The relationship between economic growth and human flourishing
The relationship between economic growth and human flourishing
The first chapter established that there is no automatic link between economic growth and human flourishing. Countries with a high GDP per capita, such as Saudi Arabia, do not necessarily exhibit high human development achieve- ments, for example. It is not because income per capita rises that one will necessarily observe corresponding increases in life expectancy, literacy and
other human freedoms. 22 Economic growth does indeed provide the resources to sustain improvements in human development, but only if it is accompanied by many other things, including higher public expenditures on health and education, and particularly female education.
Ranis et al (2000) highlight four factors that influence the extent to which economic growth contributes to human flourishing. First, there is household activity, especially the households’ propensity to spend their after-tax income on items that contribute most directly to the promotion of human flourishing, such as food, potable water, education and health. The extent to which households spend on these goods depends on who controls the expenditures in the household (greater female control over household income and greater female education often mean higher spending on such goods). Second, the extent to which economic growth increases the incomes of the poor depends on income distribution in the country itself, and the extent to which economic
ECONOMIC GROWTH
growth is capable of generating employment for low-income groups and rural households. Third, the level of government activity influences the translation of economic growth into improved quality of life. This depends on the public expenditure ratio, the social spending allocation ratio (the proportion of total government expenditures going to the education and health sectors), and the social priority ratio (the proportion of total social expenditures going into primary areas, such as basic education). These three ratios are determined especially by the tax capacity of the government, the size of military expenditures, corruption and the level of decentralization in the government. Finally, NGOs can be an important factor in promoting human flourishing.
But the relationship between economic growth and human flourishing is not only uni-directional: it goes in both directions. Ranis et al (2000) highlight the following mechanisms through which improvements in human flourishing contribute to greater economic growth: (1) Health, primary and secondary education and nutrition raise the productivity of rural and urban workers; (2) secondary education facilitates the acquisition of skills and managerial capacity; (3) tertiary education supports the development of basic science, the appropriate selection of technology imports, and the domestic adaptation and development of technologies (see the discussion above on ICTs); (4) secondary and tertiary education represent critical elements in the development of key institutions, such as government, the law and the financial system; (5) a better educated workforce is more creative, leading to greater technological innovation (see above); and (6) a better educated female workforce leads to reduced fertility rates, and hence higher economic growth per capita. Ranis et al (2000) however qualify the role of education in promoting economic growth: for education to lead to economic growth, one needs a certain quantity and quality of foreign and domestic investment so that employment opportunities can be created. Figure 4.2 summarizes the bi- directional relationship between progress in human development and economic growth.
Gathering evidence for 76 countries over 30 years, Ranis et al (2000) classify country performance into four categories: virtuous, vicious and two types of lop-sidedness – lopsided either with strong human development but weak economic growth (HD-lopsided), or lopsided with strong economic growth but weak human development (EG-lopsided). In the virtuous cycle, human development enhances growth, which in turn promotes human development, and so on. In the vicious cycle, poor performance on human development tends to lead to poor growth performance, which in turn depresses human development achievements and so on. On the other hand, HD-lopsided may happen when good human development performance does not generate good economic growth, due to a dearth of complementary resources arising from low investment rates. However, Ranis et al conclude that such a scenario does not persist in the long-term. Countries can thus move in all directions except from EG-lopsided to the virtuous cycle. In other words, unless concern for human development is included in policies aiming
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Human Development Progress (HD)
Human Development Capabilities of
improvement function labour, managers,
entrepreneurs
Social allocation NGO income, Choice of technology;
Household
and priority allocation and R and D; local adaptation
expenditure
ratios priority ratios domestic saving
patterns and
and innovation
Foreign and
allocations
and investment
CC
H Level and
Distribution
Household
Govt. expenditure
A composition of
of income
income and
ratios (central and
IN
I exports and output
poverty rates
local)
NB
Economic Growth (EG)
Figure 4.2 Causal chain between human development and economic growth
Source: Gustav Ranis, HD Insights, UNDP Human Development Report Office, Issue 6, March 2007; see also: http://www.econ.yale.edu/~granis/
at promoting economic growth, the latter cannot be sustained in the long term, and hence improvements in human flourishing cannot take place in the future.
Figure 4.3 traces the experience of different countries. In the 1960–2001 period, East Asian countries tended to experience a virtuous cycle, sub-Saharan Africa a vicious cycle, and Latin America a HD-lopsided development pattern.
The findings of Ranis et al demonstrate that economic growth is essential to human development, but it all depends on the kind of growth and the strength of existing mechanisms for translating growth into human flourishing. Echoing the findings above, the 1996 Human Development Report enumerates the following ingredients to enable economic growth to contribute to human flourishing: 23
• equity: equal distribution of economic opportunities; • job opportunities: opportunities for productive and well-paid work;
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60 HD Lopsided Virtuous
30 REGION South Asia
20 Middle East Latin Am/Carib East Asia
% HDI* Shortfall Reduction (1960–1992) 10 Vicious EG Lopsided Africa –4
% GDP per capita growth (1960–92)
Figure 2. Classification of country perfomance (1960–92). Note: The horizontal and vertical lines defining the four quandrants represent developing country averages weighted by population.
Figure 4.3 Human development and economic growth performance: Cross-country evidence
Source: Gustav Ranis, HD Insights, UNDP Human Development Report Office, Issue 6, March 2007; see also: http://www.econ.yale.edu/~granis/
• access to productive assets: equal access to assets, such as land, physical infrastructure and financial credit; • social spending: channelling a major part of public revenue into high priority social expenditure; • gender equality: investing in women’s capabilities and empowering them; • population policy: creating the conditions for slower population growth; • good governance: those in power giving high priority to the needs of the
whole population, and people participating in decision-making at many levels; and
• active civil society: non-governmental organizations and community groups playing a vital role in enhancing human development.
Without appropriate public policies, economic growth can end up being jobless without increased employment opportunities; ruthless with benefits going mainly to the rich rather than the poor; voiceless without an expansion of empowerment and political engagement; rootless by stifling rather than encouraging cultural diversity; and futureless by depleting natural resources rather than being environmentally friendly.
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