EDITORIAL: by Peter WestmoreNews Weekly
G20 summit: end of the "Washington Consensus"?
, April 18, 2009
In the absence of any real solution to the global financial crisis, Australia must do what it can internally to maintain economic output and employment.In 1989, when Soviet communism was in its death throes, an American economist John Williamson coined the phrase, the "Washington Consensus", to describe the package of free-market policies which formed the economic orthodoxy governing national and international economic policy in the post-communist era.
The specific prescriptions of the Washington Consensus included support for balanced budgets (or preferably government surpluses), trade liberalisation, removal of governments' regulatory and supervisory role in the economy, relaxation of foreign investment rules, privatisation of public utilities such as electricity and power, tax reform away from income taxes towards indirect taxes such as the GST, and similar measures which reduce the role of government in the economy.
Internationally, it has been the driving force behind the World Trade Organisation (WTO)'s campaign for a global free trade agreement, and to promote the movement of capital and technology, unregulated by governments or international agencies.
Whatever the benefits of individual measures in this policy matrix, its overall effect has been to separate the financial markets from regulatory control, and to that extent, contributed to the internationisation of the financial crisis which began with the subprime mortgage collapse in the United States in 2007.
This view was expressed at the recent G20 Summit in London. British Prime Minister Gordon Brown publicly declared that the Washington Consensus was dead, saying, "This old world of the old Washington Consensus is over, and what comes in its place is up to us.... We must reshape our global economic system so that it reflects and respects the values we celebrate in everyday life."But how?
Quite how that is going to happen was never spelt out. Evidence of the prevailing confusion was the decision of the G20 to massively expand funding for the International Monetary Fund to $US1 trillion.
The fact is that the IMF has been the international enforcer of the Washington Consensus, through its imposition of free-market solutions and economic castor-oil on countries whose economies have collapsed through mismanagement or crises in the banking system.
The IMF's activities are unchanged since the late 1990s, when it caused the virtual collapse of the economies of Indonesia, Thailand and other countries at the time of the Asian financial meltdown. Significantly, Malaysia - which refused to accept the IMF rescue package - fared far better than most of its Asian neighbours.
In recent months, the IMF has imposed financial strait-jackets on Latvia, Iceland and Hungary, to name just three countries, in exchange for capital to underwrite the banks which got their economies into unsustainable debt.
The other key decisions of the G20 meeting - the new "name and shame" rules for tax havens and caps on bankers' pay packets - are just populist rhetoric to cover up the fact that there was no consensus at the London summit on what should be done to unfreeze the global financial system.
The United States, backed by countries like Australia, have put their weight behind the idea of reflating the world's economy through massive government handouts. On the other hand, the European nations have argued that the cause of the financial crisis is the lack of global financial regulation.
The European nations, already facing massive public sector deficits, are scared of increasing their public debt. The Americans, whose governments have run budget deficits for years, are reliant on the fact that Beijing and the oil-exporting nations have nowhere else to park their currency surpluses except US dollars.
The declaration adopted at the G20 meeting was designed to paper over these differences, to sustain the illusion that the world's largest economies have a plan to emerge from the global financial meltdown. In fact, they haven't.
In the absence of any real solution, countries such as Australia must look to what they can do internally to address the local effects of the global economic crisis.
For Australia, this means increasing investment in long-term infrastructure such as ports, water storage facilities, electricity and communications, through the private sector if possible, but using the public sector where necessary. This will have far more long-term benefits than the government's multi-billion spending spree on schools and domestic home construction.
The Australian Government should move quickly to establish a Development Bank, along the lines of the old Commonwealth Development Bank, to ensure that these works can proceed. The Federal Government must step in to ensure working capital for the small businesses and farms which are facing real difficulty in surviving the current economic downturn.
The Commonwealth Development Bank was established under the Commonwealth Banks Act 1959 and, during its 30-year life, helped almost 400,000 businesses across Australia, before being privatised.- Peter Westmore is national president of the National Civic Council.