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GROWTH & DEVELOPMENT

Week 1 – Meaning, Measurement, and Determination of Development

Intertwined nature: what we think development is and how we go about measuring it.
• How is development commonly measured?
• What is the relationship between indicators of human welfare and levels of income per capita?
• How useful are the composite indices of human welfare that have been proposed?
• How useful are the indices of happiness that have been proposed?

Plan – to look at introductory issues briefly, discuss the past, and then look at one of the most prominent
composite development indicators, the Human Development Index, HDI. Provide a critique of it – and its
theoretical backing. Look at happiness measures, a new and trendy way of measuring welfare.

INTRODUCTORY ISSUES

It may come as some surprise to those of you sitting here, that there is no consensus on what exactly
development is and, on how it should be measured or assessed. There might be general agreement that
development is about improvement in human welfare (meaning general human flourishing) and that it is
multi-dimensional (meaning that it has a number of aspects or components). This is as far as agreement
goes, with agencies, academics and policy makers having a number of different viewpoints.

Do you know what the World Bank uses as the standard international poverty line of about a $1 per.
However, as well as an income per capita poverty line, they have also funded the Voices of the Poor
study, from 23 developing countries, and found six dimensions of well-being emerged as important to
poor people. These are in your handout.

Table 1. Voices of the Poor

Material Well-being: having enough Security:


Food Civil peace
Assets A physically safe and secure environment
Work Personal physical security
Lawfulness and access to justice
Bodily well-being: being and appearing well Security in old age
Health Confidence in the future
Appearances
Physical environment Freedom of choice and action

Social well-being: Psychological well-being:


Being able to care for, bring up, marry and settle Peace of mind,
children
Self-respect and dignity Happiness,
Peace, harmony, good relations in the Harmony (including a spiritual life and religious
family/community observance)

Source: Alkire 2002.

Martha Nussbaum from a human rights perspective has a list of 10 central human capabilities, with the
express intention that these should provide the basis for ‘‘constitutional principles that should be

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respected and implemented by the governments of all nations.’’ Life, Bodily health, Bodily integrity,
(Senses, thought, imagination), Emotions, Practical reason, Affiliation, Other species, Play, Control over
one’s environment

Table 2. Nussbaum: central human functional capabilities

Life. Being able to live to the end of a human life of normal length; not dying prematurely, or before
one’s life is soreduced as to be not worth living.

Bodily health. Being able to have good health, including reproductive health; to be adequately nourished;
to have adequate shelter.

Bodily integrity. Being able to move freely from place to place; having one’s bodily boundaries treated as
sovereign, i.e. being able to be secure against assault, including sexual assault, child sexual abuse, and
domestic violence; having opportunities for sexual satisfaction and for choice in matters of reproduction.

Senses, imagination, thought. Being able to use the senses, to imagine, think, and reason—and to do these
things in a ‘‘truly human’’ way, a way informed and cultivated by an adequate education, including, but
by no means limited to, literacy and basic mathematical and scientific training. Being able to use
imagination and thought in connection with experiencing and producing self-expressive works and events
of one’s own choice, religious, literary, musical, and so forth. Being able to use one’s mind in ways
protected by guarantees of freedom of expression with respect to both political and artistic speech, and
freedom of religious exercise. Being able to search for the ultimate meaning of life in one’s own way.
Being able to have pleasurable experiences, and to avoid non-necessary pain.

Emotions. Being able to have attachments to things and persons outside ourselves; to love those who love
and care for us, to grieve at their absence; in general, to love, to grieve, to experience longing, gratitude,
and justified anger. Not having one’s emotional development blighted by overwhelming fear and anxiety,
or by traumatic events of abuse or neglect. (Supporting this capability means supporting forms of human
association that can be shown to be crucial in their development.)

Practical reason. Being able to form a conception of the good and to engage in critical reflection about the
planning of one’s own life. (This entails protection for the liberty of conscience.)

Affiliation. A. Being able to live for and towards others, to recognize and show concern for other human
beings, to engage in various forms of social interaction; to be able to imagine the situation of another and
to have compassion for that situation; to have the capability for both justice and friendship. (Protecting
this capability means protecting institutions that constitute and nourish such forms of affiliation, and also
protecting the freedoms of assembly and political speech.) B. Having the social bases of self-respect and
nonhumiliation; being able to be treated as a dignified being whose worth is equal to that of others. This
entails, at a minimum, protections against discrimination on the basis of race, sex, religion, caste,
ethnicity, or national origin.

Other Species. Being able to live with concern for and in relation to animals, plants, and the world of
nature.

Play. Being able to laugh, to play, to enjoy recreational activities.

