IT has often been acknowledged by disputatious economists the world over that if ever there was a controversial economic indicator from the statistics world, GDP is it. Not only is the concept of Gross Domestic Product (GDP) considered narrow and outdated in mainstream economics, some economists also view it as woefully unreliable citing its failure to factor in social welfare and the development of human capital. A German economist famously called the notion of GDP “laboured and overwrought”, as it measures income but not equality, growth but not development, and it ignores values like social cohesion and the environment. Yet, governments, businesses and probably most people swear by it. As an indication of the level of distrust and scepticism expressed with regard to this statistical icon, the tiny remote Himalayan kingdom of Bhutan invented its own Gross National Happiness (GNH) index in 1972. The idea was to use happiness and other non-economic aspects of wellbeing as a measure of good governance and social prosperity, given the obvious limitations of GDP.
Consider the following analogy: Discerning parents would understand the difference between the growth and development of their child. In the first crucial years, the child becomes bigger and actually grows physically. It may even be a source of happiness to them if the child is growing very fast. But after about 18 to 20 years, they don’t want the child to grow any more; they want the child to develop – to become wiser; to learn foreign languages; to learn how to have important love relationships; to be a good parent; and so forth. In a different context, if an undeveloped country or corporation was flooded with money it would be richer but no more developed. On the other hand, if a well developed country or corporation was suddenly deprived of wealth, it would not be less developed.
Unfortunately, in the economic sphere, we haven’t made this distinction between “growth” and “development”. Economic growth in many instances, whether market-led or government-facilitated, is still widely confused with economic development, even by economists themselves. The term “economic growth” is more widely used internationally since quite a few economists believe it to be a necessary condition for development. But is this ostensible intellectual gospel always true especially in the context of developing countries? Does growth come before development or do they occur simultaneously?
Of course, there has been endless debate and discussion on the use and application of the two terms. Some economists have even gone as far as suggesting that there is no relation between the two. Yet, I believe growth and development do not have to conflict; they can reinforce each other. In other words, growth and development are neither mutually exclusive nor are they perfectly correlated. Research has shown that high economic growth may not necessarily result in increased economic development of the overall population, and targeting human development indicators will not automatically translate into higher level of economic growth. Further, some economists believe that a lack of resources can limit growth but not development. The more developed individuals, organisations or societies become, the less they depend on resources and the more they can do with whatever resources they have.
So what is development then? First and foremost, development is both a human condition and a progressive mindset that facilitates people upliftment, cultural advancement, and the harmonious and social integration of society. The concept of economic development as used by mainstream economists is the “increase in the standard of living in a nation’s population with sustained growth from a simple, low-income economy to a modern, high-income economy. It is typically measured in terms of work and income, but also includes improvements in human development, education, health, choice, and environmental sustainability.” The six factors that constitute economic development are education, incentives, quality of life, infrastructure, health and social cohesion. Some economists speak of the four Ts of development namely: talent, technology, tolerance and thinking.
Essentially, economic development alleviates and elevates people from low standards of living into proper and effective members of civil society. Since the notion of development implies more a matter of learning than earning, the famous German economist Hans-Werner Sinn believes it may be more relevant to measure progress and quality of life in developing nations. Promoted and sustained through social and technological progress, economic development implies a change in the way goods and services are produced, but not an increase in their actual production.
Of crucial importance is the fact that development nowadays is defined in the context of sustainability which means meeting the needs of the present without compromising future needs. The main idea behind sustainability is to shift the path of progress from growth, which is not sustainable, toward development, which can be. The sustainable economy must at some point stop growing, but it need not stop developing.
Adair Turner, former head of the Confederation of British Industry (CBI), said in the 2008 book “Do Good Lives Have to Cost the Earth” that we need to “dethrone growth” and place more importance on social justice, ecological sustainability and prosperity.
In contrast, economic growth entails only an increase in quantitative output; it may or may not involve development. Consequently, as economist AmartyaSen points out, “economic growth is one aspect of the process of economic development.” As I mentioned before, GDP is an indicator for economic growth, and thereby is not single-handedly expedient for economic development. My economics professor used to argue that economic growth is a more relevant metric for progress in developed countries. However, the two famous Indian-American economists, JagdishBhagwati and ArvindPanagariya seem to think that growth is especially important for developing countries. They maintained that economic growth – measured by GDP – constitutes the foundation for any meaningful development and the reduction of poverty in developing nations. Only on the basis of fast growth, they say, redistributive reforms for poverty alleviation and human capital as well as capacity building become viable.
Now I admit that I am an unswerving believer in economic development. However, I also believe that growth is crucial for economic and social stability. Although there are no explicit indicators for economic development, the Human Development Index (HDI) is a popular and reasonable measure which covers GDP, education, life expectancy and purchasing power parity. The HDI also takes into account the literacy rates and life expectancy which affect productivity and could lead to economic growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment.
So what are the prerequisites for economic development? Most economists concur that strategic (long-term) planning, technology, political conditions and the attitude of the people are necessary; all being major determinants for nation-building. In all fairness, lifting the poor out of poverty and making them self-sufficient is not a task that the government can do on its own. The private sector, think tanks and civil society are equally responsible partners in helping promote and sustain the economic health of a nation.
Finally, does growth create development? There are different opinions on that question. First the “yes” side believes that growth causes development because some of the increase in income gets spent on human development such as education and health. Conversely, the “no” side assert that poor countries have experienced economic growth with little or no economic development, indicating that they have functioned mainly as resource-providers to wealthy industrialized countries. They provide Angola as an example, where it is one of the fastest growing countries through its huge oil fields, but there is nearly no development.
It has become conventional wisdom that the idea of taking economic growth for granted and focussing just on social development is a mistake. Conversely, taking economic development for granted while focussing just on GDP growth through industrialization will be equally risky.
For comments, write to [email protected] – Clement Wulf-Soulage is a Management Economist, Published Author and Former University Lecturer.