Washington's waning way: how bail-outs poison a free market recipe for the world
Sunday, 5 October 2008
Alan Beattie
Debating with Al Gore in the presidential election eight years ago, George W. Bush defined a new, humbler attitude towards the rest of the world. "I'm not so sure the role of the United States is to go around the world and say, 'this is the way it has got to be'," he said. "I just don't think it's the role of the United States to walk into a country and say: 'we do it this way, so should you'."
In one area Mr Bush might be about to get his wish, though not perhaps in the way he expected.
The events of the past few weeks on Wall Street have handed ammunition to the opponents of free markets well outside the financial sector and way beyond America's shores. A model of freewheeling finance the US has pushed around the world, which had already undergone some tactical withdrawals over the past decade, appears in headlong retreat.
For some, the retreat of the Washington model risks turning into a rout. David Rothkopf, a senior Commerce department official during the administration of President Bill Clinton, says the world is at a turning point. "This is a watershed," he says. "This is the end of 25 years of Reagan-Thatcherism, 'leave it to the market, less government is better government'. That is over - period."
That package may have started with advocating lower import tariffs on goods, a policy which commands relatively wide support among orthodox economists. But it has expanded to include more controversial strategies: allowing foreign institutions to buy local banks or set up their own subsidiaries, deregulating domestic financial markets and ending controls on cross-border capital movements.
Jagdish Bhagwati of Columbia University, a leading trade economist, has long warned that this is a dangerous confusion of liberalised financial markets, which are subject to repeated bubbles, panics and crashes, and the international movement of goods and services, which is not. Yet in practical terms the two have often been bundled. Washington has sought, for example, to export its own financial model through its trade deals. The template that the US uses in all its negotiations for bilateral trade pacts, and from which it tolerates few departures, includes strict limits on using capital controls to control financial crises.
The package of reforms that runs from opening up trade to liberalising capital flows is typically labelled the "Washington consensus". But as the originator of the phrase wearily points out, this is something of a caricature.
John Williamson of the Peterson Institute for International Economics in Washington invented the expression in 1989 to describe the standard set of 10 policy prescriptions for Latin American countries that emanated from the International Monetary Fund, the World Bank and the US Treasury. But the deregulation of financial markets and the free flow of capital, widely blamed for making developing countries vulnerable to financial crisis, were not on the list.
Mr Williamson says most of the to-do items are relatively uncontroversial and have been implemented even by centre-left governments such as that of Luiz Inácio Lula da Silva in Brazil: competitive exchange rates, fiscal discipline, property rights and shifting spending from general subsidies towards investment in infrastructure, education and health. "There is a lot more consensus around issues like trade liberalisation than there is about following a particular model of rapid financial deregulation," he says. "The expression 'Washington consensus' got a bad press."
This, Mr Bhagwati says, is the result of a "Treasury-Wall Street nexus" that has an irrevocable attachment to deregulation. "Wall Street tries to exert pressure on US policy in a big way wherever possible," he says. "It is an ideological commitment. You are made to feel like a socialist freak if you argue against any part of it."
Debating with Al Gore in the presidential election eight years ago, George W. Bush defined a new, humbler attitude towards the rest of the world. "I'm not so sure the role of the United States is to go around the world and say, 'this is the way it has got to be'," he said. "I just don't think it's the role of the United States to walk into a country and say: 'we do it this way, so should you'."
In one area Mr Bush might be about to get his wish, though not perhaps in the way he expected.
The events of the past few weeks on Wall Street have handed ammunition to the opponents of free markets well outside the financial sector and way beyond America's shores. A model of freewheeling finance the US has pushed around the world, which had already undergone some tactical withdrawals over the past decade, appears in headlong retreat.
For some, the retreat of the Washington model risks turning into a rout. David Rothkopf, a senior Commerce department official during the administration of President Bill Clinton, says the world is at a turning point. "This is a watershed," he says. "This is the end of 25 years of Reagan-Thatcherism, 'leave it to the market, less government is better government'. That is over - period."
That package may have started with advocating lower import tariffs on goods, a policy which commands relatively wide support among orthodox economists. But it has expanded to include more controversial strategies: allowing foreign institutions to buy local banks or set up their own subsidiaries, deregulating domestic financial markets and ending controls on cross-border capital movements.
Jagdish Bhagwati of Columbia University, a leading trade economist, has long warned that this is a dangerous confusion of liberalised financial markets, which are subject to repeated bubbles, panics and crashes, and the international movement of goods and services, which is not. Yet in practical terms the two have often been bundled. Washington has sought, for example, to export its own financial model through its trade deals. The template that the US uses in all its negotiations for bilateral trade pacts, and from which it tolerates few departures, includes strict limits on using capital controls to control financial crises.
The package of reforms that runs from opening up trade to liberalising capital flows is typically labelled the "Washington consensus". But as the originator of the phrase wearily points out, this is something of a caricature.
John Williamson of the Peterson Institute for International Economics in Washington invented the expression in 1989 to describe the standard set of 10 policy prescriptions for Latin American countries that emanated from the International Monetary Fund, the World Bank and the US Treasury. But the deregulation of financial markets and the free flow of capital, widely blamed for making developing countries vulnerable to financial crisis, were not on the list.
Mr Williamson says most of the to-do items are relatively uncontroversial and have been implemented even by centre-left governments such as that of Luiz Inácio Lula da Silva in Brazil: competitive exchange rates, fiscal discipline, property rights and shifting spending from general subsidies towards investment in infrastructure, education and health. "There is a lot more consensus around issues like trade liberalisation than there is about following a particular model of rapid financial deregulation," he says. "The expression 'Washington consensus' got a bad press."
This, Mr Bhagwati says, is the result of a "Treasury-Wall Street nexus" that has an irrevocable attachment to deregulation. "Wall Street tries to exert pressure on US policy in a big way wherever possible," he says. "It is an ideological commitment. You are made to feel like a socialist freak if you argue against any part of it."