Document(s) 5 of 16

In the first chapter, we detailed some unverified assumptions regarding the relationship between economic growth and human flourishing. We noted that the positive link between the two is not as obvious as one might think. There are countries that have experienced high rates of economic growth but not necessarily an expansion in valuable capabilities. We cited the example of India which, after 15 years of steady economic growth, still shows no decrease in the rate of malnutrition among its children. This chapter explores in a more systematic way the mechanisms through which economic growth leads to the expansion of valuable capabilities.

This chapter is divided into three sections: the first section reviews how economic growth has been treated in the history of economic thought. It illustrates that there are divergent views among economists about the role of economic growth in the promotion of human flourishing. The second section discusses various economic growth theories that have been prevalent since the 1950s and are still called upon today to support economic growth as a key development objective. It argues that considerations about what constitutes economic growth and human flourishing, what factors cause or facilitate them, and how they are related depend upon the respective ideological positions, theories and historical experiences of different societies. The final section analyses the specific contribution of the human development literature to the growth debate.

Concluding with questions and points of discussion, the chapter assists readers in forming their own respective opinions. There is no canonical view about the relationship between economic growth and human flourishing. Short historical reviews of economic thought and experience inevitably tend to be both selective and interpretive, and this one is no exception. But the chapter attempts to be as broad as possible. Readers are advised to read widely on the basis of the literature provided here and elsewhere, and to draw their own conclusions.

Growth in the history of economic thought

Classical economists

Some of the major classical economists were: Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill and Karl Marx. As Europe moved from feudalism into capitalism, the major preoccupations of classical economics were about the relationships between laissez-faire policies – free markets with everyone pursuing their own personal gain – and the development of society itself, where issues such as power, class, individual equity, governance and the emergence of democracy played a critical role. Most classical British economists were interested in the same key questions: what propelled economic growth and what determined its distribution? The 19th century saw the development of laissez-faire economies, with workers and goods free to move, and workers’ organizations free to advance their own respective interests.

In establishing the theory of comparative advantage, Ricardo made economics even more concerned with efficiency: all economies can gain by specializing in the production of goods that they are better at producing, and by trading them with other countries. For example, given that Portugal is more abundant in land suitable for growing vines, and England more abundant with land for grazing sheep, one country has an advantage in specializing in wine production and the other in wool.¹ Adam Smith’s demonstrations of specialization, self-regulating markets and ‘the invisible hand’ are well known. But classical economists were invariably political, and economic considerations were rarely divorced from political and ethical concerns. Smith was very clear that there were many internal and international conditions necessary if market-regulated economies were to work, such as the ability to ‘see the world through the eyes of other people’, which was fundamental to the pursuit of justice, a central theme in Smith’s works (Rothschild, 2001).

Of the classical economists, Marx was the most focused on labour, although all the classical British economists (and intellectually Marx was one) used various labour theories of value. Marx’s theory holds that the value of goods and services is ultimately based on human labour input. He predicted that socialism would replace capitalism, as the workers would ‘rise and abandon their chains’. But the 20th century failed to play out this prediction. This convinced many that a socialist state which provided incentives, minimized rent-seeking behaviour based on position rather than a contribution to the economy, avoided state control and repression, and that was efficient and stable enough to avoid economic collapse or drastic political reform, has yet to be found. Despite this, Marx foresaw many of the problems and opposition that the expanding global dominance of market forces and industrial power would encounter.

Pre-World War II: National Accounting

Along with major experiments in centrally-planned economies, the development of the theory of efficient market functioning continued, and national economic accounts were developed and refined to provide detailed data on production, consumption and the trade of goods and services – and of factors of production – across all domestic economic sectors² and in trade with other countries. Aggregate measures of domestic or national production and income, and their change from year to year, became the standard measures of economic growth.

Gross domestic product (GDP) is the total value-added in production of goods and services within an economy in a year.³ Value is added at each stage of the production of a product,⁴ by factors of production (land, labour and capital), which are paid for accordingly. GDP is therefore equal to total national income (Y) – paid to factors in the form of wages, interest, rents and profits (w, i, r and p). These incomes are spent each year on household consumption of final goods and services (C), investment (I), government spending (G) and net exports (exports minus imports or X–M):

GDP = Y = w + i + r + p = C + I + G + (X–M)

The distribution of income depends on who in a society owns which factors of production: land/resources, labour/skills or capital (plant and equipment).

Measuring economic growth performances, with GDP as a primary measure, requires national accounts. But GDP, while certainly useful and important, has several serious drawbacks, as a measure of both economic activity and well-being. As a measure of material consumption, income and expenditure, the figures leave out many components, including environmental damage, activities in the informal sector that dominate in many countries (the informal sector accounts for 85–90 per cent of the Indian economy, for example), household and reproductive work, and non-profit activities such as volunteering. Furthermore, all public sector activity is valued at cost, as there are no markets and prices for most public services. Moreover, GDP is the economy-wide total and does not give information about what happens at the individual- or household-level. More individual income or consumption data are needed. Another severe limitation of GDP is that it does not take into account certain variables that matter for human flourishing. Neither income nor expenditure measure the well-being people obtain from such goods and services. Thus, Bill Gates is not necessarily millions of times better off than the average American. People derive well-being not only from consuming goods and services, but also from peace, meaningful employment and fulfilling relationships, etc. (see Chapter 2).

