The System Worked_How the World Stopped Another Great Depression
Page 19
The trajectory of debate over the China model does suggest that a consensus may be emerging—but not one that will directly challenge neoliberalism. Until 2012, for example, two leading New Left advocates of creating a Chinese pathway for development chose as their exemplar the “Chongqing Model” of Communist Party boss Bo Xilai as their exemplar. These analysts praised Bo’s housing policies, anticorruption campaigns, and quasi-Maoist sloganeering in Chongqing as the remedies to the worst ills of neoliberalism. But hitching their star to Bo, however, made their argument vulnerable to his downfall. Bo Xilai was arrested in early 2012; he was tried and convicted a year later. Subsequent media reports revealed that his success in Chongqing was predicated on bribery, corruption, extralegal forms of brutal coercion, and quite possibly, murder.88 At a minimum, this made it much harder for advocates of the emerging Chongqing Model to portray their version of the China model as a roaring success.
As the New Left advocates lost their luster, other Chinese officials began to ratchet up their criticism of China’s development model. Perhaps the biggest signal that China was uninterested in articulating an alternative economic model was the China 2030 project. This was a joint study—the first of its kind—produced by researchers from the World Bank, China’s Ministry of Finance, and the Development Research Center of the State Council, a top government think tank.89 The China 2030 project had the official imprimatur of key organs of the Chinese central government, as well as the personal backing of president Xi Jinping and premier Li Keqiang, who took leadership positions in the party and government in 2012 and 2013.90 With powerful patrons, the China 2030 project had an authority that other external assessments of the China model had lacked.
The official report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, made clear that whatever the virtues of the China model, they were fading fast. It stressed that unique factors had contributed to China’s post-1978 economic growth, thereby rendering it not useful as a model to emulate.91 The report went on to note the myriad problems facing China over the next two decades—environmental degradation, rising levels of income and asset inequality, a looming demographic crunch, and low rates of personal consumption—and concluded that “it is imperative that China adjusts its development strategy as it embarks on its next phase of economic growth.” Most of the proposed adjustments push China’s political economy in a direction that more closely resembles the advanced industrial democracies. For example, the report stressed that the government had to retreat from the commanding heights of the economy: “the government’s continued dominance in key sectors of the economy, while earlier an advantage, is in the future likely to act as a constraint on productivity improvements, innovation and creativity.”92 With respect to China’s approach to the rest of the world, the report concluded, “China’s long-term interest lies in global free trade and a stable and efficient international financial and monetary system. China benefited enormously from entering the WTO and is now an important stakeholder in the existing global trading system. Similarly, it will want to see stable international financial markets and a well-regulated international monetary system supported by stable currencies and underpinned by sound monetary policies.”93
As previously noted, China’s “fifth generation” of leaders supported the drafting of the China 2030 report as well as its conclusions. Since taking office they have credibly signaled that they are beginning to push for the core components of the China 2030 recommendations. In a major speech in May 2013 outlining his plan for further economic reform, Prime Minister Li Keqiang stressed the need to “further develop the market’s fundamental role in allocating resources.” Among his recommendations were proposals to significantly scale back the central government’s licensing requirements for new businesses, outsource public services to private enterprises where appropriate, boost intellectual property rights enforcement, and demonstrate greater adherence to the rule of law. Many of these proposals echoed kindred observations and recommendations from the China 2030 report. Li noted, “If we excessively rely on government dominance and policy traction to stimulate the economy, it will be difficult to keep it going, and will even produce new contradictions and risks.”94
Following Li’s speech, the government issued new edicts that buttressed some of these recommendations, including proposals to liberalize interest rates, ease the credit boom, reduce barriers to FDI in China’s service sector, and initiate steps toward the full convertibility of China’s currency.95 Chinese authorities also took measures to crack down on its shadow banking system and tighten credit, allowing economic growth to taper off in the short run. The New York Times concluded, “China’s recent cooling has been engineered by the authorities in Beijing, who are trying to steer the economy from an increasingly outdated growth model toward expansion that is more productive and sustainable.”96 The government’s summer 2013 “mini-stimulus,” intended to counteract the effects of tightening credit, rewarded private small businesses and households rather than state-owned enterprises.97 Beijing restarted negotiations with the United States over a bilateral investment treaty, demonstrating an unexpected willingness to liberalize most of its economy to FDI. China also renewed its intent to sign the WTO’s Government Procurement Agreement.98
The most important signal came at the third plenum of the Communist Party’s 18th National Congress in November 2013, Traditionally devoted to economic matters, this third plenum laid the groundwork for further liberalizing the market and constraining the state’s role in the economy. The communiqué explicitly stated that the market must play a “decisive role” in the allocation of resources. This was stronger rhetoric than in previous third plenums, which had described the market’s role as merely “basic.”99 Concrete policy pledges included a reform of the permit system that constrains labor mobility and an end to the one-child policy. Several additional planks of the plenum’s concrete policy document were drawn from the China 2030 report.100 Both the tenor of the leadership’s rhetoric and these announced reforms are consistent with the neoliberal economic ideas that still dominate the global economy. They also suggest that China sees itself as merely the latest Pacific Rim country to transition from a state-led economy to one with a greater emphasis on market forces.101
To be sure, these rhetorical and policy gestures may be more hype than reality. It is likely that China will continue to deviate from free-market orthodoxy in practice. Throughout his term as prime minister, Wen Jiabao made similar noises about the need for further economic and political reforms and produced little in the way of follow-through. China’s ability to alter its growth model to boost domestic consumption is also far from clear.102 Unless and until Chinese policymaking institutions are recast to permit consumption-friendly lobbies to thrive, substantial policy change is unlikely. Furthermore, nothing in the Third Plenum documents guarantees that neoliberal economic reforms will necessarily occur. Vows of reform in earlier third plenums did not necessarily lead to concrete policy actions, and nothing in the 2013 Third Plenum documents suggests state-owned companies will be reformed anytime soon.103 The Chinese Communist Party’s goal of maintaining political control will likely override any preference for comprehensive economic reform. The new leadership has made clear its intent to keep a grip on political power.104 In summer 2013, the leadership published an ideological memo—Document No. 9—that listed seven perils to the party. One was free-market “neoliberalism.”105 These sentiments are hard to reconcile with a push toward greater economic liberalization.
