The System Worked_How the World Stopped Another Great Depression

by Daniel W. Drezner

  The distribution of power played a contributing role in the continued functioning of global economic governance—but power alone is an insufficient explanation. Why did the American and Chinese governments continue to comply with WTO norms? What explains the preferences of the great powers? To answer these questions, we need to turn to the role of economic ideas.

  6

  The Role of Ideas

  AS WE HAVE SEEN, global economic governance has functioned surprisingly well since the 2008 financial crisis. This is due in part to shared material interests and in part to resilient American leadership and robust Chinese supportership. The question of why the system worked remains somewhat unresolved, however. Arguments grounded only in material power and interest cannot explain everything. There are simply too many instances in which powerful national or sectoral interests compromised. As we shall see, Germany was not enthusiastic about the notion of Keynesian stimulus at the outset of the economic crisis. In the end, however, the German government was responsible for some of the largest stimulus spending among the G20 economies.1 Chinese princelings resisted any move by the Chinese government to allow the remninbi to appreciate—and yet, beginning in 2010, the government allowed the currency to rise relative to the dollar. European governments resisted the dilution of their influence in the World Bank and the IMF, but eventually acquiesced. And the negotiations over Basel III suggested the limits of an approach based solely on material interests. More generally, neither interest nor power alone explains why the United States chose to perpetuate the system of global economic openness, and why China supported that decision.

  This chapter considers the role that economic ideas played in fostering the necessary comity for global governance to function. Ideas can provide a powerful guide for action during times of crisis—provided they are shared. There were excellent reasons to believe that the 2008 financial crisis would delegitimate the economic principles that undergirded the open global economic order. Despite this expectation, delegitimation occurred only on the margins. Because rising actors failed to articulate a coherent alternative, the neoliberal ideas of the Washington Consensus continued to act as a guide for key actors in the post-crisis world.

  In this chapter I look at why there were excellent reasons to believe that the 2008 crisis could have been a game-changer in how elites and publics viewed the global economy in general and neoliberalism in particular, and then review the data confirming that there has been no sea change in public attitudes and only minimal changes in policy content. Then I discuss the conditions for ideational change in times of economic crisis, and follow with discussions of two ideational debates that played out in the five years after the financial crisis: the competition between the Washington Consensus and the Beijing Consensus, and the battles over austerity in fiscal and monetary policy.

  Why the Great Recession Could Have Been an Existential Crisis

  The dominant theme of global economic policy for the three decades prior to 2008 was the retreat of the state from the commanding heights of the economy.2 The embodiment of this trend was the articulation of a set of ideas that was sometimes labeled “neoliberalism” and sometimes labeled the Washington Consensus. Economists have developed the core of neoliberalism over the previous half-century.3 Its central argument is that the world is most likely to prosper if the state adopts a hands-off attitude to markets. At the international level, the embrace of market forces led to a series of policies that pushed toward reducing restrictions on cross-border exchange: freer trade, capital account liberalization, and fewer restrictions on foreign investment. In finance, the efficient-market hypothesis held that state regulation is essentially unnecessary, since all information about any financial asset is encapsulated in its price.4 Via privatization, liberalization, and deregulation, governments across the globe increasingly accepted the idea that markets represent the most efficient method of resource allocation. At the most abstract level, the spread of neoliberalism was a strong affirmation of Francis Fukuyama’s “end of history” thesis—the idea that no universally viable challenger to liberal capitalist democracy would emerge as an alternative mode of domestic governance.5

  Even in the run-up to the subprime mortgage crisis, however, there were signs that both American politicians and the American body politic were souring on globalization. According to a recent Gallup poll, at the peak of the late-1990s economic boom, 56 percent of Americans believed that the economic opportunities created by foreign trade outweighed the costs; only 36 percent thought the costs outweighed the benefits. By 2008, however, that support for freer trade had collapsed. As the financial crisis was growing more acute, 52 percent of Americans thought the costs had become prohibitive; only 41 percent thought otherwise.6

  The attitudes of US political and business elites matched the public’s turn against the global economy. Most business interests didn’t exactly clamor for a return to protectionism, but neither were they terribly enthusiastic about lobbying for the completion of the Doha Round. Political elites paid lip service to supporting free trade—unless Dubai Ports World tried to acquire holdings in US ports or foreign sovereign wealth funds tried to invest in the United States. Still, the number of congressional bills targeting China as an unfair trader exploded.7 And during the 2008 presidential campaign, one of Barack Obama’s sharpest conflicts with then-rival Hillary Clinton was over which candidate would renegotiate the North American Free Trade Agreeement (NAFTA) more favorably in America’s direction.

