Part three
The debate on the superiority of the Beijing Consensus (BC) over the Washington Consensus (WC) usually ends up with the question: what is the ideal role for the government in growing the economy? A market shaper or, simply, a market facilitator?
In the 1980s, Ronald Reagan of the United States and Margaret Thatcher of the United Kingdom provided the answers: “privatization,” “liberalization” and “deregulation.” The two led the global assault against the “visible hand” of the State in the market. No or minimal State intervention in the market. No or minimal State regulation on the flow of goods, capital and investment. No or minimal role for government corporations in the market, that is, in the production, distribution and delivery of goods and services. Hence, yes to policies of trade and investment liberalization, privatization and deregulation of different sectors of the economy. It is a laissez faire market scenario so close to the hearts of the founders and developers of the neo-liberal school—Friedrich Hayek, Milton Friedman and the so-called Chicago school.
Neo-liberalism became the guiding policy framework in the lending operations of the International Monetary Fund (IMF) and World Bank in the 1980s and 1990s, with the Philippines becoming one of the original guinea pigs of the so-called “structural adjustment loans” (SALs). Subsequently, the architects of the World Trade Organization (WTO) embraced neo-liberalism and exerted utmost efforts to broaden the concept of global commerce to include not only the free flow of industrial and agricultural goods but also the free flow of services and capital. The dream of the neo-liberalizers and globalizers was to have a “borderless” world economy.
The problem is that not all countries are equal in a borderless world economy. Countries in the North, with their strong industrial base, are naturally able to progress further given their technological superiority and their “global reach” advantages (R&D, market linkages and so on).
Countries in the South, which are not prepared to compete in this borderless world order, are marginalized further. This is particularly true for the heavily indebted developing countries that accepted the SAP/SAL neo-liberal packages in an uncritical fashion. These packages—composed of fiscal austerity, currency devaluation, tax reliefs for the big investors, trade/investment liberalization and privatization of public services—have an immediate anti-growth impact without any assurance of sustained growth in the medium and long terms. These packages weaken these countries’ capacity to get out of the debt quagmire. This is precisely what happened to the Philippines and a number of Latin American and African countries in the 1980s and 1990s.
The dislocating impact of how an uncritical acceptance of the neo-liberal policy package, marketed as “economic reform package,” can damage a country is dramatically illustrated by what happened to the Russian Federation (former Soviet Union), when it decided to accelerate its twin programs of marketization and global economic integration by implementing in 1992 the so-called “shock therapy” package proposed by Western economists such as Lawrence Summers and Jeffrey Sachs and the Russian advisers of President Boris Yeltsin. Overnight, the Russian government lifted controls on prices and credit, eliminated all forms of subsidies, allowed the Russian ruble to float freely, opened the economy to world commerce and foreign investors, and declared the wholesale privatization of government-controlled businesses.
The results? Economic “shock” to the Russian people due to inflation (reaching 2,500 percent within a year), double-digit unemployment, collapse of the safety nets (pensions, food subsidies, etc.) under the old Soviet system, bankruptcy of a large number of Russian industries and enterprises, ruble-to-dollar exchange rate declining from R144/$1 to R5,000/$1, and the overall contraction of the Russian economy (by 45 percent in three years). Gone was the old image of the former Soviet Union, a “superpower” Cold Warrior, competing head-to-head with America. The big winners in the “catastroika” are the Russian mafia or privileged buyers/managers of government businesses, e.g., oil, mining and so on, that were privatized in the name of marketization.
In contrast, there was no “shock therapy” for China. Nor were there any SAP/SAL policy packages. Yes, China embraced marketization and global economic integration. But it did so at its own pace and based on its vision of development. There were no IMF-WB economic advisers offering loans with SAP policy conditionalities.
Yes, China joined the WTO. But unlike the Philippines, it did not join the WTO by offering the wholesale tariffication and liberalization of its industrial, agricultural and other economic sectors. In fact, it became a WTO member only in 2001, that is, after 15 years of lengthy negotiations on how to adjust its tariff schedule line by line (there are 10,000 plus tariff lines). China was insistent on maintaining policy space in deciding which domestic industries deserve continuing protection and which ones need to open up. On foreign exchange, China resisted for over three decades Western demand to freely float the renminbi and give up its two-tier exchange rate policy, which enabled China to conquer global markets while preserving its domestic industries.
In brief, China is a classic developmental state, not a subservient one that is dependent on the neo-liberal diktat of Western banks and economists. China’s marketization and global integration drives have been pursued without the State, led by the Communist Party, giving up its role as the overall economic leader, as intervenor in the market when needed, as regulator of how industries should be run (look how Jack Ma is being tamed), as protector of industries both export- and domestic-oriented, as investor in new industries which need to be developed, and so on. In a way, China has replicated what the Asian developmental states—Japan in the pre-war and post-war periods, Asian NICs (Singapore, South Korea and Taiwan) in the 1960s-1980s and Malaysia (1980s-2000s)—did by pursuing an integrated nation-first economic modernization and development program, a program that provides protection and support to both the domestic- and export-oriented industries as well as one that continuously tries to upgrade national industrial capacity. The big difference: China is doing the program of a developmental state on a larger scale and in a focused and sustained manner, which explains its success in registering annual double-digit GDP growth in four decades.
The Western economists who coined the term Beijing Consensus such as John Williamson are painting an incomplete and inaccurate picture when they assert that the Washington Consensus is not repudiated by the BC simply because the BC builds upon key components of the WC (e.g., market liberalization) by adding new policy components such as innovation. They forgot the central role of China’s developmental state in engineering economic transformation. According to the China’s Institute of Reform and Development (China’s Economic Transformation Over 20 Years, Beijing, 2000), Russia’s “shock therapy” failed because it meant the abandonment of the State of its critical duty to provide macroeconomic control over foreign trade, exchange rate, investment and credit policies, “unified allocation of goods and equipment,” fixing prices and so on.
The point is that a country can be market-oriented and outward-looking without being imprisoned in the narrow neo-liberal policy constructs advanced by the WC economists.
More in the next issue (on major principles of political economy as articulated by the Chinese economists themselves).
Dr. Rene E. Ofreneo is a Professor Emeritus of
University of the Philippines. For comments, please write to reneofreneo@gmail.com.