Are the Washington Consensus Policies Sustainable? Game Theoretical Assessment for the Case of Ecuador

This paper presents an evaluation of the so-called Washington Consensus economic policies in the case of Ecuador during the eighties and the nineties in a game theoretical framework. In a multi-period game, in which it acts as Stackelberg leader, the government minimizes a quadratic loss function using stochastic dynamic control techniques. A system of simultaneous equations represents the private agents' aggregate best responses that result from the general equilibrium solutions to the different agents' optimization problems. Its dynamic features show a stable system by itself, isolated from the type of policies that the government chooses. However, the introduction of the specific “style” of neo-liberal policies typical of the Washington Consensus, econometrically captured as they were applied in Ecuador, generates an explosive dynamics in every state variable of the system, suggesting that these types of policies are intrinsically unsustainable.