The System Worked_How the World Stopped Another Great Depression

by Daniel W. Drezner

  The support for liberalizing trade with other countries was even more resilient, as table 6.2 demonstrates.43 Twenty-four countries were surveyed in 2007 and in at least one year after 2008, including a majority of the G20 economies. Overall, eighteen of those twenty-four countries showed equal or greater support for trade in 2009 than in 2007. In the countries surveyed in 2007 and 2009, the unweighted average support of free trade increased from 78 percent to 79.5 percent. By 2011, twenty of twenty-four countries showed greater or equal support for trade compared to the 2007 surveys. Between 2007 and 2011, the unweighted average support for increased trade in the countries surveyed rose from 78.7 percent to 84.4 percent. Indeed, according to a Gallup poll, Americans were more positive about international trade in February 2013 than at any point in the previous twenty years.44 Contrary to expectations, there was no public rejection of either the free market or the open global economy. Furthermore, any measurable dips in national support that did occur did not come from the developing world or BRICS, but from eurozone economies beset with multiple economic travails.

  The absence of an ideational shift away from neoliberalism is consistent with the actual behavior of the BRICS economies. A glance at the scores on the Heritage Foundation’s economic freedom index, for example, shows that trade freedom rose in all the BRICS countries between 2008 and 2013. This matches the BRICS’ own rhetoric. As Miles Kahler observes, “The Great Recession did not produce a redefinition of their interests away from international economic integration. Rather than delinking, as they had in the 1930s, or demanding a new international economic order, as they had in the 1970s, the developing world remained invested in the existing order and served as a key constituency in its defense.”45

  Despite the potential for transformation, the ideas animating the Washington Consensus emerged from the 2008 financial crisis relatively unscathed. Even though a few practices changed—such as the legitimation of capital controls—the basic premises of neoliberalism went unchallenged. Mercantilism and protectionism were rhetorically eschewed. Capital account liberalization remained a goal of global economic governance, albeit a less important one. Conservative macroeconomic policies were encouraged. The Washington Consensus continued to function as the “privileged” set of economic ideas in global economic governance. As Sarah Babb concludes, “Neither the policy changes recently adopted by national governments nor those adopted within the [international financial institutions] qualify as a paradigm shift. In this sense, the Washington Consensus lives on.”46

  This failure by elites and publics to overtly reject the Washington Consensus has nettled its critics. John Quiggin noted, “The zombie ideas that brought the global financial system to the brink of meltdown, and have already caused thousands of firms to fail and cost millions of workers their jobs, still walk among us.” Colin Crouch observed, “Neoliberalism is emerging from the financial collapse more politically powerful than ever … and the issue today is not limited to a single country, as neoliberalism is an international, even global, phenomenon. What we have to understand today is, therefore, the strange non-death of neoliberalism.”47 Whatever new ideas have been introduced into the global public sphere, they have not reconstituted the core elements of the system.

  The Necessary Conditions for Ideational Change

  To understand why there was no fundamental challenge, it is worth considering how economic ideas matter in world politics. International relations scholarship on economic ideas comes from heterogeneous worldviews, but there are commonalities in the literature that are worth exploring to explain the survival of neoliberalism.48 For example, almost every scholar agrees that ideas matter more during periods of crisis and uncertainty. Judith Goldstein and Robert Keohane talk about ideas functioning as road maps or focal points when there is a lack of clarity about what to do.49 Mark Blyth refers to the problem of “Knightian uncertainty” during an economic crisis—the moment when actors look to ideas to explain both its causes and possible solutions.50

  Uncertainty is a function of three factors: the depth of the shock, the linkage between the idea and the adverse outcome, and the depth of the preexisting consensus among policy elites for the privileged set of ideas. The bigger the shock, the bigger the uncertainty. A market crash or sustained recession clearly suggests that the status quo is not working, which creates a powerful incentive to search for new ideas. As the biggest global downturn since the Great Depression, the 2008 financial crisis definitely met this threshold criterion.

