Pacific Money

Beijing Takes Cues from the Washington Consensus

The reforms that have emerged from the recent Third Plenum seem familiar.

Beijing Takes Cues from the Washington Consensus
Credit: China skyscrapers via Shutterstock

The Beijing Consensus is slowly taking cues from the Washington playbook. China’s landmark Third Plenum has mapped a decisive role for the free market, with a concerted effort to reform state-owned enterprises (SOEs), ease regulations, liberalize market interest rates, improve fiscal imbalances, and allow for full capital account convertibility. In announcing these reforms, the Party appears to have acknowledged that the China growth model has served its purpose and must now shift to something similar to the Washington Consensus.

The Washington Consensus traces back to economist John Williamson’s 10 propositions summarizing the economic beliefs of the IMF, World Bank and the U.S. Treasury. Dominant in the 1980s and 90s, it encompasses the following:

  1. Fiscal discipline with low budget deficits;
  2. Redirect public spending from subsidies to pro-growth areas like education;
  3. Broadening tax reform;
  4. Financial liberalization for market determined interest rates;
  5. Competitive exchange rates to promote exports;
  6. Trade liberalization to eliminate import quotas and lower tariffs;
  7. Removal of barriers to inward FDI;
  8. Privatization of state-owned enterprises;
  9. Deregulation to enhance competition;
  10. Secure property rights;

Despite the Washington Consensus’ flaws and historical misapplications in Latin America and the 1997 Asian financial crisis, few economists would see these policies as the demon of economic extremism so often associated with the name. On careful analysis, there was no call for rapid market liberalization or “shock therapy.” None of the recommendations required a complete opening of the capital account. In reality, the Washington Consensus was a series of modest recommendations, not commandments for development.

The reforms’ flaw was they resembled an end state that most developed nations already possessed. They did not offer an informative game plan for developing countries looking to get from point A to Z. Were all reforms meant to be simultaneous with the same emphasis or could some wait till more critical elements of macroeconomic stability were addressed? The Beijing Consensus has shown a viable path to reaching this end state.

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Since Deng Xiaoping, China has tacitly accepted all ten recommendations with what it calls “socialism with Chinese characteristics.” For forty years, the Beijing Consensus produced double-digit growth as it slowly pulled back the visible hand of the socialist market economy. The Third Plenum is a further move towards “capitalism with Chinese characteristics” and a tacit shift away from the China model.

Joshua Cooper Ramo coined the term “Beijing Consensus” in his 2004 article of the same name. China’s model deviated from Washington’s in four key “Chinese characteristics”: i) incremental reform, ii) soft authoritarianism iii) export-led growth, and iv) state capitalism. Support for these characteristics reached an apex after the 2008 financial crisis as Washington-style capitalism appeared discredited and Chinese growth continued largely unscathed.

However, China has since been having its own troubles. While fears of a “hard landing” have subsided, Chinese companies are still seeing a decline in global competitiveness. Profit margins have declined 7.9 percent since 2000 and return on equity has fallen 8.5 percent in the past five years, according CLSA Asia-Pacific Markets. Capital allocation has met overcapacity as corporate borrowing, especially among SOEs, has not helped move companies up the value chain. China is desperate to avoid this “middle-income trap,” whereby export-led economies stagnate below high-income consumer-based economies of services and innovation.

The Plenum, subsequent communiqué, 60-point Decision, and official Xinhua articles clearly point at less state capitalism and more growth founded on internal consumption. While it is not an all-out push towards the Washington Consensus, Xi Xinping is making a deliberate tilt in that direction. The Third Plenum, and forty years of reform leading up to it, embraces all ten elements of Williamson’s propositions. According to Yang Yao, deputy dean of China’s Peking University:

“…the Chinese economy has moved unmistakably toward the market doctrines of neoclassical economics, with an emphasis on prudent fiscal policy, economic openness, privatization, market liberalization, and the protection of private property. Beijing has been extremely cautious in maintaining a balanced budget and keeping inflation down. Purely redistributive programs have been kept to a minimum, and central government transfers have been primarily limited to infrastructure spending. The overall tax burden… is in the range of 20 to 25 percent. The country is the world’s second-largest recipient of FDI, and domestically, more than 80 percent of its state-owned enterprises have been released to private hands.”

This sounds quite similar to Williamson and the Washington Consensus. Overemphasis on the “Chinese characteristics” obfuscates the overwhelming truth that China sees the U.S. financial model as its road to riches. The only difference seems to be in terms of pacing and one-party politics. Thus, the Beijing Consensus, properly understood, is a derivation of the Washington Consensus, albeit a slow, incremental embrace. Saying economic policy must adopt only one model is false. While many different paths can help a country develop, the Washington Consensus serves as the finish line. As China continues to liberalize, it will likely resemble more aspects of Anglo-Saxon capitalism. Just as the Beijing Consensus might guide countries out of poverty, the Washington version can guide China on the path to higher development.

Ryan Rommann is an independent economic researcher based in Singapore. He studied at Beijing’s Tsinghua University and the Maxwell School of Syracuse University. He can be reached on Twitter @RyanRommann