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The Washington Consensus, the system of beliefs that led to a market-driven expansion of trade not seen in a century, has unraveled. Rising inequality, the global financial crisis and the attraction of China’s state-driven model all contributed to its downfall.

The world is now more fragmented. A new global consensus has not emerged, nor is one likely to emerge soon.

This lack of global consensus will impede progress on issues including climate change, the energy transition, debt relief, trade policy and healthcare.

The period corresponding to the Washington Consensus, which began with the fall of the Soviet Union, was the high-water mark of global economic efficiency and cooperation. Nearly all countries operated under the assumed benefits of open markets, frictionless trade and limited geopolitics. Incomes and wealth boomed, at least in aggregate, and billions of people were lifted from poverty. Bretton Woods Institutions enjoyed large legitimacy and were used to address global problems. The breakdown of the Washington Consensus leaves us in a more confrontational, less optimal world. Trade is constrained, the cost of doing business is higher, and the cooperation needed to solve global challenges such as climate change, debt and healthcare is elusive.

The life and death of the Washington Consensus

The Washington Consensus is gone. This system of beliefs emerged triumphant after the collapse of the Soviet Union in the early 1990s. Its central tenets were the primacy of markets, with a limited role for the state, multilateralism and globalization, and the free movement of workers and capital. The Bretton Woods Institutions — the International Monetary Fund, the World Bank and the World Trade Organization (WTO) — were the global public bodies charged with promoting its policies and supporting prosperity. The Washington Consensus encouraged a second wave of globalization, delivering positive results in the 1990s and 2000s. Most notable was a burst of global trade not seen since the UK led the first wave of globalization a century earlier. Companies sought to minimize costs and boost returns, driven by new entrants — particularly China — into global production chains and the WTO. As production spread to new countries and incomes boomed, billions of people were lifted out of poverty in the emerging world. The structural increase in supply kept inflation in check and global interest rates low. As a result, profitability rose, and asset prices soared. However, inequality also increased, particularly in the advanced economies.

What went wrong?

The Washington Consensus was undone by three main factors:

  • A lack of attention to distributional issues, particularly in the advanced economies. Globalization was not a win-win. While the economic pie was certainly made bigger, the benefits were unequally distributed. Higher-income groups fared well, but working-class manufacturers in the West saw their jobs disappear and their living standards stagnate. Some of this was due to technological advances, but trade was also responsible. 

  • The global financial crisis of 2008. A financial meltdown originating mainly in the US banking sector, which was supposed to be better at managing risk than the public sector, put a huge dent in support for the Washington Consensus. The US policy response, with limited support for households hit hard by declining property prices, exacerbated these views.

  • The rise of China and the relative attractiveness to some countries of its state-led model. This was based on China’s meteoric rise, including a mass reduction in poverty. Its relative stability and avoidance of the financial crises plaguing other emerging markets were enticing as well.

Where are we now?

Nationalism is challenging multilateralism. As a result, we are moving to less cooperative and suboptimal outcomes. This unraveling of the Washington Consensus can be seen across the board. Trade has been increasingly scrutinized, if not weaponized. No longer are we in a laissez faire world where goods are produced according to competitive advantage. Tariffs are seen, incorrectly, as a way to create more balanced trade flows. Countries are applying sanctions for reasons of (very broadly interpreted) national security, some legitimate and some largely imaginary. Production is being moved in anticipation of real or perceived threats from rivals as well as in response to COVID-19-related supply chain disruptions. These measures raise the cost of producing, storing and shipping goods worldwide, although they may be “cheaper” on a risk-adjusted basis. 

The role of the state is rising and is no longer seen as secondary to the markets. China, with its consistently adopted state-led economic model, has always had national champions. Now, the US and others are moving toward a more state- heavy model as well. The Inflation Reduction Act is putting enormous amounts of public money toward the energy transition — arguably a public good, where the state should play a catalytic role — but it also aims to “boost domestic manufacturing [and] create good-paying union jobs,” which can be interpreted as industrial policy. Indeed, some US allies are pushing back against the Inflation Reduction Act and its state-induced, “unfair” competitive advantage to American companies. 

The post-Washington Consensus world is increasingly fragmenting along ideological and income lines.

On the global stage, the Bretton Woods Institutions are no longer the only game in town. China is flexing its geopolitical muscles by creating a new set of institutions. These include the Asian Infrastructure Investment Bank, which supports the Belt and Road Initiative, and the New Development Bank, which centers on Brazil, Russia, India, China and South Africa — the BRICS — a group that has recently expanded. China is now a larger creditor to many emerging markets than all the traditional development banks combined. More generally, the Global South has emerged as a group of countries wanting a larger say in global governance, including the energy transition.  

Perhaps most importantly, trust among the global powers is low, with the frequency and level of communication between the US and China having declined considerably in recent years. While both sides recognize that they remain interlinked economically, this is not translating into a commensurate level of cooperation. The low level of cooperation between the two largest economies and global powers does not bode well for addressing the ever-growing list of global challenges.

Progress in a less orderly world

A new global consensus has not emerged, nor is one likely to emerge soon. The post-Washington Consensus world is increasingly fragmenting along ideological and income lines. This is happening both across and within countries, particularly in the advanced economies. The lack of a global consensus will make progress difficult in a number of key areas.

