A new global economic consensus

Synopsis: Cornwall Consensus should replace the Washington Consensus.

Introduction

The world is now facing a future of unprecedented risk, uncertainty, turmoil, and climate breakdown.

In this context, a report released recently by the G7 Economic Resilience Panel demands a radically different relationship between the public and private sectors to create a sustainable, equitable, and resilient economy.

As per the report, the World leaders have a simple choice now: either continue supporting a failed economic system, or scrap the Washington Consensus for a new international social contract.

What is the Cornwall Consensus and how’s it different from the Washington consensus?

The alternative that has been proposed in the report is “the Cornwall Consensus.”

It seeks systematically to address chronic and acute issues to advance global economic resilience.

Key points of Cornwall Consensus:

The Cornwall Consensus would invert the Washington consensus.

i). It revitalizes the state’s economic role, and would allow to pursue societal goals, build international solidarity, and reform global governance in the interest of the common good.

ii). This means that grants and investments from state and multilateral organisations would require recipients to pursue rapid decarbonisation rather than rapid market liberalisation, as required by IMF lending for structural adjustment programmes.

iii). The Cornwall Consensus also entails moving from reactively fixing market failures to proactively shaping and making the kinds of markets we need to nurture in a green economy.

iv). It will replace redistribution with pre-distribution. The state would coordinate mission-oriented public-private partnerships aimed at creating a resilient, sustainable, and equitable economy.

Why is a new consensus needed?

Firstly, the old model (Washington Consensus) is no longer producing widely distributed benefits. It has proven to be disastrously incapable of responding effectively to massive economic, ecological, and epidemiological shocks.

Secondly, today’s crisis conditions make a new global consensus essential for humanity’s survival on this planet. For instance, achieving the United Nations Sustainable Development Goals, adopted in 2015, is difficult under the prevailing global governance arrangements.

Thirdly, there is an urgent need to strengthen the global economy’s resilience against future risks and shocks. This cannot be done without overhauling the outdated economic system.

Finally, most economic institutions are still governed by outdated rules that render them unable to bring in the responses needed to end the pandemic or achieve the Paris climate agreement’s goal of limiting global warming to 1.5° Celsius, relative to pre-industrial levels.

What needs to be done?

First, There is a need to move away from measuring growth in terms of GDP, GVA, or financial returns to assessing success on the basis of whether we achieve ambitious common goals.

Second, need to invest substantially in pandemic preparedness and mission-oriented health financing.

Third, innovations that benefit from large public investments and advance purchase commitments needs to be prioritised. This calls for a new approach to governing intellectual-property rights. In this regard, IP governance should be reformed to recognise that knowledge is the result of a collective value-creation process as recommended by WHO.

Fourth, need for increased state investment in the post-pandemic economic recovery, that this spending be increased to 2 per cent of GDP per year, thereby raising $1 trillion annually from now until 2030.

Fifth, Public investment must be channeled through new contractual and institutional mechanisms that measure and incentivise the creation of long-term public value rather than short-term private profit.

Sixth, a new multilateral and interdisciplinary institution focused on decarbonizing the economy should be institutionalized like ‘CERN for climate technology’ inspired by the European Organisation for Nuclear Research. It would pool public and private investment into ambitious projects.

Source: This post is based on the article “A new global economic consensus” published in Business Standard on 19th October 2021.