* States show willingness to defy monetarist orthodoxy
* Investor tolerance could give way as policy risk rises
* Hungary a poster child for 'Beijing consensus'
By Sebastian Tong
LONDON, Dec 13 (Reuters) - Elements of China's all-controlling state capitalism have always been envied by developing economies keen to emulate its spectacular growth but its appeal is growing among embattled policymakers everywhere.
Whether Brazil's capital tax to discourage hot money flows or Hungary's unorthodox deficit-slashing plans, states are adopting policies that have less to do with the 'Washington consensus' espoused by the U.S. and the International Monetary Fund (IMF) and more in common with China's particular brand of state activism in the economy.
This so-called 'Beijing consensus' eschews liberal capitalism in return for the state's hold on the exchange rate and an ability to mobilise state-owned firms -- an alluring alternative for emerging economies trying to limit destabilising capital flows and currency appreciation that threatens to erode their competitive advantage.
The tide of cheap money arising from ultra-low interest rates in the developed world have also given policymakers leeway to flirt with free-market heterodoxy.
"The rule book has been thrown out the window. Because capital flows are so strong, there's a sense markets implicitly endorse more unorthodox economic policies," said Deutsche Bank emerging markets strategist John-Paul Smith.
BEIJING TO BUDAPEST
Hungary offers a stark example of how far some states have strayed from the free-market orthodoxy that has dominated much of the global economy since the end of the Cold War.
The European Union member has ruled out further IMF aid and defied conventional economic wisdom arguing for austerity by opting to grow its way out of a deficit with tax cuts, paid for in part by windfall taxes on banks.
A radical pensions overhaul, reminiscent of Argentina's nationalisation of its private pensions industry late 2008, will also see the state effectively seize 10 billion euros from private pensions.
Muted investor reaction reveals how far opinion has evolved.
While Moody's cut Hungary's credit rating by two notches to just above 'junk', the forint
Budapest last week managed to sell more local debt than planned and the cost of insuring the country's debt
Given the scale of fiscal pressures elsewhere, particularly in the euro zone, investors are braced for similar unorthodox moves albeit on a more modest scale.
Poland is seeking to reduce private pension contributions to rein in public debt and Ireland is raiding its national pension fund to help support its banks. [ID:nLDE6B50P8]
"Governments will become more inventive. You'll see measures to cut deficit and debt levels that you've never seen before," said Cheuvreux strategist Simon Quijano-Evans.
The financial meltdown triggered by the collapse of Lehman Brothers in 2008 immediately made investors keener on state involvement in the economy -- both to bail out the financial sector and try and revive growth from the fallout.
"There's an element of social contract; a recognition that the state may intervene in the economy for social stability," said Cambridge-based academic Stefan Halper.
"There's growing global acceptance of state capitalism. Venezuela and Chile are adapting portions of it. In Saudi Arabia and the UAE, public/private sector decision-making are blurred," said Halper, author of 'The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-First Century'.
PULLING LEVERS
The shift in thinking adds up to a reassessment of whether and to what extent governments can justifiably place barriers to capital, a central theme for markets and Group of 20 talks in recent months.
An IMF paper this year said capital controls could be part of a policy mix to cope with sudden capital surges while the G20 last month endorsed "carefully designed macro-prudential measures" for emerging economies coping with investment flows.
Instead of automatically triggering capital flight, recent capital controls adopted by economies from Brazil to Taiwan to slow foreign inflows have had limited effect, with investors willing to pay higher costs in their search for yield.
But a pullback in liquidity may hit markets where the state's encroachment into the economy has been most acute.
Deutsche's Smith says investors are increasingly aware of the risks of state involvement in the economy. This could be why China and Brazil stock markets underperformed relatively more open markets in Turkey and Thailand this year, he said.
And as politicians face increasing pressure to protect domestic jobs, the temptation is to resort to more unorthodox economic measures that may finally scare investors.
"Policy risk is getting larger...The more economic levers the authorities can pull, the greater the danger of them pulling the wrong one," said Nick Timberlake, Head of emerging equities at HBSC Global Asset Management. (Reporting by Sebastian Tong; editing by Patrick Graham)