Balance of payments implications of global decarbonisation

On the first point, Marglin appears to support the principle otherwise known as ‘contraction and convergence’ (Reference MeyerMeyer, 2000). This principle means that the socially just way of addressing carbon emissions at a global level is to allow per capita emissions to rise in poorer countries for a certain period of time in order to provide them the space to develop towards a convergence with contracting levels of per capita emissions in richer countries. After convergence, all continue to contract at equal levels of per capita emissions. Convergence thereby occurs in a manner that is not, in the words of Marglin, ‘a license for the South to replicate the wasteful disregard for ecosystem boundaries that has characterized growth in the North’ (p. 149).

This principle is based on the understanding that development and poverty reduction in poorer countries will necessarily require rising levels of material consumption. (It has become a truism that poverty is not simply about incomes and material consumption, although a large part of it is, especially in poorer countries that still contend with relatively high levels of ‘absolute’ poverty and malnutrition.) Rising per capita incomes and consumption imply rising labour productivity, however measured (or, shall we say, rising labour value-added, with a portion of the increase going to labour through wage increases). Given existing technologies and techniques of production, rising productivity implies more carbon emissions and other forms of pollution. Even improvements in the efficiency of technologies and techniques of production would generally constitute relatively marginal offsets to the much greater increases in productivity required for the scale of material consumption in poor countries to reach levels that might be deemed as socially just.

Even if we accept that such increases in consumption cannot simply happen through transfers of Northern wealth to the South, some degree of redistribution will nonetheless be required in order to achieve the alternative of raising Southern (value-added) productivity. This is especially true if rising productivity is to take place through more efficient technologies and techniques of production that maximise the potential to reduce the carbon emitting effects of growth. The logic is the same as with the foreign exchange constraints faced by late industrialising countries, as articulated by some of the seminal pioneers of development economics in the immediate post-Second World War era, particularly those who associated themselves with a structuralist theoretical position.^{Footnote 1}

According to this logic, developing countries attempting to ‘catch up’ to the industrially advanced countries face structural foreign exchange constraints because such late industrialisation is so import-intensive and import-dependent, especially in the face of increasingly large technological gaps and an increasing dominance of large oligopolistic transnational corporations based in the advanced countries. In other words, industrial and urban growth (when the latter occurs through the extension of modern urban infrastructure rather than slums) involves capital-intensive technological requirements, which for most developing countries are supplied by industrially advanced countries, including the foreign exchange to finance these imports. These requirements are also largely inelastic, in that they are based on the technological and input characteristics of production (and consumption). Hence, the requirements are ‘structural’ and cannot be overcome through either market clearing prices or macroeconomic demand management, both of which might even exacerbate the problem. Moreover, such dependence intensifies the more a country is a latecomer, given increasing lags from the technological frontier, or else the more a country is late in demographic transition, which generally results in more rapid population growth and subsequent urban growth. The more critical structuralists also further emphasised that the entrenched, peripheral and subordinate integration of most poor countries into the world economy accentuates these constraints by exacerbating terms of trade declines or outflows of wealth at the expense of import capacity.^{Footnote 2}

Countries attempting late industrialisation therefore have a chronic tendency to run trade deficits. When supplies of foreign financing dry up, they then have a tendency to experience balance of payments crises, such as with the swath of currency crises that occurred in many so-called emerging economies in 2013 and 2014, merely on the suspicion (or slight gesture) of tapering by the US Federal Reserve. Alternatively, if these countries run trade surpluses, they often do so through import austerity, as was the case in the immediate aftermath of the Latin American debt crisis in the early 1980s.^{Footnote 3} The option of using trade surpluses rather than deficits to drive rapid industrialisation (through augmented external demand rather than net financial inflows)^{Footnote 4} has been a relatively new phenomenon among developing countries and is part of the China puzzle to this question. However, even in the case of China, we must be cautious with the presumption that a solution has been found to this dilemma of peripheral late industrialisation, rather than certain problems being transformed into others.^{Footnote 5} It is also questionable whether other countries would be able to repeat the same strategies now.