  The connection between privileged ideas and bad outcomes also matters, however. If the link between an economic idea and an outcome is clear, simple, and direct, then it is easier for elites and publics to make the cognitive connection. For example, there has been considerable debate about the underlying causes of the 2008 financial crisis.51 The misplaced faith in the efficient-market hypothesis seems to be directly related to the subprime mortgage crisis: deregulation permitted the creation of an asset bubble that, once popped, triggered the crisis. In finance, the causal logic connecting the privileged idea to negative outcomes was tightly coupled. On the other hand, few analysts blamed the Great Recession on low trade barriers. In trade, therefore, the causal logic was more loosely linked.

  The strength of the expert consensus also affects uncertainty. One can argue that confidence in policy ideas mirrors the way Bayesian statisticians predict how people update their beliefs.52 In Bayesian theory, expectations about the future are based on the strength of prior beliefs and the extent to which new data contradict those beliefs. In the world of economic ideas, the strength of that prior distribution is a function of the historical depth and current breadth of the consensus view among policy elites. The longer an ideational consensus has taken root, the more it takes on a “technical” rather than “ideological” cast—thereby making it harder to challenge. Deeply privileged ideas often possess an array of auxiliary arguments that can explain anomalous effects, making it less likely that these ideas will be usurped.53 So in areas in which experts have been in agreement for quite some time, even severe shocks might not trigger a substantive reevaluation of beliefs. In public policy areas in which the consensus is shallower, however, such shocks might lead to large changes in policy attitudes.

  Even during periods of high uncertainty, it is not enough for the privileged set of ideas to be discredited. There must also be a viable alternative. It is quite easy for discontented elites to criticize the privileged set of ideas; it is quite another for them to agree on another idea. For that to happen, there must be a substitute paradigm that provides a compelling explanation for the current negative outcome, offers a policy that reverses the status quo, and coalesces strong interests around the idea to supplant the existing ideational order.54 This is a daunting intellectual task, particularly if there is no “off the shelf” idea available that can explain current events. It is also a daunting political task: the proposed alternative needs to be simple and clear, and compelling enough to serve as a focal point for a heterogeneous group of individuals opposed to the status quo.55

  Given this checklist, the failure to dislodge the Washington Consensus begins to make more sense. To be sure, the Great Recession triggered genuine uncertainty, but that uncertainty varied across different areas of global public policy. Post-crisis surveys of leading economists suggest that a powerful consensus persisted on several key international policy dimensions. For example, the University of Chicago’s business school has run surveys of the world’s leading economists since the crisis started. On the one hand, the surveys show a strong consensus on the virtues of freer trade, as well as a rejection of returning to the gold standard to regulate international exchange rates. On the other hand, there is less consensus on monetary policy and the benefits of continued quantitative easing.56

  To demonstrate the ways in which the relative strength of economic ideas affected the willingness of states to cooperate with global economic governance, the next two sections look at two areas where the outcom
es differed. First, we examine why a Beijing Consensus failed to take root to challenge the Washington Consensus. In this case, the necessary conditions to displace the ordering principles of neoliberalism were never in place. The depth of belief in the privileged set of ideas was strong, and the alternative set of ideas was too inchoate to be a plausible substitute. This explains, in part, why China proved to be a supporter rather than a spoiler after 2008.

  Then we examine the more contested debate about macroeconomic policy coordination. In this case, the possibility of ideational change found more fertile ground. The depth of the consensus on macroeconomic policy was newer and weaker. The existence of Keynesian ideas enabled a global policy shift. Nevertheless, the shift turned out to be only a transient deviation from the neoliberal paradigm. The tightly coupled relationship between macroeconomic policy and the sovereign debt crisis enabled advocates of austerity to push back against Keynesian ordering principles.

