Select Committee on Environmental Audit Minutes of Evidence


Memorandum from nef (the new economics foundation)

SUMMARY

  We believe that DFID could be contributing to an unnecessary conflict between dealing with climate change and eradicating poverty, by promoting a paradigm of development which increases the dependency of developing countries on unsustainable growth in developed countries. The period since 1981, which marks the shift to the current paradigm of development, has been characterised by a dramatic and accelerating slowdown in the rate of poverty reduction, as social objectives have been sacrificed to achieve faster growth, which has failed to materialise.

  Just 60 cents of each $100 of per capita growth went to the poor in 1990-2001, 73% less than in 1981-90. This means that $166 of additional production and consumption, with all the associated greenhouse gas emissions, are required to achieve each $1 of poverty reduction. As a result, current global growth rates which, to tackle climate change, will require at least a tripling of the rate of reduction in the carbon intensity of production, are set to leave 550 million people below the "$1-a-day" line even in 2050.

  nef believes that the only way to reconcile poverty eradication with our carbon constraints is to shift from reliance on the "trickle-down" from global growth to a greater emphasis on the distribution of income at the global level. This will mean focusing policies directly on social and environmental objectives, and redesigning the global economic architecture to permit, foster and support such policies.

DFID, CLIMATE CHANGE AND DEVELOPMENT

  DFID's response to environmental concerns appears to be limited to national-level environmental policies and programmes in developing countries (DFID, 2006). This implicitly assumes that environmental problems arise within countries, as a result of domestic policy and institutional failures. Climate change, however, differs fundamentally from this paradigm. While it impacts primarily on the poorest people and the poorest countries, it arises globally, primarily from economic activity in developed countries, and has its roots in the global economic system.

  While DFID's potential role in direct action to limit climate change is thus limited, it plays a critical indirect role through its influence on development policies. Here, DFID's role is seriously counterproductive, not only defending but actively promoting the current growth-focused, outward-oriented model of development. In his recent article "Growth Is Good" (Benn, 2006), for example, Hilary Benn wrote that "Economic growth is needed to achieve the goal of making poverty history . . . . Without growth we will have little if any long-term development", and asserted that "poor countries must trade more and receive more foreign investment"—reflecting the view embodied in DFID's 2000 White Paper (DFID, 2000).

  In reality, however, the growth-focused model of development creates an artificial and unnecessary tension between poverty reduction and dealing with climate change, and actually makes the eradication of poverty—by any reasonable definition and in any reasonable timeframe—impossible, because the scale of growth required to eradicate poverty is incompatible with constraints on carbon emissions in any realistic scenario for the reduction of the carbon intensity of global production; and breaching these constraints will have a serious adverse effect on poverty reduction.

GLOBAL GROWTH: THE SOLUTION OR THE PROBLEM?

  The rate of poverty reduction, based on the "$1-a-day" line, has slowed down dramatically over the last 25 years, from 1.4% pa in 1981-90 to 0.9% pa in 1990-96 and 0.3% pa in 1996-2001. (See Figure 1; based on Chen and Ravallion, 2004, Table 3). This compares with an annual reduction required to meet MDG1 of 0.6% pa. At the same time, the narrowing of the average income shortfall of households below the "$1-a-day" line slowed from 1.9% pa in 1981-90, to 0.5% pa in 1990-96, and to zero in 1996-2001. (See Figure 2; based on Chen and Ravallion, 2004, Table 5).




  That poverty reduction in 1996-2001 should be only one-quarter of what it was in the 1980s—the "lost decade for development"—is a major danger signal, indicating that the current economic model is failing to reduce poverty significantly. More than two-thirds (nearly 450 million) more people were below the "$1-a-day" line in 2001 than if the 1980s rate of poverty reduction had been sustained. (See Figure 3; based on Chen and Ravallion, 2004, Table 3.)

  This dramatic deterioration in progress in poverty reduction even since the 1980s can be seen as a product of two factors. First, even before the post-2001 slowdown, the growth rate of the global economy fell between the 1980s and 1990s (having already fallen dramatically in the 1970s, and further in the 1980s). (See Figure 5, based on data from World Bank, 2006.) Second, and more importantly, the share of the "$1-a-day" poor in the proceeds of growth also fell dramatically between the 1980s and the 1990s, both absolutely (by three-quarters) and relative to their share in income (by three-fifths). (See Figure 6, based on Woodward and Simms, 2006, Table 4.)


  In other words, global growth has both slowed and become strongly anti-poor, resulting in a dramatic slowdown in poverty reduction to barely half the rate required to achieve MDG1. We have sacrificed measures aimed directly at social objectives such as distributional equity, poverty reduction, social provision, health and education, in order to achieve faster global growth; but that growth has not materialised, leaving the poor with the worst of both worlds—a rapidly declining share of an ever slower rate of growth.

  Despite slowing, however, global growth has still pushed economic activity beyond the Earth's environmental carrying capacity. This issue is reaching critical dimensions in terms of carbon emissions and climate change. Despite technological optimism bordering on the Panglossian, there is no sign of the fossil fuel intensity of production and consumption declining fast enough to off-set our current growth rate, let alone to achieve the minimum 60% reduction in global carbon emissions required by 2050 to avoid irreversible climate change.