A lack of clarity about China’s intentions exists but is also beside the point. Skeptics of the Washington Consensus looked to China, as the fastest-growing great power in the post-2008 era, to articulate a coherent replacement. China’s internal splits over the future of its economic model make it impossible for Chinese officials to do so. Indeed, China’s response has been to reject any notion of a Beijing Consensus. Prime Minister Li Keqiang insisted in a Financial Times op-ed that China “can
no longer afford to continue” its existing growth model.106 China may not be rigidly adhering to its stated reform path, but neither is it articulating an alternative pathway. Even if the global financial crisis battered and bruised the Washington Consensus, it did not break it—in part because the most viable potential proponent of an alternative pathway acted more like a responsible stakeholder of the status quo.
The Fall and Rise and Fall of Keynesianism
Contrary to expectations in late 2008, there has been no serious challenge to neoliberalism as an ordering principle for global economic governance. Within the macroeconomic policy dimension, however, there was greater flux in both the state of economic ideas and the state of economic policymaking. The macroeconomic components of the Washington Consensus had stressed relatively conservative fiscal and monetary policies: keeping budgets close to balance and focusing on keeping rates of inflation low.107 During the initial stages of the financial crisis, however, there was consensus among policymakers on pursuing Keynesian macroeconomic policies. As noted earlier, by 2010 this consensus had fallen apart as European economies began to favor policies of fiscal austerity and monetary tightening. Over the next two years, adherence to austerity wavered in the countries that tried it. At the same time, faith in Keynesian stimulus waned somewhat in the United States. What explains the gyrations in macroeconomic policy during the post-crisis years?
For one thing, the depth of the macroeconomic policy consensus was never as strong as that surrounding trade liberalization. The dominant belief on macroeconomic policy before the crisis was known as the Great Moderation. The Great Moderation was based on the argument that monetary policy had been refined to such a degree that it could displace the blunt tool of fiscal policy in managing the business cycle.108 The reduction of business cycle volatility in the United States seemed to buttress this belief. This relegated Keynesian ideas about fiscal policy to the margins. That said, the Great Moderation rested on weaker foundations than did the microeconomic roots of neoliberalism. The macroeconomic policy consensus was of a more recent vintage—it emerged only in the 1980s. Furthermore, there were still prominent experts that did not reject the utility of Keynesian fiscal policies in case of emergencies.109
The 2008 financial crisis prompted a search for new macroeconomic ideas.110 In short order there was a dramatic ideational shift toward the Keynesian position that expansionary fiscal and monetary policies would have to be pursued while the private sector recovered.111 Leading economists such as Lawrence Summers were calling for fiscal stimulus in September 2008.112 The consensus grew stronger as prominent conservative economists—including Martin Feldstein, Lawrence Lindsey, and Kenneth Rogoff—began to publicly call for deficit spending and looser monetary policy.113 Robert Lucas praised Federal Reserve chairman Benjamin Bernanke for turning to quantitative easing as the economy worsened.114 Advocates of Keynesian policies took advantage of their online prominence to loudly and publicly advocate their positions.115 Traditional critics of Keynesian spending had little in the way of positive policy alternatives to recommend, making it harder for them to politically counter the emerging consensus. In November 2008, N. Gregory Mankiw, a skeptic of greater spending, nevertheless acknowledged, “If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. … His insights go a long way toward explaining the challenges we now confront.”116
Global economic governance structures also played a role. In fall 2008, IMF officials, including managing director Dominique Strauss-Kahn, called for governments to achieve deficit spending equal to 2 percent of global output.117 Given the IMF’s traditional association with fiscal conservatism, such a pronouncement sent a powerful signal. The consensus around a Keynesian macroeconomic response coalesced quickly in the United States and in the international financial institutions. Because of the hegemonic position of US-based economists within the profession, this consensus quickly became a global one.118 It was therefore not surprising that policymakers in the G20 economies received similar advice from their national economists. UK chancellor of the exchequer Alistair Darling noted in his memoirs, “In late 2008, I was influenced hugely by Keynes’s thinking, as indeed were most other governments dealing with the fallout from the crisis.”119 By December 2008, many of these economies were announcing their own emergency fiscal measures designed to prop up the global economy.