Control over one’s Environment. A. Political. Being able to participate effectively in political choices that
govern one’s life; having the right of political participation, protections of free speech and association. B.
Material. Being able to hold property (both land and movable goods), not just formally but in terms of

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real opportunity; and having property rights on an equal basis with others; having the right to seek
employment on an equal basis with others; having the freedom from unwarranted search and seizure. In
work, being able to work as a human being, exercising practical reason and entering into mutual
relationships of mutual recognition with other workers.
Source:Alkire 2002

Doyal and Gough identified 11 ‘‘intermediate needs’’ that governments should address.

Table 3. Doyal and Gough: intermediate needs


Nutritional food/water
Protective housing
Work
Physical environment
Health care
Security in childhood
Significant primary relationships
Physical security
Economic security
Safe birth control/childbearing
Basic education

So there are a number of different ways of thinking about development – although there is some overlap
between the areas listed by different researchers. However, many of these dimensions seem different in
type to each other – so we have Doyal and Gough’s intermediate needs of safe birth control and voices of
the poor dimension of ‘security’ which includes ‘confidence about the future’.

I GAVE THESE EXAMPLES TO GIVE YOU AN IDEA OF THE DIFFERENT VIEWPOINTS THAT
EXIST AT THE PRESENT TIME ON WHAT DEVELOPMENT IS. This is not purely academic but
exists in real debates – and we can see fundamental differences in opinion about what the components of
development are in debates such as whether the jobs created by Nike sweatshops are jobs that contribute
to development or not.

LET ME MOVE ON TO AN EVEN MORE CONCRETE ISSUE: HOW is development measured at by


present by both POLICY MAKERS AND BY ACADEMICS.

Measurement through:
i) PPP adjusted Poverty Lines;
ii) HDI and other composite indicators;
iii) happiness surveys.

Illustrates debates over what development might be – and what indicators we should use to assess if it is
happening. Different responses to problems experienced.

CHANGES IN APPROACH TO MEASURING DEVELOPMENT

The situation in the 1960s and 1970s is usually characterized as being one where development was
entirely conceived as economic growth, i.e growth in national income – and welfare improvements seen
as occurring through increases in national income per capita. This is partly true – for instance the UN

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declaration that 1960s were to be the first decade of development set as its goal that poor countries should
achieve at least a 5% annual growth in income. As Gaspar says, the UN used GDP p/c as an indicator of
development into the 1980s.

The bulk of attention, particularly measurement, was on national income and particularly national income
per head, as this was though to provide an indication of the level of resources and hence wellbeing that
the average person could command. National income per head was measured either using Gross National
Product divided by the size of the population or as this was data was hard to calculate Gross Domestic
Product per person.

However, dissatisfaction with GDP and GNP per capita measures grew through the 1970s and was based
on the following issues that made it difficult to compare the data from different countries or to understand
what the data meant in terms of the outcome for the population:

• unevenness of income distribution – GNP pc is an average and doesn’t say anything about the
distribution of income across genders, households of different social standing, different
ethnicities.
• differences in the pattern of public spending – i.e. whether a government decides to provide
health services or a large army;
• differences in the purchasing power of the local currency in each country – GNP and GDP are
usually converted at their ruling exchange rates, but there are many reasons why this won’t be a
good measure of the ability to purchase goods and services;
• there are different degrees of accuracy of measurement associated with the national income data
collected in different countries – how good are the national statistics? Most poor countries will
have problems with measurement of GNP and will only attempt GDP with any confidence. Even
for the best there are problems. For example, in the articles by both Ravallion and Deaton on
your reading list, both quotes the example of India which has the best data of any developing
country. However, in India there have been reasons to doubt the accuracy of GDP data. Data on
consumption from the national accounts and from the national household survey shows
increasing divergence – with a key debate being about which one was to.
• differences in tastes, cultures, climates and working conditions will affect the way a certain
amount of income will transfer into a certain level of welfare.

These concerns led to two responses:


• improvements in the data on income – these focused on attempts to calculate what the true
purchasing power is in a country – and then to apply an adjustment factor to its GDP data so that
it can now be compared. Deaton discusses this in detail and we will come back to it later in the
convergence lecture. However, the data that results from it is used widely and you will see it
referred to as GDP at purchasing power parity. In itself it’s a problematic statistical technique
and it does not solve the other problems that I mentioned.
• Use of other indicators – such as composite indicators or happiness studies. What are composite
indicators – they are indicators that are comprised of several different data series.

And the first composite indicators were developed in response to a desire to find out whether people’s
basic needs were being met. Let me talk now about the Basic Needs approach and how it started.

