The current financial meltdown sweeping across the globe may well mark the demise of the so-called "Washington Consensus" on economic development and its displacement by the "Beijing Consensus".
While there have been vigorous debates in academic circles about their respective efficacy, the ongoing financial turmoil seems to favor the Beijing approach.
In recent days, it is China - still a developing country - that is talking about rescuing the United States, the world's economic and military superpower. This is the first time in history that their respective positions have shifted in this manner.
The term "Washington Consensus", first coined by economist John Williamson in 1989, referred initially to a set of 10 policy prescriptions that formed the standard package for developing countries facing crisis. These are: fiscal discipline; reduction of public subsidies; tax reform; market-determined interest rates; competitive exchange rates; trade liberalization; free flow of foreign direct investment; privatization of state enterprises; deregulation; and legal protection for property rights.
The consensus came to be associated with neo-liberalism, which stressed the primacy of markets and limited the role of the state. The Washington Consensus later became the basis of the "shock therapy" that was applied to the former Soviet Union and East European countries in the 1990s.
Countries that have adopted the Washington Consensus wholesale, though, have not performed particularly well, prompting Williamson to ask in 2002: "Did the Washington Consensus fail?"
Professor Cheng Enfu, director of the Shanghai School Economics Research Center at Shanghai University of Finance and Economics, has offered an explanation for why it has. The Washington Consensus, he says, has double standards, one for developed and another for developing countries. Its goal is to establish a new global economic order dominated by developed countries.
He believes implementing the Washington Consensus fully would lead to the polarization of rich and poor, both within developed countries and between developing and developed countries.
China's rapid growth over the past 30 years prompted Goldman Sachs' Joshua Cooper Ramo to advance in 2004 the possibility of a "Beijing Consensus" as an alternative road to development. The Beijing Consensus, says Ramo, consists of three features:
The first is a commitment to innovation and constant experimentation in reforms.
The second, a rejection of per capita GDP as the only measure of progress; sustainability and equality also count.
And the third, a commitment to self-determination. Less developed countries should ensure their own financial integrity and keep great powers in check.
Ramo asserts that the Beijing Consensus represents opposition to the status quo represented by US hegemony. This perhaps explains why China is gaining ground worldwide at the expense of the US, as no one seems comfortable with a world with just one superpower.
A Chinese scholar, drawing lessons from the financial crisis, has added beef to Ramo's concept. According to Professor Huang Weidong of the China University of Science and Technology, the current crisis was caused by the US' huge current account deficit, financed as it was by booming Asian and oil-rich countries.
With both US households and government in the red, the US has become the world's largest debtor economy. China, Japan and other holders of US treasury bills footed the bill for its imprudence.
According to Huang, China can keep itself intact by drawing seven lessons from the crisis. The more salient ones include upholding self-reliance as the foundation of economic growth; de-emphasizing trade and capital account surpluses; re-focusing on the real side of the economy such as the production of basic necessities; increasing income and employment; and fueling growth via technological advancement and domestic consumption.
Huang is not alone in these prescriptions. Akira Kojima, a senior fellow at the Japan Center for Economic Research, too has urged Japan "to slow or reduce exports to the US and to expand its domestic demand".
If China manages to emerge from the current financial crisis relatively unscathed, the Beijing Consensus might well find favor among developing countries as an alternative approach to economic growth.
The Straits Times/Asia News Network
(China Daily 10/28/2008 page9)