standard policy recommendations were not wrong, just incomplete. Critics will say this is a bid by one of the Big Brother institutions of the world economy to alter the content of the consensus while keeping the Washington bit intact. For the World Bank still has a shopping list of appropriate policies for emerging economies.
But it is worth looking at the lessons drawn from the crisis given that the original Washington consensus did generate such spectacular growth in the countries that embraced it. The new report concludes that the mistake was to overlook the importance of the institutional structure of economies. The sound macroeconomic policies were applied regardless of the historical and cultural context of individual economies, as if there really were such as thing as a pure free market. Of course there is not, and it seems mad that anybody could have imagined otherwise. But it is not that obvious, except with hindsight, that there is any link between the need for a small government budget deficit and, say, the regulation of the banking system or the types of contract on which civil servants are employed.
The report summarises research on the links between certain types of institutions in developing economies and their growth rates and poverty levels. The results are unsurprising. Respect for property rights, honest civil servants and politicians, protection of investors' and depositors' rights, and so on, are all correlated with higher GDP and lower poverty and inequality. There is a similar link with strong shareholder rights, such as allowing small shareholders to vote by proxy, not setting too high a threshold for the calling of exceptional shareholder meetings, and making it possible for shareholders to oust directors. So in this sense the World Bank vindicates the commonplace conclusion that, broadly speaking, "crony capitalism" was to blame for the severity of the east Asian crisis.
This does not just mean the tendency of eminent politicians to appoint members of their family and entourage to all the top jobs. It includes, also, things like legal protections for creditors. One fascinating table ranks countries according to whether or not their laws guarantee that secured creditors get paid first, whether there is an automatic stay on assets, whether managers are forced to leave a bankrupt company, and so on. The developed economies mostly enjoy a high score. So do many countries whose legal system is derived from the Anglo-Saxon tradition, including Hong Kong, Singapore and Thailand. But those with traditions more like the French or German - most of Latin America, Korea and Japan - have a lower average score. The same groups do worse on indicators of accounting standards, too.
This comparison prompts the interesting thought that if this is what constitutes crony capitalism, it is an ailment that does not just afflict developing countries. For Germany, too, has close links between banks and corporations not mediated by markets, overlaps of personnel and misty accounting standards. Even taking a narrower view of crony capitalism, the rich countries share with the developing countries many institutional problems. Russia is not alone in being plagued by the web of Mafia control ensnaring its businesses or by massive tax evasion; but Italy is a very wealthy country and Russia is not. Just recently the entire European Commission was forced to step down over allegations of fraud and mismanagement; the EU budget forms one of the world's biggest gravy trains. The Anglo-Saxons do not escape; after all the US has given us the phrase "pork barrel" politics.
Perhaps it is true, then, that in the end the rich are just different from the rest in having more money. The lesson seems to be that developing economies have to get their macroeconomic policies right (the first version of the Washington consensus); then their microeconomic policies and institutions right (the updated version). And then they need to get richer too, because that is what really helps weather the storms of financial crisis.
But I think this would be too defeatist a conclusion. The World Bank's authors conclude that, just as the 1980s debt crisis spurred the afflicted countries to cut deficits, liberalise their trade rules and start privatisation programmes, the 1990s crisis will set in train a process of detailed institutional reform. Let's hope the developed economies should be busy applying the same logic to themselves as well as hectoring poorer countries about what they ought to do. For the same set of solutions might well help solve the different kinds of problems faced by different groups of countries. After all, a breath of free-market fresh air in Germany's jobs and capital markets might help reduce its seemingly permanently high unemployment rate. More equal access to education and healthcare in the US might give young men in its ghettos an alternative career to prison. There cannot be one Washington consensus for the poor and another for the rich.