1970s. The starting point of the basic needs approach was the argument that the benefits of development

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should reach the poorest groups – and fulfil their needs, which would be basic needs. And progressed by
academics like Paul Streeten and Francis Steward as well as certain international agencies, like the
International Labour Organisation.

It was proposed that countries should try to guarantee a minimum income to the poorest groups of the
population. This income must cover the primary needs of a family as regards food, housing, clothing but
also those fundamental services like "the availability of drinking water, public sanitation, transports,
medical care, other than an adequately paid job for whoever wished to work" (ILO, 1976).

The overall objective is to guarantee not only a certain amount of income, but a "full life" status for all.
This ideology was translated into particular measurement tools that would be used in conjunction with
GDP per capita when assessing the level of development of a country.

The most well-known measurement tools used in the Basic Needs approach was the Physical Quality of
Life index, developed in 1979. Which later joined by the world quality of life index (WPQLI) and the
north-south gap index the NSPQLI and a host of others.

PQLI – took data on literacy, infant mortality and life expectancy at age one and combined it into an
index. Why this simplified presentation – i.e. why combined? It was argued that it could improve a
government to assess performance over time. Also importantly and in practice the main driver was its use
by donors to justify the direction of donor funds, and to apply pressure.

The Basic Needs approach was concerned with human welfare as the purpose of development. But the
emphasis was overwhelmingly on defining ‘basic needs’ in terms of supplying services and commodities
rather than emphasizing human rights and freedoms. Although many of the proponents of the basic needs
approach, such as Paul Streeten, had emphasized people’s participation, the absence of strong and explicit
philosophical foundations of this approach left it open to be translated into a policy of ‘count, cost and
deliver’.

In 1984 Paul Streeten published a short article which reflected on ‘‘unanswered questions’’ of the basic
needs approach: who defines needs; were the goals of development full human flourishing or meeting
basic needs; where does participation fits in; which needs can institutions legitimately plan to meet.

For some time, then, the underlying theoretical rationale for using the various sets of welfare indicators
seemed to be lacking. However, in a number of works published between 1984 and 1990, the Nobel prize
winning welfare economist Prof Amartya Sen developed a theoretical basis for the use of certain social
indicators for the measurement and assessment of well-being.
This seems to have returned the measurement of development to sounder theoretical roots.

In order to assess well-being, Sen argued in favour of focusing on the capability to function, hence, on
what a person can do or can be, rather than on ability to purchase or to consume certain resources. For
Sen, development is defined as an expansion of capability: capability refers to a person’s freedom to
promote or achieve valuable functionings; functionings are beings and doings. E.g. whether well
nourished, well-clothed or taking part in the life of the community.

The capabilities of a person reflect the various combinations of functionings (’beings’) he or she can
achieve, which depends on the freedom a person has in terms of the choice of functionings and his or her
command over commodities. In this viewpoint, development is seen as increasing freedom over the
choice of functionings.

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THE HUMAN DEVELOPMENT INDEX

The capabilities approach was operationalised when UNDP began to calculate the Human Development
Index in 1990 – and were assisted in their early work on the concept and measurement of the HDI by Sen

Table - The HDI attempt to measure in a comparable way: longevity, education, and standard of living.
• Longevity is measured by life expectancy at birth;
• Education is measured by a combination of the adult literacy rate and the combined gross
primary, secondary, and tertiary enrolment ratio; and
• Standard of living, as measured by GDP per capita (PPP US$).

You should be aware that the components of the HDI have changed overtime a little and so when you are
reading some of the references they may be slightly at odd with the latest version.

Use of HDI: to focus attention of policy makers, media and NGOs on human outcomes, not economic
data. To question national policy choices - asking how two countries with the same level of income per
person can end up with such different human development outcomes (HDI levels).

An example, in your selection of data, you can see that in 2001 South Africa was estimated to have PPP
GDP per capita of 11,290 dollars. However, it ranks 111 in HDI out of 175 countries for which data is
available. Not on this sheet, but Argentina has a v. similar gdp pc of 11,320 but is ranked at 34 in terms
of HDI, with a life expectancy of 73.9 years, literacy of 96.9% and enrolment ratio of 89%.

Also other indicators: Human Poverty Index, Gender-related Development Index, Gender Empowerment
Measure.

The UNDP say that the HDI is used by heads of state, policy makers, the media, ngos and academics.
There is evidence that Brazil used regional measures based on the HDI to allocate $6.5b to combat
poverty – in addition, the law in Brazil now makes it mandatory to use the HDI to plan social
programmes; Japan and Sk have adopted the Gender Empowerment Measure in the formulation of
national legislation; and the results of the GDI for Cambodia had effect of getting the government to
improve access to education and health care.

