Neither Washington, Nor Beijing Consensus, But the New Pragmatism

Neither Washington, Nor Beijing Consensus, But the New Pragmatism

An article by professor Grzegorz W. Kolodko published at Economonitor on January 24, 2012

First things first. In the short run, the expansion of the social market economy is not on the agenda, because more urgent challenges must be addressed. However, in the longer run a kind of global social market economy seems to be the only sensible option for the future of mankind. A social market economy implies that the core of economic activity is based on private ownership motivated by the desire to maximize profits, yet at the same time it takes care of social cohesion. The power of the market must be used for facilitating the needs of the people and not just for the purpose of people’s exploitation. Therefore, a social market economy is not just incompatible with neoliberalism which works on behalf of the few at the cost of the many; it is contradictory to it.

One must not be naive. The world, with 7 billion people already and 9 billion expected 35 years from now, with great inequality and contradictions, with a variety of hardly compatible values and agendas, will never look like the social market economies of the social-democratic countries of Scandinavia. Yet, progress can be achieved only if there will be balanced and sustainable development. As I write in my book, “It is not possible to get to a perfect world, yet it is worth it to keep moving there”.

Regarding neoliberalism, which is confusing the means with the ends of economic policy, it is just a recipe for disaster. We must get rid of this biased type of a market economy. The recent crisis should help to do so, however – and strangely – so far it hasn’t.

Is the “Beijing Consensus” leading to a social market economy?

To what extent is the “Beijing Consensus” meeting the criteria for a social market system? Unfortunately, the current Chinese institutional system and development strategy is not sufficiently determined  to create a social market economy. It should, but it does not, basically because China is extremely oriented towards growth. Such strategy indeed delivers remarkable GDP growth, but at the same time creates new problems and challenges which are not addressed in a way they ought to be in a social market economy. The most important issue with this regard is high – and still growing, which is a destabilizing factor – income inequality. This is not sustainable and cannot be tolerated much longer. Either it will be reversed by policy means, because the market works the other way, or there will be serious social conflict.

As for the so-called “Beijing Consensus”, as it is understood in the West, China is more like “state capitalism” than “social market economy”. It would definitely be much better for the great country of China as well as the world to evolve gradually from the former to the latter. Therefore, the economic development strategy shouldn’t rely on “Beijing Consensus”, nor the already compromised “Washington Consensus”. It must be crafted from something in between.

The other developing countries, more recently referred to as “emerging markets”, have a lot to learn from China, but they should also follow what has been working in countries like Brazil and Poland, and even Canada and Sweden, while certainly taking all local and specific factors into account. Learning from the experiences of others is a multi-directional process.

Why New Pragmatism?

There is a great need for pragmatism, a new pragmatism. Why “new”? First, one must take all of a country’s specific factors into consideration: geopolitical position, local culture, legacy from the past, resources, existing structures and institutions. One size absolutely doesn’t fit all. Second, the policy for a better future implies heterodoxy. The orthodox mainstream economics is pass?. New Pragmatism points to the necessity of exercising various approaches, be it a bit of neokeynesism or monetarism, neoinstitutional and behavioral economics, development economics and ordoliberalism. Third, it’s “New”, since it must take into account not only traditional micro- and macro-economics, but also a new mega-economics of an interdependent global economy. Therefore, there is a need for pragmatic co-ordination of policy on a worldwide scale. More and more challenges cannot be solved on the national economy level, even for great countries like China and the USA, nor at the regional level, like the European Union or ASEAN. Fourth, a new approach is needed, because it must deal with the new position of transnational capital vis-?-vis national states. Traditional regulation and government interventionism is categorically inadequate.

In other words, China’s policy over the last couple of decades is indeed quite pragmatic: step by step many problems are being solved and the country doubles GDP every seven years or so. On the contrary, US economic policy has hardly been as pragmatic and has led to a great financial crisis. There is certainly a long way to go to build a new global pragmatism.

The institutional challenge of an interdependent global economy

The most difficult problem has emerged: how to manage the conflict of interests on a truly planetary scale? It is indeed a great challenge, but we must find a pragmatic way forward. The main mechanism must be transnational negotiations and an agreed global co-ordination policy response. My proposition is to move ahead, toward a more socially oriented worldwide economy, within a specific triangle of long-term development. It must take into account not only a requisite economic (trade, finance, investment, migrating labor) equilibrium, but also social balance (a kind of worldwide social cohesion) and environmental sustainability (especially a slowing down of the exploitation of non-renewable natural resources).

