La réduction de l'économie mondiale en 2012 signe-t-elle l'effondrement du nouveau cadre politique de consensus? (document en anglais)

DOES THE PRESENT DOWNTURN OF THE WORLD ECONOMY SIGNAL THE COLLAPSE OF THE NEW CONSENSUS POLICY FRAMEWORK?

The current slowdown is now described as the prolongation of the financial crisis of 2008. The brightest minds have reached the conclusion that the time for regime change has came. This does not mean the collapse of the new consensus policy framework but its renewal in order to fit with the new global stakes.

In the first part of this paper, I will present an overview of the current downturn, its causes and its implications. In the second part, I will assess the viability of the new consensus policy framework, which is seriously challenged by the global economic crisis. And finally I will wonder how a renewed economic consensus may help to boost the world economy in a sustainable path.

1. THE PRESENT DOWNTURN

The current downturn finds its roots in the 2008 financial crisis, which is considered as the worst shock ever experienced by the global economy since the Great Depression in the 1930s. During that crisis, international financial institutions threatened to collapse, governments were compelled to bailout their national banks and stock markets around the world were totally depressed. This 2008 financial meltdown contributed to a contraction in global trade that was “severe and internationally synchronized” , partly due to the global production chains scheme. This economic downturn led to a global recession from 2008 to 2012 (Figure 1) and contributed to the sovereign-debt crisis in Europe.

Figure 1: World map showing GDP real growth rates for 2009

Economists and global institutions such as the International Monetary Fund, the World Bank, the OECD, the European Commission, to name a few, are working very hard to find solutions to this prolonged downturn on both market-based and regulatory levels. These solutions help to stabilize the world economy but seem to be not sufficient to boost it sustainably.

According to the IMF (WEO, Oct. 2012), the 2013 forecasts for global economy was revised; decreasing from 2% to 1,5% in advanced economies and from 6% to 5,6% in emerging and developing countries .

In the advanced countries, the growth is negatively impacted by the fiscal consolidation, which weighs on demand and by a still-weak financial system, which has still difficulty to lend. While central banks are working very hard to offer low policy rates and help borrowers.

Furthermore, the world economy is suffering from a global feeling of uncertainty which make investors not feeding the system and more generally, major economic actors not being proactive.

This sluggish growth in western countries and the uncertain climate impact also the emerging markets and developing economies because of the decrease in exports and the volatility in capital flows.

What to do? In a short term, to reduce the uncertainty that undermines the global growth, there are 2 major tasks that must be handled quickly and successfully.

“The first is that European policymakers (…) will adopt policies that gradually ease financial conditions further in periphery economies. The second (…) is that U.S. policymakers will prevent the drastic automatic tax increases and spending cutbacks (the “fiscal cliff”) implied by existing budget law, raise the U.S. federal debt ceiling in a timely manner, and make good progress toward a comprehensive plan to restore fiscal sustainability.” (IMF, WEO, Oct. 2012)

In a medium and long term, the economic consensus on the base of which the global economy was run until now can no longer be used as it is. The current slowdown is severely testing our usual frameworks and doubts are now rising even from economists and experts. Indeed, the variety of policies applied all over the world to improve the situation seems not sufficient to create a long-run growth. That is why we can logically argue that the world economy needs more than a symptomatic treatment. In other words, is it time for a new policy regime?

2. WHAT ABOUT THE NEW CONSENSUS POLICY FRAMEWORK ?

During the 1980s, it was observed a convergence in economic policies through the western countries starting with UK Prime Minister Margaret Thatcher and US President Ronald Reagan. These economic policies were articulated around three pillars: competition and market system, macroeconomic stability and globalization. This consensus, wrongly named also “Washington Consensus” (Williamson, 1989), gained wider acceptance from a large range of countries even with different ideologies and systems over the past decades because it was seen as the best recipe for a faster growth and better standards of living.

The first principle emphases the role of the market and its natural mechanisms and the role of the competition as main vectors of great performance. To make this work, governments have set up some policies: pro-competition policies, labour market flexibility, privatization, deregulation and enterprise-friendly environment. The second principle aims to ensure a macro-stability by focusing on price stability, budget balance and control of government spending. The third principle is based on trade liberalization, widely called globalization. It implies free trade policies, foreign investment acceptance, liberalization of capital and labour mobility. (McAleese, 2004)

The present major slowdown, however, is raising doubts about this new economic consensus because of the free trade drawbacks, the pressure for protectionism, the high level of public debts in western countries and their threat on price stability, some critical sectors were too much deregulated…

On behalf of the new policy consensus, some critical sectors were too much deregulated and primarily the financial market. Although regulators had kept a minimum regulation on financial system, they failed to take into account the ability of innovation of the financial players who had build the “shadow banking system” and some unconventional practices. Some critics argued that this parallel system has amplified the financial crisis. One of them, Paul Krugman, Nobel Prize in Economics, explained that the “shadow banking system” is the "core of what happened"

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