Economic Growth as an Indicator for Development

“Economic Growth is a necessary but not sufficient condition of Economic Development”. Comment on the limitations of economic growth and the importance of accounting for multiple dimensions of well-being beyond growth. You can use empirical findings or a case study to support your arguments.

Introduction

Economic growth is the percentage rate of increase in the monetary value of all the final Goods and Services produced in a period of time. Economists usually measure economic growth in terms of Gross Domestic Product (GDP) or Gross National Income(GNI)

 Economic development is the improvement in the well-being of the people of a nation in its economic, political and social spheres. The economic growth is an important condition in the economic development of a country. But the economic development is a much broader connotation than just the economic growth. The economic development of the people cannot be measured only by the increase in their income. The other measures of economic development include the social conditions like literacy rate, life expectancy and various other indicators which will influence the social and cultural well-being of a human being.

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In trying to explain the necessity but the insufficiency of economic growth on economic development, this essay will first discuss what economic development actually means and the different dimensions it entails. Then the essay will go on to talk about the importance of economic growth in the framework of economic development and yet why it falls short of being sufficient enough for economic development.

The last section will include a case study of India, which has shown remarkable economic growth post liberalisation and still lags behind in economic development indicators reinforcing the limitations of economic growth.

Economic Development over the years

The term ‘Development’ has its origins immediately after the second world war, when the United States initiated a massive reconstruction programme. From then on, the word has been researched and analysed and has over the years taken various different forms and meanings. In strictly economic terms, development has traditionally meant achieving sustained rates of growth of income per capita to enable a nation to expand its output at a rate faster than the growth rate of its population (Todaro.P 2010: 14). Till the 1970s it was believed that an increase in the gross national income(GNI) will trickle down to the masses in some form and help improve their social and economic indicators. But very soon it was realized that the even with the increase in the national income the social indicators of many underdeveloped countries remained stagnant. So the term economic development was redefined in terms of the reduction in poverty, inequality and unemployment within the context of the growing economy (Todaro.P 2010: 15) 

The decade before the turn of the millennium saw many new changes in the way economic development was being understood. The goals of economic development became much wider by including improvements in the income distribution, environment, health and education (Pheng L., Dang G.,2015) During this period Sen’s work brought about the broadest perspective of development goals (Pheng L., Dang G., 2015: 13) As Sen put it, “Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy.” (Todaro.P 2010: 16). This marked a complete shift in the way economic development was perceived and appraised. Income or wealth which were till then seen as ends in itself began to be seen as means to  achieving other purposes. The focus of economic development shifted towards the quality of life that individuals are able to achieve ( Dang. 2014: 461). The idea is that the quality of life cannot be determined or evaluated only by the resources an individual has but the ability of the individual to use the resource(capabilities), the reality of using the resource (functioning’s) and the psychic state of the individual in using the resources (Utilities) (Sen.A, 2000). The development economists started to focus on health and education after Sen’s capability approach since to convert the characteristics of commodities(resources) in to functionings, and to have the freedom of the choice of functionings, in most important cases, requires good health and education. (Todaro.P, 2010 : 18). Thus to broadly conceptualize economic development, it basically means improvement in the well-being of an entire society and its social systems (Todaro.P, 2010)

 Multiple dimensions of well-being

From the previous section it was clear that the wellbeing is inherently multidimensional (Decanq. A., Lugo M, 2013: 8). It should take in to account the objective condition of people and their subjective assessments of their lives. (Adler.A 2016). The objective dimension of the well being largely originates from Amartya Sen’s work where he talks about the capabilities individuals should have to live fulfilling lives. (Western M, Tomaszewski W 2016). Some core human capabilities include bodily health, bodily integrity, the ability to use the senses to think and to imagine, the ability to express emotions, to exercise practical reasons and autonomy with respect to one’s own life, to affiliate, to live with dignity etc (Nussbaum M 2003). The subjective dimension of wellbeing. Broadly the subjective dimension includes the freedom defined in terms of what an individual values doing and being. ( Sarah c, Mcgregor A,White C., 2018). The freedom to doing and being will be contingent on other components of well-being like education and in turn becomes a pre- condition for a few constituents of well-being like equity and fairness.( Millennium Ecosystem Assessment, 2005). There is also a relational dimension which should be considered, the social relationships of an individual, where the well-being of the individual is seen as a social or collective, going beyond the individual (ibid). Mankind’s activities have adversely affected the functioning of the earth that the wellbeing of an individual is also based on the quality of the ecosystem (Helne T, Hirvilammi T,2015). This adds an environmental dimension to the well-being conundrum.  If we are to achieve the development in our societies then it is necessary to reform our statistical data collection from being focussed on measuring progress in terms of production and consumption, to measuring in terms of human wellbeing ( Sarah c, Mcgregor A,White C., 2018) But it is very important to understand the various dimensions that influences the well-being of individuals before it can be operationalized into a single index of well-being. Many studies have been made to operationalize all these dimensions of well-being in to a single index. Indices like Human development index(HDI), Multidimensional poverty index(MPI) have been created to measure progress and well-being of a society. Studying the indices is beyond the scope of this essay.