Polanyi vs. Hayek

In his Great Transformation, Karl Polanyi (1944) analysed the development of markets from early history to the great transformation of the 1900s, particularly the separation of their control first from monarchs and then from guilds in the 18th and 19th centuries. State intervention was to be minimized, except where markets failed. In this regard, Adam Smith’s Wealth of Nations(1776) had been an important landmark. Polanyi argued that labour should not be seen just as another commodity for sale, both because of the intrinsic value societies place on labour (work as part of human dignity) and because markets tend to fail in promoting human flourishing on their own (education and health are not best provided only by the free functionings of markets but also by public provision). He argued that effective regulation at macro and sectoral levels were urgently needed. The great transformation thus included building the capacities of both government and market institutions. Like Marx, Polanyi saw the end result as the socialist state, but also predicted opposition and problems for its opposite – the global rule of market forces and industrial powers.

Fredrick von Hayek, a rival and ideological opponent of Polanyi’s, had a strong influence in setting out the case for market efficiency and minimal government intervention. He saw in the price system the key allocative mechanism in an efficient market economy. The Road to Serfdom became a seminal publication for market liberalism, as has already been discussed in Chapter 3. Governments, which had substantially expanded during both World Wars, did not contract in the post-war era and had begun to develop obvious pockets of inefficiency. But, instead of demanding efficiency in core public sector functions, neoliberals demanded that the role of government be minimized instead.⁵

The elegant calculus of neoclassical economics has been highly influential in promoting this view. In seeking to maximize their ‘utility’ by consuming goods and services, consumers express to the production system exactly what they want – voting with their wallets. In seeking to maximize profits, producers make what people want as efficiently as possible, given the resources available to the economy at any given time (natural resources, labour, capital and knowledge). At the ‘margin’ of everyone’s efforts, wages, interest, rents and profits received by factory owners exactly equal the value of their contribution to economic production. There are no ‘excess’ profits in a competitive system, beyond market-determined payments for the contributions of all resource owners.

This efficient equilibrium occurs because of price mechanisms. The prices of production factors, as well as those of goods and services, are constantly adjusting themselves to reflect changes in consumer demand or production costs.⁶ These adjustments, however, only work under conditions of perfect competition, that is, large numbers of producers and consumers, no market power exercised by any groups of producers or consumers, no barriers to trade of goods or factors, equal information available to all market participants and many other conditions. These never fully exist in real markets, of course (see Chapter 7). In reality, many situations of imperfect competition tend to exist. In addition, the idea of efficient market operation only applies to goods that are individually consumed, and there is a further set of public goods, like health, education, law/justice, the environment, equity and security that comprise about a quarter of the GDP of most economies.⁷

Keynes and Schumpeter

Keynes’ General Theory of Employment, Interest and Money (1936) helped to formalize important traditions of economic thought. While neoclassical economics is about the (static) efficiency of resource allocation, it does not explain how production grows. According to Keynes, the principal mechanism in market economics is savings and investment. People hold back income from consumption in a year, and use it to increase the production capacity of the economy in the future – investing it in capital (building plant and equipment) and education (building skills and knowledge). He argues that the rate of saving is one of the main drivers of growth in market economies. Thus the growth theory of the post-war period focused on the rate of saving, and the productivity of the new capital in raising income.

Keynes focused more on the imbalances which arose between intended savings and investment, and between money demand and supply, and on the nature of instabilities and disequilibria that could result from these imbalances – notably unemployment and other factors. The Great Depression had reinforced the importance of stability, in addition to efficiency, and had demonstrated that growth could be de-railed and in fact entirely undone by severe macroeconomic instability. To this day, debate has continued about how governments can best achieve greater stability. Keynes was also influential in the creation of the Bretton Woods institutions after the war – the International Bank for Reconstruction and Development (IBRD, now the World Bank group) and the International Monetary Fund (IMF). These were designed to promote stability, reconstruction and liberalization in global finances. The General Agreement on Tariffs and Trade (GATT), which resulted from the failure of governments to create an International Trade Organization at the Bretton Woods negotiations, was directed almost entirely at trade liberalization.

These institutions have been central in maintaining strong market economies and a liberalization agenda in global economic and development relations, reflecting the views and interests of the US and European countries, who continue to remain the dominant financial contributors in the international arena today. But although Keynes and ‘Keynesian economics’ were very influential, arguing for a public sector role in stabilizing market economies, the Bretton Woods institutions and WTO still maintain a strong non-interventionist agenda. We will return to these issues later.