This understanding of foreign exchange constraints is historically informed. The experience of the Marshall Plan in the post-war reconstruction of Europe epitomised the constraint, although it was related to reconstruction rather than to development per se. Nonetheless, the Marshall Plan was instituted in 1947 following severe balance of payment problems in Europe and the risk that Europe would fall anew in financial crisis, as in the 1920s and 1930s. The root cause was that reconstruction was hugely import-intensive, especially for capital-intensive inputs from the USA. The experience of South Korea provides for a more developmental example: despite being known as an export-oriented success story, the country had in fact run very large trade deficits right up until the 1980s, and it was able to do so because of a generous supply of aid, followed by a generous supply of preferential loans. This example (along with that of Taiwan) obviously involved heavy doses of geopolitics, although this point should not detract from the importance of the principle that international redistribution strategically supported the broader development strategies of these countries.

Such a perspective is vital to the question of reducing the carbon intensity of growth in developing countries because the logic is the same. The needs of newly constructing (or reconstructing) the capital infrastructure of developing countries in a manner that could maximise the potential for efficiency gains in energy inputs and carbon and other polluting outputs follows more or less the same logic as with late industrialisation. The technologies (and the knowledge of techniques of production) involved are predominantly owned and/or controlled in Northern economies (with some exceptions such as with the impressive development of the photovoltaic industry in China). Hence, a path of ‘catching up’ to these technologies, or else simply adopting them without producing them, would have a structural tendency of being very import intensive, and hence of requiring external financing to sustain such investments in building a ‘new economy’ in the peripheries (as opposed to ‘central’ Northern economies, where much of this can be sourced and financed domestically). Moreover, the extra resources would have to be in addition to existing foreign exchange needs, rather than substituting for them and thereby causing austerity in other dimensions.

Reversing regressive flows in the global economy

A social justice approach to sustainable development must also embrace North–South redistribution because the global political economy is already skewed against redistribution towards the South. Indeed, a fundamental problem with the focus on productivity is the assumption that wages in sectors of physical production are somehow related to labour productivity, which in turn can be measured in non-problematic real terms despite the reliance on value-added data. (Value-added data include wages; hence, the suggestion that productivity measures based on value-added data can predict wages amounts to a tautology; see Reference Felipe and McCombieFelipe and McCombie, 2001, Reference Felipe and McCombie2013; Reference FischerFischer, 2011.)

This was precisely the problem that Arthur Lewis addressed in his classic (and often poorly regurgitated) contribution to development economics on growth with unlimited supplies of labour, regarding the question of ‘why tropical produce is so cheap’. He pointed out that the rate of productivity growth in the sugar industry was unparalleled at the time by any other major industry in the world, and certainly not by the wheat industry, and yet wages in the sugar industry only provided a bare subsistence living standard, whereas those in the wheat industry were among the highest in the world (Reference LewisLewis, 1954: 442). He argued that because wages are set in what he called ‘subsistence sectors’ rather than in capitalist export sectors, the benefits of increasing productivity in the latter accrue chiefly to the (Northern) importers of these exports by way of lower prices. The implication of his argument, which is now usually overlooked in deference to a caricature of his theory of growth, is that wages do not reflect productivity, even in physical production, and that increasing productivity in physical production will not necessarily result in rising wages, at least not under the conditions of an open and poor economy with substantial supplies of labour available to work at given wages in the so-called capitalist sectors.

Later in his life, Reference LewisLewis (1978: 36) similarly predicted that even as developing countries would move into manufacturing exports, these new exports would function in a manner similar to their previous agricultural export commodities. Increasing productivity would simply reduce the prices of such manufacturing exports, and thereby continue to result in declining terms of trade. If we are to believe the evidence regularly presented by United Nations Conference on Trade and Development (UNCTAD),^{Footnote 6} for instance, this prediction appears to have borne true in the three decades since Lewis’ prediction, at least for the huge increase in Southern manufacturing exports that are integrated into international production networks dominated by transnational corporations. Certain countries such as China have been able to amass substantial value-added in such networks through scale rather than mark-up, which is a consideration that needs to be integrated into Marglin’s advice to move investment away from capacity expansion.