  If global growth and the share of the poor in the proceeds of growth (relative to their share in income were to continue indefinitely at their post-1990 rates, MDG1 would be missed by a substantial margin, 20% (177 million) more people remaining below the "$1-a-day" line than if the target were achieved.

  Even in 2050, more than 550 million people[1] (including nearly a quarter of Africans) would remain below the "$1-a-day" line. And, if the post-1990 rate of change of the carbon-intensity of production were also to continue, global carbon emissions would not fall by 60% by 2050, as required, but would increase by 60% over the same period. Achieving the 60% reduction in carbon emissions necessary to avert irreversible climate change would require us to triple the rate of reduction in carbon use per $1 of GDP, from 1.5% pa[2] to 4.5% pa.

  In other words, our present (post-1990) trajectory, if maintained, will result in a simultaneous failure to meet MDG1, to eradicate poverty even by 2050, or to avoid catastrophic and irreversible climate change.

  This problem would become considerably more acute if one were to consider a poverty line consistent with a tenable interpretation of human rights standards, such as the right to child survival established under the UN Convention on the Rights of the Child. Households living at the "$1-a-day" line are estimated to have a typical child mortality rate in the order of one in six to one in 12, compared with one in 140 for the population of developed countries, and in at least one case (Niger) more than one in three, while a third to half of surviving children at this income level are stunted (Woodward and Simms, 2006, based on Wagstaff, 2003, Table 2). Edward (2006), for example, proposes an "ethical poverty line", based on life expectancy, between $2.70 and $3.90 per day at purchasing power parity.

WHAT NEEDS TO BE DONE?

  This is a fundamental problem, and simply throwing the global economy into reverse gear is not a solution. Through their dominant role in international economic organisations—not merely the IMF and World Bank, where they have a majority of the votes, but also the GATT (Watkins, 1992) and WTO (Jawara and Kwa, 2004)—the governments of the developed countries have for the last quarter century increasingly used their overwhelming political and economic dominance to create an ever greater dependency of developing countries on economic growth in the North. To end this growth without relieving this dependency would therefore be little short of disastrous in terms of its human impact.

  Rectifying the situation therefore needs to be a phased process, beginning with a deliberate process of rolling back the dependency which has thus been created. This will, of course, limit the acceleration of progress which can be made towards tackling climate change, which in turn means both that the end-point of this process will need to be more ambitious, and that the roll-back of dependency needs to be begun and to proceed as quickly as possible.

  The first step is to stop pressure on developing countries to open their economies further ("no forced liberalisation", a key demand of the make Poverty History campaign), whether through PRSPs, WTO Agreements or bilateral trade and investment agreements. This would require, inter alia, changes in the advice given by IMF and World Bank staff in relation to PRSPs; a major revision of the PRSP "Sourcebook" (Klugman (ed), 2002); suspension of developing countries' obligations under the WTO Agreements (restoring their discretion over their trade and other policies), further negotiations on trade in services under the GATS Agreement, and negotiations on bilateral trade and investment agreements; and replacing the Doha Round WTO negotiations with a process directed to the reorientation of trade rules and policies in line with the moral imperative of poverty eradication and the urgent practical necessity of tackling climate change.

  Beyond this, there is a need for a fundamental review of the current outward-oriented model of development, which depends disproportionately on foreign capital for investment and the global market for demand. After 25 years, it is apparent that this has failed the great majority of developing countries, particularly in terms of poverty reduction—still more clearly than the import-substituting industrialisation of the 1960s and 1970s, whose failure was the rationale for the present model.

  The imposition of a global economic model driven by neo-liberal ideology and commercial interests, and its continuation long after it has clearly failed to serve the interests of the majority of the world's population, is largely a result of an abject failure in the system of global economic governance. The decision-making structures of the IMF and the World Bank give the majority of votes (and the de facto right to appoint the heads of both institutions) to the developed country governments on matters whose impact is felt overwhelmingly by the five-sixths of the world's population who live in developing countries. These structures date back to the foundation of these institutions during the colonial era, when their role was also directed primarily to the developed countries.

  While the WTO's constitution is, in principle, more democratic, the real locus of decision-making lies place outside this process, in unofficial "green room" and "Mini-Ministerial" meetings, which are consistently used by developed country governments to abuse their political and economic power, and in "confessional" processes which contravene basic principles of democracy, transparency and accountability.