Another influential perspective on economic growth in the immediate postwar era was Schumpeter’s Capitalism, Socialism and Democracy (1944). While critiquing Marx, he argues that capitalism will ‘decompose’ for a number of reasons, including monopolistic practices, the destruction of the institutional framework of capitalist societies, a ‘growing hostility’ to excessive materialism and ‘the process of creative destruction’ inherent in capitalism. Current thinking on growth and development, as will be detailed below, takes somewhat similar views. The rapid growth of countries as large as China – with successes, failures, experimentation and enormous learning curves – reinforce the view that there is no general or single (capitalist) model of economic growth and development. Creative destruction also recalls an earlier focus on technological change as a central driver of economic growth. Factors that generate and facilitate technological development and change (innovation) have become major analytic concerns, particularly in the past two decades.

Public economics

Public finance, better understood as public economics, underwent extensive development in the mid-20th century. It is mainly concerned with the principal operations of governments, public goods provision (expenditure), public revenue raising (taxation and borrowing) and economic stabilization. The most well known public finance economists include Richard and Peggy Musgrave, Ursula Hicks, Kenneth Arrow and Paul Samuelson. Public economics defines the principal functions of government as efficiency, equity, stabilization, public engagement and participation.

One major failure on the part of markets in allocating resources efficiently is in the area of public goods and services. It is not efficient for many individuals and groups in a society, for example, to have their own respective defence forces or legal and justice systems; once in place, these services generally tend to be available to everyone and are collectively consumed. Less completely collective in consumption are, for example, education and health, where the benefits of services go mainly to the individual student or patient, although if an individual is healthy or well-educated, many others (as family, friends, co-workers or fellow citizens) also benefit. In such cases, markets either fail to produce the services or allocate too few resources. Public financing and provision of these services is necessary from the point of view of pure ‘efficiency’.

Environmental degradation involves a similar kind of collective consumption and market failure. Global warming occurs because we collectively release too much carbon into the atmosphere. We collectively consume the ability of the atmosphere to absorb carbon because, in the short-term, no one has to pay. In the longer-term, however, we all pay. But, because market forces do not assign the costs to individuals, collective action is needed. A public economics solution to this would be for all countries to agree upon maximum global carbon emissions levels annually, and to then assign these global quotas to countries on the basis of a collective agreement that favours poorer countries. The latter would get higher allocations than they currently need if, for example, quotas were based on population. They could then sell part of their quota. A true marginal cost of burning carbon would be established, and poor countries would gain.

A second category of market failure lies in the concentration of market power (imperfect competition) in the hands of a few sellers or buyers. In the cases of monopoly and oligopoly (when there is one or very few dominant sellers), consumers pay too much and the dominant producer(s) earn/s monopoly profits. In reality, almost all markets have some degree of market concentration. For the more extreme cases, where consumer welfare is strongly affected, countries use competition policy instruments and related regulation to break up or reduce monopolies/oligopolies and increase the efficiency of the economy’s operation. An insufficient capacity to employ competitive policies leaves consumers in many developing countries open to the monopolistic tendencies of both domestic and foreign producers.

A second function of government, in addition to correcting market failures, is to establish equity, for a purely market economy does not redistribute income and wealth. The only significant avenue open to individuals is to save and invest, so that their income and consumption can increase over time. This is particularly hard to do for poor people whose consumption is already too low to permit survival, let alone savings. Most societies therefore redistribute resources from the rich to the poor, and the tools of public economics analyse the different redistributive options – mainly types of government taxes and expenditures – in terms of their redistributive results and economic efficiency. A progressive income tax (the higher the income, the higher the tax rate) is a favoured instrument in many countries where the tax system is strong enough to implement it. Subsidizing health care and education for poorer segments of the population is also frequently done, as it is often politically more feasible to redistribute ‘opportunity’ (e.g. via education) than to redistribute income.

The third function of governments, ensuring economic stability, has been especially highlighted by the structural adjustment experiences of the 1970s and 1980s. The negative consequences of economic instability, such as high price inflation and exchange rate volatility, can be very large for both economic growth and human flourishing. The principal stabilizing instruments governments have are: monetary policy, fiscal policy (taxation and expenditure) and financial sector regulation. Experience suggests that frequent intervention by governments to stabilize markets is often destabilizing because it is anticipated by market actors and because of lags of recognition, action, policy implementation and impact in the processes of intervention.

As a result, steady and conservative monetary and fiscal policies have been practised in most advanced economies, together with firm financial sector regulation.⁸ In particular, money supply is kept growing at the growth rate of the real economy, and the government deficit is kept to a very small percentage (2–4 per cent) of the GDP. With today’s complex and global financial markets, traditional tools of monetary policy intervention are used more frequently to expand or contract money supply, such as fixing the rate at which the central bank lends to other banks, or specifying the amount of reserves banks are required to keep on deposit at the central bank. Extraordinary measures are used under extraordinary circumstances, such as the nationalization of some banks during the 2008–2009 financial crisis.

