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IOS Minaret Vol-1, No.1 (March 2007)
Vol. 11    Issue 15-16   16 December 2016 - 15 January 2017
GDP vs Human Development

Professor A. R. MOMIN

Since the time the Scottish social philosopher and political economist Adam Smith laid the foundations of modern economics with his monumental work An Inquiry into the Nature and Causes of the Wealth of Nations (1776), the Western world has relentlessly pursued the goal of economic growth and has considered it the key to human progress and prosperity. Smith’s ideas continue to dominate economics and economic planning, politics and social policies. Smith’s views played a central role in the emergence of a distinctive perspective on man’s nature and behaviour, known as Homo economicus or Economic Man. The term Homo economicus was first used in the late 19th century in critical responses to John Stuart Mill’s treatise Principles of Political Economy (1848), and later elaborated by the Italian sociologist Vilfredo Pareto in the early part of the 20th century. The term encapsulates a model of man who acts rationally out of self-interest and a desire to maximize his happiness and well-being through material possessions. His actions, according to the model, are motivated purely by self-interest. Economic Man is essentially an amoral being, devoid of all social values and ethical norms, except when they serve his material interests.

A striking manifestation of the model of Homo economicus is found in the concept of Gross Domestic Product or GDP. Economists defined GDP as “an aggregate measure of production equal to the sum of the gross values added to all resident, institutional units engaged in production.” GDP measures are generally used to indicate or measure the economic performance of a country. Since its birth in the 1930s, GDP has been widely adopted as a reliable measure of economic performance, progress and development around the world. Another offshoot of Homo economicus is what has come to be known as the Washington Consensus, which equates development with economic growth and holds that development occurs mainly in the context of economic growth. The Washington Consensus, which has been embraced by developed nations as well as many developing countries and endorsed by international financial organizations like the World Bank and the International Monetary Fund, links development with the powers of the market, which are thought to be absolutely rational and reliable. The collapse of the Soviet Union in 1991 and the rapidly dwindling fortunes of socialism throughout Europe led some commentators to speak of the inevitable triumph of free market capitalism. Francis Fukuyama famously and triumphantly spoke of the end of history, marked by the astonishing success of free market economy and liberal democracy.

In the 1970s some economists began to focus attention on the worrying consequences of unbridled economic growth for the environment, the earth’s finite resources and human populations. In 1972 a group of researchers at the Massachusetts Institute of Technology brought out an important document Limits to Growth, which warned that unchecked economic growth could threaten the planet’s limited resources. A year later, an eminent British economist E. F. Schumacher wrote a best-selling book Small is Beautiful, in which he launched a blistering attack on neo-classical economics and pointed out that the single-minded concentration on output and technology had dehumanizing consequences. He was one of the first economists to question the appropriateness of using GNP to measure human well-being. The critique of GDP as an exclusive and absolutely reliable index of development and progress has gathered momentum over the past few years. An increasing number of economists, policy makers and environmentalists point out that the model of GDP leaves out of account the benefits from the ecosystem as well as the environmental, human and social costs of unbridled economic growth. Moreover, it does not address the important question of the unequal distribution of resources in society and the widening divide between the rich and the poor. The complacent view that economic growth held the key to development was rudely shaken by the 2008 global meltdown.

Joseph Stiglitz points out that development, measured in terms of economic growth, is meaningless in the long run unless it is sustainable, equitable and participatory. He emphasizes that it is not just income that matters but overall standards of living. Stiglitz says that the discourse on development cannot be divorced from the issues of social justice, equality, cultural diversity, environmental safeguards and universal access to education and health care. Stiglitz emphasizes that it is important for countries to focus on equity so that the fruits of economic growth are widely shared. This is necessary if there is to be sustainable growth. Stiglitz points out that if the benefits of economic growth are not shared throughout society, it will inevitably result in growing inequalities. In Latin America, for example, while GDP rose by 25 per cent from 1981 to 1993, the proportion of the population living under $2.15 a day increased from 26.9 per cent to 29.5 per cent.