  An alternative model should learn from the failings both of the current neo-liberal/outward-oriented model and the interventionist/import-substituting industrialisation model. It should focus on:

    —  measures aimed directly at increasing the real incomes of poor households (eg, income generation, agricultural extension, employment generation, "self-targeting" subsidies)—rather than reliance on "trickle-down", either at the national level, as in the ISI model, or at the global level, as in the neo-liberal model;

    —  expanding supply and demand in parallel, at the local, national and regional levels, encouraging production of the goods whose demand will be increased by poverty reduction, and fostering forward and backward linkages in production—rather than relying on the global market as a bottomless pit into which unlimited supplies of a relatively narrow range of commodities can be supplied, or developing industries which depend critically on imported inputs, and on increasing incomes at the top of distribution for demand;

    —  strengthening the government revenue base and harnessing and retaining local resources for investment—rather than removing constraints on capital flight, tolerating tax avoidance, promoting tax competition, and relying on untenably high rates of return to attract and retain private capital in the face of economic and political instability, and on an inadequate, vulnerable and insecure supply of official capital;

    —  supporting and promoting the provision of universal public health services and education, free at the point of delivery, rather than encouraging "cost recovery" and parallel commercial markets;

    —  developing a collaborative model of the global economy, rather than a competitive model in which the success of some economies comes at the expense of, and arguably depends on, the failure of others;

    —  increasing North-South transfers financed by a system of global taxation, with greater pooling and automaticity, rather than dependence on a discretionary system which results in chronic shortfalls (eg, from the 0.7% commitment made in 1970) while perpetuating neocolonial control of developing countries through direct and indirect policy conditionality and the entrenchment of dependency and clientelistic North-South relations; and

    —  fundamental reform of the anachronistic institutional framework of the system of global economic governance, to allow collective decision-making in the collective long-term interest, through mechanisms consistent with standards of democracy, accountability and transparency which would be considered appropriate at the national level.

WHAT SHOULD DFID DO?

  DFID should

    —  stop promoting the current outward-oriented neo-liberal approach to development;

    —  actively investigate possible changes its existing aid programme and its procedures to promote the country-level approaches proposed above, for example:

    —  increasing local and regional procurement;

    —  using local economy multipliers in project design and appraisal;

    —  designing income generation programmes to meet the additional demand they create by increasing incomes; and

    —  shifting support from exports to the production of basic goods for local consumption);

    —  seek an urgent and objective review of the Doha Round WTO negotiations in terms of their consistency with global needs for poverty reduction and the reduction of carbon emissions, and a suspension of developing countries' obligations under existing WTO Agreements and of negotiations offers and requests under the GATS Agreements;

    —  investigate the consistency of policies promulgated by other UK government departments (eg on immigration and domestic energy policies) with the needs of developing countries and the global environment, and press for changes where necessary;

    —  develop a strategy, in collaboration with civil society organisations, to promote a shift of the global economic system in the directions outlined above;

    —  use its disproportionate power and influence within the international system to push strongly and proactively for:

    —  a fundamental reform of the system of global economic governance;

    —  changes in the policies, programmes and operations of the international financial institutions; and

    —  a comprehensive renegotiation of the existing WTO Agreements, through genuinely democratic processes, to prioritise social and environmental objectives.

March 2006

REFERENCES

  Benn (2006) "Growth Is Good". http://www.guardian.co.uk/comment/story/0,,1705954,00.html

  Chen. Shaohua and Martin Ravallion (2004) "How have the World's Poorest Fared since the Early 1980s?" World Bank Research Observer 19(2):141-169.

  DFID (2000) "Eliminating World Poverty: Making Globalisation Work for the Poor—White Paper on International Development". Department for International Development, London, December.

http://www.dfid.gov.uk/pubs/files/whitepaper2000.pdf

  DFID (2006) "DFID's Approach to the Environment". Department for International Development, London, February. http://www.dfid.gov.uk/pubs/files/approach-environment.pdf

  Edward, Peter (2006) "The Ethical Poverty Line: a Moral Quantification of Absolute Poverty". Third World Quarterly 27(2):377-393.

  Jawara, Fatoumata and Aileen Kwa (2004) Behind the Scenes at the WTO: the Real World of International Trade Negotiations—Lessons from Cancun. London: Zed Books.

  Klugman, Jeni (ed) (2002) A Sourcebook for Poverty Reduction Strategies. Washington DC: World Bank.

  Marland, Gregg and Tom Boden (2005) Global CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring: 1751-2002. Carbon Dioxide Information Analysis Center (CDIAC), Oak Ridge, Tennessee. http://cdiac.esd.ornl.gov/ftp/ndp030/global.1751_2002.ems

  Wagstaff, Adam (2003) "Child Health on a Dollar a Day: Some Tentative Cross-Country Comparisons". Social Science and Medicine 57:1529-1538.

  Watkins, Kevin (1992) Fixing the Rules: North-South Issues in International Trade and the GATT Uruguay Round. London: Catholic Institute for International Relations.

  Woodward, David and Andrew Simms (2006) Growth Isn't Working: the Unequal Distribution of benefits and Costs from Economic Growth. Rethinking Poverty, No 1, nef (the New Economics Foundation), London. http://www.neweconomics.org/gen/z_sys_publicationdetail.aspx?pid=219

  World Bank (2006) World Development Indicators Online. www.worldbank.org







1   Based on extrapolation of the World Bank's forecast population growth rate for developing countries (1.2% pa). Back

2   Estimated from World Bank (2006) and Marland and Boden (2005). Back


 
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