The increasing transnationalisation of production and distribution in the post-war era makes this issue especially pertinent (although it was also very pertinent during the colonial era for similar reasons). Under such circumstances, the value-added and the appearance of productivity of Southern producers integrated into international networks can be undermined by the wide variety of channels of siphoning profits from Southern subsidiaries (often via various offshore financial centres) to the headquarters of transnational corporations located overwhelmingly in the North and that increasingly control the most lucrative flows of value in the global economy. For instance, transnational corporations commonly engage in transfer pricing and equivalent practices as means of transmitting profits from Southern subsidiaries to headquarters.^{Footnote 7} As a result of these practices that have become standard and pervasive in international accountancy, the subsidiary appears less productive and the head office appears more productive (insofar as productivity is measured in value-added terms), even though most of the activities of the headquarters are in services, not in comparable physical production. Ironically, the actual producers of goods – who are increasingly located in the Global South – might well be accused of being inefficient (in value-added terms) and in need of extra structural adjusting. Yet, such apparent inefficiency is at least partly the outcome of these accountancy practices, and the producers might otherwise be working very diligently and investing in a whole myriad of ways in order to keep up with the competition. Indeed, Southern producers involved in such networks might also be accused of becoming more carbon profligate, in part because the suppressed value-added equates to higher carbon emissions per unit of value-added (produced in large part for Northern consumption).^{Footnote 8}

These issues also highlight the importance of ownership and/or control over processes of value circulation in monetary economies, and the insidious siphoning of wealth that usually results from a dominance of foreign ownership in the peripheral economies of the Global South. Effective outflows of wealth, whether through licit or illicit capital flows,^{Footnote 9} or else through subtle processes such as transfer pricing, undermine the resources available in these economies that could otherwise contribute towards objectives such as enhancing employment generation and providing comprehensive social policies, let alone investing in more carbon efficient capital infrastructure. In particular, because siphoned resources are in foreign exchange, they also undermine import capacity, as discussed in the first point above.

Raising productivity in the Global South is obviously an important component of poverty alleviation and inequality reduction, particularly if the resulting wealth is used in ways that genuinely improve well-being among the poor. For instance, small-scale farmers would benefit from raising their output on both their existing plots of land and, ideally, on enlarged land holdings (which, by implication, would require land reform), at least so long as the costs of increasing their output would not exceed the benefits. However, such self-evident examples are often used to simplify and legitimise the more generalised patterns of inequality in our world today, which are much more obscure in terms of a direct connection between effort or output and poverty.

The underlying fallacy is important to recognise within the discussion of decarbonising the global economy because conventional measures of productivity are, at least in part, the outcome of integrating and subordinating Southern labour and producers into international networks, rather than a starting point from which we must then weigh the costs and benefits of allowing them to become ‘more productive’. Indeed, a risk in climate negotiations is that they lock in the subordination that has already occurred, rather than seeking ways for Southern producers to leverage more value for the output and carbon emissions they are already producing. Redistribution needs to play a central role in the latter option by serving as an important corrective to the already skewed nature of current global flows of value and wealth.

The redistributive imperative of population and labour transitions

Global population transitions, occurring largely in the South, reinforce this redistributive imperative. The reason is not derived from a neo-Malthusian vision of rapidly growing Southern populations stressing planetary boundaries. Rather, redistribution arguably becomes increasingly important the more that Southern populations urbanise and seek employment in the tertiary (service) sector. Within this sector, notions of productivity become vague because of the absence of physical output, and value-added is largely determined by distributive and redistributive dynamics within local, regional and global political economies.^{Footnote 10}

The conventional focus on population in debates about sustainability is usually on rapid population growth (rapid from a historical perspective). In this respect, according to 2012 revision of the United Nations World Population Prospects, the world’s population reached 7billion in early 2012, with about 80million people being added to this total annually (United Nations, 2013). Given that fertility and birth rates have been declining worldwide, this annual addition is also declining, although according to the median variant estimate of the 2012 revision, total world population is projected to be still growing by 10million people a year by 2100, when it will have reached almost 10.9billion people. More proximately, an estimated 2.5billion people will be added to the world’s population by 2050. Even according to the low fertility variant, whereby total fertility rates around the world fall much faster than expected (which is possible), world population is estimated to peak at 8.34billion by 2050, or an addition of about 1.3billion people to our present numbers. In other words, the bulk of this global population increase is more or less guaranteed by population momentum even if the higher fertility regions of the world quickly move to replacement levels of fertility (i.e. two children per women on average). Notably, close to the totality of this increase is destined to take place in the Global South, with the bulk occurring in the poorest of these countries, particularly in Sub-Saharan Africa and South and Central Asia.

