“Development can be viewed as a process of increasing people’s true liberties.” Sen, Amartya
The expansion of a country’s economy is measured by economic growth. Today, policymakers and scholars alike commonly quantify it by rising gross domestic product, or GDP. This metric calculates a country’s value added, which is the total value of all products and services produced minus the value of goods and services required to produce them. The GDP per capita is calculated by dividing this metric by a country’s population to determine how productive and developed an economy is.
A brief history of growth and GDP
Economic growth is derived from classical economics, where an increase in national income signifies an increase in a nation’s wealth the traditional metric of success. During the industrial revolution, when market economies blossomed, the concept of economic growth gained prominence. Simon Kuznets, a Nobel winner, wrote extensively about national statistics in the 1930s and promoted the use of GDP as a measure of the US national income. “The national income total is thus an amalgam of relatively accurate and only rough estimations rather than a unique, extremely precise measurement,” Kuznets stated, taking this measure with a grain of salt (Kuznets, 1934).
Governments were looking for analytical methods to raise taxes to fund the newly minted war machine against the backdrop of a brutal world war. GDP became the standard metric for measuring a country’s economy at the 1944 Bretton Woods conference. The concept of development has always been linked to economic expansion, i.e. the accumulation of wealth and the creation of products and services, from the classical through the neo-classical periods.
Finally, with the close of World War II, in 1945, the concept of emerging countries became a focal point of public policy. In his inauguration address in 1949, US President Harry Truman characterized “underdeveloped countries” as a bigger portion of the world, and stressed that growth should be based on “democratic fair-dealing” (Truman announces Point Four program).
The dominance of GDP as a measure of economic growth today is due in part to the fact that it is easier to quantify the production of goods and services than it is to measure other welfare outcomes with a multi-dimensional index. Because of this, GDP is not an appropriate indicator of a country’s development on its own. Development is a multi-dimensional notion that encompasses not only an economic but also social, environmental, and emotional aspects.
Towards inclusive and sustainable growth
One of GDP’s shortcomings is that it solely considers average income, which does not reflect how most people live or who benefits from economic growth. Thomas Piketty (2014) proposes a two-pronged hypothesis for how a society’s wealth grows more concentrated and why this is harmful to development:
- The first law states that when the rate of return on capital (profits, dividends, interests, and rents) exceeds the rate of economic growth, inequality rises.
- According to the second law, continuous rises in the capital-to-output ratio concentrate income in the hands of capital owners at the expense of employees (return of capital surpasses the return of labour, i.e. wages).
Piketty examines a large number of data sets, although they are all limited to industrialized countries. He contends that these principles explain capitalism’s fundamental market failings. These shortcomings should be addressed by government intervention in the form of:
Growing inequalities, if allowed unchecked, might not only stifle prosperity, but also create instability and disorder in society, jeopardizing the very foundations of free democracy. As the wealthy amass ever more capital and wealth, economic and, as a result, political power becomes increasingly concentrated in the hands of a few wealthy individuals. As a result, policy-making processes are skewed to favor the interests of these wealthy elites.
As a result, a rising GDP cannot be believed to automatically lead to long-term development. On the other hand, Piketty’s so-called “basic rules of capitalism” have been widely criticized due to miscalculations in savings and depreciation rates (Mankiw, 2015; Milanovic, 2016).
The Human Development Index
The Human Development Index (HDI), devised by the United Nations Development Programme, is one enlarged indicator that aims to quantify the multi-dimensional element of development (UNDP). The index was created by Mahbud ul Haq and Amartya Sen, and it is better suited to tracking the progress of both rich and poor countries.
The first HDI report was published in 1990. It takes into account the traditional method of assessing economic growth, as well as education and health, which are important factors in establishing a society’s level of development. This is derived by using the geometric mean of GDP per capita, life expectancy at birth, and the average of mean and predicted schooling years.
