Hanging on Financial timesAnd the Martin Sandbo Recently he wrote an article mentioning that he is a new file Washington Consensus. Unlike the 1990s version, the new paradigm encourages government spending in areas that generate returns, such as health and education. He adds that despite being indebted, Brazil will have to come to terms with the new reality. The way out is that you spend better. “High debt does not alter the fact that Brazil also has to adapt to the conditions of this changing world, and in particular to the challenge of the global climate.”
Read the interview’s key excerpts below:
Did the Washington Consensus fail or is this new trend stemming from the Covid-19 crisis?
It failed in the sense that it was never a fully functioning policy package. If the country needs to balance its budget and forbid people to go to the doctor because they cannot afford it, you reduce productivity and the ability to finance the budget. Similar, and perhaps less serious, errors were seen in the Eurozone crisis. Countries that have received financial bailouts have had to adopt some counterproductive policies that slowed growth. Since the global financial crisis, we have seen productivity slowdowns in high-income countries, persistent low interest rates, insufficient demand, and an adverse effect on fiscal consolidation. People started saying, “We don’t understand how the economy works here.” They have realized that it is not true that (fighting) inequality and growth are opposites. It is not true that financial liberalization always increases productivity. What we are seeing now in the political councils is a response to this new way of thinking.
Could the new consensus be as strong as the old consensus?
The previous consensus was very strong because “Washington” is so powerful. There is Washington from the American administration, Washington from international institutions, the International Monetary Fund and the World Bank. But there was a change. The United States has lost its prestige, and the International Monetary Fund and World Bank are no longer the only ones in the game either. We now have institutions from emerging countries. Washington and Washington are no longer in control, but they are still powerful. When Trump was in charge, other countries were encouraged to emulate him. Now, Biden is doing a giant and very active economic experiment. That would make it easier for Europe to say, “They are doing it, maybe we shouldn’t worry about spending too much.”
If Biden’s plan worsens, could the new consensus collapse?
I think so, at least the part that advocates active economic policy. There is an experience that is not only financial, but also cash. If he fails, this kind of idea will die out in political circles. But if it succeeds, it will reinforce the trend. The consensus contains other elements as well, such as a sustainable agenda. This part is not in danger.
And like mr. How do you rate Biden’s package?
The question is how countries finance themselves. Most of it is domestic funding. The question that should be asked is: “What policy will lead to greater and more sustainable growth?” The sustainability of debt and the risk of lending depend not only on how much you have, but on how much you will have to pay the bill in the future. This is easier said for high-income countries than for emerging ones, who have to borrow from others. But we are re-balancing what it means for sustainable public finance. They depend on what the state spends, and whether it invests in productivity. It is important to highlight that the forecast for the United States says that in the next two years and the next two years, the economy will be larger than it would be without the pandemic. This is because of these extraordinary expenses and financing.
The situation is different for emerging countries. Won’t investors demand traditional reforms as in the past?
In terms of spending power, it will be important that the country has built a good reputation among investors. In this case, it would not be a problem to be slower to open the financial sector or to invest in health and education, because in the end, the country will be able to increase productivity. If the International Monetary Fund says this is the policy for countries to follow, it will be easier for emerging countries.
Brazil is already saddled with debt. Could it be part of this new consensus?
The country already has a large country, but it has a lot of potential to improve how the government spends public money. This has to be a priority. But high debt does not alter the fact that Brazil also has to adapt to the conditions of this changing world, and in particular to the global climate challenge. The country needs to think about what will work for its economy 30 years from now. The answer would be a better educated and healthier population. My point is that having debt does not change the challenges. I would suggest that Brazil find ways to loan safely, with long terms, so that it doesn’t suddenly have to refinance itself when interest rates are higher.
Is there a difference between the new consensus and Keynesianism?
It is broader than Keynesianism, because it includes, for example, a new view of how inequality or excessive financial deregulation can be detrimental to growth. It also contains an opportunity for an advanced industrial policy.