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Yury Rubinsky

Doctor of History, Professor of the Higher School of Economics

World economic forecasts are not remarkably optimistic, as the crisis of confidence in the elites who got together at the regular session of the World Economic Forum in Davos is on hand.

Is there a new economic model that can effectively replace the “Washington consensus”?

World economic forecasts are not remarkably optimistic, as the crisis of confidence in the elites who got together at the regular session of the World Economic Forum in Davos is on hand. Is there a new economic model that can effectively replace the “Washington consensus”?

The 42nd regular session of the World Economic Forum (WEF) held on January 25-27, 2012 at the Swiss ski resort of Davos in many ways followed the deeply rooted long-standing traditions. Among 2.6 thousand guests invited to the annual meeting – reputable representatives of business, political and scientific elite of the world – there were 40 heads of states and governments, top executives of the leading international organizations (UN, WTO, OECD, EU and IMF), Nobel Prize winners in economics. Davos hosted 20 multi-billionaires from the US, 16 – from India, and 12 USD billionaires from Russia.

Awareness of Pending Problems

The general tendency of discussions was shaped by the last review of the World Bank on the world economy prospects in 2012 which was far from being remarkably optimistic. The previous forecast of the global GDP was cut by 1.1 points down – from 3.6% to 2.5%. At the same time, the report’s authors headed by Andrew Burns warned that it would be even difficult to reach the indicators of the minimized forecast. Both economic recession in Europe and growth slowdown in the developing countries amplify mutual risks which can be fraught with more serious consequences, they say. The WB also feels concerned about high debt load in the US and Japan, as well as political instability in the Middle East capable to disrupt energy supplies to the leading centers of world economy.

Economic problems are tightly connected with socio-political issues. Mass protest rallies are becoming more and more common to a larger number of cities around the world. Motivation and slogans of their participants are entirely diverse: “Occupy Wall Street” movement in New York demands a more fair distribution of hardships and incomes; the Greeks, Spaniards and Italians reject austerity measures of endorsed by the government; demonstrators in Moscow voice their protest against rigged election results; Chinese peasants resist the lawlessness of government officials who are selling land to profiteers. In the Arab world such movements caused the overthrow of corrupt authoritarian regimes by revolutionary means.

Nonetheless, all these movements have one common base – a deep crisis of confidence of the younger generation of the active and educated middle class in the elites whose big brass gathered in Davos.

As the focal point of the world financial crisis is the problem of sovereign debts of a number of European countries, first of all Greece which has been on the brink of a default for a year already, as well as Portugal, Spain and Italy, special attention of the forum participants was focused on the speech of German Chancellor Angela Merkel who is widely recognized as a “hard core” of the entire European Union.

A.Merkel’s revelations were not at all original. Keeping in mind a staunch reluctance of her voters to pay for others’ expenses, the German Chancellor just reiterated the decision of numerous EU summits. The point is to synchronize taxation systems of the Euro area by providing for a highest admissible level of budget deficit on penalty of severe sanctions in a new agreement and national laws. Those are the requirements to meet for the desperately needy countries to count on the assistance through a new financial stability mechanism.

In contrast to A.Merkel, a renowned American financier George Soros said that German tight economic measures are driving whole Europe into a deflationary spiral, i.e. stagnation. In his turn, US Secretary of the Treasury Timothy Geithner stood up for Barak Obama’s policy in speeding up the pace of economic growth through cheap credits, structural health care reforms and infrastructure projects.

Disenchantment caused by the absence of unanimity as to the choice of the best strategy to overcome the world crisis among representatives of the leading post-industrial Western nations was further intensified by the statements made by the guests from BRICS countries – China, Russia, India, Brazil and South Africa. Obviously, they fell short of the expectations that dynamically developing markets would become a steam engine to lead the world economy out of its current impasse.

“Capitalism, in its current form, nolonger fits the world around us. We have failed to learn the lessons from the financial crisis of 2009. A global transformation if urgently needed and it must start with reinstating a global sense of social responsibility”.

“Systematic liberals” from the economic bloc of the Russian Government who arrived in Davos – Vice Prime Minister Igor Shuvalov, Presidential Advisor Arkady Dvorkovich, former Finance Minister Aleksei Kudrin, Sberbank President German Gref, and closely allied representatives of big business made their statements in a minor key which strongly contrasted with the pre-election optimism of Prime Minister Vladimir Putin. They complained about notorious flaws of domestic economy – red tape and foot-dragging, corruption, stranglehold of state monopolies, dependence on raw materials prices, primarily crude oil, and expressed only modest hopes as regards the coming reforms.

In their turn, representatives from the PRC, primarily medium-tier officials and businessmen, were far from signing their own praises as regards a phenomenal breakthrough of the Chinese economy over the last decades which was the second best in the world in the GDP volume in 2011. On the contrary, being true to the wise covenant of Deng Xiaoping – “keep a low profile” – the Chinese in every possible way were pointing out that their country was not watching the world crisis from the sidelines. Production costs are soaring due to higher prices of raw materials, while the GDP growth rate and the surplus of trade balance are going down. It demands to give up the PRC former export strategy and shift the emphasis on internal consumption.