The Human Capital Index
The Human Capital Index was established by the World Bank on October 11th, 2018. (HCI). This newly established index rates 157 nations on a set of four health and education variables based on a calculation of the economic output lost as a result of poor social outcomes. The key advantage is that, like the Social Progress Index (SPI) and unlike GDP, it focuses on results rather than inputs. For example, educational quality is more correctly weighted against years of schooling when measured by actual adjusted learning. The main objection leveled about the HCI is that it risks overvaluing the pecuniary benefits of education and health care, so commoditizing people rather than their societal contributions and intrinsic status as basic human rights. Nonetheless, it is expected that the HCI will be used primarily by developing countries to quantify the outcomes of social sector investments, thereby increasing spending on human development (health, education, social security, and so on), which the World Bank claims has been overlooked in favor of infrastructure and institutional development.
The Social Progress Index
The SPI is a superior means of gauging societal growth, in my opinion. The SPI was created by the Social Progress Imperative, a non-profit organization. It’s one of the Commission on the Measurement of Economic Performance and Social Progress’s or simply Stiglitz-Sen-Fitoussi, after the commission’s leaders outcomes. The Commission’s major goal was to look at how countries’ wealth and social development may be quantified in ways other than the one-dimensional GDP measure. It is still a relatively new indicator, with data only going back four years, but it covers a large number of countries, totaling more than 130.
The SPI is a modification of the HDI in that it increases the number of composite indicators from four to fifty-four in a wide range of categories, such as basic human requirements, foundations of well-being, and possibilities for advancement. As a result, this index can synthesize the most important aspects that influence development. Access to water and sanitation, educational and health results, public criminality, housing, information access, and communication are only a few examples. Naturally, the SPI’s biggest flaw is its relative complexity and lack of applicability when used to advise policymaking.
Economic growth as freedom
Sen’s (2000) concept of economic growth as a successful way of extending personal and societal freedoms the impact it has on people’s lives lies at the heart of the SPI. Consider the following scenario:
- participation in commerce and manufacturing as well as access to economic opportunities.
As a result, development entails the abolition of restrictions on liberty that limit people’s choices and opportunities to express agency in their own lives.
2. A multi-dimensional approach to development
The SPI has a significant additional value in that it incorporates a variety of subjective indicators that are sometimes overlooked in economic debates. Political rights, freedom of expression, assembly, and religion, corruption, tolerance for minorities and immigration, and discrimination and violence against them are among them.
There isn’t a single factor of the index that degrades a country. Instead, a combination of variables provides more information on a country’s level of development. It is unsurprising that developed countries are at the top of the table; nonetheless, some of the world’s wealthiest countries still trail behind in certain developmental indicators. The United States, France, Italy, Russia, Brazil, and China all received low marks.
3. Development vs. economic growth
There are three key reasons why countries do poorly in comparison to their economic size:
The SPI does not capture the third reason, but it does capture the first two. Poverty and inequality are becoming widely contested in academic literature, not only because of their detrimental effects on human development, but also because they stifle GDP growth.
Economic growth: for whom?
Is the average worker’s situation improving? Economic growth, as measured by GDP, is a useful supplementary indication of development, but it is not sufficient on its own. Modern capitalism’s task is to strike a balance between its function as an efficient and successful method of production and its proclivity to concentrate income, money, and thus power. Indeed, social growth will lead to economic progress, and the SPI is a welcome addition to development measures in this regard.
GDP measurement may be strengthened if it included not only physical capital, but also natural and human capital. Economic development in its pure accounting format (GDP expansion) will always result in less inclusivity and a generalized sense of societal discontent, which is harmful in democratic countries when it is divorced from social progress.
As a result, when used to gauge development, the present measure of economic growth, GDP, has significant drawbacks. The SPI can be considered as a more appropriate indication given the multi-dimensional character of development.
References
L. Burman, J. Rohaly, and R. Shiller (2006). The Rising Tide Tax System: Indexing for Changes in Inequality (at Least Partially). http://www.econ.yale.edu//shiller/behmacro/2006-11/burman-rohaly-shiller.pdf is available.
N. G. Mankiw, N. G. Mankiw, N. G. Mankiw (2015). “Yes, r exceeds g. pp. 43-47 in American Economic Review, Vol. 105, No. 5.
E. Matthew (2008). Masters Dissertation, Singapore Management University, Stock Markets and Income Inequality: A Cross-Country Study.
B. Milanovic (2016). LIS Working Papers No. 663, LIS Cross-National Data Center in Luxembourg, Increasing Capital Income Share and its Effect on Personal Income Inequality.
