The London Consensus traces this evolution. It includes contributions from dozens of economists who either taught or studied at the London School of Economics, but as Velasco puts it, “you won't find a Ten Commandments that are universally applicable.” Rather than making broad policy statements, he and Besley lay out a few general economic principles in a long introductory essay and then apply them to various policy areas, while emphasizing the value of “caution and gradualism” and “pragmatism.”
By Besley and Velasco's definition, the London Consensus does not supersede the entire Washington Consensus. Like his predecessor, he prioritizes fiscal prudence and low inflation. But it also stresses the importance of effective regulation of the financial system to prevent booms and busts, and argues that policymakers should not shy away from periodically using exchange controls to “prevent destabilizing flows of short-term capital.”
In line with the Washington Consensus, the London version states that global trade brings significant economic benefits to everyone. But in an essay detailing the evidence to support this claim, MIT economist Dave Donaldson points out that trade liberalization creates losers as well as winners, and that hits to jobs and incomes can have lasting negative consequences for entire regions and even entire countries. “We see this where negative trade shocks have left places in low-level traps that persist for generations, and in those countries that have failed to create new internationally competitive industries,” writes Anthony Venables of Oxford in a commentary on Donaldson’s essay.
One of the general principles of the London Consensus is: “Growth matters, but so does place.” To cushion trade shocks, he calls for financial compensation for losers and for governments to invest in infrastructure and education to make economically depressed regions more attractive to outside companies. In the 1990s, some officials in the Clinton administration advocated similar trade regulation policies, but they made little progress. Now they have been justified. “The structural changes needed to maximize trade opportunities and adapt to trade shocks often require systematic policy intervention,” Venables argues.
Thirty years ago, many leading economists were deeply suspicious of industrial policy. The London Consensus covers this, albeit under a different name – a “productive development policy” – which covers everything from investment in skills and infrastructure to ensuring access to key raw materials and creating a regulatory framework that rewards innovation and punishes corporate predation. “Economic growth requires an enabling environment, much of which is created by targeted government action,” write Besley and Velasco.
What about tariffs? Central to 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 say, “Our principles do not categorically exclude all protections.” They then add: “This does not mean, of course, that any old protectionist policy is justified.” When I pressed this ambiguity, Velasco said that tariffs should not be used to extend the life of mature industries, but that under certain circumstances they could be used in combination with other policies to help develop future industries. This reasoning certainly doesn't support Trump's 50 percent tax on steel imports or his blanket tariffs on goods from more than a hundred countries, but can it justify the massive tariffs on Chinese electric vehicles that the Biden administration has imposed as part of its efforts to boost cleaner manufacturing? The London Consensus states that green growth is the goal. However, Velasco did not appear to be particularly enthusiastic about using protectionist measures to achieve this goal. “If you think about the list of tools that governments can use to stimulate growth and development, tariffs have come down quite a bit,” he told me.
Another author of the London Consensus is Philippe Aghion, a French economist who won this year's Nobel Prize in Economics for his theoretical work on how “creative destruction” drives economic growth. Citing this research, the London Consensus advocates policies that encourage innovation. Some recommendations, such as supporting scientific research, are obvious. Others don't. In an essay written with John Van Reenen of the London Stock Exchange, Aghion calls for tougher antitrust policies, especially regarding corporate mergers. The problem is that established tech giants like Alphabet and Meta have a strong incentive to monopolize their markets and acquire nascent innovators they view as threats. Governments can “make our economies more innovative and more inclusive by continually fostering new innovative companies and new talent,” write Aghion and Van Reenen.
