Note : The original article includes "grades" for Gordon Brown's efforts
in government after each item that is reviewed below. These grades have been
deleted here since they are more distracting than useful.
BR comment
======================================================
Peterson Institute for International Economics
The “Washington Consensus”: Another Near-Death Experience?
by John Williamson | April 10th, 2009
Many times, since I first used the phrase in 1989, the “Washington
Consensus” has been proclaimed dead, most recently by Prime Minister Gordon
Brown
of Britain at the press conference following the G-20 summit in London
earlier this month. Yet most of the governments of the world seem to be
determined to follow the precepts originally enshrined in my ten points under
the
Washington Consensus heading, irrespective of the ritual condemnations by
their leaders.
Some of the critics have doubtless never troubled to read the original and
therefore fallen prey to the populist reinterpretation of the Washington
Consensus as a neoliberal tract, a reinterpretation endorsed in recent years
by figures such as Joe Stiglitz and Naomi Klein. The problem with this
interpretation is that there never has been a consensus in Washington or
anywhere else in favor of monetarism, “supply-side economics,” belief in the
ubiquity of perfect competition, the immorality of state action to
redistribute income from rich to poor, and the other cranky right-wing
doctrines that
have been grouped under neoliberalism. There have doubtless been
individuals, and even administrations, that espoused such beliefs, but they
are as
representative of Washington in general—including such Washington-based
institutions as the World Bank and International Monetary Fund—as is the
neoconservative belief that it is smart policy to spread democracy by invading
countries.
In introducing the communiqué of the London summit to the press, the UK
Prime Minister Gordon Brown not only declared that the old Washington
Consensus was dead but also that it had been superseded by a new consensus
achieved in London. This suggests that it is worth doing two things: First,
examining Mr. Brown’s record on the ten specific points that I included in the
original statement of the Washington consensus. (I ignore the populist
reinterpretation, which remains—thankfully—as dead as the critics assert.)
Second, trying to distill the London consensus of which Brown spoke and
comparing it to the original consensus.
To turn to the first of those tasks, my ten points were as follows.
1. Fiscal discipline. The notion that governments should eschew
inflationary finance and normally seek to raise through the honest mechanism
of
taxation what they spend. At one time Gordon Brown was an enthusiastic
exponent of such honest finance: He even enshrined the doctrine in his rules
for
the conduct of fiscal policy. Nowadays he is, like everyone else, engaging
in fiscal stimulus. I have no objection to this. Exceptional times demand
exceptional policies. I remain a Keynesian in the sense that when there is
a deficiency of aggregate demand, the government should seek to remedy it.
But what has been unforgivable about Gordon Brown’s period in office was
that he allowed a budget deficit, and even increasing debt/GDP ratios, at the
height of the last boom. This behavior would certainly have been condemned
by the Washington Consensus. It is a pity that Gordon Brown ignored it.
2. Redirection of public expenditure. The Washington Consensus was
supposed to represent a consensus and therefore did not take a position on
whether an excessive deficit should be remedied by cutting public expenditure
or increasing taxation. What it did affirm is that such public expenditure
as was to be undertaken should be directed to worthwhile objects, like
health, education, and infrastructure, rather than (as is so often the case)
to
defense, bureaucracy, or subsidizing the output of state-run industries.
Gordon Brown’s tenure in office has witnessed a considerable increase in the
proportion of public expenditure going to health, so his record on this
one is respectable. Does he wish to condemn it?
3. Tax reform: expanding the tax base and cutting marginal tax rates.
The idea was to improve incentives without worsening income distribution.
As Chancellor of the Exchequer, Mr. Brown cut marginal tax rates slightly,
but he did not do a great deal to expand the tax base, e.g. by risking the
City of London’s status as a tax haven by joining in the Continental war on
tax evasion. With luck Prime Minister Brown may be swept along by President
Obama’s evident concern about cracking down on tax havens.
4. Financial liberalization. I have already expressed two mea culpas
on this subject: first for initially referring to interest-rate
liberalization rather than the more general term used above (though I was
certainly
thinking of domestic financial liberalization rather than the freeing of all
capital flows), and second for failing to accompany the advocacy of
liberalization with a reminder of the need to improve supervision and
regulation.
Gordon Brown presided over one of the world’s freest financial systems. If
one criticized him, it would be for his excessive enthusiasm for the system,
not for a failure to liberalize; his failure would be a failure to install
and maintain an effective system of supervision and regulation.
