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Former Canadian central banker pushes for the Cornwall Consensus after the death of the Washington Consensus

The need for governments to focus on shaping markets, rather than reacting to problems affecting markets, says Carolyn Wilkins.

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Carolyn Wilkins, who retired last year as Senior Vice Governor of the Bank of Canada, began her career in the Finance Department in the late 1980s with a degree in economics from the University of Western Ontario.

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At the time, his finance bosses, as well as his former professors, thought they had cracked the code by promoting a policy mix that emphasized free markets over government intervention. It came to define mainstream policymaking and was even given a name: the Washington Consensus, so named because the International Monetary Fund and the World Bank, both based in Washington, DC, were by then making contingent loans to the discipline of spending, the market – determined exchange rates and the like.

“The Washington Consensus emerged at a time when we felt that market forces could deliver a lot of what we wanted, and if we focus on that, the benefits of higher growth and higher productivity would be distributed to people in different ways. income levels and worldwide. different cultural groups, ”Wilkins said in an October 19 interview. 13. “History has shown us that we are wrong in that sense.”

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Free market theory made intuitive sense, and economists who developed sophisticated mathematics to show why such policies would work in practice were winning all the top awards in the profession. There were also obvious success stories, including Canada, which had a pretty good streak after it embraced free trade and cut social spending to eliminate budget deficits in the 1990s.

Those policies also fueled innovation and created enormous wealth. However, the assumptions that markets would distribute wealth fairly and that enlightened owners would act as controls for the excesses of free-market capitalism were wrong. These were fatal flaws.

The last twelve years of Wilkins’ career were spent battling crises, first the financial collapse that triggered the Great Recession and then the COVID-19 pandemic, which showed what happens when we become too obsessed with balanced budgets and delivery. just in time. .

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We face environmental risks that are quite serious. There are political and social unrest that must be addressed

Carolyn wilkins

“The journey has been to understand what part of the Washington Consensus worked and why it worked, and which part should be put aside and replaced with something that is more realistic in terms of providing the kind of standard of living and prosperity that we are all seeking.” , said.

True believers in the Washington Consensus will argue that the crises of the last decade were just a failure of execution, not of theory. Regardless, it was a useful narrative device that helped a generation of politicians sell a story about how best to structure a productive economy.

However, the rich world now feels more chaotic, in part because its economic playbook is in shambles. That’s why you hear Liberal Finance Minister Chrystia Freeland dismiss economists who helped Jean Chrétien and Paul Martin balance the budget in the 1990s as “old generals,” and why conservative leader Erin O ‘Toole is having such a hard time convincing his base members. back ideas like a carbon tax and demand union representation on corporate boards. At least the Washington Consensus provided an anchor. Now we re-invent it as we go along.

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Wilkins is among those trying to make the post-pandemic story more coherent. She is a member of the advisory board of the Coalition for a Better Future , an assembly of dozens of associations and business leaders led by former Cabinet Ministers Anne McLellan and Lisa Raitt, and endorsed by the Business Council of Canada.

The effort is a recognition that policy paralysis has become an impediment to economic growth. Wilkins has also been thinking about the issue globally. He spent the past year working with a small group of experts brought together by the G7 to develop a roadmap for a group of rich countries that have lost faith in markets, which were supposed to be their advantage in their power struggle with China. and Russia.

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The G7 Panel on Economic Resilience offered the interventionist without apology Cornish Consensus ahead of this year’s G7 Summit in June. This week, the group published a more detailed report on the kinds of policies that the G7 and its allies should follow in the years to come.

He proposed that the government guide the invisible hand of the market in seven areas: global health, climate change, digital economy, international trade, business investment, labor standards and supply chains. Specific recommendations include a “root and branch” review by the World Trade Organization, a commitment to increase investment by two percent of GDP per year, and offering tax breaks for businesses that recycle.

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Governments “should focus on shaping markets, rather than reacting to problems that affect markets,” Wilkins said.

The Cornwall Consensus does not cover governments spending at will. For example, Wilkins called fiscal sustainability a “foundation of the economy,” emphasizing that deficits should be used to finance policies that boost productivity.

Nor is it a total condemnation of the old ways, which, for all their flaws, created the conditions to develop COVID-19 vaccines with surprising speed. But a mountain of evidence shows that the bad now outweighs the good. If those who built the system don’t fix it, their opponents will eventually bring it down.

“We left a lot of people behind,” Wilkins said. “We face quite serious environmental risks. There is a political and social unrest that must be addressed. The way to do it is to choose a new paradigm to follow. “

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