Context: As Prime Minister Narendra Modi steps up engagement with the US and its allies — at the G7 summit in Hiroshima this week, the Quad summit in Canberra week after, and bilateral visits to Washington and Paris in June and July— the restructuring of the global economic order will figure high on India’s bilateral and multilateral agenda. In the geopolitical domain and so in the geoeconomic, there is a growing convergence of interests between Delhi and Washington. Translating that into concrete outcomes will demand much hard work and some creative solutions
- The United States today is seeking wider international consensus on the new economic approach from its allies and partners, including India. The Unites states is pushing its efforts to build a “New Washington Consensus” as there is also a geoeconomic competition between Washington and Beijing which had begun to develop in the Trump years and President Joe Biden has intensified it and lent a plausible ideological framework to it.
- The term “Washington Consensus”, which gained ground in the late 1980s, referred to the shared prescriptions from the International Monetary Fund, World Bank, and US Treasury on deregulation, privatisation, and free trade for economic modernisation. By the 1990s, these recommendations gained widespread policy traction in the chancelleries of the world, including in India.
However the Washington Consensus has started showing fissures and the lacunas in the approach which are highlighted by the following reasons:
- The conviction that the “markets know best” approach led to the hollowing out of the US industrial base. It was argued that in the name of oversimplified market efficiency, entire supply chains of strategic goods along with the industries and jobs that made them moved overseas. It was realised that deep trade liberalisation though helped America export goods, but not jobs and capacity.
- Secondly the notion that “all growth was good growth”, led to the privileging of some sectors like finance “while other essential sectors, like semiconductors and infrastructure, atrophied”.
- Thirdly, the old assumption “that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative”, also led to distortion wherein Unites States referred to the premise underlying China’s admission into the WTO in 2001 wherein admitting countries into the rules-based order should have incentivised them to adhere to its rules”. However the problems triggered by the integration of a “large non-market economy” like China into the WTO.
It was realised that the America’s economic policy must confront the urgent need for a “just and efficient transition” to green economic growth and the political imperative of reducing economic inequality at home that has undermined American democracy. Thus for this purpose the United States has offered a five-fold policy framework under the New Washington Consensus
- The first is to return to industrial policy that was the hallmark of US economic development historically, but dismissed by economic neoliberalism in the last few decades. For this the US has restored the role of the state in pumping investments into semiconductor production and promoting the development and deployment of green technologies.
- Second, the United States under its new approach is not seeking autarky or promoting protectionism. The US is not going alone, and wants to develop a joint effort with US allies and partners, including India.
- Third, United States wants its friends and partners to look beyond traditional trade policies. Wherein he highlighted the US-proposed Indo-Pacific Economic Framework is not a free trade agreement.
- Fourth, the US is trying to mobilise “trillions in investment into emerging economies with solutions that those countries are fashioning on their own, but with capital enabled by a different brand” of US economic diplomacy. This primarily involves offering an alternative to China’s Belt and Road Initiative, addressing the global debt crisis, and reforming multilateral development banks.
- Lastly United States is also pushing the efforts to develop a new set of export controls on sensitive technology that will limit national security threats from China and other rivals.
ABOUT WASHINGTON CONSENSUS
A list of policies that had gained support among Latin American policymakers in response to the macroeconomic turbulence and debt crisis of the early to mid-1980s. These policies also had the backing of experts at Washington’s international institutions—especially the International Monetary Fund and the World Bank, as well as the US Treasury—to help the recovery from the debt crisis and popularly came to be known as Washington Consensus
- Fiscal Policy discipline, with avoidance of large fiscal deficits relative to GDP;
- Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
- Tax reform broadening the tax base and adopting moderate marginal tax rates;
- Interest Rates that are market determined and positive (but moderate) in real terms;
- Competitive exchange rates
- Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs.
- Liberalization of inward foreign direct investment
- Privatization of state enterprises
- Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institution
- Legal security for property rights.
INDIA AND WASHINGTON CONSENSUS
- Pursuit of this policy resulted in annual economic growth breaking out of the 3 to 5 percent band of the pre-1991 era. But redistribution of the extra wealth has been skewed. Those already better off have improved their living standards further whereas the large majority who lagged behind before have stagnated or grown poorer.
- The emphasis of the WTO and the IMF on export-led growth encouraged cultivators to switch from food crops to fertilizer-intensive cash crops like cotton, coffee, sugarcane, groundnuts, pepper and vanilla. As a consequence, the daily per capita availability of food grains declined from 510 grams in 1991 to 422 grams in 2005.
It is for India to understand that the common themes in the economic strategies are many and these include China’s geoeconomic challenge, the dangers of dogmatic commitment to globalisation, the need for industrial policy to develop national manufacturing, technological cooperation among like-minded partners, building resilient supply chains, addressing the economic concerns of the Global South, and reforming the global financial institutions.
It is also important to understand that there will also be many disagreements on the identification of priorities as well as on the details of the specific outcomes in rearranging the global economic order. But Building on new opportunities and resolving new problems must be viewed as a historic opportunity for India’s economic statecraft. As the US is ready for substantive engagement with its partners and Delhi must be ready to respond.