Economic models: is there an alternative to neoliberalism?
David Woodward, nef (the new economics foundation)
(Note for the Development and Environment Group, March 2007\0
Global Growth and Poverty
An estimated 40% of the world population are below the “$2-a-day” poverty line, and one
in six below the “$1-a-day” line. It is conservatively estimated that low income levels
materially affect life expectancy below about $3-4 per day, the effect increasing
dramatically as income declines1, and typical infant mortality rates at the “$1-a-day” are
between one in six and one in six2.
The current model of economic development relies on global economic growth to reduce
poverty. However, global growth remains far below the levels achieved between 1945
and 1970; and the share of growth going to poor households is minimal, and has fallen
dramatically even since the “lost decade for development” of the 1980s. The share of
households below the “$1-a-day” line, in particular, is estimated to be barely half their
share in global income, and barely one-quarter of what it was during the 1980s.3
As a result, the rate of poverty reduction (based on the “$1-a-day” line poverty line) has
slowed dramatically, from 1.4 percentage points per year in 1981-90, slowing to 0.9
points per year in 1990-96 and just 0.4 points per year in 1996-2003 (Figure 1)4. At the
same time, the narrowing of the average income shortfall of households below the “$1-aday” line slowed from 1.9% pa in 1981-90, to 0.5% pa in 1990-96, and to zero in 19962001 (Figure 2)5.
The result is that poverty was 50% higher in 2001 than it would have been had the rate of
reduction in the 1980s been sustained (Figure 3). If global growth and the share of poor
households in the proceeds of growth (relative to their share in income) were to continue
indefinitely at their 1990-2001 rates, even in more than 550 million people (including
nearly a quarter of Sub-Saharan Africans) would remain below the “$1-a-day” line.
Moreover, these results almost certainly under-state the extent of the problem, because
analytical problems in the estimation and application of poverty lines mean that they both
under-state the extent and over-state the rate of reduction of poverty6.
1
Edward, Peter (2006) The ethical poverty line: a moral quantification of absolute poverty. Third World
Quarterly 27(2):377-393.
2
Based on the inter-quartile range of results in Ravallion, Martin (2003) “Child Health on a Dollar a Day:
some Tentative Cross-Country Comparisons”. Social Science and Medicine, 57(9):1529-38.
3
Woodward, David and Andrew Simms (2006) “Growth is Failing the Poor: the uneven distribution of
benefits and costs from economic growth. nef (the new economics foundation).
4
Using data from Chen, Shaohua and Martin Ravallion (2004) “How have the World’s Poorest Fared since
the Early 1980s”. Development Research Group, World Bank, Washington D.C., Table 2; and World Bank
(2006a) Global Economic Prospects, 2007: Managing the Next Wave of Globalization. Washington D.C.:
World Bank, Table 2.3
5
Using data from Chen and Ravallion (op. cit.), Table 5.
6
Reddy, Sanjay and Thomas Pogge (2002) “How Not to Count the Poor”. Columbia University, 1 May.
1
Fig. 1: Rate of Reduction in "$1-a-day" Poverty, 1981-2001
(actual data)
percentage points per year
2.0
1.5
1.0
0.5
0.0
1981-90
1990-96
1996-01
Fig. 2: Rate of Reduction in Average Income Shortfall below
"$1-a-day"
per cent per year
2.0
1.5
1.0
0.5
0.0
1981-90
1990-96
1996-01
Fig. 3: Proportion of Developing Countries' Population
below the "$1-a-day" Poverty Line, 1981-2001 (actual data)
50
30
actual
20
1980s
trend
10
2001
1996
1990
0
1981
per cent
40
2
This dramatic deterioration has occurred despite a considerable improvement in the
global economic environment, from a development perspective, and the increasing
application over most of this period of a neoliberal model of development whose
rationale has been precisely to promote economic growth and poverty reduction.
Global Growth and Climate Change
It is now generally recognized that climate change is reaching critical dimensions; that it
is a result of excessive concentrations of greenhouse gases, particularly carbon dioxide, in
the atmosphere; and that the increase in concentrations is at least largely a result of
anthropogenic emissions, primarily as a result of the direct and indirect effects of
production and consumption. Other things being equal (including the rate of technological
progress and trends in consumption patterns), a faster rate of global economic growth
would imply a faster rate of increase of such emissions, and thus a more rapid increase in
atmospheric concentrations, and an acceleration of climate change.