5. A competitive exchange rate. I have argued recently that the
equilibrium exchange rate for the pound in terms of the euro (the currency of
Britain’s main trading partners) almost certainly lay in the range of 1.3 to
1.5 (in Ten Years of the Euro: New Perspectives for Britain). Personally I
would pick a number of about 1.3, but there are serious analysts who would
prefer a stronger pound. Chancellor Brown took office with a pound that was
weak by those standards, but it subsequently became (and remained for a
lengthy period) far too strong before its recent collapse. In no case did
Gordon Brown make the slightest effort, by market or oral intervention, let
alone by urging that the United Kingdom join the euro in its initial phase, to
guide the exchange rate to a more appropriate level.
6. Trade liberalization. The United Kingdom likes to regard itself as
a leading force for trade liberalization, and its record has generally been
constructive. However, it is not perfect: For example, the United Kingdom
is a member of the European Union, and the European Union recently
increased export subsidies on dairy and a number of other agricultural
products. It
therefore has to be counted as one of the 17 participants of the
Washington G-20 that broke the Washington trade pledge.
7. Liberalization of inward Foreign Direct Investment (FDI). The
Washington Consensus was developed for an era and a continent in which many
countries were still resisting the entry of FDI. Britain had long since
abandoned all restrictions on both inward and outward FDI, and this sensible
stance was maintained under Chancellor Brown and Prime Minister Brown.
8. Privatization. Britain started the worldwide trend to privatize
state industries under Prime Minister Margaret Thatcher, and this was the one
novelty introduced by Thatcher that outlasted her. The desire to privatize
was maintained by the “New Labour” governments in which Brown served.
Criticism would not be that there had been a failure of the will to privatize,
but that policy was determined by a fear of being tarred by association
with state industry rather than by pragmatism. For example, Chancellor Brown
espoused public-private partnerships as a way of escaping the rigors of his
fiscal rules even though they were going to increase the cost of
essentially public investment, and Prime Minister Brown refused to nationalize
Northern Rock long after it had become obviously necessary.
9. Deregulation (in the sense of abolishing barriers to entry and
exit). There was no major example of deregulation under the New Labour
governments, but the cases of re-regulation were minor.
10. Property rights. The initial Washington Consensus was concerned
with extending property rights to the informal sector, which is hardly
relevant in Britain. Property rights in Britain are well established and were
respected by the New Labour governments.
Those were the original ten points of the Washington Consensus. One wonders
whether Prime Minister Brown disagrees with many of the judgments
expressed above, although presumably he joins conventional wisdom in rejecting
the
view expressed that what matters about an exchange rate is that it be at
roughly the right level rather than whether it is fixed or floats. But would
he really wish to defend his expansionary fiscal policy at the height of
the last boom? Is he still proud of doing so little to oblige the dishonest
to pay a fair share of taxes? Has he recognized that it was the failure to
install an effective system of regulation and supervision of the financial
sector in which he was complicit that is responsible for the severity of the
current crisis?
President Obama in his press conference was asked two questions about the
Washington Consensus, but he answered only one of them by commenting on it.
His answer indicated that he believed many adherents of the Consensus tend
to hold that problems can be resolved by a “cookie cutter” approach to
economic policy; presumably that it is necessary and sufficient to obey the
ten injunctions stated above. The key question is whom this criticism can
legitimately be directed at. Perhaps adherents of the Washington Consensus are
more prone to this error than others, but this has yet to be demonstrated.
Certainly there are those who have emphasized that the propositions need
to be supplemented by a number of others, which will differ depending upon a
country’s individual circumstances (see, e.g., my article in After the
Washington Consensus: Restarting Growth and Reform in Latin America, p.19).
Similarly, it is difficult not to believe that the relative emphasis to be
given to different injunctions will depend upon a country’s individual
situation. After his initial characterization, President Obama went on to a
measured discussion of the spectrum of opinion about how unfettered a free
market should be.
The London communiqué, which summarized agreements among the leaders who
met in London, included a pledge to work toward a “new global consensus on
key reforms and principles that will support sustainable economic activity”
(paragraph 21). To judge by what was contained in the London communiqué, one
can already anticipate a number of the topics that will be judged to merit
inclusion, such as:
1. Globalization. It is quite apparent, from paragraph 3 (which
contains a forthright declaration that “prosperity is indivisible”) through
the
rest of the text, that our current leaders have no intention of retreating
from the globalization of the past decades. The importance of maintaining
an open trading system is subsequently stressed in paragraphs 12, 22, 23,
and 24.
2. Shared prosperity. Once again, the tone-setting paragraph 3 makes
it clear that what matters is not just prosperity for the rich and powerful,
but prosperity for all. The importance of caring for those least able to
care for themselves is subsequently taken up in paragraphs 25 and 26.
3. Market principles. Paragraph 3 mentions three foundations (apart
from openness) of sustainable globalization and prosperity. The first of
these is endorsement of market principles.