High economic growth is not necessarily or invariably accompanied by a corresponding progress in human development indicators. This is attested by the record of quite a few countries around the world which have made impressive economic progress but have not performed well enough on social indicators. The United States is the world’s largest national economy with a GDP of $16.8 trillion. Despite having a robust economy, the US lags behind other OECD countries in respect of life expectancy, child mortality and poverty rates, health, and economic and social inequality. Life expectancy in the US (at 78.7) is one of the lowest among all OECD countries and lower than the OECD average of 80.2. The obesity rate (which is positively correlated with greater health risks) in the US is the highest among all OECD countries. Child poverty in the US is among the worst in developed countries. Inequality in the US is not only entrenched and widespread but growing. The 2013 UNDP report ranked the US 28th in its inequality-adjusted HDI. Rising income inequalities and social disparities have fuelled the growth of a vast underclass. Americans experience more stress than people in 144 other countries and consume nearly two-thirds of the world’s anti-depressants. More than a third of Americans over 45 years of age report being depressingly lonely.

In some developing countries, impressive economic growth has been accompanied by poor performance on social indicators. This is the case with many Latin American countries, India, Kenya, Venezuela and many Arab countries. Economic growth in India increased from around 4 per cent in the four decades before the early 1990s – when a programme of wide-ranging economic reforms and liberalisation was launched – to more than 8 per cent in 2007-08. India is today the world’s fastest-growing economy and the fourth largest economy in the world after the US, China and Japan. Amartya Sen has convincingly shown that despite the push for economic growth in India, the country has not paid sufficient attention to basic public concerns such as food security, safe drinking water, education and health care. More than 30 per cent of the population still live below the poverty line. Over half of Indian children are undernourished. More than 50 per cent of the population has no access to toilets. About a quarter of men and one-third of women are illiterate. The female-male ration in some parts of the country is among the lowest in the world.

In 2011 the United Nations recognized that gross domestic product was a poor index of a nation’s progress and an insufficient and inadequate guide for safeguarding the well-being of people and their future. Despite poor or modest economic growth, some developing countries, such as Bangladesh, Brazil, Mexico, Algeria and South Korea, have made impressive progress on the human development index. According to UNDP, four of the top 10 HDI performers had annual income growth of less than 3 per cent. From 1993 to 2005, the rate of economic growth in Brazil was a modest 1 per cent, compared with India’s 5 per cent. But Brazil managed to cut poverty rates much faster than India. Mexico and Algeria witnessed a modest rise in annual income, ranging between 1 and 1.7 per cent, in 1990-2012, but they were among the top performers in human development index. China, whose income rose by 9 per cent a year from 1990 to 2012, was ranked third on the human development index. But South Korea, whose income per head rose by about 4 per cent, was ranked first by the human development measure. This convincingly shows that though economic growth matters, it is not an absolutely reliable index of overall human development.

The United Nations emphasizes a “more inclusive, equitable and balanced approach to economic growth that promotes sustainable development, poverty eradication, and happiness and well-being of all people.” In November 2007, a high-level international conference called “Beyond GDP” was held in Brussels under the auspices of the European Commission, European Parliament, Club of Rome, Organisation of Economic Cooperation and Development and WWF. The conference brought together some 650 experts, policy makers and civil society representatives to deliberate over indices most appropriate to measure human well-being and progress and how these indices could be integrated into policy making processes and public debates.

The relentless pursuit of economic growth and higher incomes has resulted in growing inequalities of wealth and power, caused serious environmental damage, swelled the ranks of marginalized and deprived people and generated increasing insecurity and dissatisfaction around the world. There is increasing disenchantment with the reckless, profit-driven model of development which is invariably associated with a consumerist society. A growing number of economists emphasize that development and progress require not just investment in economic capital but also in social capital, which refers to shared values and social trust that bind people together. Elinor Ostrom, the Nobel Prize-winning American economist, questions the assumptions of classical economics and points to a shift from what she calls “Gucci capitalism” to cooperative capitalism, which involves values like collaboration, partnership, relationships, networking and social capital. World Development Report 2015 recognizes that people’s thinking and behaviour and human agency need to be accommodated in the formulation and implementation of economic policies.

Human Development

A pioneering contribution to the idea of human development, which has been embraced by the United Nations and which has become part of the contemporary discourse on development, was made by the Pakistani economist Dr. Mahbub ul Haq (1934-1998). During his tenure as Special Advisor to the UNDP from 1989 to 1985 and as Project Director of the Human Development Report, Haq gathered a team of distinguished economists, including Paul Streeten, Amartya Sen, Frances Steward and Richard Jolly.

The paradigm of human development, as conceived and developed by Haq and Amartya Sen, seeks to go beyond such issues as economic growth (measured in statistical terms) and the rise and fall of national incomes. It focuses on creating an environment in which people can develop their full potential and lead productive and creative lives in accordance with their value preferences, needs and interests. The focus in the discourse on human development is on building human capabilities. The most basic capabilities are to lead long and healthy lives, to have access to resources needed for a decent standard of living, and to be able to participate in the life of the community. The notion of human development is closely intertwined with issues of human freedom and human rights.

