[Topic 4] Difference between Growth and Development PDF

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Topic 4: Difference between Growth and Development How have economic growth and other indicators changed since 1870? What insights does a more open view of development provide? Is development the same as growth? Keywords:   

Growth: sustained growth in national income  Escosura: “income is only one facet of human wellbeing” Development: rise in standard of living  Sen: “expanding real freedoms that people enjoy” Capabilities

Amartya Sen: “freedoms are not only the primary ends to development, but the primary means to development”

1. Growth Divergence!

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Economists focus on “Functionings”: o “Beings and doings” a person can undertake.  Outcomes of living standards: GDP, wages, life expectancy, literacy etc.

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“Capabilities” approach to development: o Real freedoms or opportunities to achieve valuable functionings.  Reflection of person’s opportunity and ability to generate valuable outcomes and live the life they have reason to value.  Include political freedoms, economic facilities, social opportunities, transparency, and protective security. o “Freedom to achieve” ignored by economists. o Freedom of choice  direct importance to quality of life.  But hard to quantify and measure.

“Development as process of expanding real freedoms that people enjoy”  cannot be reduced to solely increasing incomes and GDP.  Social and economic arrangements, political and civil rights more important determinants of development.  Need for a wider range of indicators of living standards other than income-based measures. th  20 century stylized facts: o OECD (developed countries) forges ahead in 20th century. o Asian tigers and China embark on rapid catch-up growth. o Africa fall behind during latter half of 20th century. o Income gaps increase  larger in 2000 than 1870  stagnation and take-off countries in c.20. 

Metric for economic growth o Real GDP/person – per capita growth. o Total national output each year at current market prices.  Adjusted for price changes over time (inflation/deflation) using price index ($1990). o Measurement effectiveness for income and wages? o Distribution of income? (internal inequalities)

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Primary Sources of growth: o Investment and innovation o Incentive structures that facilitate capital accumulation and technological progress.

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Gaps between Western Europe/US and “Rest” relatively small in 1870  Divergence 18702000: o Africa increases 3x o Asian Tigers increases 27x (Hong Kong, Singapore, South Korea, Taiwan). o China increase 6.5x o Western Europe increases 10x o USA increases 11.5x

Divergence (1870-2000):

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Africa: o Constant decrease in GDP relative to US (20% to 5%) substantial divergence. Western Europe: o 1870: 80% of US GDP o 1950-1973: 50% o 2000: 70% (catch-up growth) China: o Divergence in early 20th century – 1973: 4% of US. o Catch-up since 1979 – 2000: 10% of US. Asian Tigers: o Dramatic Catch-up growth 5 per 100,000 (1880) to 0.5-2 per 100,000 (2000) o Living more peacefully than before  improvement in living standards.

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6. Subjective Well-Being: capture everything

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Threat of violence as an African-American (minority in US): o Lynchings fell from 160 (1891) to 0  African-Americans discrimination  detrimental to welfare/living standards. Self-reported life satisfaction (subjectively choose between 0-10)  survey. Worldwide variation (2015): o Western Europe/US: 7 o Africa: 4-5 o Japan as an exception: 6 despite highly developed economy and growth (constant since 1958).

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Limitations: o Unable to analyse changes in development over time o Unable to examine reasons for self-reported satisfaction level.

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Positive relationship between GDP per capita and happiness o Diminishing marginal increase as GDP per capita increases  increasingly smaller increase in happiness with GDP. o Shows limited contribution of GDP per capita to happiness/satisfaction after certain threshold.  GDP is irrelevant to subjective wellbeing after certain threshold. Self-reported happiness has not increased in OECD countries: o Japan mean subjective well-being stagnant at 6 since 1950  despite high growth  GDP unable to capture capabilities important for wellbeing. o Perhaps due to rising aspirations (“hedonic treadmill”)  as person increases income, expectations and desires rise  no permanent gain in happiness as people return to relatively stable level of happiness.

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7. HDI:

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Composite measure of human development in a country between minimum and maximum levels of (log) GDP/person, life expectancy and literacy/schooling. o Each component measured on a scale of 0 to 1. o Broader measure of wellbeing than GDP and weights improvements in mortality heavily  focuses on lives that people lead, not just average income of country.

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Takes into account: GDP/capita (Y), Longevity (L) and Education (E). o GDP/capita – basic level of income required for wellbeing. o Life expectancy at birth – health and length of life important for wellbeing. o Education – increases opportuntitie/possibilities for people.

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Each component measured between minimum and maximum (scale of 0 and 1). Construction of HDI: o HDI = (E+Y+L)/3 o E = (2/3)*Literacy + (1/3)*Enrolment o Y = (log y – log 100)/(log 40,000 – log 100) – log income to fit scale. o L = (life expectancy – 25)/(85-25) – relative life expectancy.

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Convergence in HDI: o OECD: 0.2 (1860)  0.8 (2010)  Conditions in 1860 worse than developing countries today o Central/Eastern Europe: 0.1  0.55 o Latin America: 0.05  0.5 o China: 0.03  0.45 (convergence since WWII) o North Africa/SSA  similar convergence despite stagnant GDP.

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Some countries (Africa)  despite stagnant GDP  convergence in HDI due to improved life expectancy and education.

Convergence over c.20th

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HDI relative to US improved in all regions: CONVERGENCE. o Western Europe: 85% to 100% o China: 30% to 80% o India: 20% to 60% o Africa: 35% to 50% o All areas of world benefited from advances in medical knowledge  life expectancy exhibits beta-convergence (poor regions grow faster than rich regions) compared to GDP/capita which have diverged. HDI convergence suggests growth is less exclusive than GDP/capita. o GDP is one lens through which development can be viewed. o Education, health etc. also matter  can lead to future growth

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Conclusions

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Economic development = multifaceted. o Not solely dependent on economic growth  HDI still fails to capture all aspects (subjective wellbeing, violence, leisure) o Worldwide reductions in mortality = outstanding achievement in c.20th  poorer countries today have mortality rates lower than advanced countries of 1870  due to disemmination of medical knowledge. o Literacy and education expansion = important.  Important for setting policy goals  pursue development through growth and other aspects (health, education etc.)

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8. Anthropometric measures Substantial divergence at end of c.19th

A holistic view of development sees more convergence than just GDP per capita.

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Baten and Blum: Human stature is an indicator of biological standard of living  ability to use height as a composite outcome measure of “net nutritional status”, taking into account food intake (quantity and quality), energy expenditure on work and fighting disease.

Pros:  Positively correlated with income per capita, health and longevity o On average  taller the population, more economically developed the country. o Income level determines quality and quantity of food  correlates with better health and larger heights  correlation of 0.64 with GDP per capita. o Correlation with life expectancy: Income level  better access to medical services  every 0.5cm above average height increases life expectancy by 1.2 years. o (Exception: Japan)  Data availability (especially in historical periods)  found retrospectively from skeletal studies of historic societies.

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Data for individuals available  not just country as a whole  ability to account for inequality.

Cons:  Height affected by factors other than living standards o Effect of genes  not just environmental conditions. o Different diets  Sahel anomaly: poor families but relatively tall (protein rich diets)  Migration of people  individuals not representative of population into which they are born.  Income fails to account for height discrepancies within households.  Only captures living standards as a child  nothing about adult conditions/education/life expectancy  tall child can be a poor adult....