Not all policymakers embraced the switch to expansionary fiscal policy. As noted earlier, Germany fiercely resisted the Keynesian turn. Germany’s initial spending proposal was meager, consisting of little beyond accelerating previously planned spending.120 When asked about the global shift to expansionary fiscal policy, the German finance minister Peer Steinbrück blasted it, proclaiming, “The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.”121 This statement was revealing in two ways. First, Steinbrück was admitting that a Keynesian consensus had formed and, second, emphatically not agreeing with it. Similarly, Angela Merkel viewed both quantitative easing and greater stimulus spending as “treating a junky with massive doses of heroin,” according to one of her advisors.122 An allied pole of opposition was the European Central Bank. In a December 2008 interview with the Financial Times, European Central Bank president Jean-Claude Trichet stressed the need for member governments to adhere to the Growth and Stability Pact, which restricted eurozone members from running fiscal budget deficits larger than 3 percent of GDP.123 Nevertheless, bank officials were largely silent during the debates about fiscal policy in late 2008 and early 2009.124
German politicians from across the political spectrum resisted external pressure for more government spending.125 Deficit spending was anathema in Germany for numerous reasons. The country’s principal economic trauma in the twentieth century—the hyperinflation of the 1920s—had long conditioned Germans to be wary of deficit spending. German ordoliberalism stressed a minimal state role in managing the business cycle. The high rate of German household savings also raised valid questions about whether tax cuts would have had the same stimulative effects in Berlin that they were projected to have in London or Washington. The prominent role of manufacturing exports in the German economy meant that Germany was less dependent on domestic consumption as a driver for the domestic economy. Finally, one of Angela Merkel’s signature political achievements was bringing the federal budget closer to balance, and pushing through a constitutional amendment designed to limit deficit spending. Even before the crisis, Merkel compared herself to a thrifty “Swabian housewife” to whom money saved is money earned.126 Keynesian spending flew in the face of entrenched German ideas and interests.
In the end, however, Germany enacted the third-largest fiscal stimulus in the world in 2009.127 There were three sources of pressure on German policymakers. First, as the German economy encountered the effects of the Great Recession, Merkel felt greater domestic political pressure to do something.128 Second, global governance structures began to pressure Germany to follow their lead. In January 2009, IMF managing director Dominique Strauss-Kahn said that Western European governments were “behind the curve” on fiscal stimulus and were “underestimating the needs” of more expansionary policy.129 Germany found itself isolated from its G20 peers. Great Britain’s Gordon Brown and other G20 leaders also called on Merkel to pledge greater government spending or be accused of freeriding off the fiscal stimulus of others. Responding to Steinbrück’s interview, British officials said that there was “a broad international consensus that a fiscal stimulus is now the right step for the economy.”130 Third, most German economists agreed with the notion of a temporary stimulus program.131 Merkel consulted regularly with private-sector economists as the crisis unfolded. Germany’s influential Council of Economic Experts, which had traditionally been anti-Keynesian, changed its tune and recommended a bigger stimulus in
late 2008. Critics of the volte-face blamed the change in German attitudes on the “social contagion” of American economists.132 Nevertheless, there was little depth of conviction behind this conversion. As one German economist explained in early 2009, “We are only doing all this for symbolic reasons; we don’t believe it will affect the current crisis.”133 This is consistent with the theory that Germany’s compliance with global norms and ideas was superficial and due to fear of ostracism, rather than the internalization of such ideas.134
The Keynesian consensus on macroeconomic policy did not last long. Changes in both outcomes and ideas altered the policy landscape dramatically. The beginnings of the eurozone debt crisis in Greece in late 2009 gave critics of Keynesian deficit spending a useful hook for attacking sustained deficit spending. This hook was based on a valid connection to a policy outcome; even staunch advocates of Keynesian policies agreed that Greek fiscal profligacy had precipitated its sovereign debt crisis.135 However, Keynesians emphasized that Greece was a sui generis situation; whereas advocates of fiscal austerity argued that the prognosis was the same for other countries running large fiscal deficits.136 In the United States, Alan Greenspan and other opponents of deficit spending warned that the United States would soon become “another Greece.”137 In Europe, the reluctance of the European Central Bank and Germany to help Greece led to a feedback loop. The bank’s foot-dragging exacerbated the sovereign debt crisis, which worsened the fiscal balance sheets of the affected countries and, in turn, allowed opponents of Keynesian policies to harp even more about skyrocketing budget deficits.