Former Canadian central banker pushes Cornwall Consensus after Washington Consensus dies

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Carolyn Wilkins, who retired last year as Bank of Canada’s senior deputy governor, began her career at the Finance Department in the late 1990s armed with an economics degree from the University of Western Ontario.

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At the time, her bosses at Finance as well as her 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 policy-making and was even given a name: the Washington Consensus, so called because the International Monetary Fund and the World Bank — both based in Washington, D.C. — were by then making loans contingent on spending discipline, market-determined exchange rates and the like.

“The Washington Consensus emerged at a time when it felt like market forces could deliver a lot of what we wanted, and if we focused on that, the benefits of increased growth, increased productivity, would be distributed to people in different income brackets and across different cultural groups,” Wilkins said in an interview on Oct. 13. “History has proved us wrong in that regard.”

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Free-market theory made intuitive sense, and economists who developed fancy math to show why such policies would work in practice were winning all the profession’s most important awards. There were also apparent success stories, including Canada, which went on a pretty good run after it embraced free trade and slashed social spending to erase budget deficits in the 1990s.

Those policies also supercharged innovation and created tremendous wealth. Yet assumptions that the markets would distribute wealth fairly and that enlightened owners would act as checks on free-market capitalism’s excesses were misguided. These were fatal flaws.

The final dozen years of Wilkins’ career was spent fighting crises, first the financial meltdown that triggered the Great Recession, and then the COVID-19 pandemic, which showed what happens when we become overly obsessed with balanced budgets and just-in-time delivery.

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We’re facing environmental risks that are pretty dire. There is political and social unrest that needs to be addressed

Carolyn Wilkins

“The journey has been to understand what part of the Washington Consensus worked, and why did it work, and what part of it needs to be put aside and replaced by something that is more realistic in terms of delivering the kind of living standards and prosperity that we are all looking for,” she said.

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

Yet the rich world now feels more chaotic, partly because its economic playbook is in shambles. That’s why you hear Liberal Finance Minister Chrystia Freeland dismissing the 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 members of his base to get behind ideas such as a carbon tax and mandating union representation on corporate boards. If nothing else, the Washington Consensus provided an anchor. We’re now back to making it up as we go along.

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Wilkins is among those trying to make the post-pandemic story more coherent. She’s an advisory council member of the Coalition for a Better Future , an assembly of dozens of business associations and leaders led by former cabinet ministers Anne McLellan and Lisa Raitt, and backed 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 on a global level. She spent the past year working with a small group of experts assembled by the G7 to develop a road map for a group of rich countries that have lost faith in markets, which were supposed to be its advantage in its power struggle with China and Russia.

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The G7 Panel on Economic Resilience offered the unapologetically interventionist Cornwall Consensus ahead of this year’s G7 Summit in June. This week, the group published a more detailed report on the sorts of policies the G7 and its allies should pursue in the years ahead.

It proposed that government guide the market’s invisible hand in seven areas: global health, climate change, the digital economy, international trade, business investment, labour standards and supply chains. Specific recommendations include a “root-and-branch” overhaul of the World Trade Organization, a pledge to raise investment by two per cent of GDP per year, and offering tax breaks for companies that recycle.

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Governments “need to focus on shaping markets, as opposed to reacting to problems that hit markets,” Wilkins said.

The Cornwall Consensus isn’t cover for governments to spend at will. For example, Wilkins called fiscal sustainability a “foundation of economics,” 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 faults, 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 tear it down.

“We left a lot of people behind,” Wilkins said. “We’re facing environmental risks that are pretty dire. There is political and social unrest that needs to be addressed. The way to do that is to choose a new paradigm to follow.”

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