From the Washington Consensus to the Berlin Declaration

Dani Rodrik, Laura Tyson, and Thomas Fricke
Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017). Laura Tyson, a former chair of the President’s Council of Economic Advisers during the Clinton administration, is a professor at the Haas School of Business at the University of California, Berkeley, and a member of the Board of Advisers at Angeleno Group. Thomas Fricke is Director of Forum for a New Economy.

CAMBRIDGE/BERKELEY/BERLIN – Paradigm shifts in mainstream economic thinking usually accompany crises demanding new answers, as occurred after stagflation – low growth and high inflation – gripped advanced economies in the 1970s. And it may be happening again, as liberal democracies confronted a wave of popular distrust in their ability to serve their citizens and address the multiple crises – ranging from climate change to unbearable inequalities and major global conflicts – that threaten our future.

The consequences can now be seen in the United States, where former President Donald Trump has a good chance of winning the presidential election in November. Similarly, a far-right government could take power in France after the coming snap election. To prevent dangerous populist policies that exploit voters’ anger, and to avert major damage to humanity and the planet, we must urgently address the root causes of people’s resentment.

With this imperative in mind, many leading economists and practitioners convened in Berlin at the end of May for a summit organized by the Forum New Economy. The “Winning Back the People” summit led to something resembling a new understanding that may replace the market-liberal “Washington Consensus,” which for four decades emphasized the primacy of free trade and capital flows, deregulation, privatization, and other pro-market shibboleths.

The Berlin Declaration published at the end of the gathering has since been signed by dozens of leading scholars, including Nobel laureate Angus Deaton, Mariana Mazzucato, and Olivier Blanchard, as well as by Thomas Piketty, Isabella Weber, Branko Milanovic, and many others.

The Washington Consensus has been wobbly for some time, challenged by abundant research documenting rising income and wealth inequality and its causes, as well as reassessments of the role of industrial policy and strategies to combat climate change. Recent crises, not to mention the danger of losing the fight for liberal democracy itself, have catalyzed an effort to translate all this research into a new common framework of policies to win back citizens.

The Berlin Declaration highlights widespread evidence that people’s distrust is to a large extent driven by the shared experience of a real or perceived loss of control over one’s own livelihood and the trajectory of societal changes. This sense of powerlessness has been triggered by shocks stemming from globalization and technological shifts, amplified by climate change, artificial intelligence, the recent inflation shock, and austerity.

This diagnosis logically leads to an equally clear conclusion. To win back people’s trust requires policies that restore confidence in their – and their governments’ – ability to respond effectively to the real problems they face. This means focusing policies on the creation of shared prosperity and good jobs, including policies that proactively address imminent regional disruptions by supporting new industries and directing innovation toward wealth creation for the many.

There is equally strong support for designing a healthier form of globalization, for coordinating climate policies, and for allowing national control over crucial strategic interests. Underlying these priorities is broad agreement that income and wealth inequalities must be narrowed.

As part of a new consensus, climate policies will need to combine reasonable carbon pricing with strong positive incentives and ambitious infrastructure investment. And there is widespread acceptance of the need for developing countries to get the financial and technological resources they need to embark on the climate transition. In sum, there is a new shared common sense that a new balance between markets and collective action needs to be established.

To agree on all of this would probably not have been possible five years ago. The large number of signatories, and the diversity of perspectives they represent, reflect how much the discussion has changed with the accumulation of more and more empirical evidence.

The signatories of the Berlin Declaration do not pretend to have all the answers; far from it. Rather, the Declaration’s purpose is to offer a statement of principles that obviously differ from the previous orthodoxy and to create a mandate to refine political concepts for practice. How to get industrial policy right must be defined in a national context, as well as in a cooperative international effort; the same is true of how governments can best incentivize climate-friendly behavior. How to re-frame globalization or most effectively reduce economic inequality also remain open questions.

Nevertheless, achieving a consensus on the principles that should guide policymakers is hugely important. Recognizing that markets on their own will neither stop climate change nor lead to a less unequal distribution of wealth is only one step toward devising optimal strategies that can effectively address the real challenges that confront us. A lot of progress has already been made on this front.

We now face a choice between a protectionist populist backlash, with all the conflict that this implies, and a new suite of policies that are responsive to people’s concerns. To preempt the populists, we need a new political consensus that focuses on the causes of citizens’ distrust, rather than on the symptoms.

A concerted effort to put citizens and their governments back in the driver’s seat and promote well-being for the many is needed to restore trust in our societies’ ability to overcome crises and secure a better future. To win back the people requires nothing more – and nothing less – than an agenda for the people.

The Berlin Declaration has also been signed by Adam Tooze, Gabriel Zucman, Jens Südekum, Mark Blyth, Catherine Fieschi, Xavier Ragot, Daniela Schwarzer, Robert Johnson, Dalia Marin, Jean Pisani-Ferry, Barry Eichengreen, Laurence Tubiana, Pascal Lamy, Ann Pettifor, Maja Göpel, Stormy-Annika Mildner, Francesca Bria, Katharina Pistor, and some 50 other researchers and practitioners.

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017). Laura Tyson, a former chair of the President’s Council of Economic Advisers during the Clinton administration, is a professor at the Haas School of Business at the University of California, Berkeley, and a member of the Board of Advisers at Angeleno Group. Thomas Fricke is Director of Forum for a New Economy.