Best for Emerging Markets - Washington or Beijing Consensus?

Date: January 16, 2014

Best for Emerging Markets - Washington or Beijing Consensus?

For close to six decades now, the basic tenants of the liberal economic philosophy championed by the United States – free markets, free trade, and minimal government intervention – have been in ascendance worldwide, attracting adherents in developing countries from Latin America to Asia. The collapse of the Soviet Union in 1989, along with its centrally planned economic system, signaled in the view of many analysts, the final victory for liberal economic and democratic principles, and spawned talk of the “end of history”.

Today, a little over two decades later, the relevancy of these principles  (broadly referred to as the “Washington Consensus”)  as a development model is under greater pressure than at any other time since the modern global economic system first began to take shape in Bretton Woods seventy years ago.  

So – what has happened? 

In essence, two things:  first, cracks have begun to appear in the basic foundations of the Washington Consensus, causing many to question the wisdom of its underlying policy prescriptions.  Secondly, a competing alternative model, sometimes known as the Beijing Consensus, has arisen, seeming to provide a more suitable path to prosperity for many developing countries.

The first substantial cracks in the foundation of the Washington Consensus began with the Asian Financial Crisis of 1997. As analysts and policy makers picked through the wreckage of the crisis to discern lessons, it seemed that countries that toed the Washington Consensus most faithfully seemed to suffer the worst, while those who flouted the “rules” faired considerably better. 

Indonesia, for example, adhered strictly to the Washington Consensus-oriented prescriptions of the International Monetary Fund and was plunged into severe contractions and heavy social hardships, which ultimately helped to fuel a political revolution. Malaysia, on the other hand, blatantly rejected the conventional wisdom dispensed by the IMF, and violated a basic precept of the Washington Consensus by imposing capital controls. Ultimately, Malaysia suffered less economic dislocation and emerged more quickly from the crisis than did most of its neighbors.

But it was the Global Financial Crisis which delivered perhaps the sharpest and most serious body-blow to the credibility of the US model. This “American-born” global crisis seemed to lay bare the inherent flaws in the US system, and many of the principles of the Washington Consensus, upon which that system is based.      

It also became evident that – strictly speaking – the US has not always taken the same medicine it prescribed to others. After all, large swaths of the US automotive industry were essentially nationalized during the Global Financial Crisis, and large financial institutions received multi-billion dollar government cash injections rather than being left to the vagaries of the cherished free market. 

As questions over the Washington consensus grew, the ongoing economic ascent of China, pursuing a much more state-directed form of capitalism, provided an intriguing alternative model. Although somewhat more amorphous than the Washington Consensus, the basic outlines of the Beijing Consensus revolve around the flexibility to experiment with policies most beneficial for a country’s national economic interests, rather than a strict adherence to “chiseled in concrete” precepts handed down by Washington-centric multilateral institutions. In short – self-determination. As a practical matter, this has frequently meant a much stronger government role in the economy – a more state-directed form of capitalism in which the “wisdom” of the marketplace is frequently subordinated to the hand of government intervention.   

As any emerging economy charts its development course, the China model certainly warrants close scrutiny. It would be foolhardy to ignore the experiences of a country which has lifted hundreds of millions of its citizens out of poverty and charged up the economic development ladder faster than any other in history.     

At the same time however, any enthusiasm for attempting to duplicate China’s remarkable experience needs to be leavened with several heavy doses of reality. The simple fact of the matter is that certain aspects of China’s experience are entirely unique, and will defy attempts at replication.   For instance, China was able to succeed in pursuing its strategy, to a large extent, because of the overwhelmingly large size of its market and labor pool. The potential of the Chinese market fired the imaginations (to say nothing of the profit projections) of multinational corporations from every region of the world. The tantalizing allure of the “China market” provided the Chinese government with tremendous leverage it shrewdly employed, on issues ranging from technology transfer to local production facilities. Few other developing countries will enjoy anything even approaching this level of leverage.    

China also benefited from extraordinarily good timing. China’s integration into the global trading system, culminating in its WTO accession in 2001 – and the enhanced market access that provided – coincided with an unprecedented credit-fueled consumption binge in the US. The GFC helped bring that era to a close. Today, with the US struggling under the weight of its massive debt, and a multi-billion dollar trade deficit, deleveraging and rebalancing are the key watchwords. “Borrow and spend” is no longer seen as sustainable policy – for either governments or households.  

Attempting to replicate China’s model or adhering to the precepts of the Beijing Consensus is therefore unlikely to provide a panacea for any developing country. And while substantial flaws in the Washington Consensus have become painfully obvious, especially in the aftermath of the Global Financial Crisis, it also worth noting that this system has also been largely responsible for ushering in the greatest period of prosperity, economic development, and rising standards of living in modern history. While adjustments are clearly in order, and evolution is both healthy and necessary, one should be careful about “throwing the baby out with the bath water”. 

Ultimately, the key contribution of the Beijing Consensus might lay not in supplanting or replacing the Washington Consensus, but rather in helping to usher in a new “post-Bretton Woods era” in which countries have greater latitude to embrace a less doctrinaire and more flexible approach to growth and development.


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