L. Mishel, L. Mishel, L. Mishel, L. Mishel “Economic Policy Institute, “The Wedges Between Productivity and Median Compensation Growth,” Issue Brief #330.
T. Piketty, T. Piketty, T. Piketty, T (2014). Harvard University Press, Cambridge, USA, has published Capital in the Twenty-First Century, translated by Arthur Goldhammer.
T. Piketty and G. Zucman (2015). In the Long Run, Wealth and Inheritance, Handbook of Income Distribution, Vol. 2. Anthony B. Atkinson and Franois Bourguignon edited the book. Elsevier, Amsterdam, Chap. 15, pp. 13031368.
How can GDP be used to assess progress?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
How do you assess progress?
The Human Development Index (HDI) is used to assess progress. The United Nations calculates the HDI. It calculates each country’s average life expectancy, educational attainment, and income.
How does GDP assess social progress?
- GDP, or gross domestic product, quantifies the economy’s overall output, including activity, stability, and growth of products and services; as a result, it’s used as a proxy for the economy.
- The standard of living is calculated using per capita GDP, which is calculated by dividing GDP by the country’s population.
- GDP can thus be used to determine the standard of living on a broad scale.
- Economists, on the other hand, frequently make changes to GDP, such as utilizing real GDP or use different methodologies for calculating the standard of living.
- In general, rising global income leads to a higher quality of life, and declining global income leads to a worse level of living.
Why is GDP not a good indicator of progress?
GDP is a rough indicator of a society’s standard of living because it does not account for leisure, environmental quality, levels of health and education, activities undertaken outside the market, changes in income disparity, improvements in diversity, increases in technology, or the cost of living.
What are the methods for calculating GDP?
GDP is calculated by adding up the quantities of all commodities and services produced, multiplying them by their prices, and then adding them all up. GDP can be calculated using either the sum of what is purchased or the sum of what is generated in the economy. Consumption, investment, government, exports, and imports are the several types of demand.
Why is GDP the best metric?
Because it represents a representation of economic activity and development, GDP is a crucial metric for economists and investors. Economic growth and production have a significant impact on practically everyone in a particular economy. When the economy is thriving, unemployment is normally lower, and salaries tend to rise as businesses recruit more workers to fulfill the economy’s expanding demand.
What are the indicators for measuring progress?
Education, health, employment and unemployment rates, and gender equality are among the most important social indicators of development, and this post introduces students to the specific indicators used by institutions like the World Bank and the United Nations to determine how ‘developed’ a country is, as well as the main indices used to compare the levels of development of different countries.
Indicators Used to Measure Education and Development
The World Bank considers the following eight basic measures to assess a country’s educational development:
*The net enrolment rate for primary is defined as “the number of pupils of official primary school age who are enrolled in primary education as a proportion of the total children of official school age population” (according to ISCED97).
**The gross primary school enrolment rate. The percentage of children enrolled in primary school (of any age) as a percentage of the total population of children of school age.
In this blog entry on NER, GER, and Universal Primary Education, the difference between Net Enrolment Rate and Gross Enrolment Rate is described clearly.
Why is it critical to track a country’s progress?
The United Nations created a special group in 2013 to explore into expanding its data collection. This is part of a broader trend that favors collaborations that can provide regular evidence of development success. In an era of “open” government, budgets, contracts, and aid, Thomas Wheeler and Craig Fagan argue that there is no reason why data should stay the domain of statistical offices. In these initiatives, civil society, the commercial sector, and governments may and must collaborate. Indicators should be selected using defined criteria and include data from both official and non-official sources.
Big data may be the trendy buzzword these days, but the nitty-gritty of statistics is frequently enough to put people to sleep. However, numbers are important in many aspects of life, especially when it comes to issues of inequality and poverty. The UN Statistical Commission met last week in New York to explore what indicators it may use to measure the new set of development goals that the UN will approve in September to follow up on the Millennium Development Goals.
