Here we detail about the ten elements of Washington consensus in new economic policy.
The ten elements are: (1) Fiscal Adjustment, (2) Tax Reforms, (3) Deregulation, (4) Privatisation, (5) Trade Liberalisation, (6) Competitive Exchange Rate, (7) Removal of Barriers to Foreign Investment, (8) Financial Reforms, (9) Protection of Property Rights, and (10) Redirection of Public Sector Investment.
Element 1# Fiscal Adjustment:
This means that developing countries should take steps to reduce fiscal deficit through curtailing Government expenditure by drastically reducing explicit and implicit subsidies provided by the Government of developing countries.
Element 2# Tax Reforms:
It was suggested that tax rates should be cut substantially to promote saving and private investment. This will promote investment and ensure a higher rate of economic growth. This was in line with supply-side economics. In fact, Jagdish Bhagwati and T.N. Srinivasan invoked Laffer Curve Concept of supply-side economics to argue that reduction in rates of taxes would cause not only greater private saving and investment but will lead to greater revenue for the government. Besides, it was suggested to broaden the tax base by withdrawing exemptions and plugging the loopholes in taxes.
Element 3# Deregulation:
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This was most significant policy measure under which it was recommended that industrial licensing controls be abolished but also such measures as Monopolistic and Restrictive Trade Practices Commission (MRTPC) and FERA (Foreign Exchange Regulation Act) be done away with so that private sector should grow without any obstructions.
Element 4# Privatisation:
This is another significant measure of development policy under which it was proposed that there should be disinvestment of public sector enterprises and accordingly either they should be sold out rightly to the private sector or Government stake should be reduced and its shares sold or transferred to private enterprises.
Element 5# Trade Liberalisation:
Under this it was suggested that tariffs on imports should be drastically reduced to promote free trade. Besides, all quantitative restrictions on imports were also to be eliminated to permit free trade.
Element 6# Competitive Exchange Rate:
Under this it was recommended that developing countries like India should devalue their over-valued currencies and ultimately adopt flexible exchange rate system. Besides, it was suggested to make the currency convertible so that obstacles to growth of free trade and capital mobility be removed.
Element 7# Removal of Barriers to Foreign Investment:
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It was stressed that economic growth in developing countries could be accelerated through larger foreign direct investment (FDI). Therefore, all barriers put up by developing countries should be eliminated to attract foreign investment in their countries. To facilitate foreign investment it was also suggested to adopt Convertibility of currency on current account as well as on capital account.
Element 8# Financial Reforms:
They involve reforms in the banking and insurance system and also in capital market.
Element 9# Protection of Property Rights:
According to this, suitable legislative measures should be taken to protect property rights. Besides, labour law should be amended so that it becomes easy for private enterprise to enter and exit the industries. In this, freedom to exit was emphasized and it was recommended that labour laws be made flexible so that it should be easy to retrench workers.
Element 10# Redirection of Public Sector Investment:
Lastly, it was emphasized that public sector investment should be redirected towards education, health and infrastructure only and also leave these and other fields open to private sector operation.