Without falling into alarmist Malthusian or neo-Malthusian narratives regarding the ecological consequences of such rapid population growth, the development challenges are nonetheless monumental in terms of the need for employment creation in poor countries with few resources to finance capital deepening of even existing employed people. For instance, Uganda had an estimated population of 5.2million people in 1950 and almost 34million people by 2010. According to the median variant (which assumes that Ugandan women will reduce their fertility by about half), its population is estimated to reach 104million by 2050, a population larger than every European country by that time besides Russia. Moreover, the rate of increase in the working age population will be even faster given declining fertility. This being said, the population density of Uganda in 2010 was significantly less than that of Germany, and even in 2050 it will be significantly less than that of the Netherlands (according to the medium variant), so whether Uganda should be considered as ‘overpopulated’ is open to debate. The main issue is one of economic resources to finance employment creation, not population density per se. Nonetheless, the speed of change is remarkable, with multiplying rates far higher than was ever experienced by Northern countries during their own phases of rapid population growth in the 19th and early 20th centuries.

The potential for agriculture to productively absorb such increases in the labour force is negligible. If anything, agriculture needs to shed labour if agricultural (labour) productivity is to increase, as many argue needs to happen in these countries. Rather, the bulk of the increase in employment will most certainly need to occur in the secondary sector (manufacturing, mining and construction) or in the tertiary sector (services, broadly speaking). And even then, in the best of scenarios, rapidly growing Southern populations would need an outlet of international emigration. After all, during Europe’s phase of rapid population growth, as much as 20% of its population increase emigrated to Europe’s temperate colonial offshoots, which had been murderously cleansed for the purpose. Emigration from developing countries today accounts for a far lesser share of their population increase than in these earlier European cases, yet these countries today face a far greater need for emigration due to more rapid growth pressures (a result of rapid reductions in mortality since the 1950s), and with far fewer resources to face the employment challenges of population increase at home.

In the absence of a substantial outlet for migration, these countries face a particular employment predicament in the contemporary context. Given the capital intensity and hence the low degree of employment creation relative to output that is offered by contemporary manufacturing, the bulk of employment generation will need to occur in services, largely in urban areas. In other words, the burden placed on the tertiary sector to absorb rapidly increasing labour forces is relatively greater in countries attempting to industrialise now than in past cases of industrialisation, and this burden is compounded by faster rates of population growth than in past cases.

Service sectors do not, however, ‘produce’ value in a tangible sense. Instead, they circulate the value derived from tangible production. Hence, a key development question is how to channel the wealth generated by rising productivity in the primary and secondary sectors of poorer developing countries into the tertiary sector of employment, rather than allowing it to be siphoned out of these economies as discussed above. Strong redistributive measures are needed to guarantee that a substantial portion of the wealth generated by enclave manufacturing or mining is circulated through the rest of the domestic economy, in order to boost aggregate demand and employment. ‘Success’ might be deemed as avoiding a situation in which the bulk of transitioning labour ends up in insecure informal employment, as has occurred in much of Latin America where labour forces are both highly urbanised and informalised. The success in avoiding this outcome in East Asia was not the result of labour market flexibilisation and other orthodox approaches to employment policy. Rather, higher priority was given to measures that enhanced livelihood or employment security through the course of labour transitions – starting from land reform at the source of emigrations in the early 1950s – so as to avoid excessive social dislocation and unrest, among other concerns. Redistribution in various forms has been central in these strategies.^{Footnote 11}

