A NEW POST-KEYNESIAN WASHINGTON CONSENSUS?

The Reencounter of the State with the Market


The Old Neoliberal Washington Consensus (ONWC) is dead and now the question is: Are we evolving towards a New Post-Keynesian Washington Consensus (NPKWC)?

The ONWC which dominated in Latin America and part of the developed world since the 80´s is dead, as the Prime Minister of United Kingdom Gordon Brown said. This consensus was based in what we could call the OLPMS (ALPES in Spanish) economic model:

1. Openness through free trade and the end of industrial policy.
2. Liberalization through deregulation of markets.
3. Privatization of the economy and a minimalist State.
4. Macroeconomic Stabilization through inflation targeting and balanced budget; and in practice with a restrictive and inflation targeting monetary policy.

The ONWC development strategy has not allowed Latin America to attain sustained and competitive growth, this argument has been demonstrated as despite these economies are open to globalization, their growth has been half of that achieved by the region between 1950-1970, when the region followed the strategy and policy of imports substitution. Undoubtedly, the external debt crisis that Latin America lived during the 80´s evidenced the problems of a growth strategy biased towards the internal market through imports substitution, and the excesses of a patrimonial and regulatory State in a macroeconomic context of inflation. All this was product, in great measure, of the exchange rate adjustments (devaluations) that led to net capital exports for external debt service. In this logic the central lines of the old Washington Consensus of openness, liberalization, privatization and macroeconomic stabilization were necessary.

In this context, at the beginning of 90´s, the OLPMS economic model had a positive effect on the growth of Latin American economies, yet later it generated seven years of stagnation and recession. The model showed its limitations, in an extreme way, with Argentina’s economic crisis in 2001 and with the Anticompetitive Stagnation that Mexico has suffered in the last decade (2001-2009). All this shows that both countries, after following the basic rules of OLPMS, have faced great economic problems, so today Mexico has accumulated more than 10 years of economic stagnation, employment and competitiveness losses although it has price stability.

Paradoxically, it is the Prime Minister of United Kingdom who facing the global economic-financial crisis in 2008-2009 expressed “the Washington Consensus is dead”, reminding everyone that advanced countries such as United States with Ronald Reagan and the United Kingdom with Margaret Thatcher promoted free market capitalism laissez faire, laissez passer.

During the global financial crisis, Alan Greenspan, a strong believer and promoter of the free and auto-regulated financial market doctrine, expressed as mea culpa that the only way out from the financial crisis was banks’ nationalization. Hence, as a consequence of this crisis President Barack Obama created an anti-crisis program breaking with ONWC myths, because the strategy and policies go beyond those of a Keynesian policy (monetary and fiscal led by FED) and are aimed towards a financial market regulation policy as well as to industrial and sector active policies (energy, environment, health, education, innovation and technological development) reflecting a new role of the government in the economy.

As Roger Altman has recently expressed: “The era of laissez-faire economics is over, and statism, once discredited, is making a comeback—even in the U.S. Also out of vogue is globalization. Much of the world now sees it as harmful." [1]


Myths and False Dilemmas that were taken down by Washington´s New Post-Keynesian Policies

The neoliberal paradigm of auto-regulated market entered in crisis because it neither worked nor led to economic equilibrium. Obama´s economic policy is marking the emergence of a new post-Keynesian paradigm where a new balance between governmental active policy and regulated market is being implemented, marking the transition and rising of a new theoretical-economic Post-Keynesian paradigm. Hence, among the various aspects to analyze and debate for the construction of a new post-Keynesian paradigm we have the following:

Breaking Myths and Generating New Policies


The Auto-regulated Financial Market Myth: Financial Regulatory Reform Proposal
The liberalization of the financial market is being globally acknowledged as a central factor of the present crisis, so now a new regulatory system for the financial-banking sectors is being constructed. This has ended the myth of the free auto-regulated market.

In President Obama´s words: "We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind." "My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression." [2] This pronouncement was made when the document “Financial Regulatory Reform: A New Foundation. Re-building Financial Supervision and Regulation”, was presented by the Department of Treasury.

The Neutral Monetary Policy Myth and the FED´s Quasi-Fiscal Actions

In order to face the recessive financial crisis -and because of the limitations of low interest rates (liquidity tramp)- the Federal Reserve (FED) has been utilizing heterodox monetary policies. The rescue of the banking-financial system includes some government interventional actions, especially by the FED, which included loans and (temporal)assets participation in the main U.S. banks and financial institutions, as well as support, loans and credit almost directed to the riskiest companies, consumers and government structure (recently the FED bought $300 U.S billions in treasury bonds). In this context, the FED has generated as William Buiter has called them “quasi-fiscal actions”, whose main objective is to pull out the economy from recession and to avoid a fall in a second Great Depression, as Bernanke has said.