It is now generally accepted that a 60% reduction in carbon emissions from their 1990
level is required by 2050 merely to limit the increase in global temperatures to 2°C, which
would itself have potentially serious consequences, not least for poverty. However,
emissions have continued to increase, by a total of around 25% since 19907, implying a
need for a reduction of 68% (2.6% pa) between 2007 and 2050.
However, if the post-1990 trend in global economic growth were to continue, this would
increase global production and consumption by some 500% in real terms. This means that
global carbon emissions per (real) dollar of production and consumption would need to
fall by around 95% by 2050, equivalent to more than 6% per year, from their current
level.
The post-1990 rate of reduction carbon-intensity of production (1.5% pa) falls far short of
what is required to achieve this. If this rate of reduction were also to continue, global
carbon emissions would not fall by 68% by 2050, as required, but would increase by
195% over the same period, to more than nine times the target level. Achieving the
necessary reduction would require an immediate acceleration in the rate of reduction in
the carbon intensity of production of 4½% pa (from 1.5% pa to 6% pa), which would then
need to be sustained for the next 43 years. By comparison, the acceleration achieved
between the 1960s and the 1980s in response to the oil price shocks of the 1970s – a real
increase in world oil prices of 700%, which had a devastating impact on the global
economy – was just 1% pa over the course of two decades8. Any shortfall in the rate of
reduction in the early years would need to be off-set by a still faster reduction later.
Despite an extraordinary level of technological optimism, there is no evidence to suggest
that an acceleration of this order can be achieved. On the contrary, the rate of reduction in
Marland, Gregg, Bob Andres and Tom Boden (2006) “Global CO2 Emissions from Fossil-Fuel Burning,
Cement Manufacture, and Gas Flaring: 1751-2003”. Carbon Dioxide Information Analysis Center, Oak
Ridge, Tennessee, May 30. The figure of 25% is based on the extrapolation of the 1990-2003 trend to 2007.
8
Based on data from Marland et al (op. cit.).
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3
the carbon intensity of world GDP actually slowed marginally from 1.6% pa in the 1980s
to 1.5% pa in 1990-20039.
The Need for an Alternative
The above discussion suggests that our present (post-1990) trajectory, if maintained, will
result in a serious failure to meet MDG1, or to eradicate poverty even by 2050, while
rendering catastrophic and irreversible climate change inevitable long before then. Given
the prominence of poverty reduction and dealing with climate change on the global
agenda, this indicates a fundamental incompatibility between the current, neoliberal,
model of development on the one hand, and our major objectives on the other.
This suggests an urgent need for an alternative approach to development which is capable
of achieving both of these goals simultaneously. However, we have, for more than a
quarter of a century, been told repeatedly that “there is no alternative”. Of course, other
models of development have been pursued in the past – in fact, anything approximating
neoliberalism was virtually unknown until about 30 years ago. And some, at least, of
these other approaches have been much more successful in their time than neoliberalism
has been more recently.
However, the current context is, in important respects, different from the past – not least
in the challenges it presents. The question, therefore, is to what extent alternative models
of development can meet the present challenges in the present context; and, if they
cannot, what other options might be available which could do so more effectively.
Economic Models: a Typology
Widely adopted economic models in the post-1945 period can be broadly divided
between six broad types:
 central planning (eg the Former Soviet Union), characterised by state ownership of
the means of production, and economic decision-making by government and public
sector agencies;
 state capitalism (eg the Former Yugoslavia), characterised by the domination of
production by large state enterprises operating on a quasi-commercial basis;
 import substituting industrialisation (eg Brazil), characterised by the use of import
restrictions to foster domestic production of industrial goods for the local market,
typically accompanied by other types of government intervention;
 the “East Asian” model (eg Korea), characterised by a substantial level of
government intervention in industrial policy, to “pick winners”, usually for domestic
consumption with “infant industry” protection initially, but subsequently for export,
often backed by temporary subsidies;
 neoliberalism (eg Hong Kong), characterised by the (relatively) free operation of
market forces and a limited role of the state, with a high level of openness to trade
and financial flows, and (in developing countries) reliance on foreign investment; and
Author’s estimates, based on data from World Bank, World Development Indicators Online, and Marland
et al (op. cit.).