  The Chimera of the Beijing Consensus

  As previously noted, many Chinese officials and commentators took great delight in criticizing the United States for some of the neoliberal policies it espoused during and after the Great Recession. Numerous Western commentators began to embrace China’s development model as a genuine challenger to the neoliberal model. There were certainly some policy steps that could be equated with growing Chinese assertiveness in the global political economy. Chinese policymakers embraced the openness of the WTO trading system while simultaneously arguing in the G20 and the IMF that exchange-rate questions were matters of domestic sovereignty and should not be discussed.57 China created or joined new institutional structures that were outside America’s reach, including the Forum on China-Africa Cooperation, Asian Bond Markets Initiative, and Chiang Mai Initiative.58 China’s response to the 2008 financial crisis was to double down on its investment-and-export growth model. Massive fiscal and monetary stimulus benefited state-owned sectors far more than it did private firms over the next few years.59 China’s robust rate of economic growth during the Great Recession seemed to vindicate its development path yet again.

  Nevertheless, Chinese officials were not keen on proselytizing the Beijing Consensus to other countries. Indeed, both boosters and critics of the Beijing Consensus note that Chinese officials refrained from promoting such a discourse.60 The Chinese Communist Party flatly refused to officially promote any formulation of a Beijing Consensus or China model. Chinese officials and commentators also abstained from espousing a China model of development as a pattern to be copied by other developing countries. Le Yucheng, the Ministry of Foreign Affairs’ director of policy planning, stated, “There is no Beijing Consensus.”61 Miles Kahler notes that, “China’s policy preferences might have created an even more serious challenge to the prevailing consensus at the World Bank and the IMF. During the Great Recession, however, China’s policy preferences have hardly deviated from this revised [Washington] consensus.”62 This attitude mirrors a more general reluctance from the Chinese government to offer an alternative pole of leadership. David Shambaugh concludes that “China does not lead … It does not shape international diplomacy, drive other nations’ policies, forge global consensus, or solve problems.”63 Another assessment comparing China with the other BRIC economies concluded that “China has yet to provide many major ideas or set many important norms pertaining to global governance.”64

  This lack of economic proselytizing is doubly puzzling when one considers that China acted more assertively vis-à-vis the security status quo following the 2008 financial crisis.65 In early 2009, Chinese ships engaged in multiple skirmishes with US surveillance vessels in an effort to hinder American naval intelligence-gathering efforts.66 China’s 2010 Defense White Paper suggested that China viewed its own security situation as one of intense security competition.67 At the 2010 ASEAN Regional Forum, Chinese foreign minister Yang Jiechi faced pushback from the United States and ASEAN over China’s assertive actions in the South China Sea. Yang responded angrily, bluntly lecturing other participants that “China is a big country and other countries are small countries, and that’s just a fact.”68 In November 2013 China announced a new air defense identification zone that contested Japanese and South Korean sovereignty claims in the East China Sea, ratcheting up security tensions across the region. Even scholars who generally downplay China’s aggressive behavior acknowledge that Beijing acted in a bellicose fashion in the South China Sea.69 While Chinese officialdom has been willing to act aggressively in the security sphere, this has not been the case in the economic sphere.

  Why has China not been more outspoken about its economic model? In part, China’s traditional foreign policy posture stresses noninterference in the affairs of other countries, making Beijing reluctant to proselytize to the rest of the world. However, there has also been a lack of clarity about exactly what constitutes its growth model. This is particularly true with respect to anything labeled the Beijing Consensus. As one scholarly assessment noted, “Whatever one may think about the impact and underpinning logic of the so-called ‘Washington Consensus,’ it did represent a fairly coherent set of policy proposals and implicit normative values. Few people are making similar arguments about the ‘Beijing Consensus.’”70

  A look at the authors who use the term “Beijing Consensus” reveals its heterogeneous meanings. Joshua Cooper Ramo coined the term, characterizing it as a combination of China’s innovative capabilities, environmentally sustainable economic growth, and the preservation of economic equality.71 This description invited derision from serious China watchers.72 Innovation, for example, has played a marginal role in China’s economic ascent to date.73 As noted in previous chapters, China’s contributions to the value-added of its manufacturing exports are extremely small, suggesting minimal high-tech input. Similarly, China’s “indigenous innovation” policies have not yielded significant successes to date.74 China’s environmental degradation has been extensively documented.75 No serious Chinese economic observer believes its current growth trajectory is environmentally sustainable. Nor has economic growth occurred without a rapid rise in inequality, to the point where China has one of the highest levels of income inequality in the world.76 In fact, most of the planks that Ramo outlined in his definition of the Beijing Consensus were wildly off-base.

