Meed | Embracing the new Washington consensus

Embracing the new Washington consensus

21 June 2023

Commentary
Edmund O'Sullivan
Former editor of MEED

Speaking at a Brookings Institute conference in Washington DC in May, US national security adviser Jake Sullivan set out America’s international economic priorities under President Joe Biden.

Deep trade liberalisation had failed, as had prioritising growth over its form. The merits of global economic integration had been overstated. Regressive tax cuts, lower public investment, corporate concentration and weaker unions had failed America’s middle class — and the world.

Sullivan declared that Biden had restored “an economic mentality that champions building …and a foreign policy for the middle class”.

His new industrial policy will mobilise public and private investment worth $3.5tn over the next decade.

The consequences will be significant. The Congressional Budget Office forecast in February that the US budget deficit in the 10 years starting this July will total $20tn.That is an average of more than 6 per cent of GDP for the period as a whole, and twice the level once deemed to be the sustainable maximum.

The Washington Consensus – neoliberal ideas that for 40 years prioritised fiscal discipline, privatisation and international trade liberalisation – is officially dead. And Biden’s new one rejects everything that the old one championed.

The IMF now offers a toolkit for Middle East nations to manage fiscal risk

For most Middle East nations, this has not come a moment too soon. A report by the Washington-based IMF published in June painted a grim picture of the economic prospects that low-income Middle East nations face.

They experience large macroeconomic shocks that cause debt to increase by an average of 12 per cent of GDP every eight years. The region is more vulnerable than other parts of the world to commodity price, exchange rate and interest rate fluctuations. Governments are exposed to risks incurred by state-owned enterprises, troubled banks, public-private partnerships and power purchasing agreements that underpin electricity sector privatisations.

These problems are compounded by natural and climate disasters and health crises such as the Covid-19 pandemic.

Risk management

Echoing the new Washington Consensus, the IMF no longer issues calls for tough fiscal action and threats of financial punishment if it is not forthcoming. Instead, it now offers a toolkit for Middle East nations to measure and manage fiscal risk.

The majority of the countries in the region – and at least half its population, who live in or near poverty – will be relieved that economic shock doctrines are a thing of the past.

Sullivan said the new approach was needed to counter China’s growing influence, particularly in the global south. He is right, but it will take more than words to make that happen.