All this is paradoxical, because these monetary policies and quasi-fiscal practices would have been totally censored and considered inappropriate and harmful for Latin American countries, by the ONWC principles.

Notwithstanding, the critical reality demands to break the myths that prevent governments from searching and applying new monetary policy measures which may allow them to get out of the most acute financial crisis since the Great Depression.



The balanced budget myth: An active fiscal policy and two digits deficit

The old Washington Consensus set fiscal discipline as the fundamental axis of macroeconomic stability which in practice means a balanced budget and a fiscal surplus as a successful policy, but it does not consider the costs in terms of economic growth and unemployment.

The fiscal policy for economic reactivation has led the developed countries to present massive fiscal deficits. The United States and United Kingdom present deficits of more than two digits, which contrasts with one digit deficits of Latin American countries.

FISCAL DEFICIT, JUNE 2009

Source: “The Economist”, June, 2009.

The Passive Industrial Policy Myth: The Reconversion and the (temporal) U.S. Automotive Industry Nationalization

According to the ONWC active industrial policy is inefficient and government intervention unnecessary. Thus, in some cases trade liberalization was accompanied by the dismantling of the industrial policy. The most evident example is Mexico where after economic liberalization with NAFTA the lemma was: “The best industrial policy is that which does not exist.”[3]

In this context, John Williamson doubts that the government’s decisions regarding investment options could be more accurate than the ones made by entrepreneurs who are risking their own capital. Hence, while he is in favor of governments that take actions to attract foreign and private investment, he thinks that it is not very useful to pick winners through industrial policy[4].

Notwithstanding, President Obama’s automotive sector rescue policy has implied industrial reconversion and temporal nationalization, as has been reflected by the GM case (with a 50 billion dollars investment, which represents more than 60% of the company assets). These measures in fact break with the myth that the best industrial policy is that which does not exist. In addition, he has developed policies for the restructuration of the automotive industry promoting technological changes which lead to the production of “greener” compact cars that save energy.

Active Policies in Health, Energy, Environment, Education and Technological Innovation

The new energy policy of Obama´s government will lead to energetic independence and the fight against climate change focusing the effort in two fronts: more ecological cars and a more efficient use of energy by government offices. The measures impose limits on vehicle gas emissions and ask producers to make vehicles more efficient in terms of fuel consumption, contributing to diminishing U.S. dependency on foreign oil. Regarding transportation it has been announced that 8 billion will be given in support of the development of high speed trains.

The health care reform is considered one of the main projects of Obama´s government. The central objective of the reform is that every American citizen has medical insurance, as nowadays 47 million of the 306 million inhabitants do not have it. The project includes measures to lower the great costs of the health care system and improve the quality of the service. The proposal will be debated next August.

Another two important pillars in Obama´s public policy are the education reform as well as policies focusing on innovation and technological development. In Obama’s words, this will be achieved through: “policies that invest in basic and applied scientific research; create new incentives for private innovation, foster innovation on energy and medicine as well as improve education on mathematics and science. This represents the biggest commitment with scientific research and innovation in U.S history.”

SME´s Support Policy

The reactivation plan will reduce the interest rate of public credits for SMEs and the government will guarantee payment of up to 90% of the loan value. This process will be realized through the Small Business Agency (SBA) which nowadays covers 85% of the credit for less than US$ 150,000 and 75% for bigger loans.

The objective of this measure is to widen the financial coverage for SMEs with which the government intends to reduce the risk for banks of a possible payments suspension from companies and to encourage banks to give more credit to this sector.

The Minimalist State: The State-Market reencounter

The application of monetary, fiscal and industrial heterodox policies in U.S. and other advanced countries imply a new role of the State as economic agent and leaving behind the minimalist State.

The ONWC ideology “demonized” the State role and “beatified” the free auto-regulated market, but the NPKWC has to avoid fall in to a false dilemma State vs. market as the old Washington Consensus postulated. Today, the market role is out of question because markets are globalized in production-investment with the global factory, in commerce with free trade agreements, in financial markets with electronic money and in information with Internet and TIC´s. The game field is hyper-competence in globalized markets, independently of its ideologies.
It is important to recognize that the market is the best method to resource assignment in an economy, but that it presents failures too (imperfect and incomplete markets, anticompetitive practices, monopolies, among others) and limitations, because there are things that market do not do by its self, like promote sustained growth with human development. That is why is necessary an intelligent intervention of the government with public policies but not to replace the market but to complement it and correct its failures.

Today, even countries such as China and Vietnam are practicing what they call “the market socialism”. These countries play in the international market, although they maintain public property structures and State interventionism, which are socialists’ characteristics but each time with more private enterprise participation and a bigger market role.