Finally, while leadership remains an important role of government, public engagement and participation have not been sufficiently emphasized in the many countries that practise neoliberal economic policies. They have been more prominent in centrist and social democratic countries (e.g. in Scandinavia), and are making a comeback in others where opposition to corporate lobbies as the main shapers of public policy is rising.

The possibility of social choice

In his Nobel lecture of this title, Amartya Sen observed:

Arrow’s ‘impossibility theorem’ (formally the ‘General Possibility Theorem’) is a result of a breathtaking elegance of power, which showed that even some very mild conditions of reasonableness could not be simultaneously satisfied by any social choice procedure, within a very wide family. Only a dictatorship would avoid inconsistencies, but that of course would involve: (1) in politics, an extreme sacrifice of participatory decisions, and (2) in welfare economics, a gross inability to be sensitive to the heterogeneous interests of a diverse population. (Sen, 1999, p351)

The search for workable theories and processes of social choice became one focus of Sen’s work, and that of many others. With neither market economy mechanism nor reasonable voting or decision rules for the making of public choices on a range of basic areas – from what public goods and services to provide to the provision of the non-economic freedoms – the development of pragmatic theory and practice has drawn on several sources; from the conclusion of Sen’s lecture:

Addressing these problems fits well into a general program of strengthening social choice theory (and ‘nonobituarial’ welfare economics). In general, informational broadening, in one form or another, is an effective way of overcoming social choice pessimism and of avoiding impossibilities, and it leads directly to constructive approaches with viability and reach. Formal reasoning about postulated axioms (including their compatibility and coherence), as well as informal understanding of values and norms (including their relevance and plausibility), both point in that productive direction. Indeed, the deep complementarity between formal and informal reasoning – so central to the social sciences – is well illustrated by developments in modern social choice theory. (Sen, 1999, p366)

Economic thought at the periphery

The underlying theory of the mixed economy was developed mainly among the more advanced economies of the Organization for Economic Co-operation and Development (OECD) states. The experiences of other countries were very different, and economic thought about growth reflected these differences. One body of ‘opposing’ views to liberalization and free markets is that of ‘dependency theory’. This theory emerged in Latin America in the 1950s and borrowed significantly from Marxist analysis.⁹ According to dependency theory, the economies of colonized countries – the periphery – were doomed to provide raw materials for the colonizing centre, where goods were manufactured and prosperity grew. This meant that the economy at the periphery was characterized by low productivity, leading to low savings, investment and growth and a vicious circle of underdevelopment. Because resources flew from periphery to centre, the latter enriched itself at the expense of the former. Post-World War II attempts in Latin American countries to develop domestic industry behind high tariff barriers – so-called ‘import-substitution policies’ – reflected this kind of thinking. These policies tended to develop inefficient industries which could not compete in global markets, and were mostly abandoned by the late 1970s. However, opposing neoliberal forces imposed by the political, economic and military elites in Latin America were also characterized by failures.

Other analyses of growth became influential during this period as well. Gunnar Myrdal won a Nobel Prize in 1974, the same year as Hayek, for his penetrating analysis of the interdependence between economic, social and institutional phenomena. His ten-year study of poverty in Asia, Asian Dream: An Inquiry into the Poverty of Nations, published in 1968, resulted in the prediction that high population growth would stunt economic growth. Rapid development would be possible only with population control, wider distribution of agricultural land and investment in health care and education. One reason his predictions could not be verified was the heavy investment in health and education in East Asia prior to this period, which led to growth spurts in the second half of the 20th century. In addressing the relationship between human development and economic growth, Myrdal was a pioneer in the field of economics. As we will later discuss, it has now been established that there can be no long-term economic growth without investing in health and education (Ranis et al, 2000).

There are other influential theories of growth that are based on developing country experiences but which remained unrecognized by the ‘mainstream’ – because development economics was generally regarded with some disdain in economics departments in Western universities. The dual sector model of Sir Arthur Lewis, in Economic Development with Unlimited Surplus of Labour published in 1954, posited that there was surplus labour in developing countries, particularly in agriculture, and that the movement of labourers to higher productivity jobs in manufacturing could be an important and ongoing source of growth. China’s current economic growth experience exemplifies this. The experiences of other countries also underscore that labour productivity in manufacturing is typically much higher than in agriculture. Movement from agriculture to industry is thus one of the few sources of rapid economic growth. Exports of manufactured goods may also be typically needed to provide markets for rapidly growing production. This export-oriented growth has had a strong emphasis in neoliberal economic policy.

Of the many other theories of economic growth which deserve mention, the theories advanced by Rostow and Hirschman still bear relevance today. In his Stages of Economic Development: A Non-Communist Manifesto (1960), Walt Rostow put forward the view that there are five stages of economic growth: the traditional society, the preconditions for take-off, the take-off, the drive to maturity and high mass consumption. He argued that these stages apply to both communist and capitalist countries. He analysed the effects of different kinds of conflict and war on progression from stage to stage. While criticized for oversimplification, his theory retains both empirical and intuitive merit. It also emphasizes the building of capacities involved in growth – in agriculture and industry, in social overhead capital, and in political coalitions and non-economic factors – a view increasingly found in recent development thinking.