Though the Chinese accentuated modesty was aimed, in particular, at beating off the US ritual accusations of artificial underrating of the Yuan exchange rate to the detriment of production and employment in the US, it reflected actual negative tendencies in the national economy. Soaring debts of provincial authorities, speculative boom in real estate demand a cool-off of inflationary overheating by restricted access to credit resources. China does not deny financial assistance to European countries in principle, but it firmly demands reciprocity, primarily in restructuring of the International Monetary Fund.

Dangerous Trends

If it all had boiled down to the recognition of disagreements on short-term anti-crisis policy of individual countries rooted in different levels of development and specific interests, the results of the last WEF session would have looked a mere platitude. Keeping that in mind, the forum sponsors decided to enhance the level of discussions formulating its agenda with due regard of the unprecedented scale of shock disturbing the world.

The “WEF Global Risks Report 2012” presented to the participants points out three most dangerous tendencies: 1) measures in protecting the stability of the world economy remain unreliable; 2) everyday life of people becomes more and more dependent on the Internet where the danger of devastating cyber attacks is great; 3) the youth is deprived of life perspectives against a growing number of retired people dependent on the state.

In his opening address Chairman of the forum Klaus Schwab stated the following: “Capitalism, in its current form, nolonger fits the world around us. We have failed to learn the lessons from the financial crisis of 2009. A global transformation if urgently needed and it must start with reinstating a global sense of social responsibility”.

K.Schwab’s stance was supported by Managing Director of the International Monetary Fund Christine Lagarde. She insisted that the world was at a sharp turn, and warned against the danger of a wave of economic nationalism and protectionism which, in her opinion, can thrust the world back to the times of the Great Depression of the 1930s.

Forum’s participants were somewhat skeptical about this gloomy prophesy: it was ironically compared to the prediction of ancient Maya of the end of the world to come in December 2012.

Retrospective Analisys of Economic Models

Replicating C.Lagarde, in its report on the Davos’ results the highly reputable New York Times decided that it would be expedient to remind the readers of the Great Depression times and the then disputes on the best ways to overcome the crisis.

At the time the major dispute developed between the two leading figures of the economic science of the West – John Maynard Keynes of England and Friedrich August von Hayek of Austria. The first put forward the ideas highly bold for his times on massive pouring of money into major infrastructural projects during recession in order to fight unemployment and to increase demand, even at the cost of a temporary growth of budget deficit and inflation. On the contrary, his opponent was a supporter of orthodox economic liberalism which denounced state interference into the mechanism of free market competition, and demanded to minimize the tax load on private businesses and to pursue an austere monetary policy.

Keynesian ideas gained the upper hand before the Second World War. They were the foundation of the F.D.Roosevelt’s New Course, and in the postwar period his methods were the cornerstone of the plans of restoration and reconstruction of the European economy, contributing to the establishment of an extensive system of social protection. One way or another, up to this date neo-Keynesianism remains an ideological doctrine of left centrist forces – the US Democratic Party and European social democrats.

Participants have failed to come up with a universal alternative model of an effective and fair economic system.

However, since the mid-1970s and especially in the 1980s his influence has noticeably dwindled. Neo-liberal ideas came into the world’s limelight with a swing in prices on raw materials and energy resources, and intensification of competitive struggle on the globalized world market due to the arrival of Asian giants therein which amalgamated Western technologies with cheap labor.

The role of their standard-bearer moved from the Austrian school of von Hayek to the Chicago school headed by Milton Friedman. His monetary credo – privatization of the public sector, budget discipline, and struggle against inflation at the cost of cutting social expenses – became the guideline of the “conservative revolution” of Margaret Thatcher and, then, Ronald Reagan. Further on, it became the program of the IMF and the World Bank substantiated by the so-called “Washington consensus” – the prerequisites coined in 1989 by the English banker John Williamson for granting credits to poorer countries.

However, the victory of neo-liberals was a short-lived triumph. In the eyes of public opinion their policy of deregulation of financial markets was the main contributor to the world economic crisis of 2008 which started in the US with the collapse of a mortgage loans pyramid and bankruptcy of Lehman Brothers Holdings, Inc. According to renowned philosopher Francis Fukuyama, if the American version of capitalism has not been discredited fully and completely, then it is no longer a dominating model. In 2011 the IMF Managing Director herself has publicly acknowledged that the “Washington consensus” belongs to the past.

Davos’ Results

Seeking an alternative to the “Washington consensus” was in fact the key topic of discussions at the Davos convention whose participants have failed to come up with a universal alternative model of an effective and fair economic system applicable pari passu to all countries regardless of their level of development and civilization peculiarities. However, the WEF is by no means an international organization authorized to adopt any binding decisions.

The same applies to “counter-Davos” – a forum of environmentalists held in Sao Paulo simultaneously with the WEF session: so far, its slogan of “green capitalism” put forward by its participants looks just like a list of vain wishes.

Admittedly, such an authority is also denied to the G8 or G20 summits attended by the leaders of sovereign countries. The task of all these informal consultative structures is to work out recommendations to resolve specific problems. Evidently, flexible models applicable to entirely different situations in the globalized world economy of the 21st century will be formulated in the course of this process.

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