Economic growth

Foremost, it is important to understand the term economic growth in it fullness. Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another (Investopedia 2005). Often, but not necessarily, aggregate gains in productivity correlate with increased average marginal productivity(ibid) So in simple terms, more the economy grows, more the income of the individuals (Income per capita) of the nation whose economy has grown. More income naturally leads to increased consumption, investment and savings.

Relationship between economic growth and economic development

The presumption for many years was that increased income(Economic growth) of a nation will lead to economic development. It was Richard Easterlin who first questioned the idea that GDP will lead to economic development. For the last few decades the debate on whether higher GDP will lead to greater social prosperity has existed. (Adler A, Seligman M, 2016:2) So what exactly is the relationship between economic growth and economic development? Before the start of industrialization, the average real life standards of the rich countries were no more than three times as great as the other poorer countries of the world (Todaro P, 2010: 78). But in the previous century the today’s developed countries have enjoyed far higher incomes than the developing (Poorer) countries. (Pritchett L, 2010: 4). The living standards of these developed countries have also increased many folds in the last century compared to the developing countries. I(ibid). Clearly there exists a strong relation between economic growth and human development. The economic growth provides the resources for human development and without these resources it will not be possible to achieve human development which is clear from the average real life standards of the rich countries today when compared to the poorer countries. (Ranis G, Stewart F, Ramirez A, 2000: 197).

A study done on 14 countries from the 1990s by the UK department of International development, the world bank, shows that poverty fell in the 11 out of the 14 countries which experienced economic growth and poverty grew in the other 3 countries where the economy showed negative growth ( World bank 2005). )  Reduction in poverty will surely aid in increase in Human developmentThe study of Gallup world poll data by (Deaton A, 2008) shows that “Each doubling of GDP is associated with a constant increase in life satisfaction” ( Easterlin A, 2013) . Thus it is clear the economic growth in GDP per capita is a very important and a necessary condition for economic development.

But the rankings done on the basis of HDI for 37 countries in 1993 did not match with the income rankings. (UNDP 1996 :5) Some countries like Colombia has achieved high human development though their income per capita is quiet modest, while countries like South Africa and Gabon having more than twice and thrice the per capita incomes of Colombia shows lower human development. (ibid). Social Progress Index (SPI) is one of the new measures developed to evaluate human development. The SPI takes in to account 53 social and environmental indicators under three headings : basic needs, the foundation of a well being and opportunity. (Economist 2016) When SPI is shown against the economic growth (GDP Per capita). The curve is not linear showing that the social progress slows down after a lever of GDP per capita is reached. Thus there is diminishing returns for GDP when a threshold is reached.

                Figure 1 : Source : Social progress indicative, The economist(June 2016)

The OECD( Operation for Economic Cooperation and Development, 2013) devised an index for the measurement of economic development called as the better life index. They chose 11 domains to be included in the index and ranked all the 11 domains individually as well as had a composite index based rank. Different ranks emerged when the domains are taken differently. If only life satisfaction is taken countries like Switzerland, Norway tops the list. But the wealthiest country is the United States. Australia which tops the list in the composite index does not even come in the top ten of the highest income generating countries and the US comes a distant 14^th in life satisfaction and 6^th when all the 11 domains are taken together. (Alder A, Seligman M, 2016).

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As the many studies clearly suggests GDP as the single measure of economic development raises many questions. There are many facets of economic development which cannot be quantified like the relational dimension, the environmental factors, the psychological factors etc (Adler A, Seligman M, 2016). Other issues like Justice, governance, equity and fairness which plays vitally important roles in the well-being of the humans could never improve with increase in GDP. Finally, economic growth is not an end in itself, while economic development or the well-being of the individual is a means to an end. Of course economic growth is necessary for economic development, as all indicators show that the richer countries have better well-being indices. But after a point there are far too many factors which influence the economic development of a country or the well-being of an individual to reduce it to an index as small as economic growth. Economic growth is not sufficient enough to represent economic development of a country.

Conclusion

Economic growth is a very important indicator in the development of a country. More the income, more the capital spent on welfare mechanisms and social structures. But income in itself is not an accurate measurement of the development story of a country. Income distribution is equally or sometimes more important. Thus GDP per capita is a better measurement of the economic growth than GDP in itself. But Increased GDP per capita is just a means to an end, higher economic development of a country or increased well-being of individuals. Thus Economic growth is a necessary but not a sufficient condition of economic development

Many countries have started using different indicators to measure the economic development of their countries. Bhutan is using Gross National Happiness (GNH) to design its policies. “France has recommended that the statistical offices of the world should  incorporate questions to capture people’s life evaluations, hedonic experiences, and priorities in their own terms” (Adler A, Seligman M, 2016 : 17). The United Kingdom has released their own Gross Domestic Well-being. The OECD had developed its own Better life index for its countries. a United Nations resolution encouraged Member States “to pursue the elaboration of additional measures that better capture the importance of the pursuit of happiness and wellbeing in development with a view to guiding their public policies” (UN General Assembly Resolution A/65/L.86).

In the broader context, these indices help the governments of the various countries and the international organizations to formulate policies which will improve the quality of life of the masses.

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