Albert Hirschman, in The Strategy of Economic Development (1958), theorized that most countries lacked the capacity to pursue investment and growth on a broad basis across economic sectors. With a shortage of entrepreneurship (rather than capital) as the binding constraint to growth, and with many factors typically inhibiting entrepreneurs in poor countries, Hirschman argued that investments should be strategically focused on a few sub-sectors – notably in manufacturing – in order to create profitable opportunities for further investment. This theory of ‘unbalanced growth’ is reflected in current thinking about agglomeration economies, and their importance in the rapid growth of East Asian countries.¹⁰ Hirschman’s view is quite the opposite of Rostow’s, which involves a ‘big push’ rather than a series of small strategic movements.

Contemporary approaches to economic growth

Economic growth theories

Robert Solow received a Nobel Prize in 1987 for his contribution to the theory of economic growth. His theory relates to explanations of the sources or determinants of growth in the supply or production side of an economy. It starts with the idea of production functions, namely that the quantity of output (Q) in any sector is a function of the amounts and qualities of inputs or factors of production. These typically are land and natural resources (R), labour (L) and physical capital, such as buildings and machines (K):

Q = f (R, L, K)

With detailed data for an economy’s sub-sectors, it should then be possible to ‘explain’ the growth of output by the growth in quantities and qualities of inputs. Any residual is attributed to ‘technological change’, that is, shifts in the production functions not due to factor inputs. Solow’s results challenged economists who thus far had seen savings and capital accumulation as the main determinants of economic growth. As he succinctly summarized in his Nobel lecture:

The main result of that 1957 exercise was startling. Gross output per hour of work in the US economy doubled between 1909 and 1949; and some seven-eighths of that increase could be attributed to ‘technical change in the broadest sense’ and only the remaining eighth could be attributed to conventional increase in capital intensity. (Solow, 1987)

Over the next 50 years, much work was done to set out the conditions of steady growth with aggregate supply and demand in balance, and to examine ways in which technology and knowledge were ‘embodied’ in capital or in labour (people). These approaches, however, mainly took the primary explanatory variables of growth – the rate of technological change and the rate of savings – as being exogenous and largely unexplained.

Not surprisingly, efforts over this period to explain technological change were also active, culminating in ‘endogenous’ growth theory since the 1980s (Romer, 1990). Two of the key factors underlying technical change, not surprisingly, are education and research and development, with the latter subsequently broadened to ‘innovation’. We return to these factors later, particularly in terms of what factors influence innovation in all sectors and levels of the economy. In sum, the growth theory of the past 50 years brought attention back to technology, ideas and knowledge, and thus to the capabilities of people, in the form of education and innovation.

Evolutionary theory and behavioural economics

The seminal 1982 work of Richard Nelson and Sidney Winter, An Evolutionary Theory of Economic Change – building on earlier thinkers, including Throsten Veblen and Joseph Schumpeter – refuted the idea of rational profit-maximizing firms and put forward an evolutionary process by which firms adapt their technologies and processes to changing market conditions, succeeding or going bankrupt according to the success of their respective paths to adaptation. Evolutionary economics stresses the importance of new ideas and knowledge-generation, the adoption of ideas through (market) selection and learning processes, the importance of organizational capabilities and behaviour, and the inter-dependency and irreversibility of these evolutionary growth processes.

Such approaches apply not only to firms and industries, but also to political, social, legal and other institutions. In enumerating consequences of evolutionary thinking, Geoffrey Hodgson (2007, pp336–7) includes as a priority ‘the development of an ontology of institutions, leading to refined definitions and classifications of institutional types, the building of a theory of institutional evolution, and an enhanced understanding of the role of institutions, culture and technology in economic growth and development’. Chapter 7 will discuss the role of institutions and institutional economics in greater detail.

Behavioural economics considers ‘rational’ welfare-maximizing behaviour unrealistic, and introduces insights from psychology into explanations of market decisions and public choice. Daniel Kahneman received a Nobel Prize in Economics in 2002 for having integrated insights from individual and social psychology into economics, especially concerning human judgement and decision-making in contexts of uncertainty (Kahneman and Tversky, 1979).¹¹ In general terms, the main forms of what neoclassical theory classifies as ‘irrational’ behaviour occur because people’s rationality is bounded or limited, as is their resolve and self-interest. Resulting behaviours include overconfidence, undue optimism, loss aversion, inequity aversion, reciprocity, herd instinct, resorting to rules of thumb, habit and cognitive frames. Important behavioural insights include the notions that: the savings rates of individuals can be dramatically increased by long-term programmes that require no immediate sacrifice of consumption;¹² drug and substance abuse can be reduced by changing the environment and alternatives faced by users (Green and Kagel, 1996); and habit change and loss aversion can result in small penalties being very effective in environmental matters (a habit-changing policy with extremely successful results has been the introduction of a small charge for plastic shopping bags, for example).¹³

As markets often do not operate efficiently in terms of economic growth and human flourishing, policies designed to improve outcomes depend strongly on knowledge of human behaviour and institutional change – the clearer and more specific the knowledge, particularly with respect to the human and institutional (cognitive and organizational) environments in question, the better.