However, this power and prominence is a cause for concern for those who are critical of the HDI.

Critiques of HDI:
• Data difficulties in components. The data problems that we mentioned for GDP are still there – as
GDP p c is part of the index – in addition there are problems measuring each of its components.
• ‘Standards’ of measurements and choice of weights – ‘hidden’ value system. Standards weights –
this is to do with the actual compilation of the data into an index, and so let me talk about how
that happens for the HDI.

Before the HDI is calculated, an index is calculated for each factor –

Life expectancy – life expectancy has certain goal posts set for it, so UNDP assumes that the max is 85
years. The minimum that UNDP thinks a country should achieve is 25 years. The life expectancy index
is worked out by calculating how far a country is above the mininmum in the light of this maximum.

On education – the two measures are in the form of percentages and are added together such that literacy
accounts for two thirds of the final score and enrolment one third.

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GDP p/c – measures an amount up to a maximum income of $40,000 US $ pc – with a mininum expected
of $100. Assumed that unlimited income not needed.

Then the three indicies – life expectancy, education and gdp pc index are averaged – i.e. they are given
equal weighting in the final score.

So the final HDI contains a number of hidden standards and weights that are assigned to the welfare data.
Some of these such as the weighting are arbitrary – i.e they do not reflect any known values about relative
importance of the three measures, eg. Is income as important as longevity or as education.

Srinivasan both provide a good discussion about the difficulties of this - For example, for very poor
countries, would an extra year of life expectancy be valued more than an extra year of literacy?

Just for one series, there are problems related to the manner of standardisation. Again, Srinivasan gives
an example. He says that the intrinsic value of living longer cannot be measured by a change in a
longevity index – why because a unit decrease in life expectancy at an initial life expectancy of 40 is not
like to be same as the value of a unit decrease when the initial life expectancy is 60 years.

So there are problems with the data for each element of the HDI, but these are compounded by the way
that the data is standardised and weighted. I.e the composite nature of the index is creates a problem of
interpretation and clarity. It effectively places certain values on particular human welfare achievements –
but these values have not emerged out of any kind of participatory process.

• Does it tell us more than income?

In measurement terms, both McGillivray and Srinivasan say that the HDI tell us very little more than an
index of GDP pc on its own – i.e. statistical analysis suggests that it gives much the same results as GDP
pc. So we might get the odd outlier, like south Africa, but overall there is a high correlation between the
two. This suggests that the HDI gives us little new in terms of identifying areas of policy.

• What is the relationship between income and welfare?

• Hanmer, Lensink & White – Journal of Development Studies, 40(1):101-18

Now we are going to talk in detail about income growth and poverty later in the term. However, here lets
talk about growth and welfare more generally. I’ve given you one example in your reading list, the
Pritchett and Summers article, but wanted also to include the publication by Hanmer et al. It should be
noted that both articles look at the relationship between income growth and health outcomes – they show
that while income growth appears to be important in explaining health outcomes, there is a great deal that
goes unexplained. So increasing health goes along with increasing wealth in general BUT A high
percentage of the variation in health outcome (p’haps 50%) cannot be explained by variation in income
growth – and this shows that other factors, particularly government health policy, are important. This
confirms the need to look at something other than income when we are assessing welfare – but it doesn’t
say what. I’ll come back to this later.

• Is it a conceptual departure? Who chooses components?

It is questionable whether the HDI does measure functionings. These could only be measured if we
knew what value different people or societies put on various outcomes. I.e we would need to know the
values of different levels of health and education before we could combine them or compare them. And
we would need probably observations of personal states. The indicators considered to be relevant refer to

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health (like morbidity or undernourishment), education, the ability to be housed and sheltered,
employment, leisure, security, etc.

Conceptually then, the HDI is on shakey ground – and may actually simply be a limited collection of
arbitrarily-chosen data, much as the PQLI.

These critiques share much in common with general critiques of the capabilities approach.

CRITIQUES: CAPABILITIES

How useful is capabilities approach – to what extent is it operational?

This raises two issues:

First, unlike the basic human needs approaches, Sen has refrained from developing (i) a list of basic
capabilities or (ii) from saying which capabilities within categories should have priority. Although he
gave examples of what capabilities and functionnings were, he felt that the actual list should be worked
out by debate. So we need to agree about valuable capabilities should be decided.

Secondly, the type of data one needs for the assessment of well-being within Sen’s theoretical framework
we have already said would probably observations of personal states. The indicators considered to be
relevant refer to health (like morbidity or undernourishment), education, the ability to be housed and
sheltered, employment, leisure, security, etc. Unfortunately, although the database is expanding,
internationally comparable data are not available for many of these indicators. We would need
considerably more sophisticated ways of measuring Human welfare.

