“The London Consensus” traces this evolution. It includes contributions from dozens of economists who have either taught or studied at the L.S.E., but, as Velasco put it, “you will not find Ten Commandments that are universally applicable.” Rather than making blanket policy pronouncements, he and Besley outline several general economic principles in a lengthy introductory essay and then apply them across various policy domains, while highlighting the value of “care and gradualism,” and “pragmatism.”
As defined by Besley and Velasco, the London Consensus doesn’t throw out all the Washington Consensus. Like its predecessor, it prioritizes fiscal prudence and low inflation. But it also emphasizes the importance of regulating the financial system effectively to prevent booms and busts, and asserts that policymakers should not shy away from occasionally using foreign-exchange controls to “prevent destabilizing short-term capital flows.”
In keeping with the Washington Consensus, the London version says that global trade generates substantial economic gains over all. But, in an essay detailing the evidence to support this claim, the M.I.T. economist Dave Donaldson points out that trade liberalization creates not only winners but losers, and that the hits to jobs and income can have a lengthy negative impact on whole regions and even entire countries. “We see this where negative trade shocks have left places in a low-level trap, persistent across multiple generations, and in those countries that have failed to establish new industries that are internationally competitive,” Anthony Venables, of Oxford, writes, in a comment on Donaldson’s essay.
One of the general principles of the London Consensus is “Growth matters, but so does place.” To cushion trade shocks, it calls for the losers to be compensated financially, and for governments to invest in infrastructure and education to make economically depressed regions more attractive to outside companies. During the nineties, some officials inside the Clinton Administration advocated for trade-adjustment policies of this nature, but they didn’t make much progress. Now they have been vindicated. “The structural changes required to make the most of trade opportunities, and to adjust to trade shocks, often require systematic policy intervention,” Venables argues.
Thirty years ago, many mainstream economists regarded industrial policy with deep suspicion. The London Consensus embraces it, albeit under a different moniker—“productive development policies,” which encompasses everything from investing in skills and infrastructure to insuring access to key raw materials to setting up a regulatory structure that encourages innovation and punishes corporate predation. “Economic growth requires an enabling environment, the lion’s share of which is created by deliberate government action,” Besley and Velasco write.
What about tariffs? A central element of the Washington Consensus was its commitment to freer trade. Noting the shift toward protectionism in recent years, and the acceleration of this trend since the start of Trump’s second term, Besley and Velasco state, “Our principles do not rule out all protection measures categorically.” They then add, “This certainly does not mean that any old protectionist policy is justified.” When I pressed Velasco on this ambiguity, he said tariffs shouldn’t be used to expand the life of mature industries, but that under certain circumstances they could be utilized, in conjunction with other policies, to help develop industries of the future. This reasoning certainly wouldn’t support Trump’s fifty-per-cent levy on steel imports, or his blanket tariffs on goods from more than a hundred countries, but could it justify the hefty levies on Chinese electric vehicles that the Biden Administration introduced as part of its effort to stimulate green manufacturing? The London Consensus endorses green growth as a goal. Still, Velasco didn’t seem very enthusiastic about using protectionist measures to advance it. “If you think of the list of tools that governments can use to stimulate growth and development, tariffs are pretty far down,” he told me.
Another contributor to “The London Consensus” is Philippe Aghion, the French economist who shared this year’s economics Nobel for his theoretical work on how “creative destruction” drives economic growth. Citing this research, the London Consensus advocates for policies that stimulate innovation. Some of the recommendations, such as supporting scientific research, are obvious. Others aren’t. In an essay co-written with John Van Reenen, of the L.S.E., Aghion calls for stricter antitrust policy, particularly in regard to corporate mergers. The issue is that established tech giants such as Alphabet and Meta have a strong incentive to monopolize their markets and to acquire nascent innovators whom they view as threats. Governments can “make our economies both more innovative and more inclusive, by constantly favouring the entry of new innovative firms and the emergence of new talents,” Aghion and Van Reenen write.