Neoliberalism

Despite the many developments that have taken economic thinking beyond it, neoclassical theory has been the dominant force in international economic relations since the mid 1970s, influencing economic policies imposed by Western powers and the International Financial Institutions (IFIs).¹⁴ Neoclassical economics has also influenced successive negotiating ‘rounds’ under GATT and its current successor, the World Trade Organization (WTO); trade barriers have been dramatically reduced worldwide. But it is only in the latest Doha round that much attention has been given to the critical needs of poorer developing countries, particularly with regards to access to essential medicines.¹⁵

Neoliberal policies focused primarily on the privatization of public ventures, the deregulation of markets, trade and financial sector liberalization, and generally minimizing the size and role of government in the economy. Countries that could escape the dictates of the IFIs generally did so, however. These included East Asian countries in particular, where governments followed liberal economic policies in leveraging global markets, but intervened heavily through investment in education, health, technology and innovation. Their very rapid growth reflects the success of these home-made policy combinations, as well as cumulative skill in experimentation and learning.

In Latin America, the ability of countries to follow their own paths was also at stake (Seers 1983). Chile was a particularly dramatic example. Neo-liberal policies were imposed by the Pinochet regime (1973–1980) with the overt backing of the US and economists from the University of Chicago.¹⁶ A period of high economic growth followed – above 7 per cent per annum – and growth has slowed to a still favourable rate of about 4 per cent since 2000. Chile, however, remains a relatively inequitable country in terms of income distribution, with about 30 per cent of the population living at European standards of living, while the rest remain poor. We will return to questions about growth and trickle-down economics, including the best timing for increases in economic growth, its translation to better equity outcomes, and its role in promoting human flourishing.

During the past 30 years, advanced Western countries have continued to pursue mixed economic strategies in ways that were quite different from the neoliberal policies many of them promoted and imposed in the developing world. Some serious mistakes were made internationally by failing to address the capacity constraints that prevented developing countries – particularly in Africa – from achieving the potential benefits of liberalized economies, and from failing to understand that policies not made and owned domestically ultimately have little chance of success.

The World Bank and the IMF, for example, imposed neoliberal policies during the structural adjustment programmes of the 1970s and 1980s. While unavoidable in nature, the speed and extremity of these policies left many of the ‘losers’ of economic structural change destitute, particularly those who were already poor to begin with (Cornia et al 1988). Little thought was given to adjustment assistance or to potential political backlashes and instability. Similarly, IMF policies imposed to correct financial crises were in many cases too contractionary, causing unnecessary damage to economies and individuals. Privatizations – in telecoms, for example – often resulted in private monopoly operators replacing public monopolies, with no increase in competition, no increase in service and no reduction in communications costs to consumers.

The continuing production and export of arms on a very large scale has also been particularly damaging to both economic growth and the promotion of human flourishing. In a recent study of The Bottom Billion People of the World, Collier (2007) estimates that ‘the cost of a typical civil war to the country and its neighbours can be put at about $64 billion’ (p32), that ‘the expected time before a failing state achieves decisive change is fifty-nine years … and the cost of a single failing state over its entire history of failure, to itself and its neighbours, is around $100 billion’ (p75).

Growth of what and for whom?

Much of the history of economic thought is oriented towards the aggregate growth of the economy and average income per person (GDP/P) – but not to improving the well-being of individuals. Neoclassical economics, however, begins with individuals and defines well-being as the value (price times quantity) of consumption of (material) goods and services, for each individual and for the society as a whole. As Chapter 2 has already argued, the value of income or consumption for an individual is not necessarily a good representation of his/her well-being.

The human development and capability approach defines well-being in many dimensions. Growth therefore has different meanings, and has to be aggregated in different ways to get measures for an economy and the sub-groups within it. This is being done in many places, but not yet on a global scale. Efforts are being made in the Philippines, for example, where half of the local governments have adopted a community-based monitoring system that collects data every 3 years for every household for 16 indicators of income, employment, health, education, security and community involvement. Geographical Information Systems (GIS) software is then used to map the data. By scrolling through GIS maps created over time, one can see changing school attendance rates, access to safe water or health care, income, incidents of violence, etc.¹⁷ This is a different but very tangible definition of growth, and one that can be highly useful to communities and governments tackling very serious issues.

