A new global economic consensus

The pandemic has highlighted the deficiencies of economic deregulation and market liberalisation and a new policy-making paradigm is emerging.

The Washington Consensus is on its way out. In a report released this week, the G7 Economic Resilience Panel (where I represent Italy) demands a radically different relationship between the public and private sectors, to create a sustainable, equitable and resilient economy. When G20 leaders gather on October 30th-31st to discuss how to ‘overcome the great challenges of today’—including the pandemic, climate change, rising inequality and economic fragility—they must avoid falling back on the outdated assumptions that landed us in our current mess.

The Washington Consensus defined the rules of the game for the global economy for almost half a century. The term itself came into vogue in 1989—the year western-style capitalism consolidated its global reach—to describe the battery of fiscal, tax and trade policies being promoted by the International Monetary Fund and the World Bank. It became a catchphrase for neoliberal globalisation and thus came under fire—even from its core institutions’ leading lights—for exacerbating inequalities and perpetuating the global south’s subordination to the north.

Having narrowly avoided a global economic collapse, twice—first in 2008 and then in 2020, when the coronavirus crisis nearly brought down the financial system—the world confronts a future of unprecedented risk, uncertainty, turmoil and climate breakdown. World leaders have a simple choice: continue supporting a failed economic system or jettison the Washington Consensus for a new international social contract.

Pursuing social goals

The alternative is the recently proposed ‘Cornwall Consensus’. Whereas the Washington Consensus minimised the state’s role in the economy and pushed an aggressive, ‘free-market’ agenda of deregulation, privatisation and trade liberalisation, the Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall last June) would invert these imperatives. By revitalising the state’s economic role, it would allow us to pursue social goals, build international solidarity and reform global governance in the interest of the common good.

This means that grants and investments from state and multilateral organisations would require recipients to pursue rapid decarbonisation (rather than rapid market liberalisation, as required by IMF lending for structural-adjustment programmes). It means that governments would pivot from repairing—intervening only after the damage is done—to preparing: taking steps in advance to protect us from future risks and shocks.

The Cornwall Consensus would also have us move from reactively fixing market failures to proactively shaping and making the kinds of markets we need to nurture in a green economy. It would have us replace redistribution with pre-distribution. The state would co-ordinate mission-oriented public-private partnerships, aimed at creating a resilient, sustainable and equitable economy.

Disastrously incapable

Why is a new consensus needed? The most obvious answer is that the old model is no longer producing widely distributed benefits—if it ever did. It has proved to be disastrously incapable of responding effectively to massive economic, ecological and epidemiological shocks.

Achieving the United Nations Sustainable Development Goals, adopted in 2015, was always going to be difficult under the prevailing global-governance arrangements. But in the wake of a pandemic which pushed state and market capacities beyond breaking-point the task has become impossible. Today’s crisis conditions make a new global consensus essential for humanity’s survival on the planet.

We are on the cusp of a long-overdue paradigm shift. But this progress could easily be reversed. Most economic institutions are still governed by outdated rules which render them unable to marshal the responses needed to end the pandemic—let alone achieve the Paris climate agreement’s goal of limiting global warming to 1.5C, relative to preindustrial levels.

Our report highlights the urgent need to strengthen the global economy’s resilience against future risks and shocks, whether acute (such as pandemics) or chronic (extreme wealth and income polarisation). We argue for a radical reorientation in how we think about economic development—moving from measuring growth in terms of gross domestic product, gross value added or financial returns to assessing success on the basis of whether we achieve ambitious common goals.

Salient recommendations

Three of the report’s most salient recommendations concern Covid-19, the post-pandemic economic recovery and climate breakdown. First, we call on the G7 to ensure vaccine equity globally, and to invest substantially in pandemic preparedness and mission-oriented health financing. We must make equitable access, particularly to innovations that benefit from large public investments and advance purchase commitments, a top priority.

We recognise that this will require a new approach to governing intellectual-property rights. Similarly, the World Health Organization’s Council on the Economics of Health for All (which I chair) stresses that IP governance should be reformed to recognise that knowledge is the result of a collective value-creation process.

Secondly, we argue for increased state investment in the post-pandemic economic recovery and we endorse the recommendation by the economist Nicholas Stern that this spending be increased to 2 per cent of GDP per year, thereby raising $1 trillion annually from now until 2030. But marshalling more money is not enough: how that money is spent is equally important. Public investment must be channelled through new contractual and institutional mechanisms that measure and incentivise the creation of long-term public value rather than short-term private profit.

And in response to the biggest challenge of all—the climate crisis—we call for a ‘CERN for climate technology’. Inspired by the European Organization for Nuclear Research [CERN is the original French acronym], a mission-oriented research centre focused on decarbonising the economy would pool public and private investment into ambitious projects, including removing carbon dioxide from the atmosphere and creating zero-carbon solutions for ‘hard-to-abate’ industries, such as shipping, aviation, steel and cement. This new multilateral and interdisciplinary institution would act as a catalyst for making and shaping new markets in renewable energy and circular production.

New paradigm

These are just three of seven recommendations we have made for the years ahead. Together, they provide the scaffolding for building a new global consensus—a policy agenda for governing the new economic paradigm that is already beginning to take shape.

Whether the Cornwall Consensus sticks remains to be seen. But something must replace the Washington Consensus if we are to flourish, rather than simply survive, on this planet. Covid-19 provides a glimpse of the momentous collective-action problems confronting us. Only renewed international co-operation and co-ordination of enhanced state capacities—a new social contract underwritten by a new global consensus—can prepare us for tackling the escalating, interlocking crises ahead.

Republication forbidden—copyright Project Syndicate 2021, ‘A new global economic consensus’