  Chinese preferences for trade liberalization were relatively robust before the crisis—but resentment against the US-created international economic order was simmering. The US response to the Asian financial crisis in 1997–98 had already created layers of hostility to the Washington Consensus across the Pacific Rim.8 The Chinese public also resented the US-imposed terms for China’s WTO membership in 2001, viewing them as onerous.9 US pressure on China to liberalize its financial sector and allow the remninbi to appreciate also generated hurt feelings. A December 2007 survey of Chinese citizens and opinion leaders revealed that a plurality of both sets of respondents believed that the United States was trying to prevent China from becoming a great power.10 Chinese officials ratcheted up their criticism of the US-led economic order. China’s Communist Party authorized party critiques of the Washington Consensus.11 A senior Chinese banking official publicly blasted the United States for having a “warped conception” of financial regulation. Chinese trade officials accused the United States of engaging in its own form of protectionism because of dollar depreciation.12

  Once the acute phase of the crisis hit there were excellent reasons to believe that the animating ideas of the Washington Consensus would lose their legitimacy. In 2008, global markets in financial assets, food, and energy were buffeted by a series of shocks, and none of them appeared to respond terribly well. The great powers responded by increasing state intervention in all three sectors. In the United States and United Kingdom, the Great Recession rattled even the most devout free-market enthusiasts. Former Federal Reserve chairman Alan Greenspan made headlines when he testified before Congress that his faith in the “intellectual edifice” of self-correcting markets had “collapsed.”13 At the 2009 G20 London summit, British prime minister Gordon Brown flatly declared that “the old Washington Consensus is over.”14 Press reports suggested that the consensus among economists about the virtues of an open global economy was cracking.15 Over the next few years, book after book blasted the intellectual edifice of neoliberalism and the Washington Consensus.16

  If the financial crisis caused a crisis of capitalist faith in the United States, it appeared to encourage more revisionist thinking in China and elsewhere. The contrast between the successful 2008 Beijing Olympics and persistent US malaise convinced many observers that China’s moment to supplant the United States had arrived.17 China’s economic success in the wake of the 2008 financial crisis stood in stark contrast to the stagnation in the advanced industrialized economies. In early 201
0, the New York Times noted the shift: “As developing countries everywhere look for a recipe for faster growth and greater stability than that offered by the now-tattered ‘Washington consensus’ of open markets, floating currencies and free elections, there is growing talk about a ‘Beijing consensus.’”18 As we shall see, there were multiple definitions of the Beijing Consensus, but a common denominator was the prominent role of state institutions and state-owned enterprises. In 2006, the Chinese government had declared seven strategic sectors in which the state would retain absolute control, signaling a move away from fostering private enterprise in leading sectors.19 China’s massive 2008 fiscal stimulus focused on infrastructure investments, disproportionately empowering those sectors even more.20 Beyond those sectors, China facilitated the development of sovereign wealth funds, national oil companies, and state-run development banks.21 The goal of all of these structures was to ensure that the state could direct resources toward favored and strategic sectors that were considered crucial to economic development.

  Multiple Western analysts argued that the relative success of state-directed growth among energy and manufacturing exporters augured a rise in “authoritarian capitalism” or “state capitalism.”22 China was clearly the most powerful and most potent of these countries. Stefan Halper was even more explicit, arguing that “the terms, the conditions and arrangements, of state-directed capitalism give Beijing a distinct edge over Western competitors.”23 Martin Jacques noted, “China’s success suggests that the Chinese model of the state is destined to exercise a powerful global influence, especially in the developing world, and thereby transform the terms of future economic debate.”24 Even former enthusiasts of neoliberalism, such as Francis Fukuyama and Thomas Friedman, began to wonder if the China model was superior.25 At a minimum, the demonstration effect of China’s phenomenal growth suggested that there were pathways to economic development that deviated from the Washington Consensus—and maybe other developing countries would try to adopt its features.26

  The interest in a Beijing Consensus mirrored shifts in elite and public attitudes inside China that were more hostile toward the United States. As China scholars Andrew Nathan and Andrew Scobell observed, many Chinese elites viewed economic competition with the United States through a relative gains lens in which “China expects Western powers to resist Chinese competition for resources and higher-value-added markets.”27 Chinese officials publicly scorned the flaws of the Washington Consensus and began to talk privately about the virtues of their own development path. Wang Jisi noted in 2012, “It is a popular notion among Chinese political elites, including some national leaders, that China’s development model provides an alternative to Western democracy and experiences for other developing and political systems are experiencing disorder and chaos. The China model, or Beijing Consensus, features an all-powerful political leadership that effectively manages social and economic affairs.”28 Post-crisis public opinion polls also revealed that an increasing number of Chinese citizens believed that US-led global governance structures were designed to contain Chinese power.29 According to the Pew Global Attitudes survey, there was a demonstrable shift in Chinese public attitudes between 2010 and 2013. The attitudes of Chinese citizens toward the United States went from a net 21 percent positive to net 13 percent negative—a considerable swing.30 Chinese questioning of the American model dovetailed with nationalist preferences to challenge US hegemony. Many Chinese hawks urged Beijing to use its holdings of dollar-denominated assets to subvert American foreign policy and delegitimize the US-created international order.31

  During the depths of the Great Recession, there were excellent reasons to believe that the open, liberal international order faced an existential threat. The proponents of the Washington Consensus were no longer so confident in their ideas, and there seemed to be an intellectual movement coalescing toward an alternative paradigm based on China’s growth model. What actually happened over the next five years, however, was something altogether different.

