Misconceptions In Economics — Part One

FOR disputatious economists, if ever there was a contentious indicator from the statistics world, GDP is it. There is wide consensus today that Gross Domestic Product (GDP) depicts not only a narrow and shallow concept that doesn’t factor in social welfare, but is also outdated. A German economist famously called the idea 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 for this statistical icon, the tiny remote Himalayan kingdom of Bhutan invented its own Gross National Happiness (GNH); the idea of using happiness as a measure of good governance and social prosperity, given the obvious limitations of GDP.

Unfortunately, in the world of economics, there are more concepts that are either ill-defined or downright confusing. Economic growth, for instance, 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 in most countries since quite a few economists believe it to be a necessary condition for development. But is this an accurate intellectual assertion? Does that theory hold water, especially in developing countries?

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, from my perspective, growth and development do not have to conflict; they can reinforce each other. In other words, economic growth and economic development are neither mutually exclusive nor are they perfectly correlated.

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, 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 mindset predicated on people advancement, cultural upliftment, 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.”

Essentially, economic development alleviates people from low standards of living into proper and effective members of civil society. As the concept 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, development implies a change in the way goods and services are produced, but not an increase in their actual production.

Crucially, 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 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 Amartya Sen 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, Jagdish Bhagwati and Arvind Panagariya, 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.

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, or are indeed major determinants for nation-building. Taking economic growth for granted and focusing just on social development is a mistake. Taking economic development for granted while focusing just on GDP growth through industrialization will be equally risky. 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 and civil society are equally responsible partners.

Does growth create development? There are different opinions on that question. Firstly, 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 asserts 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.

For comments, write to [email protected]. Clement Wulf-Soulage is a Management Economist, Published Author and Former University Lecturer.