The points of such a triangle are: values, institutions, policies. The policies must change and be more accountable, this time already for pro publico mundiale bono. The institutions (behavioral, not organizational) are critical. The civilization of the future needs a new institutional order for a global economy that is a new set of rules for the economic game and worldwide regulation of many forms of economic activity, starting from international finance, migration, and environment. But, also the values must change. They differ significantly between China and USA, between Poland and Russia, between old and new, between rich and poor. The values of the future must shift from ‘to have as much as possible’, and from greed, to ‘to be as fine as possible”, and to share.

G-194, G-20, G-2 or G what?

This is indeed a long quest for a better future. We’re just at the beginning of the road and the current crisis, and paradoxically, it might be a good thing if it pushes us in the right direction.  Is it going to happen? It is too early to tell, but we certainly need a new intellectual leadership on the transnational, if not global scale. We need new forms of policy co-ordination. At times it will  be appropriate for the United Nations G-194, other times it will be better if it is just the G-20, and still other occasions will call for the G2, that is China and the US, or Chimerica. But that won’t be enough. I would put some trust in the further progress of regional integrations. The world of the future instead of being divided into almost 200 national economies should consist of a dozen or so regional groupings. It will then be easier to co-ordinate the policies on a planetary scale and on behalf of humanity.

When I say that neoliberalism has been the last great utopia of the 20th century, I mean utopia from the viewpoint of balanced, equitable, and sustainable development of the world economy. Yet from the point of view of a few, which enriched themselves at the cost of many, it was quite a pragmatic concept. It’s enough to say that in the US the richest 1 percent of people were getting just 10 percent of GDP (not a small part) in 1979, and in 2007, on the eve of the eruption of the crisis, it was as much as 20 percent.

The West was entirely shocked by the speedy collapse of the socialist centrally planned economy in 1989-91. There wasn’t any sensible idea how to tackle the issues, only a so-called Washington Consensus, derived from neoliberal ideology and economic thought. So, it was not only advised, but enforced upon the East European countries and Russia at the beginning of the 1990s, and with dire results, as in Russia or in Poland during shock without therapy. In my country, Poland, such ill-advised economic policy was exercised in 1989-93, with too much pain and not enough gain. The country lost 20 percent of GDP in the first three years and unemployment skyrocketed from non-existing to over 3 million people, or over 17 percent. The costs were much higher than what was deemed unavoidable, and the results much lower than what was possible. Just a shock failure. It changed in 1994, under my stewardship, when I had become deputy prime minister and minister of finance and implemented a comprehensive and unorthodox program of reforms and development known as “Strategy for Poland”. Soon after, Poland was nicknamed the ‘tiger of Europe’, real GDP jumped in 4 years by 28 percent per capita, unemployment declined by 1/3 and inflation by 2/3, and my country become a member of the OECD in 1996. This was “New Pragmatism” in practice.

How was it possible to be misled for so long?

So, how was it possible that the world, including part of East Central Europe, even my country for some time, was misled by harmful neoliberalism? Simply, there were (and still are) groups of special interests benefiting from the policy of fast (that means cheap) privatization, chaotic deregulation, and tough fiscal and monetary policy advised by the ‘Washington Consensus’. There was also very strong, ideologically driven, motivation of na?ve and primitive anti-communism. Neoliberalism is not just an ideology and policy. It’s a doctrine, a dogma, which can mislead plenty of people, especially with the assistance of the media.

Why was the misery of this ideology and policy overlooked for so long, until the moment it brought a great crisis, first to the US and then to the world economy? Mainly because of the permanent lobbying of special interest groups, corrupt politicians, and the media as well as a part of  the “academic” circles of support. They were working hard to get public support for policies that were not truly devoted to these very public needs. Many economists and policymakers, analysts and politicians, lobbyists and journalists, were not just mistaken, which would imply that they just relied on the wrong economic theory. Rather, several have just been lying, doing so on behalf of special interest groups. As I write, this is a global worldwide phenomenon. This is why my book is called “Truth, Errors, and Lies: Politics and Economics in a Volatile World”.

Professor G.W. Kolodko, is the author of the international bestseller “Truth, Errors, and Lies: Politics and Economics in a Volatile World” ( Former deputy premier and minister of finance of Poland, he teaches at Kozminski University, Warsaw.