  The Resilience of the Open Global Economy

  As discussed in chapter 2, matters played out quite differently from expectations. Global governance structures mostly doubled down in committing to an open global economy. Trade protectionism did not increase as predicted, and trade flows recovered quickly. Despite concerns about state-led foreign investment, the actual steps taken to restrict such investments were minimal.32 Only in the financial sector were there appreciable changes in the rules of the game—but even here the changes were designed to restore confidence in the markets rather than promote closure.

  It is also noteworthy that, despite enthusiasm in some quarters for the China model, official rhetoric, public attitudes, and state actions have not shifted against either free trade or the free market. One of the key elements of the G20’s “Framework for Strong, Sustainable, and Balanced Growth” articulated at the Pittsburgh summit in September 2009 was to maintain an open global economy. It included pledges to “stand together to fight against protectionism” and “minimize any negative impact on trade and investment of our domestic policy actions” and “not retreat into financial protectionism.”33 Pledges like these have littered G20 statements since Pittsburgh as well. One can argue that these endorsements were, to use the argot of policymakers, “boilerplate”—statements cut and pasted from previous communiqués and official documents. They were therefore simply unthinking reiterations of past pledges. This is the point, however: these statements were unthinking because they had been already accepted as given for quite some time. These communiqués failed to include any language that suggested any kind of fundamental rethinking of the merits of an open global economy.

  TABLE 6.1 Global Public Support for Free Markets

  TABLE 6.2 Global Public Support for Free Trade

  A similar story can be told about the BRICS summits.34 Beginning in fall 2008, policymakers from Brazil, Russia, India, and China turned what had been a Goldman Sachs marketing term into a real international grouping with regular summit meetings and working groups. In December 2010, South Africa formally joined the grouping, making them the “BRICS.” The BRICS have called repeatedly for “the reform of international financial institutions and global governance,” as they did in their November 2008 communiqué.35 When examining BRICS statements to determine their preferences, however, what emerge are demands that represent the international side of the Washington Consensus. This began with the November 2008 statement of the BRIC finance ministers, which called for taking actions to unfreeze private credit markets and prevent trade protectionism. The statement from their March 2013 summit in Durban noted strong support for “an open, transparent and rules-based multilateral trading system.” These themes reverberate in every communiqué.36 The BRIC Leaders 2010 statement did note: “Recent events have shattered the belief about the self-regulating nature of financial markets.” But as chapter 4 shows, similar language also appeared in G7 and G20 communiqués.37 After five years of summits, the only tangible step toward alternative institution-building was the March 2013 announcement that a BRICS Development Bank would be created.38 Even this bank, however, was originally projected to have a total capitalization of approximately $50 billion—less than what the World Bank loans out in a single year.39

  Public attitudes about the global economy also failed to shift all that much given the vicissitudes of global markets in 2007 and 2008. One would have expected eroding support for free markets and free trade. Given the prominence of the Washington Consensus, it would have been natural for publics across the globe to push back on the principles of laissez-faire capitalism. To be sure, one can find post-2008 global public opinion polls suggesting hostility to global capitalism, particularly with respect to finance.40 Most of these surveys, however, lack a pre-crisis baseline. Evidence of a broad-based global turn in public opinion would only be convincing if there were an appreciable shift in public responses to questions that were asked both before and after the 2008 financial crisis.

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p; Fortunately, the Pew Global Attitudes Project has surveyed a wide spectrum of countries since 2002, asking people about their opinions on both international trade and the free market more generally.41 Surprisingly, the survey results (table 6.1) suggest that the Great Recession did not lead to a drop in support for either free markets or free trade. Pew surveyed people in more than twenty countries before and after the 2008 crisis on the question of whether people were better off in a free market economy.42 There was no immediate drop in support following the crisis, and similar results were found in 2011. In 2007, the unweighted average of the twenty-three countries surveyed showed that, on average, 62.5 percent of respondents believed in the benefits of a free market. In early 2009, in response to the same question, those same countries produced an unweighted average of 62.7 percent in support. For those countries surveyed in 2007 and 2011, support for free markets increased from 61.9 percent to 62.4 percent. This is hardly a significant increase, but it demonstrates that there was no erosion of support for free markets either. Once the eurozone crisis deepened, support did plummet in European countries, such as Italy and Spain. But on the whole, and particularly in the developing world, support for free markets remained strong and robust.