Haq maintained that the real objective of development is to enlarge people’s choices in all fields, including economic, political and cultural. He emphasized that people are both the means and the end of development. To quote him:

    The basic purpose of development is to enlarge people’s choices…. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, satisfying leisure hours, political and cultural freedoms, and a sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives.

Haq argued that though economic growth is essential for reducing or eliminating poverty, the quality of economic growth is just as important as its quantity. People must have equitable access to existing economic and political opportunities. Productivity requires investment in people and an enabling macro-economic environment for them to fulfil their potentialities. Empowerment means that people are in a position to exercise choices of their own free will. He emphasized that a human development strategy must involve community participation and self-reliance.

Haq played a key role in shifting the focus of development discourse from GDP-centred economic growth to people and their well-being. He initiated a global movement involving eminent economists, planners, policy makers and activists for pushing a people-centred agenda of development. His legacy continues to reverberate in development thinking across the world and, more importantly, in the UNDP’s Human Development Reports. At Dr Haq’s urging, a global compact was reached at the World Social Summit in Copenhagen in March 1995 to the effect that the developing nations would earmark 20 per cent of their national budgets for the furtherance of five priority concerns: universal basic education, primary healthcare for all, safe drinking water, adequate nutrition for severely malnourished children, and family planning services for all willing couples. Likewise, the donor nations from amongst the industrially advanced countries would pledge to earmark at least 20 per cent of their aid budgets for the furtherance of these goals.

The Human Development Index, which has been used by the United Nations Development Programme in its annual Human Development Reports since 1990, combines a nation’s GDP with two core factors, namely, education, based on adult literacy and school-enrolment data, and health, based on life expectancy statistics. Since the publication of the first Report, three new composite indices for human development have been added: the Gender-related Development Index, the Gender Empowerment Measure, and the Human Poverty Index. Inspired by the Human Development Reports, over 600 regional and national human development reports at the country level have been published in more than 140 nations. Of particular importance is the series on Arab Human Development Reports, published in 2002, 2003, 2004, 2005, 2009 and 2016.

The perspective of human development offers an alternative to the purely economic Gross Domestic Product (GDP) and emphasizes that the central and ultimate goal of development is the expansion of human choices and freedoms.

Over the past 35 years, the Human Development Index (HDI) has served as a fairly reliable yardstick to measure human well-being. The HDI focuses on three key parameters: a long and healthy life, education and a decent standard of living.

Human Development in the Arab Region

The first Arab Human Development Report was released in 2002. Since then the six reports in the series have focused on the changing political, economic and social dynamics of the Arab region and have sought to analyse the challenges that impede human development in the region.

Measured in terms of the Human Development Index, all Arab countries have made substantial progress between 1980 and 2010. This progress has been particularly note-worthy in respect of education and healthcare. However, two points need to be borne in mind. One is that the Arab region still scores lower the world average on HDI. Secondly, while some Arab countries have fared reasonably well in terms of HDI, others continue to lag behind. In 2010, five of the world’s top 10 countries with the highest rates of progress in HDI were Arab: Oman, Saudi Arabia, Tunisia, Algeria, Morocco.

Muslim majority countries present a mixed picture in respect of human development. According to the United Nations Human Development Report 2014, out of 49 nations that were marked by very high development in 2013, six (Brunei, Qatar, Saudi Arabia, UAE, Bahrain and Kuwait) had a Muslim majority. Five of these nations are in the Arab region. Out of 53 nations that were marked by high development, 13 were Muslim. These included Libya, Oman, Malaysia, Lebanon, Turkey, Kazakhstan, Iran, Azerbaijan, Jordan, Tunisia, Algeria, Bosnia and Albania. Six of these countries are in the Arab region. Out of 42 nations which had medium human development in 2013, 14 were Muslim. These included the Maldives, Turkmenistan, Indonesia, Egypt, Uzbekistan, Syria, Iraq, Kyrgyzstan, Morocco, Tajikistan, Bangladesh, Palestine and Equatorial Guinea. Five of these are in the Middle East. Out of 32 nations that had low human development, 11 were Muslim. These included Pakistan, Nigeria, Yemen, Comoros, Mauritania, Senegal, Sudan, Afghanistan, Djibouti, Gambia and Mali. Four of the nations that had low human development are in the Arab region.

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