4. Regulation. The second foundation mentioned in paragraph 3 is “
effective regulation,” and this is further discussed in paragraphs 13 to 16
and in the accompanying Declaration on Strengthening the Financial System and
the Report of a Working Group on Enhancing Sound Regulation and
Strengthening Transparency. In his press conference Prime Minister Brown said
that the
leaders had agreed on principles for reform of the global banking system.
It is rather sad that the leaders had evidently not decided much in the way
of the principles that need to underlie effective regulation. There is a
nod in the direction of making regulation less procyclical, but no
recognition of the desirability of discouraging institutions from making
themselves
too big to be allowed to fail or of penalizing institutions that fund
long-term assets with short-term liabilities. The leaders are much clearer
about
the desirability of including systemically important hedge funds and
credit rating agencies among the entities to be overseen, making derivatives
tradable in organized markets, the need to revise accounting rules, and they
even try to specify some principles of bankers’ compensation. [emphasis
added ]
5. Strong global institutions. This is the final foundation mentioned
in paragraph 3. To those of us who grew up thinking of the global
institutions as a part of the blueprint of the future, it is a relief to find
this
strong affirmation of their potential importance rather than the ritual
denunciations that had become routine among populists in recent years.
6. The environment. Paragraphs 4, 27, and 28 make it clear that the
leaders are under no illusions about the possibility of achieving continued
growth while continuing to ignore the environment. However, they have left
the hard decisions to be reached in Copenhagen in December.
7. Fiscal discipline. While the current emphasis is quite rightly on
the need to expand budget deficits, there is explicit acknowledgment in
paragraphs 10 and 11 of the importance of long-term fiscal sustainability (and
therefore of long-term fiscal consolidation).[ code word = continued
finance capital dominance ]
What might be added to this list? Clearly one might wish to speak of
long-term monetary discipline too, although the closest the summit communiqué
got to this was in mentioning the importance of an exit strategy. But one can
be pretty sure that, if they were discussing monetary policy under more
normal circumstances, they would wish to restate advocacy of inflation
targeting, and this may well make an appearance in the putative global
consensus.
Perhaps they will make more of an issue of the desirability of policy being
framed as anticyclical. Perhaps they will choose to emphasize their
evident desire (expressed in paragraph 15 of the London communiqué) to prevent
dishonest citizens and corporations from evading their fair share of taxes by
using tax havens. Or perhaps they will pursue what seems to me an
unrealistic desire for an early warning system against economic and financial
crises (also mentioned in paragraph 15). But in the light of the London
communiqué I would be surprised, and disappointed, if any of the seven points
listed above were unmentioned.
In his press conference, Prime Minister Brown chose to list six points of
agreement. He led off with regulation (our point 4). His second issue was
cleaning up the banks and a common global approach to dealing with toxic
assets. Presumably this was a reference to paragraph 8 of the communiqué,
which
is largely in the past tense about actions that have already been taken,
although it also contains a pledge to do anything further that is needed.
But it clearly would not be an appropriate part of a new global consensus.
The third point refers to that part of the communiqué that deals with
recovery, which again would not figure in a new global consensus, except
perhaps
in a more general anticyclical context. The fourth point is about the global
institutions, and his fifth point about trade (our points 5 and 1). It is
not quite clear from the text whether his last point was fairness (our
point 2) or greenery (point 6), but in either event it is covered by our list.
He did not cover all the points in our putative new consensus, whether
because of limited time or because he preferred not to talk of (e.g.) fiscal
discipline.
A last question concerns the relationship of this list to what I termed the
Washington Consensus 20 years ago. Obviously they are not the same. There
are several issues that were not included in the Washington Consensus:
shared prosperity, regulation, strong global institutions, and the
environment. In the case of shared prosperity (income distribution) there was
no
inclusion in the Washington Consensus because, rightly or wrongly (I fear
rightly), I did not judge that the fate of the poor commanded a particularly
high
priority in the Washington of that day. In the case of financial regulation
there was no mention because, I regret to say, I overlooked its
importance. In the case of strong global institutions there was no mention
because
this was an agenda directed to Latin America, and Latin America’s voice is
not dominant in the governance of those institutions. The environment was
absent because, happily in this respect, times have changed. But the
remaining three issues—globalization, market economy, and fiscal
discipline—are
essentially the three headings under which I traditionally summarized the
Washington Consensus.
In sum, the London communiqué is better regarded as a development than as a
refutation of the Washington Consensus. Only those who have bought some
alternative interpretation of the Washington Consensus, such as the populist
view that it is a neoliberal manifesto rather than the expression of a
consensus view widely held in Washington, could doubt this. But it is a
development that is to be warmly welcomed; it has for long been clear that the
Washington Consensus was highly incomplete as a development manifesto, and a
number of the topics with which it needs to be supplemented are included in
the London communiqué.
--
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