PERSPECTIVE: The GEM consensus

By bne IntelliNews April 18, 2011

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At the end of March, Russian President Dmitry Medvedev laid out what is one of the clearest expositions of the Global Emerging Markets (GEM) consensus that is challenging - and could even one day replace - the old world order of the Washington consensus.

The GEM economies have been growing strongly for about a decade, but as prosperity really starts to take hold in this new world, the transformation is getting political as the leaders switch from fighting economic bush fires to building for the long term.

The 2008 crisis has brought into question the validity of the world's dominant liberal economic ideology, dubbed the Washington consensus, which now looks fatally flawed and led directly to the recent meltdown.

However, no one on either side of the jump has rejected capitalism, nor have they reached for the palliative of protectionism. Indeed, they've stuck to Nobel Laureate Paul Krugman's "Economist's Creed": "I understand the principles of comparative advantage and I believe in free trade." If there has been any monkey business going on, then it is with China, and more recently the US, in the largely successful attempts to manipulate their own currencies.

What is being debated is what form of capitalism works best. In the West, this boils down to a debate over what is the best size of government - big or small - and is epitomised by the charge of "socialism" that the US' Republicans are trying to tag the Democrats with.

But the whole programme of the Washington consensus' neo-liberal policies, favoured by the International Monetary Fund (IMF) and the World Bank, is being questioned elsewhere. More importantly, emerging markets have never been comfortable with the attempt to foist the West's economic agenda of liberalising trade and finance, and linking it to the Wilsonian agenda of self-determination. But while the GEM countries were poor or in crisis or both, they had to shut up or the IMF would not put up.

Now the GEMs are richer - and the West poorer - these countries are much freer to completely ignore these values and a new ideology has been emerging over the last two years. At the same time, the West has been left in an ideological and moral vacuum. As Plamen Monovski, CIO at Renaissance Asset Managers, wryly put it in a recent note titled "Sherpas and Kindergartens": "Since the crisis struck, quite the opposite is true. The considered discussions have turned into open conflicts, covered with a patina of civility, as diametrically opposed interests collide. Watching this circus, the world suddenly feels distinctly directionless. There is no G20, G8, G7 or G2 (US-China). These are the times of G0."

Looking after the young

One of the most radical departures from the Washington consensus is a rejection of the until-now de rigueur separation of commerce and state. Russian Prime Minister Vladimir Putin could have boshed the oligarchs when he took over as president in 2000; instead, he chose to co-opt them in what has been dubbed ZAO Kremlin (closed joint stock company Kremlin). Russia's biggest businessmen go for regular one-on-one meetings with the PM to get their investment plans approved. China has the same model: many firms are nominally private, but none will act without coordination with the government, which retains a de facto veto over any plan.

More generally, Monovski describes the GEM consensus as relying, "on protection of nascent industries, greater state spending on infrastructure, emphasis on social issues as a countercyclical force, producing resources and relentless industrialisation at the expense of services... This model emphasises the value of domestic savings and derides the foreign capital fetish."

There is no mention here of civil society, "freedom" or voter's rights - all core values in the western system as summed up in John F Kennedy's classic speech during the Cuban missile crisis: "Our goal is not victory of might, but the vindication of right - not peace at the expense of freedom, but both peace and freedom, here in this hemisphere and, we hope, around the world."

Neither Russia nor China would ever presume to comment on the state of "freedom around the world." China follows Deng Xiaoping's principle of tao guang yang hui ("hide brightness, nourish obscurity"), while Russia's core concept in foreign policy is the promotion of a "multi-polar" world.

The absence of liberal political values in the GEM consensus makes the emerging markets more introspective: both China and Russia don't like outside interference and play relatively subdued roles in international affairs. Neither have contributed to the three wars that the US has been involved in recently and, indeed, Russia strongly objected to the bombing of Libya (although it didn't thwart it), because it argues the bombing violates the principle of self determination. Ditto the bombing of Kosovo.

The upshot is that liberal politics has been separated out and what's left is the state's obligation to care for and support society. This emphasis - an attempt to de-politicise the relationship between the state and its people - is clearly manifest in both China's and Russia's policies.

Chinese President Hu Jintao's domestic policies are designed to promote fast economic growth, but also emphasise good governance, a strong social safety net, encouraging independent innovation, perfecting the financial system and stimulating domestic consumption.

Medvedev was even more explicit in laying out some of the details of Russia's version of the GEM consensus during his speech in Magnitogorsk on March 30, mapping out 10 goals for the government, which remain at the centre of the plans, and putting deadlines on when they should happen:

1. reduce social taxes and reduce the cost of healthcare procurement;

2. follow up on corruption complaints and make bureaucrats more accountable to the public;

3. improve the predictability of the regulatory environment;

4. appoint an investment ombundsman in each of the federal districts to make investments easier and cut through red tape;

5. accelerate the privatisation programme for firms that are ready to compete and replace government appointees from state-owned companies in "competitive sectors";

6. improve transparency by forcing disclosure by law to protect minority shareholders;

7. set up a state-backed foreign direct investment fund;

8. reduce the number of "strategic sectors";

9. improve and streamline business services like customs, visa, work permits, and the agencies controlling them;

10. organise a "mobile presidential reception" that will roam the country to better understand the problems faced by the regions and the people.

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