  To other observers, such as Stefan Halper and Martin Jacques, the key element of the Beijing Consensus is the large number of state-owned enterprises, the authoritarian mode of governance, and official overseas investments. Backed by unlimited state finances, Chinese firms have been able to expand both their domestic and overseas operations. In particular, Halper argues that “what makes the model attractive is the simple, political equation behind it: the power of the market plus the stability of authoritarian rule.”77 A more careful examination of these claims, however, reveals reasons to be skeptical. China’s state-owned enterprises are growth laggards rather than growth leaders. Between 1978 and 2007, China’s private sector generated total factor productivity growth at three times the rate of its state-owned enterprises. The doubling down of investment in state-owned enterprises caused a massive misallocation of capital investment.78 Furthermore, a majority of the state-owned firms’ overseas mergers and investments have been unprofitable—making it unlikely that they are the source of China’s economic successes.79

  One thing the proponents of a Beijing Consensus have in common is that they come from outside of China. This may be a clue as to why Chinese authorities have been reluctant to proselytize—the biggest boosters of a Beijing Consensus are not Chinese. As one Chinese academic joked to me, “The Washington Consensus and the Beijing Consensus have one thing in common: they were both invented in Washington.” Chinese elites are understandably reluctant to embrace a model as framed by Westerners.80 And, with this provenance, Chinese officials have been understandably reluctant to adopt the moniker.81

  To be clear, there has been a debate among Chinese elites on the “China model” of economic growth, with some expe
rts expressing enthusiasm about the virtues of China’s development path. Even this debate, however, reveals the failure of Chinese policymakers to reach a consensus on an alternative to the Washington Consensus. There is considerable disagreement among Chinese commentators over what constitutes the China model. There are large elements of current China policy that actually reflect the Washington Consensus; some have argued that China followed most of its original dictates—particularly the liberalization of trade and foreign direct investment.82 Nevertheless, it is the departures from the Washington Consensus that trigger the greatest internal debates between the New Left critics of neoliberalism and Chinese liberals critical of excessive state economic control. As Tsinghua University’s Matt Ferchen observes, “the different ways in which the Beijing Consensus or the China Model are portrayed as alternatives to the Washington Consensus are in themselves part of the battle of ideas.”83 The heterogeneity of ideas suggests one reason Chinese authorities have not proclaimed an alternative model—there is not enough consensus on which to base a proposal. Scott Kennedy concludes, “The word ‘model’ implies a coherence and guiding plan that likely does not square with the reality of China’s path.” Randall Schweller and Xiaoyu Pu concur, noting that “Chinese ideas about alternative world orders remain inchoate and contested within China itself. Accordingly, these visions have not yet gained traction within or beyond China.”84

  There is also considerable debate within China about whether its development has been an unqualified success. Chinese elites have been surprisingly candid in discussing the weaknesses of their own development path. In his 2007 press conference, Chinese prime minister Wen Jiabao stated unequivocally, “There are structural problems in China’s economy, which cause unsteady, unbalanced, uncoordinated and unsustainable development.” He would echo these remarks in his farewell address as prime minister.85 Similarly, Li Keqiang, Wen’s successor and then vice-premier, noted in 2010 that China’s development had created an “irrational economic structure” and that “uncoordinated and unsustainable development is increasingly apparent.”86 Both internal and external observers of China’s economy have argued that the post-2006 stage of Chinese development had numerous flaws—including environmental degradation, the misallocation of capital, low levels of personal consumption, and a bloated state sector.87