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 the social market economy (eg Sweden), characterised by a market system with a
substantial level of regulation, relatively high taxes and strong social provision.
The Road to “No Alternative”
Central planning is generally recognised as having been a failure, and effectively came
to an end with the fall of the Soviet Union – although the subsequent “economic
transition” in many formerly centrally planned economies has imposed considerable
economic and social costs. State capitalism, though less conspicuously unsuccessful has
suffered a similar demise.
The end of import-substituting industrialisation (ISI) started earlier, following the
beginning of the debt crisis in 1982, but took much longer. The widespread perception
that it contributed to the debt crisis cast doubt upon its economic sustainability; and the
conditionality of IMF and World Bank programmes on broadly neoliberal policies, and
the establishment of the WTO in 1994 largely removed the ISI option.
While the East Asian model was conspicuously successful in terms of its economic and
social results, it too has been undermined by the 1997 financial crisis (temporarily), and
more lastingly by the conditions attached to the associated “rescue” packages and the
advent of the WTO.
The social market economy has also been eroded by the process of globalisation, but has
proved much stronger, primarily because it is characteristic primarily of developed
countries who have been better able, financially and politically, to protect their interests.
Realistically, more limited tax bases and external financial constraints characterising
place it beyond the means of most developing countries.
The result has been a perception, particularly since the 1990s that “there is no alternative”
to the neoliberal model (though with some evolution towards public health services and
education and social safety nets), with the option of a constrained form of social market
economy in developed countries.
The Failure of Neoliberalism
However, while the external constraints on policy space associated with globalisation
have indeed narrowed the options available, these are primarily a political construct
resulting from a succession of decisions taken through international fora. Even if
individual governments have no alternative, there are alternatives available to the
international community which would allow other policy choices – and a widespread
view (characterised as “anti-globalisation”) that such options should be pursued.
This view has been greatly encouraged by perceived failures of the neoliberal model,
particularly for the developing world. The adoption of the neoliberal model was
predicated on the perceived failure of more interventionist models to generate adequate
economic growth on a sustainable basis; and yet, as noted above, globalisation and
widespread adoption of broadly neoliberal policy reforms over the last 25 years have had
no impact in reversing the dramatic slowdown in the global economy in the 1970s; the
rate of poverty reduction has slowed dramatically since the 1980s, and the reduction in
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the depth of poverty has stopped entirely since 1996; and there has been a dramatic
slowdown (and in some countries a reversal) in the rate of improvement of life
expectancy and infant mortality; but at the same time, climate change poses a
fundamental challenge in terms of the environmental sustainability even of the current,
relatively slow rate of global growth.
The results of neoliberal policies have been disappointing in Latin America, and little
short of disastrous in Sub-Saharan Africa. By far the greatest economic success in the last
25 years has been in China, where the move towards neoliberalism has been relatively
limited, and elsewhere in East Asia, where it has come much later in the development
process than elsewhere.
Back to the Future?
The primary response to the failure of neoliberalism in developing countries has been
calls, explicitly or implicitly, for a return to ISI or the East Asian model – and even a
cursory glance at historical data suggests that economic and social progress was much
faster when they predominated. However, beyond the need for an enabling environment
at the international level, there are questions about the viability of either to deliver as a
generally applied model.
The East Asian model shares one of the key weaknesses of neoliberalism as a universal
model for development, namely its reliance on rapidly growing exports. While a
relatively small group of (relatively small) countries can grow simultaneously through
export growth, if the entire developing world does so simultaneously, the price effects on
world markets can make the process self-defeating (cf the contributory role of increasing
Chinese manufactured exports in precipitating the Asian financial crisis). The result
would be to increase production in the developing world, without this increase feeding
through into substantial (or potentially any) increases in incomes. The primary
beneficiaries would be consumers, primarily in the North, whose incomes would also
need to increase rapidly to sustain demand growth
The potential flaw of the ISI model – at least as applied in Latin America until the 1970s
– is more subtle, and social rather than economic. The model relied heavily on the
production of heavy industrial goods for the domestic market, substituting for imports.