  • Climate change affects us all, and any approach toward addressing it needs global cooperation to be effective and efficient. Progress on adaptation requires joint action across borders.

  • The energy transition will not take place without rapid scaling of clean energy technologies. This includes decarbonizing the fossil fuel system, building out the renewables system, deploying electric vehicles and expanding new hydrogen infrastructure. Lack of collaboration risks making the transition both slower and more expensive.

  • Debt relief for lower income countries is necessary to give them space to resume growth and development and to participate in the green transition. Recent progress toward debt relief has been slow, and all creditors need to work together to find the most efficient solutions.

  • Trade policy is stuck in a rut started by the 2016 “trade wars.” Neither the US nor China has rolled back their retaliatory tariffs, and the weaponization of trade continues. Trade diversion, also known as “de-risking” or “friend-shorting,” remains rampant, and the WTO appears sidelined.

  • Healthcare is a global public good and, as demonstrated during the COVID-19 pandemic, cooperation is needed to manage the spread of diseases as well as to discover and distribute vaccines and remedies.

If the current geopolitical tensions and lack of global cooperation continue, we can expect progress on these key issues to be constrained. Any gains are likely to be modest and partial as well as more costly than in a world with an updated global consensus.


  Carlos Pascual
  Senior Vice President, Geopolitics and International Affairs,
  S&P Global Commodity Insights

Do you ever find yourself wishing that your job as an expert in geopolitics was a little less interesting?

Every day I wish that I wasn’t challenged on yet another issue. The changes are historic from a geopolitical perspective. We’ve seen the erosion of the global order over the past decades. We’re not seeing what’s coming to replace it. It’s like a shattering of an equilibrium, and we’re all trying to understand how we make progress going forward. This is a phenomenally difficult transitional moment for governments and for companies around the world.

Looking ahead to 2024, what are the geopolitical issues that you believe will most affect the world and the markets?

The list of issues in 2024 is enormous. We must begin with the US and China: the world’s two largest nations, two largest consumers of energy, two largest emitters of greenhouse gases and two largest militaries. How these nations behave and their relationship with one another is going to set the tone globally.

The wars in Ukraine and between Israel and Hamas will resonate profoundly in global politics. A North-South divide continues to deepen over economics and climate change. Never in history have we sought to make such a fundamental change in a critical part of our economic system in such a short time. This is going to affect every aspect of our lives. It will have a geopolitical impact, a commercial impact, a technological impact, and all these dynamics will come together within countries. That combination will make it challenging to manage the road ahead.

The war in Ukraine seems to have settled into a state of violent stasis in 2023. Based on your experience in Kyiv, do you have reason to believe that 2023 brought us any closer to an eventual peace?

2023 did not bring us closer to peace. Russia’s invasion of Ukraine was critical to the changing nature of the global order. A country’s national sovereignty and territorial integrity were violated. We have no effective mechanism to cut that off. Now we see a stalemate on the ground, and we are moving into a winter in which we’re likely to see increased bombings by Russia of civilian infrastructure in Ukraine. The question is how to move forward and with what resources. How do we move to the point where Ukraine’s rights are met and Russia is able to accept that? A diplomatic solution eludes us.

The war in Gaza has had remarkably little impact on energy prices so far. Are you surprised by the lack of price movement?

No, I’m not. Oil prices are volatile, but they have declined since Oct. 7. This reflects oil supply and demand throughout the world. The production coming out of the US, Canada, the North Sea, Brazil, Guyana and a few other areas is so strong that it’s exceeding the growth in global demand. The reason you would normally see a price spike resulting from conflict in the Middle East would be Iran threatening to shut down the Strait of Hormuz. That hasn’t happened because Iran is fundamentally dependent on China as a customer and as an investor. China’s other principal partner in the Middle East is Saudi Arabia. These relationships with China have dampened the political risk of disrupting the supply and movement of oil.

Increasingly, we’re hearing about the trade-off between the energy transition and energy security. Is the concern over energy security a product of the increasing geopolitical tensions in the world?

We must think about how we elevate energy security and energy transition to achieve both. It’s not an either/or. We cannot ignore the necessity and the reality of energy security. Nor are we in a world where we can forget about the energy transition because the realities of climate change are forcing us to deal with environmental consequences and transitional realities. We need to have two energy transitions at the same time. We need to reduce demand for hydrocarbons and decarbonize supply in the energy economy of today. And we need to build the energy economy of the future. Financing and implementing both of these transitions in parallel is one of the hardest strategic choices that the world faces.

The passage of the Inflation Reduction Act seems to have kicked off a global race for dominance to lead the energy transition, with the US, Europe and China each competing for market leadership. Should we be pursuing international cooperation versus competition?

International cooperation is fundamental to achieve our goals for a sustainable planet. That doesn’t mean that individual countries should not seek to create the incentives to develop technology. But what is going to become critical in the geopolitics of energy is that these different strategies are united in some form of cooperation. What is still evolving is an understanding of how we share. How do we bring other countries in? How do we make it possible for the lessons learned in one place to be shared and advanced as quickly as possible in other countries? How do we ensure developing countries have access to financing? In the end, one country learning is not enough. All nations are interdependent to solve the climate challenge and ensure our energy security.


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This article was authored by a cross-section of representatives from S&P Global and in certain circumstances external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.