Economy, explained.
Despite deregulation, markets are getting less competitive, big firms use market power to influence policies, and the share going to small firms and most workers has fallen (Sara Cottle/Unsplash)
It is important to tackle problems of growing market power and that unfettered market mechanisms widen inequality.
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Two views on the best way forward for the “Washington Consensus”Two views on the best way forward for the “Washington Consensus”
US National Security Adviser Jake Sullivan recently described the industry policy inherent in the Inflation Reduction Act (IRA) as the “new” Washington Consensus. In an issues paper released by Think7 last week, we argued for a “revised” Washington Consensus. While both the “new” and the “revised” Washington Consensus are aimed at addressing some of the same problems, the approaches are at odds. In the “new” approach, a proactive industry policy is seen as the solution to inequality arising from the loss of well-paid middle class jobs and to geostrategic risks from reliance on global supply chains. The “revised” proposal, while it does not rule out industry policy, aims to fix the fundamental problems with the failure of the original ten principles to deliver inclusive economic growth.
The Washington Consensus was a set of empirically based principles for what countries could do to promote economic growth. Coined in 1989 they reflected the experiences of Japan, South Korea and Taiwan in opening up their markets for trade in goods and capital. Domestic fiscal discipline – both in revenue raising to cover expenditure – and a commitment to rule of law, laid the foundation for a stable macroeconomic environment. Access to markets along with a supply of cheap disciplined labour and privatisation of state-owned firms made the countries attractive to foreign investors, who brought technology as well as finance.
The formula worked well in many places. Australia adopted much of the Washington Consensus in the mid 1980s. Competition from imports and for mobile international capital drove productivity growth, but it came at a cost of structural adjustment. And for the United States, which had largely modelled the principles, this turned out to be problematic in ways that the “new” Washington Consensus seeks to fix.
Globalisation has played a role in widening inequality within countries, but the problem is deeper than wage competition between countries within industries.
Structural adjustment is an ongoing process in economies as the demand for goods and services produced in a country change over time. Some industries grow, while others contract and can disappear as other regions or country’s producers expand.
In the United States, as in Australia, many of the contracting industries were concentrated in regions that had few other industries. Advances in robotics was working at the same time to reduce the share of labour in manufacturing, weakening the power of unions to negotiate higher wages for the remaining workers. Economics – at least the neoliberal version – assumed that other industries would expand to use the resources left redundant by the closure of manufacturing industries. Alternatively, the theory assumed that people would move to where the job opportunities were expanding.
There are a host of good reasons why people don’t move, and few want to take lower paying jobs. These forces drove the place-based “hollowing out of the middle-class” that has fed populism. It is this problem that the “new” Washington Consensus seeks to address through massive place-based subsidies for green industries.
The focus on green industries in the IRA responds to another perceived failure of the Washington Consensus. The ten principles of the Consensus are silent on externalities – whether local pollution or degradation of the global commons. The IRA aims to help the United States move toward reducing their contribution to carbon emissions. But as the atmosphere is a global common, the effectiveness of the IRA in lower emissions will be partially offset if it raises the cost for other countries to reduce their emissions relative to a more globally cooperative and efficient approach.
The revised Consensus we propose in the Think7 issues paper adds a principle that firms should be charged for their contribution to pollution, including carbon pollution, by the governments in the countries where they generate this pollution. The G7 countries were asked to impose this requirement on their multinationals, and to encourage the G20 countries to follow suit.
Globalisation has played a role in widening inequality within countries, but the problem is deeper than wage competition between countries within industries. Despite deregulation, markets are getting less competitive, big firms use market power to influence policies, and the share going to small firms and most workers has fallen. The financial industry has proved effective at socialising the losses, while keeping the gains.
The new Washington Consensus does not tackle the problems of growing market power, nor the inherent problem that unfettered market mechanisms widen inequality. The revised Washington Consensus takes on these problems, recommending that the G7 countries reconsider how they can redistribute the opportunity for human progress within their own economies, and use this, rather than reaching for protection and nationalism, to address risks to domestic instability.
The revised Washington Consensus also asked the G7 countries to work with the G20 countries on a set of global trade and investment rules that give more agency back to governments to collect taxes for the services their country provides, be compensated for negative externalities imposed, and to create opportunities for the Global South to benefit from the engine of growth that international trade offers.
About the author
Jenny Gordon
Dr Jenny Gordon is a Nonresident Fellow at the Lowy Institute and also a Honorary Professor at the Centre for Social Research and Methods at the Australian National University.
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