The neoliberal ideologists have been true enemies of the market, because they over sold the market role in the economy. In fact, the market is the most efficient mechanism to assign resources but not warranty an equal distribution or perfect competence. The neoliberal ideology of the free auto-regulated market said that the market generates competence; elevate countries competitiveness through free trade and besides promotes economic growth and development. Here we can use the Mercedes Benz example which is the best vehicle for transportation in land, but ideologists over sold it and said that is an amphibious and air vehicle, it´s evident failure in these functions have led to doubt about its basic function as a vehicle for land transport.

The Obama´s government has been criticized by some sectors which argue that he is applying policies which correspond to a “socialist government”, that is why recently he and his principal economic assessor Lawrence Summers declared that the final objective of the government intervention is not to cancel the market. The modern experience indicates that the active State role is to correct market failures and to complement not to substitute it.

The State functions are: market regulator, development promoter, public services provider and administrator. Hence, it is important distinguish between a socialist economic system from an institutional market and participative economy. The economic system is defined by the property of the production means and the mechanism to respond to the what, how, and for whom to produce. In communism is through the public property and central planning; meanwhile in capitalism is through private property and the market.

Undoubtedly, the debate about the “socialist” tendencies of Obama´s government is a false debate, because is evident that the patrimonial measures which have implied the intervention to rescue the banks, financial institutions and automotive industry are temporal. The free market would not lead to recover equilibrium and stability and therefore requires the State intervention. Fortunately, this government has eliminated the myths both of the interventionist State and of the free market of laissez faire, laissez passer. President Obama says that the theme is not the size of the government (bigger or smaller), but if the government is efficient to respond to the challenges that the global crisis imposes. Far from being socialist, Obama´s government is trying to save capitalism from its most acute crisis since Great Depression.

Towards a New Paradigm of Sustained Growth and Inclusive Development

The death of the ONWC and the rise of Post-Keynesian policies in Washington break with some false myths and dilemmas of development that open for Latin American countries a path for the construction of a new paradigm of sustained growth and inclusive development. It is in this perspective that we have to consider and acknowledge other approaches in this direction. Among the arguments that it is important to take into account we find the following:

The ONWC failed in Latin America, because in practice it was taken as an economic model of liberalization, macro-stabilization, free market and minimalist State. As John Williamson has expressed, the objective of the ten policies was never to become an economic model of development, growth and competitiveness. Notwithstanding, the great challenge that Latin America faces nowadays is to design its own economic model of sustained growth and inclusive development.

This consensus became a dogmatic approach more than a pragmatic one and the actual environment demands a pragmatic and open approach in order to face the challenges that globalization imposes where the only constant is change and the only certainty is uncertainty.

“The major symptom of underdevelopment is present in those countries which have to import models, whether they are apologetic of the status quo or promoters of change” as Albert O. Hirschman expressed it. This is one of the great differences which explain the Asian countries’ success such as Korea, Taiwan and nowadays China which have developed their own economic model, and the failure of many Latin American countries. Thus, developing a new paradigm for Latin America implies a change in mental model.

The free auto-regulated market does not exist, what we have in reality are institutional markets which must have: clear rules of the game, transparent players and an overseeing system as we have in the pharmaceutical market and in free trade agreements.

Monetary policy has to achieve both objectives: inflation targeting as well as growth and employment. With the financial system reforms the FED has a more active role in the regulation of the system, the agents and the financial institutions.

It is necessary to have a flexible fiscal policy that allows government action to eliminate the balanced budget or zero deficit trap.

An active industrial policy which promotes the competitive development of industry and companies. The financial system must be oriented to financing industry and entrepreneurs not speculators as President Sarkozy said.

The growth and development policy must consider active policies not just in industry but in energy, environment, education, logistics, technological development and innovation, as well as promote an efficient government.

Moreover, the Barcelona Development Agenda, arises from the Initiative for Policy Dialogue[5], (IPD) and from the theme “Reconsidering Washington Consensus” and states “…in contrast with the old doctrines, the Barcelona principles emphasize a balanced role for the state and markets, experimentation as a tool for development, and the use of microeconomic interventions to adress market failures and promote productivity (combined with incentives for improved performance).” [6]

The excellent work, under a historic perspective, of the Growth and Development Commission of the World Bank directed by Michael Spence[7] highlights the most relevant characteristics of the historical experience of countries’ growth, based on the analysis of thirteen countries whose GDP growth rate was at least 7%(annual average) for more than 25 years, among which the highlights are the following[8]:
1. They fully exploited the world economy.
2. They maintained macroeconomic stability.
3. They mustered high rates of saving and investment.
4. They let markets allocate resources.
5. They had committed, credible, and capable governments.

