IEEJ：May ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (637)

May 18, 2023

Dramatically Changing State-Market Relationship (1)-- Emerging “New Washington Consensus” -Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, Japan
In my view, the international energy situation has reached a historic turning point,
influenced greatly by a wide range of coexisting factors including the need for fundamental energy
supply and demand structure reform towards carbon neutrality, the comeback of energy security as a
top priority challenge amid the Ukraine crisis, the division of the world through deepening
confrontation between the United States and China and between the Western and China-Russia blocs,
the importance of economic security, growing hopes on innovations and energy reform’s close links
with industrial policies and growth strategies.
Under such conditions, the state-market relationship as a perspective to view theinternational energy situation is changing greatly. I would like to discuss the state-market
relationship from various perspectives in a series of reports beginning with this one, although reports
on different topics may come between the serial reports.
The first of the series takes up the emergence of a “New Washington Consensus”. What is
the New Washington Consensus? While there may be no definite definition of the New Washington
Consensus, various experts’ discussions, analyses and views apparently indicate that the word meansthat the state should take leadership in responding to and overcoming current grave challenges facing
the world. The New Washington Consensus thus seems to refer to a view giving priority to the rolesof Big Government. The view now attracts attention, particularly in U.S. forums.
As indicated by the word “new,” there has been the Washington Consensus, which has
exerted great influence over forums and societies in the world. The Washington Consensus wasshaped at the initiative of the U.S. government, the World Bank and the International Monetary Fundfrom the late 1980s. The consensus clarified the then U.S. foreign economic policy stance urging
debt-ridden and developing countries to promote market and structural reform under a small
government approach. The Washington Consensus emerged as a guideline for supporting developing
countries plagued with a debt crisis in the 1980s. It has been interpreted as a key driver ofliberalization, deregulation and competition to promote structural reform in various economic fields.
In a sense, the Washington Consensus took over a market-oriented trend through the rise ofThatcherism or Reaganomics and served as a basic guideline for U.S. foreign economic, aid anddevelopment policies as noted above, exerting great influence on the entire world. From the late1980s to the 1990s, the United States dominated the world in the wake of its victory in the East-West
Cold War. After national security was given top priority during the Cold War, winning economic
competition became more important than anything else in the post-Cold War era. Market principles
were then positioned as the key to winning economic competition. As Big Government was viewed
as risking inefficiency and market distortion, competition and liberalization in all economic sectors
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were given priority. This trend was applied to energy markets as one of the economic sectors.
Liberalization, deregulation and competition promotion waves hit the oil market first and spread toelectricity and gas markets, bringing about great market and industry reform.
Before the Washington Consensus and neoliberal economic thoughts and philosophies
emerged, however, there was an age where economic policies emphasizing government roles, asadvocated by Keynes and/or Keynesian economists, were greatly influential. John Maynard Keynes
authored “The General Theory of Employment, Interest and Money” to propose economic policy
prescriptions because classical economists failed to provide effective policies in the face of the Great
Depression in the 1930s. Keynes came up with a vision to implement aggressive fiscal and monetary
policies to generate effective demand in pursuit of full employment. In the United States duringreconstruction and economic growth after World War II, the roles of Big Government wereemphasized under the then-dominant Keynes’s and/or Keynesian economics. As the world economy
was plagued with growth stagnation and high inflation after the oil crises, however, the Washington
Consensus and neoliberalism became dominant, emphasizing fiscal discipline and leaving market
forces to resolve problems in consideration of government failures.
In this way, the state-market relationship changes over a long time just as the pendulum
swings back and forth. A change comes as it is recognized that prescriptions must be changed asconventional policies fail to address new influential social or economic problems.
What is behind the current emergence of the New Washington Consensus as a matter ofgreat interest in the United States? The answer may be the occurrence and impacts of coincident
important changes in the international situation as spelled out in the first paragraph. Particularly, akey influential recognition behind the New Washington Consensus may be that the current divisionof the world as symbolized by confrontation between the United States and China and between theWestern and China-Russia blocs is a long-term structural issue. The New Washington Consensus isdesigned for the United States to win the geopolitical competition, enhance cooperation with allies,
tackle climate change and other global issues, and explore cooperation and collaboration with theGlobal South. To these ends, the United States emphasizes industrial policies such as the Inflation
Reduction Act and gives priority to developing supply chains for strategically important materials,
goods and technologies while cooperating with allies. Another important viewpoint is that the UnitedStates has no choice but to be conscious of China’s rapid catch-up and future tough competition withChina in the current situation, which differs from the past situation where U.S. power dominated theworld just after the Cold War. The New Washington Consensus apparently indicates that the UnitedStates wants the entire world and allies to understand its seriousness about implementing a global
strategy, its sense of crisis and the new thought itself.
In this way, a new thought may be spreading from the United States, emphasizing the roles
of Big Government to enhance strategic state initiatives to beef up energy security, realize
decarbonization, vitalize innovations and secure a stable supply of important materials andtechnologies through domestic or allied supply chains. If the new thought spreads globally, it mayexert great influence on future energy policies, as did the Washington Consensus. If such initiative
becomes excessive or develops into extreme nationalism, however, the world may have to pay
higher costs, with alliances being shaken, exerting negative impacts on global stability andprosperity. We will have to check how China and Russia—confronting the United States—U.S. allies
such as Japan and Europe, and the Global South will react to the New Washington Consensus andwhat influence the new thought will exert on the world.
Contact: report@tky.ieej.or.jp
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