Arvind Subramanian

As neoliberalism swiftly gives way to a resurgence of industrial policy in advanced economies, the perspective of low-income countries is being ignored. As in neoliberalism’s heyday, a subtle form of intellectual imperialism is skewing the global economic debate toward the interests of major powers.

If developing countries’ perspectives were given due consideration, the debate about neoliberalism and industrial policies such as the US Inflation Reduction Act (IRA) would likely play out very differently. After all, the neoliberal Washington Consensus that took hold in the 1980s delivered tangible benefits to the world’s poorest countries. The turn away from it could be similarly beneficial if we draw the right lessons from the neoliberal era.

Neoliberals’ embrace of markets and globalisation has been widely blamed for a wide range of problems, such as rising inequality, concentration of power, the decline of manufacturing, recurring financial crises, and even the rise of identity politics. But while neoliberalism’s liabilities merit serious debate, its balance sheet includes quite a few assets as well, particularly when it comes to the world’s poorest regions. As Dev Patel, Justin Sandefur, and I have argued, the era of hyper-globalisation enabled developing countries to reverse a 200-year trend and catch up with their richer counterparts, resulting in the fastest reduction in poverty ever recorded.

The rising tide of global trade lifted developing countries’ exports, enabling them to escape economic underdevelopment. While China’s success story is well-known, India’s remarkable transformation offers an equally relevant example of globalisation’s transformative power. Once considered inward-looking and uncompetitive, India achieved 13 per cent average annual growth (in dollar terms) in exports, not just of its fabled IT services but also of its manufacturing output, for nearly 25 years. As economic miracles go, that is hard to beat. Such was the power of globalisation.

It is to be expected that nativist politicians and thinkers in the West focus solely on the effects of neoliberalism on their own countries. But progressive intellectuals’ willingness to overlook its positive welfare effects in developing countries is surprising and disconcerting. Any form of cosmopolitanism, whether guided by the utilitarian principle of maximising benefits for the greatest number of people, or inspired by John Rawls’s focus on benefiting the least advantaged, would credit globalisation with bringing unprecedented prosperity to billions of people in Sub-Saharan Africa and Asia.

To be fair, intellectuals in developing countries have also celebrated the demise of neoliberalism. While their reasons for downplaying its positive impact remain unclear, this may be an example of what Lant Pritchett calls isomorphic mimicry, whereby they reinforce the intellectual imperialism of their rich-country counterparts. Groupthink is not the monopoly of Davos Man; it afflicts global progressives, too.

A similar dynamic is playing out with the United States’ newfound embrace of industrial policy. Setting aside the IRA’s domestic political ramifications, much of the conversation about the Biden administration’s signature climate legislation has focused on its implications for the US-China rivalry, the tensions between the US and the European Union, and the EU’s internal politics.

Suppose, instead, that the IRA was assessed according to the needs of a typical low- or lower-middle-income country that is a net energy importer and reliant on fossil fuels. In this context, all that would matter is its impact on the cost of renewable energy. By fostering technological innovation and facilitating economies of scale, the IRA could drive down energy prices and expand developing countries’ energy access, bolster their fiscal positions, and strengthen their climate-mitigation efforts. But the IRA’s role as a provider of global public goods has been overlooked.

We tend to forget that the renewables revolution is first and foremost an energy revolution. Enhancing low-income countries’ access to energy grids would deliver enormous welfare gains. Moreover, because most developing countries subsidise energy, especially electricity, renewables could lower costs substantially, benefitting these countries’ public finances.

To expedite the green transition, it is crucial to lower the cost of renewable energy. Given major economies’ already-strained balance sheets, it is unrealistic to expect substantial climate financing for developing countries. The recent debates about expanding the World Bank’s lending capacity should puncture ambitions about large financial flows from rich to poor. The practical solution is to ensure that renewables can compete with fossil fuels, and fast. Only technological progress, supported by IRA-type industrial policies, can accelerate this process.

Without affordable, competitive renewable energy, the green transition is a non-starter. But to achieve a just transition, we must ensure that new technologies are accessible to all and are not driven solely by the proprietary interests of private capital. Developing countries’ own policies will be critical to achieving this goal.

It is instructive to compare the US approach to industrial policy and the EU’s (arguably neoliberal) strategy, which relies on carbon pricing. Unlike the IRA, it is unclear whether the EU plan could provide the global public good of cheaper renewable energy. What is clear, however, is that Europe’s carbon border taxes will undermine developing countries’ exports of carbon-intensive goods. That is why the anti-neoliberal US policy is better for low-income economies than the European approach.

While the IRA’s potentially protectionist aims and the risk of worsening tensions between the US and China have little relevance to low- and middle-income countries, any breakdown of the international economic order would have severe consequences for the world’s poorest economies. For this reason, the US, Europe, and China must reach some modus vivendi that permits the subsidization of renewables while minimising the burden imposed on others. But the cost of renewable energy itself will have the most significant impact on developing countries’ prospects.

Today’s policy debate is marked by certainty about the failures of neoliberalism and confusion about what comes next. From the perspective of developing countries, however, it is possible to mourn the death of neoliberalism while simultaneously embracing its antithetical successor.

Arvind Subramanian, distinguished fellow at the Centre for Global Development, is currently advising the Tamil Nadu government in India on power sector reform and the green transition. Copyright: Project Syndicate, 2023. www.project-syndicate.org