Written by Laurence Brahm - Published by South China Morning Post on 06/16/2009
When visiting Beijing earlier this month, US Treasury Secretary Timothy Geithner addressed a group of Chinese students at Peking University, assuring them that their country’s assets were “very safe in Washington”. He was met with laughter. It was a clear sign of changing times. Mr Geithner seemed more like an investment banker on a road show to raise capital than the finance minister of the world’s largest economy. Only a year ago, the US treasury chief was wagging his finger at China and calling for financial reform, an opening of capital markets and foreign exchange liberalisation. China’s leadership now consider themselves lucky not to have taken any of this unsolicited advice.
For decades, the Washington Consensus – a view that promotes one model of development and “structural readjustment” for transitional economies – has called for many shock therapies. These include opening capital markets, freeing foreign exchange controls, privatising state assets and removing subsidies, especially on edible oils and grains. These policies trashed the post-Soviet economies of central Asia and Eastern Europe, and later destabilised Indonesia and Thailand during the 1997 Asian financial crisis. Those countries which refused to buy into Washington’s formula – including China, Vietnam and Malaysia – have fared well, with developed, sustainable economies. So, is it now Washington’s turn to adopt “structural readjustment”, given Mr Geithner’s comments to his student audience that “in the US, we are putting in place the foundations
for restoring fiscal sustainability”.
The Washington Consensus, through institutions such as the International Monetary Fund and the World Bank, backs the globalisation of one economic model and development formula, known as neo-liberal economics or, sometimes, voodoo economics. At its core is Adam Smith’s “invisible hand” – that greed motivates all. It fails to consider other human motivational factors, such as spirituality or compassion.
Today a new paradigm, emerging as the Himalayan Consensus, has declared that the Washington Consensus is dead. The tectonic plates of our global financial system are shifting. There is no new Bretton Woods and instead a replacement, through regional alternatives, is needed. Developing nations, which are rapidly becoming developed, are setting a new agenda for themselves, one that Washington may have to follow, whether it likes it or not.
There is more to come. Tomorrow, foreign ministers from Brazil, Russia, India and China, the so-called Bric nations, will meet in Yekaterinburg, Russia. Their discussions will focus on one key issue – the future role of the US dollar in the global financial system. The Bric leaders are dissatisfied with the lack of US leadership in the financial crisis and feel that rescuing failed institutions responsible for the crisis and expanding money supply at an unprecedented rate to stimulate more consumption is both irresponsible and inappropriate. “The tendency among the Brics is to insist on having an approach to the crisis that focuses primarily not on finance but on the real economy,” said Brazil’s minister of strategic affairs, Roberto Mangabeira Unger.
Bric leaders seek alternative solutions to the economic crisis and are willing to be pioneers. For instance, Russian President Dmitry Medvedev has suggested that Russia and China should consider switching to domestic currencies in bilateral trade instead of using the US dollar. China already has similar agreements with Brazil and Belarus. The leaders want to address trade imbalances between the Bric countries and the developed world, establish a link between economic recovery and income redistribution, while reassessing the role of financial markets.
To solve the problem through a massive package to stimulate consumption will only perpetuate the problem. On a planet of diminishing resources, overconsumption is the main problem.
Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.
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