August 12th 2000

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Articles from this issue:

Cover Story: In Vitro Fertilisation on demand?

Editorial: Will GST cut the black economy?

Canberra Observed: WhatÂ’s behind the Carr for Canberra push?

Law: UN ruling used by local critics to hammer Howard Government

Economics: “Washington Consensus” risks derailment by grassroots opponents

The $7 Billion Minerals Grab: The fight for control of Australian mining

Family: Family-free family conference

Health: Health crisis obscured by ideology

Britain: BlairÂ’s Britain: where discrimination is anything his wife says it is

Straws in the Wind

Bioethics: Gene therapy business: the tragic case of Jesse Gelsinger

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Economics: “Washington Consensus” risks derailment by grassroots opponents

by Colin Teese

News Weekly, August 12, 2000
Colin Teese, formerly Deputy Secretary of the Department of Trade, explains why the so-called “Washington Consensus” on the world economy risks being derailed by community opposition.

News Weekly readers will be aware that Mr Fred Bergsten — a respected American economist of the Democrat persuasion, with experience as a senior official in more than one Administration — has expressed concern about the mounting resistance, world-wide, to globalisation.

Mr Bergsten warned that this was a development that could not be ignored and, if it went unaddressed, could undermine what he called the “Washington Consensus”.

Mr Bergsten called this so-called consensus “a widespread acceptance of the market-oriented philosophy”. He might have added it has, for more than 20 years, dominated orthodox politico-economic thinking — at least in the well-functioning economies of the world.


As it happens, Mr Bergsten’s shorthand represents something much more substantial and less spontaneously developed than his description might suggest.

Rather, it was a carefully crafted concept, energetically and patiently promoted in the service of a specific interest group — though clothed, of course, in suitably concealing garments.

Initially, the idea was launched under the banner of individual liberty: the right of the individual to be unchained from government interference.

Diminished regulation and lower taxes were the immediate and popular focus of attention. And the well-chosen initial targets were taxes, social welfare expenditure, wages regulation and working conditions.

However difficult it is to prove, we may comfortably assume that the two interests behind what Mr Bergsten calls the Washington Consensus are big business in the United States and Europe.

For them the consensus has a much wider reach and, fortunately for the ambitions of this group, it has proved possible to draw intellectual comfort from the 1940s ideas of Austrian-born economist Frederick von Hayek.

Von Hayek insisted that government regulation, taxes and the welfare state interfere with the operation of true market capitalism and, consequently, constrain individual freedom.

Such a radical version of capitalism could never have been seriously promoted before the collapse of Communism out of fear of a backlash reaction. But it had begun to take hold in academic circles in the 70s, particularly in the minds of those opposed to the economic theory of John Maynard Keynes.

Radical views

Radical capitalism of the Hayekian kind also happened to coincide with the emerging interests of big business in the US and Europe.

At that time capitalism — much to the concern of those interests — was taking a discomforting shift in direction.

Europe, it was true, had been reconstructed largely in the capitalist image, but with decidedly socialist overtures. A new and healthy market-based economy had also emerged in Japan, though it was heavily interventionist and decidedly hostile to foreign infiltration.

Korea’s economic development was following a similar pattern — funded largely with Japanese capital. Unless the trend could be arrested, other growing Asian economies might well follow the same model.

There was a further consideration. Consumption, and thus economic growth in the economies of Europe and North America, appeared to be slowing by comparison. This, added to the rise of an unwelcome form of capitalist development in Asia, represented a challenge to US and European power and influence in a region that could become an economic dynamo.

Abandon policies

The question thus became one of determining how the Asian economies could be persuaded to abandon their own brand of interventionist capitalism. Von Hayek and the universities provided helpful underpinning for the plan which became the Washington Consensus.

The immediate targets were restrictions on capital flows and trade restrictions. Economic theory prescribed all kinds of benefits for countries emboldened to remove currency controls along with tariff and other protection, though there was little practical evidence to support the theory.

A second tantalising assertion was also advanced. Not merely was industry protection harmful to the domestic economy and costly to consumers, but the maintenance of an extensive manufacturing industry amounted to a commitment to the past.

Future economic prosperity would be built around the new technology industries. Australian policy thinkers, at least, appeared to swallow this nonsense whole and continue to do so.

The Washington Consensus was happy to encourage these views, though US concerns were different.

National financial controls and protective barriers empowered the industries of individual nations over US and European big business.

Local industry protection dictated that foreign-owned industries needed to set up inside the national barriers and on terms and conditions set down by the host country. And financial controls allowed the same host countries to control inward investment flows and capital expatriation.

Open borders for capital and goods completely changed the power equation. Under these arrangements, the major industrial powers could exploit their strength and size by being able to invest in productive capacity wherever they wished, and on their own terms.

Equally important, they could export to the rest of the world, again on their own terms. And if the rest of the world believed the industrial age was over, so much the better. Equally desirable, if the burden of taxation could increasingly be borne by consumers directly, through consumption taxes, then large enterprises could become even more profitable.

Stifle competitors

Globalisation, in this mould, enabled the strong and powerful to further consolidate their strength and power, and to stifle new and smaller competitors.

Even this much power was not enough for the Washington Consensus. Privatisation — whereby publicly-owned utilities would be opened up for private purchase — was another element. Thus would a further trick be delivered into the already powerful hand held by US and European big business.

An international framework encased all this. In a case of what amounts to a new world industry policy, we have seen the creation — around the framework of the old General Agreement on Tariffs and Trade — of a body of expanded and more tightly drawn rules to govern world trade and to be administered by the World Trade Organisation (WTO).

Nor is that to be the end of it. On the back of the Washington Consensus, a new agreement is in prospect covering world trade in services, also in the WTO.

That development — though well-advanced — is yet to be finalised and, no doubt, in Mr Bergsten’s mind, agreement on the trade in services is in danger of derailment, unless public concerns about the downside of globalisation are addressed.

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