This is significant because it has the potential to shape the post-2015 Sustainable Development Agenda’s outcome. If subjects are challenged because the UN believes they can’t be quantified or the incorrect indicators are employed, the next phase of how the world strives to eradicate poverty and its causes will be distorted. That is why Transparency International and Saferworld have been working to identify relevant statistical indicators the monitoring framework in order to fulfill Goal 16’s promise: “Peaceful and inclusive societies, justice for all, and transparent and accountable government institutions” are among the goals. This is one of 17 proposed goals for the post-2015 agenda that the UN is evaluating. We feel it is a critical goal because it will aid in the fight against corruption, which disproportionately impacts the well-being of the poor and undermines peace. There is less room for corruption, violent conflict, and instability where people have access to justice and government is accountable.
So, what should be included in the monitoring framework? Under Goal 16, there are currently 12 targets specified. Here’s when data and indicators start to become intriguing. Without the correct indicators, it will be impossible to determine whether a target should be accomplished, for example “The goal of “significantly reducing corruption and bribery” has been achieved. Indicators, we feel, should be chosen based on defined criteria and include data from both official and non-official sources.
- Governments collect administrative data points. This is already taking place; all we need to do now is improve the data and make it more readily available. For example, we believe that corruption in government procurement occurs when procurement tenders are not publicly available, hence we need to track data on the percentage of publicly available procurement tenders. The same may be said for tracking progress on peace and security, such as using government numbers on violent deaths.
- Experiential, factual, and opinion surveys: they would capture and compile citizens’ experiences and impressions of major topics relating to governance, justice, and peace. For example, a poll might question if respondents have ever paid a bribe to gain access to government services or if they feel protected.
- Organizations like Global Integrity, International Budget Partnership, and Transparency International provide expert analyses of relevant rules and performance.
To get a full picture of development, we need to look at a variety of indicators, especially for Goal 16’s complex themes of peace, governance, and justice. We must demonstrate that efforts are being taken to address the problem (for example, by quantifying the number of judicial professionals per 100,000 persons using ‘capacity’ or ‘input’ metrics). We must demonstrate that change is taking place on the ground (‘objective’ or output indicators, such as lower case backlogs). Finally, we must demonstrate that people see differences in their lives (for example, by using indicators that show whether people believe improvements have been made, such as evaluating citizen confidence in the justice system).
Data on these issues is collected and analyzed by a variety of organizations. As a result, embracing partnerships that can provide regular evidence of progress will be critical. In these initiatives, civil society, the commercial sector, and governments may and must collaborate. There is no reason why data should remain the domain of statistical agencies in this age of “open” government, budgets, contracts, and help. The United Nations created a special group in 2013 to explore into expanding its data collection. “The necessary data revolution is a joint duty of Governments, international and regional organizations, the commercial sector, and civil society,” according to the UNSC Friends of the Chair Group.
Data generated by citizens or third parties supplements government data and fills in any gaps. The UN recognizes that measuring the new goals will be tough, and it will welcome any and all assistance it can get, with the obvious caveat that the data be reviewed and validated in the same way that official government data is.
While statistics offices will be in charge of data gathering, there are ways for a variety of civil society actors to participate. All stakeholders share responsibility for ensuring that the appropriate indicators are accepted, expanded, and upgraded in order to give true accountability for the development commitments made by world leaders in September 2015.
With the authors’ permission, this item was originally published on Saferworld’s website.
This article first appeared on the LSE’s Impact of Social Sciences blog.
Thomas Wheeler is the Conflict and Security Advisor at Saferworld’s Policy Programme, where he works on the role of rising powers in conflict-affected states, the confluence of aid and conflict, and the post-2015 Millenium Development Goals discussions. He formerly worked on Saferworld’s China Program, which looked into China’s role in international arms transfers, Chinese-African relations, and Chinese economic cooperation with conflict-affected countries. Thomas has a master’s degree in conflict, security, and development from King’s College London’s Department of War Studies.
Transparency International’s Head of Policy is Craig Fagan. Craig came to TI from the UNDP’s Poverty Group, where he worked as a Policy Research Analyst, advising nations on problems like civil society engagement, monitoring and evaluation, and Millennium Development Goal-based projects. He graduated from the University of Richmond (Virginia) with a bachelor’s degree in International Studies/Spanish and a master’s degree in International Affairs/Development Economics from SAIS-Johns Hopkins University (Washington, DC).
Is GDP a reliable indicator of economic growth?
GDP is a good indicator of an economy’s size, and the GDP growth rate is perhaps the best indicator of economic growth, while GDP per capita has a strong link to the trend in living standards over time.