Goodbye, Washington Consensus!

Last week, based on an article published in Foreign Affairs magazine by US National Security Advisor Jake Sullivan, I attempted to explain the framework of a “Biden doctrine,” if one exists. Even at the risk of repetition, it is worth recalling that two points stand out here:

1) In circles dealing with International Relations, it is clearly accepted by the Joe Biden administration that the era known as the “post-Cold War period,” during which the US was the sole “superpower,” has definitely ended;

2) A competition with China has begun. On the other hand, it is seen that Sullivan openly attacks the liberal “end of history” thesis, the “free trade” approach, and the liberal “democratic peace” theory based on this approach in some places. This becomes even more interesting given that the mainstream liberal wing of the Democratic Party, represented today by the Biden administration in the US, has long been referred to by many circles, including myself, as “neoliberal internationalists” or “neoliberal cosmopolitanists.” That this interesting situation does not simply stem from Sullivan’s personal inconsistency or coincidence can also be understood from the fact that the neoliberal orthodoxy, codenamed the Washington Consensus, has been reopened for debate. This week, it is necessary to focus a bit on this.

For those unfamiliar with the subject, it is first necessary to talk about the Washington Consensus. For this, one must explain the process through which this orthodoxy became hegemonic. In the Western centers of capitalism and many semi-peripheral countries, the 1960s emerged as a period in which the consensus between different social classes, based on the Keynesian social welfare state model that had functioned relatively smoothly until then and generally provided prosperity, began to fail.

Capital accumulation based on full employment and the domestic demand it would strengthen was being replaced by economic and increasingly hegemonic crises—in other words, state crises—in conditions where both competitiveness and profitability could not be maintained simultaneously against strong and organized labor, leading to the conceptualization of “stagflation,” where stagnation and inflation are seen simultaneously, as in the US.

The 1973 oil crisis, experienced because oil was used as a weapon, aggravated this situation on an international scale. The 1970s were also a period in which the Western capitalist bloc in the world faced military failures in many regions and a military presence resembling a kind of balance of power against the socioeconomic systemic alternative represented by the Soviets.

The response to this crisis situation, which was certainly not sustainable in terms of Euro-Atlantic hegemony, was given through neoliberal restructuring processes based on abandoning and, furthermore, “rolling back” the Keynesian model. Trade would be further liberalized, state intervention would be applied only in favor of the market, and social state practices and public economic policies would be abandoned in favor of mass privatizations and market forces.

In many countries, the growth model based on domestic demand, which relied on strong labor, was abandoned, and an “export-oriented” growth model, based in most places on cheap labor or reducing labor costs, was adopted. In conditions where it was difficult to generate consent for this transition, these transitions were accelerated through military coups or the approach of international financial institutions known as “conditionality.” While neoliberalism became the new hegemonic program, as evidenced by Margaret Thatcher’s famous dictum, “There is no alternative!” the new economic orthodoxy upon which this program rested was conceptualized as the “Washington Consensus” from the late 1980s onwards. This is the orthodoxy that is now being reopened for debate.

“Again”—it is useful to explain why I say this. The reason is simple: The Washington Consensus is not being debated for the first time. Leaving aside its critics, its defenders also had to review it. Neoliberal policies were mostly implemented by right-wing populist politicians in the world. In many countries, it turned out that they created burdens that the lower social classes could not bear before they were even ten years old, and maintaining them without compromise was quite difficult, especially for politicians. Yet, neoliberal policies had been defended with the claims that the market would find its own equilibrium if interventions that would disrupt it were avoided, and that this equilibrium would eventually provide prosperity to all social segments. Not only did these promises not materialize, but the entire responsibility for the failure of neoliberal policies was loaded onto politicians who had no “sins” other than making certain concessions and applying makeup to maintain these policies.

A picture was painted as if politicians were squandering national budgets for “populist” motives and all problems stemmed from this, and that neoliberal policies had no structural problems. To prevent this, certain “autonomous” institutions would be created, and thus the “recklessness” of politicians would be limited. The “conditionality” understanding of international financial institutions also included conditions for creating such “autonomous” institutions and ensuring that they did not go out of line. The projection of this in our country was the BDDK (Banking Regulation and Supervision Agency) created after the banking crisis in the early 2000s. This new institutionalist understanding was also called the “Post-Washington Consensus.”

As with other concepts that cannot stand without prefixes, it was clear that the Washington Consensus was also afflicted with serious internal problems, but because the neoliberal hegemony it was a part of had not yet begun to shake at that time, it had not yet fallen out of circulation. The first serious shock to the neoliberal hegemony after the 1980s would be the 2008 global financial crisis. Therefore, the economic roots of the process that has reopened the Washington Consensus to debate today extend to here. The political clarification and acceptance of the matter, however, could only be postponed until today.

While the Washington Consensus is being debated again today, we see that two different concepts are being proposed in its place. In one of the reports prepared last May by the “task force” established within the framework of the G-7 summit held in Hiroshima this year, the concept of a “revised Washington Consensus” is used. US National Security Advisor Sullivan, on the other hand, feels the need to use the term “new Washington Consensus” while focusing on economic policies even more than on security and foreign policy. The former consists of concepts created by the organic intellectuals of the most central elements of global capitalism, while the latter is put forward by a bureaucrat whose words cannot be ignored from the leading state apparatus of the world capitalist system.