In focusing on individuals rather than aggregates or averages, the human development and capability approach incorporates a strong dimension of equity and sustainability. Most economic literature addresses aggregate growth before distribution. That second question – growth for whom? – has of course been the battleground of economies and societies, whether in terms of class, income deciles, ethnic or religious groups, or groupings of countries. The capability approach does not ignore the importance of groups but, by focusing on individuals, it targets redistribution at that level. This is not too conceptually different from the mixed economy approach of most OECD countries, where for example progressive income tax is used to redistribute income among income groups, from richer to poorer. But the capability approach further demands a multidimensional understanding of well-being/deprivation and a wider range of normative or ethical judgements about the relative importance of different kinds of deprivations – material consumption, health, security, empowerment, etc. – on an ongoing basis.

Along with mixed economy policies, the capability approach has many other allies in economic thinking. Behavioural economics is a natural ally because it recognizes and measures well-being/poverty and designs equity-oriented policies. There are many such links in present-day theoretical and applied policy research. In this context, the capability approach is also more process-oriented and less ‘model’-oriented than most mainstream economics. Processes of informed public discourse are essential in making ongoing choices, and theories and principles of social justice and social choice are a major part of this knowledge base. There are clearly links with institutional economic thinking in the sense that the cognitive and organizational frameworks of these decisions – and the ways in which they change over time – are central to promoting the well-being and freedoms of both individuals and groups. Innovation systems thinking and experience is also a natural ally of the capability approach, as will be further explored below.

Innovation systems

Innovation systems can be defined as ‘the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies’, or ‘the elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge.’¹⁸

Focusing on innovation systems thinking and research is often done by the leading creative and technical sectors of society. This high-tech concentration is often on platform technologies like biotech, information and communication technologies (ICTs) and, increasingly, nano-technology – and their application to the production of goods, especially for export sectors. Innovations and innovation systems are however equally important for (and in) the ‘bottom of the pyramid’ (Prahalad, 2006). For example, poor Thai farmers discovered, on their own initiative, how to grow organic rice with lower cost and labour input than green revolution varieties, and got a little help from regional universities on using organic inputs from forests. Mobile phone networking is another innovation that has led to large changes for many poor populations in terms of the expansion of markets, social business and public services. Examples include: individuals arranging microfinance and insurance by mobile phone and the increase in personal security measures. In fact, an entire range of economic services has begun to emerge – finance, insurance, marketing and distribution (farmers and fishers connecting with markets, reduced middleman margins), employment services (drivers, casual workers), personal services, public tele-health and education services.¹⁹ These developments are important, and have a lot to do with the diffusion of ICTs, a key globalization driver and knowledge carrier:

Telecommunication infrastructure (and the pricing of services) is of particular importance. Telecommunication plays a variety of crucial roles in the public and private sector. It can aid education, transparency initiatives, and the delivery of government services. It can also raise productivity by disseminating price information to farmers, fishermen, and other producers. Telecommunication promotes widespread access to financial services. It also enables trade in services (a rapidly growing area of commerce) and links to global supply chains. (Commission on Growth and Development, 2008, p36)

Building innovation systems is necessary to strengthen and broaden the processes of development. Key actors are: the private and non-profit sectors at all levels, government and education institutions (especially tertiary). While the public subsidy of specific industrial outputs violates considerations of efficiency and international trade, societies can and do subsidize or invest heavily in inputs, particularly people – in a wide variety of ways, including education and health services for individuals, research and development (R&D) funding, tax and other incentives, support for start-up commercial ventures and public goods production. The judicious management of intellectual property and an ability to balance public and private interests have also become increasingly important to innovation.

But countries have different strategies and are at different stages. China, for example, is in the process of moving some 500 million people from agriculture and rural employment to largely urban manufacturing. It is dominating world production and the export of consumer goods, lending money from trade surpluses back to importing countries so they can continue to import, and developing high-tech sectors for subsequent stages of development. Chile is just embarking on a second round of developing its innovation and education systems, gradually raising R&D activity to the 1–3 per cent of GDP level typical of wealthier countries, and raising tertiary education access from 30 per cent to 60–70 per cent of the entire population. Most countries, including poor ones, are engaged in both high-tech and ‘bottom of the pyramid’ R&D aimed at solving their more immediate problems and helping to generate economic growth.

In an increasingly multi-polar global economy, with China and a few other (primarily East Asian) economies dominating consumer goods trade, sources of comparative advantage for less advanced economies remain constrained. At the same time, exporting offers major growth potential beyond domestic demand growth. Agriculture export would be a better option for many poor countries were it not so heavily protected by wealthier countries. Resource industries – petroleum, minerals and gems, forestry, horticulture and wine, and fisheries, for example – offer enormous potential for countries that are able to manage their revenues well, but otherwise resource revenues can be a curse. Industries producing for domestic demand are also important, such as non-traded goods and services, including those at the bottom of the pyramid.

Economic growth as a means to human flourishing

Do economic growth and human flourishing go together?

