It’s time to reject the Washington consensus

The G20 summit takes place this week in my home town of Seoul. The South Korea meeting has symbolic importance – the first time the world’s new top table has met outside countries of the G7, which the G20 replaced last year as the leading global body for policy co-ordination.

Now the initial crisis response is over, the G20 is looking for a mission. My fellow Koreans want that to be development, especially of the world’s poorest countries. But before welcoming this agenda, we need to ask what kind of development the G20 should promote.

An obvious place to look for inspiration is the recent history of the host country. In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible?

Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance.

The G7 was always remarkably reluctant to recommend these “heterodox” policies and insisted that the “Washington consensus” package of opening up, deregulation and privatisation was the right recipe for everyone. When confronted with the Korean case, Washington consensus supporters tried to brush it off as an exception. However, the history of take-offs in most of the G7 countries – especially Britain, the US, Germany, France and Japan – is far closer to the Korean model than is commonly thought. The “unorthodox” policies used by Korea and almost all of today’s rich countries need to be seriously considered in any discussion on development options.

Will things change with the launch of the G20 development agenda? An examination of the Korean government’s proposals suggests we can only muster cautious optimism. Korea today wants the G20 to focus on a lengthy shopping list of development issues: infrastructure; private investment and job creation; education; greater access to rich country markets by poor countries; more inclusive finance; building resilience to financial or weather shocks; food security; governance. That is a pretty good start. The Koreans reject the “one size fits all” approach of previous decades in favour of what they call a “dynamic iPhone model” – a set of development apps for every occasion, drawn from successful approaches in different countries.

But there are big holes too. Industrial policy is conspicuous by its absence. The Korean experience shows that sustainable export success over a long period of time, for which the country is justly famous, requires protection and nurturing of “infant industries” through selective industrial policy, rather than free trade and deregulation. And there is no mention of land reform and other measures for asset redistribution, which created social cohesion that made development in Korea sustainable.

Then there’s cash. True, the G7 agenda sometimes seemed to equate development with aid. However, the Korean proposals have gone too far in the other direction, making only passing mention of the importance of improving aid flows both in quality and quantity.

If these gaps can be addressed, the Seoul meeting could mark a watershed – the start of a new, realistic and historically literate approach to development, after decades of misguided market fundamentalism. Sure the G20 is a talking shop, but talking shops have a role – they confirm or challenge the “common sense” of the time. A Seoul consensus based on the history of my country could be both fairer and more effective than the Washington variety that has lost its intellectual and pragmatic credibility.