Sullivan’s speech at the meeting titled “Renewing American Economic Leadership,” held in April at the Brookings Institution, one of the leading organic intellectual sources and platforms of US leadership, is particularly important. Sullivan states here that the Biden administration considers itself obligated to “integrate domestic and foreign policy.” Sullivan, who previously expressed many of the arguments he put forward in the Foreign Affairs article I discussed last week, states the four main challenges they face for the US as: “the hollowing out of the industrial base,” “a new environment defined by geopolitical and security competition,” “the climate problem” and the “fair and effective energy transition” it requires, and finally, “inequality and the damage it has done to democracy.”

Sullivan, who puts forward “building” as the core of their economic approach, argues that the foreign policy integrated with the economic strategy I discussed in last week’s article is a “foreign policy for the middle class.” He suggests that the middle class, which has been set back by the free trade approach he criticizes, can be re-empowered with the new qualified employment capacity that will emerge in key technology areas related to national security and with the energy transition. He calls this the “modern American industrial strategy.”

He gives examples of NASA, the internet, and the support of commercial satellites to show that this strategy, which will be strengthened by public-supported investments, has a “history.” As mentioned last week, for Sullivan, the four main challenges he initially proposed are not just phenomena faced by the US, and this new “modern American industrial strategy” is a strategy that can find the opportunity to be implemented together with allied and partner countries.

While explaining this strategy, Sullivan also touches on a fundamental difference from the 1990s. Stating that the “main international economic project” in the 1990s was to lower trade tariffs, Sullivan argues that those of the 2020s and 2030s are different, and that the main issue today is not so much lowering them, but where trade stands exactly in international economic policy and what problems it aims to solve. However, he also claims that, for instance, the Biden administration is still committed to the fundamental values upon which the World Trade Organization is built, but one of these values, expressed by the WTO as “opening trade,” turns into a more general and vague expression as “openness” in Sullivan’s speech, and another of these values, “non-discrimination,” is never mentioned. This is likely not unrelated to the restrictions imposed by the US on China’s brands and products in some technology areas.

Instead, when Sullivan lists these values, he places “fair competition” at the top. Since it is a fact that China and Chinese firms are most criticized by the West on this basis, this should not be surprising. Again, it is argued that these restrictions on China are not a search for a “decoupling,” but part of a search for “de-risking and diversification.” China’s claims that a “technology blockade” is being applied against it are, of course, rejected.

At this point, Sullivan mentions that they are not cutting off trade with this country, and furthermore, when looking more broadly toward non-economic areas, there is no search for confrontation or conflict with this country; on the contrary, they cooperate with this country when there is an opportunity for cooperation. Interestingly, he describes the place where they reach political decisions as the “intersection of economy, national security, and democracy.”

One of the authors who was part of the team that previously called for a “revised Washington Consensus” criticizes Sullivan’s “new Washington Consensus” for not taking into account the negative externalities that could arise from the situation where policies aimed at, for example, reducing environmental pollution are more costly for other countries. Despite this, the contribution they propose is limited:

They suggest that multinational companies from G-7 countries should be taxed in proportion to their contribution to environmental pollution. This should later be expanded to the G-20. Other proposed items of the “revised” model include allowing governments to collect more taxes for the services they provide, compensating for their economic losses due to the negative externalities they will face, and providing opportunities, especially for the Global South, which consists of semi-peripheral and peripheral countries of global capitalism, to benefit from the growth engine offered by international trade.

One should not be unfair: In both Sullivan’s mentioned speech and his article, arguments similar to these proposals are already being voiced, except for taxing companies in proportion to their contribution to pollution. In fact, the differences between the two conceptualizations are extremely small, in other words, minimal, and the objections—if they can be called “objections”—can be considered details that could only concern academic expertise, which we could call “scholarly debates.”

Finally, a caveat needs to be added. It is definitely not correct to take these conceptualizations and the arguments they are based on “at face value,” in other words, to accept them as they are. It is seen that free trade, which was accepted as the most untouchable dogma until yesterday, can be restricted today with the justification of “national security” only because the competition entered into with China requires it. On the other hand, how these proposals, called a “foreign policy for the middle class,” will resolve economic inequalities, as a gesture to the “progressive” wing of the Democratic Party, remains, to put it mildly, uncertain.

It is, of course, impossible to understand how social inequalities, which are the result of capitalism in general and deepened by neoliberal policies in particular, can be resolved without proposing any innovation other than foreign trade protections stemming from competition with China. Therefore, it is seen that these conceptualizations inherit and repeat the flaws of the orthodoxy called the Washington Consensus. The Washington Consensus can be considered alive in terms of this general characteristic. However, it is also seen that neoliberalism, from one form to another, whether in “post,” “new,” or “revised” forms, from “globalization” based on free trade to “trade wars,” by adapting, has become a shirt that is now too tight. It appears that this orthodoxy, which is already far from providing the prosperity it promised, especially to lower social groups and the Global South, will become even more deadlocked as the geopolitical competition between the US and China deepens. Don’t you think the time to say “goodbye” to the Washington Consensus has long since passed?