Indeed, this redistributive principle draws from earlier European cases of industrialisation. As detailed in the seminal work on late industrialisation by Reference GerschenkronAlexander Gerschenkron (1962), classic late industrialisers (Germany, Russia and Japan) typically moved towards more universalistic forms of social policy and related redistributive public policies at earlier stages of industrialisation than earlier industrialisers such as the UK, if not earlier in actual historical time. Moreover, these policy initiatives were central components of their successful late industrialisation strategies, alongside their ability to leapfrog in technological progress through the adoption and adaptation of more advanced technologies from industrial leaders (education was obviously key for the capability to do this). The instituting of universalistic social policy (in combination with other redistributive policies and factors such as out-migration from Europe and inflows of colonial wealth) was arguably a key contingency that allowed for the formalisation of transitioning labour forces, in addition to rising wages and non-wage standards of employment (including gender standards).

In this sense, we might state a Gershenkronian redistributive principle that the later the industrialiser and the greater the catch-up required, the greater the imperative to pre-empt and support industrialisation with strong redistributive mechanisms, including the universalisation of social policy as a central component. We might also add a corollary that this redistributive imperative becomes even greater, the later (and faster) the demographic transition. This is because later (and generally faster) transitions result in faster increases in the labour force (in absolute terms and as a proportion of the total population), precisely at a time when productive industries are becoming less labour-absorbing. The need for employment generation in tertiary sectors thus intensifies, relative to earlier industrialisers and earlier demographic transitions.

Nonetheless, short of radical shifts towards such principles, the predominant supply-side emphasis in contemporary mainstream development policy arguably exacerbates the dilemmas of informalisation, casualisation and effective underemployment of labour transitioning to urban tertiary sectors in the Global South. This exacerbates the labour valuation problem discussed in the previous section, which in turn undermines import capacity, as discussed in the first section. In this sense, the redistributive principle of late industrialisation applies equally well to the case of decarbonising economic growth, insofar as its absence undermines the capacity of a country to follow a decarbonising path of development (versus simply remaining in a state of austere energy use).

Moreover, global (North–South) redistribution should reinforce the capacity of developing countries to face these development challenges, which are already monumental even without the inclusion of a decarbonising agenda. Northern influence should certainly not undermine domestic redistributive strategies, such as by exacerbating balance of payment constraints. Indeed, the demographic tragedy of structural adjustment policies in Sub-Saharan Africa in the 1980s was that they severely undermined public health and education systems precisely at a time when early post-colonial gains in mortality and fertility reduction needed to be reinforced.^{Footnote 12} The insistence now for radical approaches to family planning among poor people in Africa, such as the morally repugnant idea of ‘population offsets’,^{Footnote 13} would likely have little effect on reducing fertility rates (faster than they are already falling) in the absence of far more ambitious agendas for comprehensive and ideally universalistic health-care and education systems.

The experience of China is often poorly comprehended in this sense. China’s success in reducing fertility in the 1970s from a rate of 5.8 in 1970 to 2.8 by 1979 – before the introduction of the one-child policy – cannot be appreciated without understanding the entirely state-collectivised economy that existed at the time. Collectivisation assured full employment and the near universal provision of primary health care and basic education in both rural and urban areas, at least to a level that allowed for the rapid dissemination of new practices and socially transformative messages. As a result, China had already far outperformed India in human development terms by the 1970s, even though both countries had started from about the same level in the late 1940s. For instance, life expectancy at birth for both sexes combined in the period 1975–1980 was 66.3years in China versus 54.2years in India (United Nations, 2013). Similarly, China had achieved a literacy rate at the advent of the reform period in 1982 that was at about the same level as India in 2001, at around 66% of the population aged 15years and older in China^{Footnote 14} versus 65% of the population aged 7years and older in India (Government of India, 2014; National Bureau of Statistics of China, 2013). On the basis of these achievements, fertility rates fell much faster in China than in India once the Communist Party of China decided to start addressing family planning, almost two decades after India had made family planning a policy priority. The lesson for those who advocate radical population control for ecological sustainability is that the most important precondition for birth control is death control, which is best achieved through well-financed and well-staffed universalistic health-care systems.