However, such production was relatively capital intensive, limiting the number of jobs
created. At the same time, even as incomes increased, these goods were consumed
primarily by people in the upper part of the income distribution. As the substitution
process progressed, the system’s viability therefore became increasingly dependent on
increasing demand in this part of the population, creating economic and political pressure
for maintaining relatively high incomes rather than for poverty reduction. Coupled with a
very high initial level of inequality, these features arguably limited the potential for the
model’s success in generating economic growth to generate substantial poverty reduction.
Thus both models have shortcomings in terms of their reliance on rapidly increasing
output coupled with limitations in terms of their ability to translate this into increasing
incomes, at least in the lower part of the income distribution. In the past, this has not been
seen as a fundamental problem: if a limited share of the proceeds of growth went to
growth, it was assumed that this could be off-set by a faster overall rate of growth.
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However, climate change is making this increasingly questionable: binding carbon
constraints, coupled with the inadequate potential for technological change to reduce the
carbon intensity of global production, means that unlimited global growth is no longer an
option.
Thus neoliberalism has failed – almost as clearly as central planning and state capitalism
have failed, though in different ways; the social market economy is beyond the means of
most developing countries; and it is questionable whether either ISI or the East Asian
model is viable as a generally applied model in a carbon-constrained world.
Towards an Alternative: Poverty Eradication in a Carbon-Constrained World
This suggests an urgent need to develop a new alternative, designed to achieve the social
objectives of the 21st century – poverty reduction (and ultimately eradication) and health
and education for all – within our environmental constraints, particularly those imposed
by climate change.
With more than 75% of global GDP in developed countries, and 85% of the world’s
population in developing countries, any model which relies on exports and foreign capital
to increase incomes and eradicate poverty in the South will require rapid growth in the
North – that is, considerable further increases in the incomes and consumption of those
already far above any conceivable global poverty line. This is almost certainly
incompatible with prospective constraints on carbon emissions and feasible scenarios for
the carbon intensity of global production.
This suggests that an environmentally sustainable model will need to be focused
primarily on meeting local demand in developing countries using local resources. If
such a model is to be effective in reducing poverty, however, the shortcomings of the ISI
need to be addressed. This means moving away from reliance on large-scale capital
intensive industry employing a small and relatively prosperous urban sector producing
goods for a more prosperous middle class and elite, and towards production which is both
produced and consumed by poor households, primarily in small-scale agriculture, rural
and urban small and micro-enterprises and the urban informal sector, which are much
more labour-intensive (and generally less import-intensive).
In other words, what is needed is a model which seeks to expand supply by, and the
demand of, poor households in parallel. This could be fostered, for example, by income
generation schemes promoting the production of goods whose consumption will be
increased by poverty reduction (based on household surveys), using temporary import
tariffs if necessary. A kick-start could also be provided, for example by public works
schemes, cash transfers, skewing public procurement from micro-enterprise, etc.
In the long term, increased access to and quality of public health services and education
will also be essential, as will adequate infrastructure and public sector administrative
capacity. This indicates an urgent need to strengthen public revenues, particularly in
low-income and Sub-Saharan countries.
While some aspects of such a model could be implemented in the global economy as it
currently operates, some aspects of it – notably tax competition, debt-service costs,
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constraints on trade policies under WTO Agreements, etc – would be potentially
problematic. Any model which focuses on benefiting poor households directly rather than
as a by-product of making the rich richer would also face serious political constraints,
both domestically and globally.
Conclusion
Nonetheless, if we are serious about poverty eradication and health and education for all,
but recognise the imperative of living within realistic carbon constraints, none of the
currently recognised models of development is likely to provide a viable option. The
reality of climate change means that we now live in a fundamentally different context,
which requires a fundamentally different approach to development.
We therefore need:
 to recognise that globalisation in its current form and the neoliberal model of
development have failed to deliver from an economic, social or environmental
perspective;
 to step back and undertake an objective assessment of the successes and failures of
alternative economic models in terms of social and environmental objectives;
 to seek to develop alternative economic models capable of delivering on social
objectives as a generally applied economic model in a carbon-constrained world; and
 to implement reforms to the global economic system, so that it will allow, foster and
support the implementation of such models.
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