Critics have complained because Sen does not give more direction as to what capabilities are especially
valuable, and given the extent of disagreement about what human welfare involves and the limited data,
critics have asked to what extent it is operational.

In theoretical terms, is the capabilities approach useful? Does development involve increasing freedom
of choice? (Gaspar)

More fundamentally, some authors have questioned whether development always and everywhere can be
indicated by increasing freedom of choice. Gaspar argues that there is extreme emphasis on choice in
capabilities approach.
- While Sen talks about rule-led behaviour, the dominant focus is on people as choosers – yet a
way of life is more than a set of private choices, as personality and identify have a psychic and
social grounding (p451).
- For Sen, expanded choice is always good. But some choices, Gaspar argues, have negative
consequences and choices need to be more related to value – i.e. the choice of visiting a casino,
or 1,000 varieties of biscuit, or choice over whether or not to end a child to primary school. This
takes us back to the issue of values – and then to thinking that some choices are more important
than others.
- This is important because development itself often leads to a clash of values – as lifestyles
change.

Focus on the individual diverts us from a wider analysis (Fine, Gaspar). Both Fine and Gaspar argue
that the focus on the individual in capability analysis diverts us from social and political analysis –
and this is crucial in understanding welfare outcomes.
- Gaspar (p44) says that while the use of the word human (for example in hdi) gives us a warm

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feeling, it can divert us from social and political analysis.
- Fine argues that to understand outcomes (as specific systems of provision) we need a political
economy analysis – that is an analysis that encompasses the macro, social and ideological – and
that this is excluded by Sen’s focus on the individual (p160).

Development brings both improvements and impoverishments (Vogel, Sender)

Finally, many authors writing about actual development experience both in recent and distant history
(Vogel, Sender) suggest that development brings both improvements and impoverishments., i.e. that the
history of human development appears to suggest that as development occurs only certain choices are
widened while others are restricted. Vogel argues for a conflict theory of history – while looking at the
modern African experience, Sender argues that development is a complex process – entailing
improvements in some facets of the human condition while also leading to deterioration in others. On this
he quotes Marx, who believed that the capitalist system would provide the most dynamic growth in the
living conditions of the people, while also leading to outcomes that would be sickening to the human
feeling. Marx saw British capitals emerged ‘dripping from head to foot, from every pore, with blood and
dirt’ as peasants were brutally evicted from their land. But remember, this was also a system that he
believed would lead to the most dynamic living improvements.

This type of work reminds us that development brings with it both improvements and impoverishments.
Vogel argues that the test is whether or not there is a better alternative.If development is uneven, crisis
prone and providing mixed results, then the capabilities approach may be mis-focussed. Why? It assumes
that there is a crisis-free, conflict-free development process by which all really occurring development
must be judged.

HAPPINESS OR SUBJECTIVE WELLBEING

The results of surveys of happiness or subjective wellbeing have been presented as indicating average
national happiness. This has been received favourably by policy makers and spawned many thousands of
articles in economic journals, that have been described as a new industry. One of the best known writers
in the UK at any rate, is Prof Richard Layard, who suggests in the title of a recent book, Happiness:
Lessons from a New Science, that something new has been added to the discipline of economics.

Surveys on the levels of happiness reported by individuals have been carried out over a few decades in
most Western countries. The recorded levels of happiness fluctuate from year to year, but in general there
is no trend, either up or down. Over the same period, average material standards of living, measured by
real gross national product (GNP) per head, have shown a very clear upward trend.

This finding is repeated endlessly and appears to have made an impression on many people. We see the
level of happiness over time rumbling along showing no trend. In contrast, there is GNP per head
bounding ahead, soaring into the stratosphere. Surely this proves that economic growth is not making us
happier?

Time series data show that nations do not get happier over time as they get richer. In contrast, happiness
is positively correlated with individual income within a given country at any point in time; the rich
generally report greater happiness than the poor. This, the so-called Easterlin paradox, named after the
doyen of happiness studies, Richard Easterlin, is also discussed at length in the happiness literature. An
implication which is widely drawn is that if we do not get happier as we get richer, this effect must be due
to the pernicious psychological effects of inequality.

These have led to wide ranging policy recommendations – such as the need for more progressive taxation.

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As well as giving new policy advice, the data also promises a solution to the problem of measuring
development. It suggests that we can get to the heart of what improvements in welfare are about:
happiness.

However, Johns and Ormerod show us that average happiness time series are, by construction,
incapable of conveying useful information on the level of overall social wellbeing, and their use should
therefore be rejected by policy-makers and social scientists.