Regarding the macroeconomic stabilization policy, one of the main problems has been –in practice- the unidimensional approach which came from postulating price stability as the unique macroeconomic objective. Mexico´s case clearly exemplifies the limitations of this approach because it has fallen on a Stagnating Stabilizing Model: The economy is stable (4% inflation) but it did not grow. Hence, it is the Latin American country with the lowest growth in this decade (2001-2009) and the one with the highest recession in this crisis -8% GDP estimated for 2009. As Stiglitz argued, many central banks had made the "mistake" of "acting as if low consumer-price inflation was necessary and almost sufficient for economic stability".[9] That is the case of Mexico´s central bank, Banco de México.

In this perspective the unidimensional approach must be replaced by a tridimensional approach. The objective is to grow with full capacity (potential GDP), internal equilibrium (price stability) and external equilibrium (which avoids untenable external deficits and maxi-devaluations). José Antonio Ocampo´s work in this field is especially useful for developing this wider and integral approach of the macroeconomic policy of stabilization. [10]

With regards to an efficient government it is important to consider that undoubtedly the ONWC is dead and the free auto-regulated market did not guarantee an efficient market globalization, because the crisis was product of the excesses of the auto-regulated market, but it is also true that we have to avoid the State excesses. That is why; we must tend to equilibrium between the auto-regulated and institutional markets and the modern State. Hence, the NPKWC must lead us to consolidate the institutional market with an Intelligent, Flexible, Agile and Transparent (IFAT) government. We must build the new Modern State Paradigm with four functions: that of regulator, development promoter, public services provider and public administrator. Finally, the key will be to avoid the false dilemmas between State and market and falling in the false extremes of State Capitalism (statist) vs. Market Capitalism of laissez faire, laissez passer.

Just as we have market theories, we must have State theories which include its functions and actions searching for optimum equilibrium. Hence, we talk about the reencounter between a new modern State and the market, but we are talking about an institutional market which has the three elements we have mentioned before (clear rules of the game, transparent players and regulatory system). The regulatory system would not substitute the market system but instead it would support its efficient functioning.

Hoping that the ideas we have developed in here stimulate the dialogue, we open the debate about one of the topics I consider is and will be determinant in the next decades.

[1] Sin duda, una de las causas fundamentales de la crisis en ambos países ha sido la apreciación del tipo de cambio real (la caja de convertibilidad en Argentina y el tipo de cambio como ancla deflacionaria en México) que de manera estricta Williamson en su lista de políticas planteó el uso del tipo de cambio real competitivo. Sin embargo, el trade off con el problema inflacionario de la estabilización macroeconómica ha llevado en la práctica a este tipo de contradicciones priorizando el tema de la estabilidad de precios subordinando la política de la competitividad cambiaria. Situación que sigue presente en México, pero no en Argentina.

[2]Maurer Harry y Linblad Cristina, “Is Globalization Beating a Hasty Retreat?” en BusinessWeek, junio 25, 2009.

[3] Discurso del Presidente Barack Obama, “Presentación de Reforma de la Regulación Financiera”, 17 de junio, 2009.

[4] BUITER, William, “What to do with the Fed”, Financial Times, July 17, 2009. [5] Frase atribuida al Dr. Jaime José Serra Puche, Ex Secretario Comercio y Fomento Industrial y Ex Secretario de Hacienda y Crédito Público de México.

[6] Ver “Williamson versus the Washington consensus?” por John Williamson en The Growing Blog. http://www.growthcommissionblog.org/content/williamson-versus-the-washington-consensus

[7] Hirschman Albert O., “A bias for hope”, en Essays on Development and Latin America, Universidad de Yale, Londres, 1971.

[8] Discurso de Nicolás Sarkosy, 25 sept. 2008 en Toulon, Francia.

[9] Iniciative for Policy Dialogue (IPD), que tiene su base en la Universidad de Columbia y como Co-Presidentes a Joseph Stiglitz y José A. Ocampo, fue creado en julio de 2000 para ayudar a los países en desarrollo a explorar alternativas de política y permitir una mayor participación ciudadana en la política económica.

[10]Serra Narcis y Stiglitz Joseph E.” The Washington Consensus Reconsidered. Towards a New Global Governance”, Serie The initiative for Policy Dialogue, Universidad de Oxford, New York, EE.UU.,2008.

[11] Recibió el premio Nobel de economía en 2001.

[12] Commission on Growth and Development, “The Growth Report Strategies for Sustained Growth and Inclusive Development”, Banco Mundial, Washington, 2008.

[13] Terence Creamer, “‘Rigid' Application of Inflation Targeting a ‘Costly Mistake', Stiglitz Avers”, julio 8, 2009.

[14] A Broad View of Macroeconomic Stability. José Antonio Ocampo, “The Washington Consensus Reconsidered” Edited By Narcis Serra And Joseph E. Stiglitz. OXFORD UNIVERSITY PRESS 2008.Stability with Growth. Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar