The Washington Consensus is dead: Long live the new Berlin Declaration

And that is exactly what could happen again now: liberal democracies are facing a wave of popular distrust about their ability to serve their citizens and tackle the many crises that threaten our future – from climate change to unbearable inequalities to major global conflicts.

The consequences are now being seen in the US, where former President Donald Trump has a good chance of winning the presidential election in November. In France, too, a far-right government could take power after the upcoming new elections. To prevent dangerous populist policies that exploit voters’ anger and to avert great harm to humanity and the planet, we must urgently address the causes of people’s discontent.

With this imperative in mind, many leading economists and practitioners met in Berlin at the end of May for a summit organized by the Forum New Economy. This summit, under the motto “Winning Back the People,” resulted in something resembling a new understanding that could replace the free-market “Washington Consensus” that for four decades emphasized the primacy of free trade and capital flows, deregulation, privatization, and other pro-market buzzwords.

The Berlin Declaration, published at the end of the conference, has now been signed by dozens of leading scientists, including Nobel Prize winners Angus Deaton, Mariana Mazzucato and Olivier Blanchard, as well as Thomas Piketty, Isabella Weber, Branko Milanovic and many others.

The Washington Consensus has been on shaky ground for some time. It is being challenged by a large body of research documenting the increasing income and wealth inequality and its causes. In addition, there are reassessments of the role of industrial policy and strategies to combat climate change.

Recent crises – not to mention the risk of losing the battle for liberal democracy itself – have accelerated efforts to translate all this research into a new common policy framework to win back citizens.

The Berlin Declaration highlights widespread evidence that people’s distrust is based in large part on the shared experience of a real or perceived loss of control over their livelihoods and the course of societal change. This sense of powerlessness has been triggered by shocks related to globalisation and technological change, amplified by climate change, artificial intelligence, the recent inflation shock and austerity.

This diagnosis logically leads to an equally clear conclusion. Regaining people’s trust requires policies that restore confidence in their ability and that of their governments to respond effectively to the real problems they face.

This means that policy must focus on creating shared prosperity and good jobs. This includes policies that proactively address impending regional upheavals by supporting new industries and gearing innovations towards creating prosperity for the masses.

Support is equally strong for shaping a healthier form of globalization, for coordinating climate policy, and for national control over key strategic interests. Underlying these priorities is a broad consensus that income and wealth inequality must be reduced.

As part of a new consensus, climate policy must combine sensible carbon pricing with strong positive incentives and ambitious infrastructure investments. And there is broad agreement that developing countries must be given the financial and technological resources they need to achieve the climate transition.

In summary, a new general consensus is emerging that a new balance must be found between markets and collective action.

Agreement on all of these points would probably not have been possible five years ago. The large number of signatories and the diversity of perspectives they represent show how much the discussion has changed as more and more empirical evidence has accumulated.

The signatories of the Berlin Declaration do not claim to have all the answers. Quite the opposite. Rather, the aim of the declaration is to provide a statement of principles that are significantly different from the existing orthodoxy and to create a mandate to refine policy concepts for practice.

How to properly design industrial policy must be defined in a national context and in an international cooperation effort. The same applies to the question of how governments can best create incentives for climate-friendly behavior. The question of how globalization can be redesigned or how economic inequality can be most effectively reduced also remains an open question.

Nevertheless, it is crucial to reach a consensus on the principles that should guide policymakers. Recognising that markets alone will not stop climate change or reduce wealth inequality is only one step towards developing optimal policies that can effectively address the real challenges we face. Much progress has already been made on this front.

We now face a choice between a protectionist populist backlash, with all the conflicts that entails, and a new package of measures that responds to people’s concerns. To get ahead of the populists, we need a new political consensus that focuses on the causes of citizens’ distrust, not the symptoms.

Restoring confidence in the ability of our societies to overcome crises and secure a better future requires a concerted effort to put citizens and their governments back in the driver’s seat and promote the well-being of the many. Winning the people back requires nothing more – and nothing less – than a people’s agenda. ©2024/project syndicate