First of all, the lack of correlation over time between measured happiness and the size of the economy, so
widely mentioned, is a wholly misleading argument. This lack of correlation extends to a wide range of
variables, a fact which attracts far less publicity.

They show that there is no correlation in time series data between reported happiness levels and a whole
series of factors which might reasonably be thought to affect well-being: income, public spending,
longevity, gender equality, income inequality – even the incidence of depression in a population.

In fact, dramatic rises in inequality in both the United States and UK had no impact on happiness, as
shown for the US in Figure 1 – dotted line is the gini coefficient which is a measure of inequality, solid
line is well-being.

However, in examining the reasons why average happiness is flat it is important to examine the way in
which happiness is measured. People are asked to register their level of happiness on a scale of n
categories (e.g. 1 = ‘not happy’, 2 = ‘fairly happy’ or 3 = ‘very happy’). These numbers are then averaged
over the population to gain an overall happiness score. Discrete categories mean that people have to
undergo large discrete change in their happiness in order for this to be registered by the indicator; and
once they have reached the top category they officially can’t experience any further increase in their
happiness. As a consequence, noticeable changes in average happiness can only come about through
substantial numbers of people moving category.

As a general rule, if the happiness of 1% of the population (net) increases enough for them to place
themselves in the next category, the average happiness score increases by 0.01. For example, happiness
surveys on a 3-category scale in the US typically yield an average happiness of about 2.2. In order for the
measure to undergo a 10% increase, 22% of the population would have to undergo a substantial enough
increase in their happiness for them to shunted up to the next category.

It is very difficult to think of a set of circumstances in which 22% of the population would find
themselves moving from, say, ‘fairly’ to ‘very’ happy over the space of a few years, particularly as genes
and formative experiences play a large role in determining someone’s happiness. It is therefore not
surprising that we observe average happiness to be sluggish compared to other social or economic
indicators such as GNP.

Furthermore, by construction, the happiness data can exhibit no indefinite trend. As individuals answer a
survey in which they are asked to state their own level of happiness on an n-point scale, the data is
therefore bounded between one and n. Over any particular short period of time, an apparent trend either
up or down might exist, but by definition it cannot persist. In contrast, at least as it is presently defined,
real GNP can exhibit no upper bound.

Indeed, for the past 200 years it has shown a persistent trend increase.

This means that we have to exercise extreme caution in drawing any inferences from the correlation, or
rather the lack of it, between time series data on well being and real GNP. From a statistical perspective,
any calculation of a correlation between a variable which exhibits a trend and one which does not is

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fraught with inherent problems.

Johns and Ormerod argue instead that the variations which we observe in measured happiness are
completely consistent with the view that they are simply fluctuations based on sampling error.

The conclusion is therefore that society-wide happiness time series should be abandoned as they don’t tell
the social scientist anything useful; in addition, the flatness of happiness time series most certainly cannot
be pinned on the economic system, and neither do they point to some kind of social aberration in need of
government correction.

This scepticism has to be understood carefully. It doesn’t mean that maximising GNP is all that matters –
and it doesn’t apply to studies of the perception of happiness at an individual level. the more credible
results from happiness research seem to come from treating happiness scores as ordinal - i.e. using
ordered models on the probability of an individual placing him or herself in particular category. Such
analysis does produce intuitively sensible results, such as stable family life, being married and good
health, contributing to happiness, while chronic pain, divorce and bereavement detract from happiness.
These results, while consistent with everyday experience, don’t however really tell us anything we didn’t
know already.

In fact, Tribe reminds us that the ordinal nature of happiness data was recognised more than a hundred
years ago, being a source of discussion by Weber, who was dismissive of the assertion that such material
could be thought of as being cardinal (or an absolute measure of welfare). Tribe further reminds us that a
concern about ‘happiness’ was at the heart of the work of the earliest economists, but fell out of favour,
particularly as the discipline became more formalised and the unquantifable concept of happiness failed
to conform to this new goal of rigour. So happiness is not new, and neither is the recognition that it
cannot be used in the way some might hope.

CONCLUSIONS

Composite indicators have become powerful tools for directing attention and funds. However, numerous
data and methodological problems. Do they obscure more than they reveal? Possibly given the apparent
certainty that they suggest about poor data – and also the complexity of the value judgetments that are
made behind the scenes in the calculation of the HDI.

Moreover, real development issues lie with confronting what Vogel calls the Conflict Theory of History:
impoverishment occurring at the same time as improvement. The question is what is acceptable and to
whom. For this we need clarity – which we don’t get from the HDI or other composite indicators.
The alternative is not to fall back solely on income measures, but to use a range of single data series on
their own – rather than producing a muddled composite indicator. These separate indicators illustrating a
wide range of aspects of welfare. And if we want to fully understand if development has occurred we
need not only numerical information, but also detailed investigations into a range of factors that constitute
human welfare, drawing on historical, social and political factors.

This topic makes us think about why we need development data – what is it for and in what content will it
be used. Many people would argue that we need composite indicators in order to have simplified data to
use in league tables. However, this lecture should have shown that such simplification comes at a cost.

Finally, this topic illustrates the importance of improving data collection in developing countries.
To do this, I hope that you will be convinced that it is vital to improve data collection in poor countries.
That the subject of data collection is not an add-on to the issues of development but is fundamental if we
are to assess if development is indeed taking place.

- 11 -
Sample of Human Development Index data:

H Life Adult Combined GDP Life Educ G Huma GDP


D expec litera primary, per expec ation D n per
I tancy cy secondary capit tancy Index P Develo capita
r at rate and a index in pment (PPP
a birth (% tertiary (PPP de Index US$)
n (year aged gross US $) x 2001 rank
k s) 15 enrolment minus
2001 and ratio 2001 HDI
above (%) 2000- rank
) 01
2001
1 Uzbe 69.3 99.2 76 2,460 0.74 0.91 0. 0.729 21
0 kistan 53
1
1 China 70.6 85.8 64 4,020 0.76 0.79 0. 0.721 -2
0 62
4
1 El 70.4 79.2 64 5,260 0.76 0.74 0. 0.719 -17
0 Salva 66
5 dor
1 Algeri 69.2 67.8 71 6,090 0.74 0.69 0. 0.704 -31
0 a 69
7
1 Viet 68.6 92.7 64 2,070 0.73 0.83 0. 0.688 21
0 Nam 51
9
1 South 50.9 85.6 78 11,29 0.43 0.83 0. 0.684 -64
1 Africa 0 79
1
1 Indon 66.2 87.3 64 2,940 0.69 0.80 0. 0.682 2
1 esia 56
2

12
GROWTH AND DEVELOPMENT
Week 1: The Meaning, Measurement, and Determination of Development

• The “Closure” Method of Comparing Alternative Theories of Growth and Distribution

This note seeks to subject alternative economic theories of growth and distribution to rigorous
comparison, by means of treating these theories as alternative ways of “closing” a common
analytical frameworks to form alternative theoretical models. This approach is in the tradition
of Sen (1963), Marglin (1984), Dutt (1990) and Taylor (2004). Indeed, this note is entirely
taken from Dutt (1990, ch.2-3).

The main objective of this note is to clearly delineate the different “causal structures” (i.e.,
closures) of the alternative models, and therefore the alternative theories.

We will not dwell on the question as to how these closures are constructed – whether it is
individualistic rational choices (neoclassical), the expansion and penentration of particular
social relations (Marxian), the interaction between particular individualistic choices and social
relations (Keynesian), or anything else – which is left to be done in the week on growth
theory. What is of note is that the analysis of growth and distribution within the “alternative
closures” framework can be taken as the point of departure for subsequent analysis of
development issues such as industrialisation, employment, and foreign trade.

• The General Framework

Starting with the quantity side, output can either be consumed or invested, so that
X = CL + gK
where X is output, L the amount of employment, K the amount of capital, C the consumption
per employed worker, and g the rate of growth of capital. Dividing by X and denoting the
employment-output ratio given by the fixed coefficients technology by a0, we get,
1 = Ca0 + g(K/X) (1)
which is the production equation. Note that the asymmetry which allows excess capital to
exist, but the labour-output ratio to be fixed technologically. If a1 is the technologically fixed
capital-output ratio, then
K/X ≥ a1 (2)
where the equality implies production at full capacity. At that point, the economy can be
represented by the potential consumption-growth frontier given by 1 = Ca0 + ga1. This has
C and g intercepts 1/a0 and 1/a1, respectively, and a slope of -(a1/a0).

Turning now to the price side, price per unit either goes to wages or to profits, so that
P = Wa0 + rP(K/X)
where P is price, W is the money wage, and r the rate of profit, defined as the value of profit
divided by the value of capital, so that rPK is total profit. Dividing through by P we get

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1 = Va0 + r(K/X) (3)
where V (= W/P) is the real wage, which is the price equation. From (2), and analogous with
the quantity side, we have the potentital wage-profit frontier given by 1 = Va0 + ra1.

The two equations (1) and (3) contain five variables: C, g, V, r and K/X. Two further
assumptions – that there are two classes, and that only capitalists save (by a fraction s of their
income) – give rise to a third equation
PCL = WL + (1 - s)rPK
where WL is the wage bill and (1 - s)rPK is consumption out of total profit. Dividing through
by PX and substituted into (1), implies
g = sr (4)
which states that investment equals saving. Two more equations, in addition to these three,
are needed to determine the long-run equilibrium, i.e. to solve the five variables.

C
V
1/a0 1/a0

X/K 1/a1 g X/K 1/a1 r


The potential consumption-growth frontier The potential wage-profit frontier

• The Neoclassical Closure

Two assumptions: (a) perfect competition; and (b) no unemployment of labour. In addition,
the supply of labour is assumed to be growing at an exogenously fixed rate, denoted by n.
From (a), production will be at full capacity
K/X = a1 (5)
From (b) labour supply is equal to labour demand, both growing at the same rate; and from
(5) and the constant returns to scale assumption, labour demand grows at the rate of capital
accumulation, so that
g=n (6)
Now, with the five equations, we can solve the five variables. The mechanism runs in the
following way: first, g* = n determines r*, second, r* determines V*, and, third, g* = n
determines C*. The result: of the four parameters n, s, a0 and a1, only n can alter g. That is,
n ⇒ g*,
r* (to increase saving rate and hence K), and
V*↓ (to make r* possible).
Thus, an inverse relation between r* and V* (real wage), and between g* and V*.

• The Neo-Marxian Closure

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Two assumptions: (a) full capacity production; and (b) V is exogenously given – subsistence
wage, associated with the existence of the reserve army (i.e. g ≤ n). From (b)

V=V (7)


where V is the level of the fixed real wage. This, together with equations (1), (3), (4) and (5),


solve for the five variables. The mechanism runs in the following way: first, V determines r*,

second, r* determines g*(which is unrelated to n), and, third, g* determines C*. The result:

g* is now seen to depend on the four parameters V , s, a0 and a1. That is,


V ⇒g*↓, and
r*↓.
− −
Thus, an inverse relation between r* and V (real wage), and between g* and V .

• The Neo-Keynesian Closure

Two assumptions: (a) full capacity production; and (b) firms have a higher desired rate of
accumulation when the rate of profit is higher – owing to the uncertainties which they face.
From (b)
g = g (r) g' > 0 (8)
This, together with equations (1), (3), (4) and (5), solve for the five variables. The mechanism
runs in the following way: first, g* and r* are simultaneously determined by g (r) = sr (that
is, they are not automatically equal to each other), second, r* determines V*, and, third, g*
determines C*. The result: g* is now seen to depend on g (r) and s. That is,
An upward shift of g = g (r) ⇒ g*, and An increase in s ⇒g*↓,
r*, r*↓,
V*↓, and V*, and
C*↓. C*.
Thus, an inverse relation between g* and V, and between r* and V*.

• The Kalecki-Steindl Closure

Two assumptions: (a) firms set the price level as a markup on prime costs; and (b) firms have
a higher desired rate of accumulation if the rate of profit is higher, or, the rate of capacity
utilisation is higher. From (a),
P = Wa0(1 + z) (9)
where Wa0 is the prime costs, and z the markup rate determined by the degree of monopoly
power. From (b)
g = g (r, X/K) (10)
These, together with equations (1), (3), and (4), solve for the five variables. The mechanism

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runs in the following way: first, z determines V*, second, g* and r* are simultaneously
determined by g (r, X/K) = sr, third, V* and r* jointly determine (X/K)*, fourth, g* and
(X/K)* jointly determine C*.

Among the comparative statistics results, of greatest interest are effects of a change in z:
z↓ ⇒g = g (r, X/K) shifts upwards, i.e. g* & r*,
(because the wage-profit rate configuration moves closer to the frontier)
Thus, a better distribution of income accompanies a higher rate of growth, and a higher real
wage is associated with a higher profit rate.

• Remarks

(1) The purpose of this section is to bring the alternative theories of growth and distribution
into comparison – a comparison that is done in terms of models, which is an innovative
method as the theories have been developed by differing organisational principles (and
have focused on differing levels of abstraction) and therefore dialogue among them have
been largely absent.
(2) It is an open question as to the formulated models are a faithful representation of the
theories (Dutt 1990 provides some justifications), but this need not bother us.
(3) What is important to note is that the models covered here are just basic frameworks,
abstracting from important considerations like technical change, inter-sectoral relations
and trade (which are added to complete the models in subsequent chapters), and hence
we cannot derive much thing substantial of the difference between the theories. Some of
these issues will be analysed within the same framework in subsequent weeks.

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