Yes and no. Material well-being is an integral aspect of individual flourishing. The growth of consumption of goods and services is therefore a necessary part of human flourishing. Many might agree that the growth of total or average consumption or income would be an improvement if there were no losers, or if winners actually compensated losers through redistribution mechanisms (tax, public education and services, etc.). However, most societies make decisions that tend to worsen equity for a variety of reasons: those in power care little about equity or believe that it eventually comes with growth (‘trickle down’), or can be addressed once a growth process is already in place. Rapid waves of growth and technology advances tend by their nature to worsen distribution initially, so a basic issue for societies is how much equity they can and should pursue over time. Singapore eliminated poverty and unemployment in a generation of rapid growth but there were special circumstances (see question 4.5). For the most part, Latin America has not done well on growth or equity. Figure 4.1 shows regions that have high levels of income inequality, as measured by the Gini coefficient (the closer to 0, the more equitable; the closer to 1, the less equitable); for more on this see Chapter 6.

If one goes beyond material well-being to include other dimensions – political, social or cultural – there are certainly more possible differences between economic growth and human flourishing. There was significant economic growth in the USSR, but very few would claim flourishing in the comprehensive suppression of political freedom. American suppression of some basic civil liberties (like the 90-day detention without trial) during the recent Bush era was by comparison a mild negative in terms of human flourishing, but a negative nonetheless. States that severely suppress the freedoms of minorities tend to experience a widespread loss of security. In short, there is more to human flourishing than economic growth – notably the provision and distribution of material and non-material dimensions of well-being across people and generations.

Figure 4.1 Gini coefficients in the world

Source: United Nations Human Development Report 2007–2008.

Factors of economic growth

There are many factors that influence economic growth, and this number increases as the view is expanded from economic growth (GDP per capita) to include equitable growth and individual well-being in its many dimensions. A short list of causal, fundamental and enabling factors includes:

• high rates of savings and investment (including micro-credit and foreign investment);
  
  
• technological change acquisition and development (developed locally and imported);
  
  
• innovation systems (education, ideas, entrepreneurship, collaborating institutions, financing and incentives, innovation/application in commercial, non-profit and public sectors);
  
  
• human development dimensions (health and education in particular);
  
  
• export development (leveraging foreign demand, technology, knowledge and education);
  
  
• efficient resource allocation in domestic market, public sectors and labour mobility;
  
  
• committed and capable governments, efficient public services and regulation, and effective environmental management;
  
  
• external and internal trade and finance that is as ‘free’ as possible;
  
  
• equity and equality of opportunity – including gender equality – in education, labour and capital markets, access to assets;
  
  
• efficient infrastructure and public goods provision, competition policy, redistribution, social protection and risk mitigation, support of bottom-up, local development;
  
  
• stability: peace, effective governance, sound macroeconomic policy, enabling and effective law and regulation;
  
  
• institution building and change – both organizations and knowledge bases – private, non-profit and public sectors, including processes of informed public discourse;
  
  
• improved understanding of contexts of well-being and the behaviour of individuals and groups; and
  
  
• from the global community: arms reduction, financial management and stability, global environmental management and protection, progressive and coherent economic policy, effective peacekeeping and development cooperation or assistance.

It is much easier to list key ingredients than to prioritize them in any society’s actual context, or to suggest how to proceed with the recipe when some, or many, ingredients are still missing. Many challenges arise when a growth and development process is begun.²⁰ There are also many challenges regarding the balance and timing of growth dimensions, sustaining sufficient political and social consensus, and sequencing in its many dimensions.²¹ The external environment may be hostile rather than supportive, and the support of the global community (in terms of arms reduction, financial management, etc.) quite limited.

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 achievements, 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 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 bidirectional 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 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 4.2 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/

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;

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.

Questions

4.1 It has been argued that, in advanced economies, the post-World War II generation became prosperous largely because of the movement toward gender equality, women going to work and double-income families. Economies were growing, and asset prices (especially housing) adjusted slowly, so that families experienced ease in finding jobs, high incomes and low living costs. Could a similar process be possible for developing countries if internal changes were made which support rapid growth in labour force participation for women? Discuss.

4.2 The Philippines regularly monitors the well-being of certain communities in terms of 16 indicators of income, employment, health, education, security and participation, for a cost of about $1 per person per year. It successfully uses this information to substantially reduce severe deprivations. Other countries could do this too, for the cost is low and the benefit high. Sketch some of the ways the municipality or district in which you live might benefit from a regular picture of the well-being of individuals and households.

4.3 Agriculture should be a comparative advantage and source of growth for many poor countries that are endowed with plentiful land and farm labour. But advanced economies protect their markets and farmers by trade barriers. With rising world food demand and prices, could agriculture become a stronger growth engine for the poor? If so, how? Who would benefit most – their food consumers or producers, or consumers in advanced economies?

4.4 Fast-growing economies have a lot of imbalances to sort out – e.g. equity and environmental management – and play a growing role in international affairs and institutions. What can reasonably be expected of them in terms of the provision of global public goods, such as arms reduction, financial management and stability, global environmental management and protection, progressive and coherent economic policy, effective peacekeeping and development cooperation or assistance?

4.5 In the mid-1970s, Singapore shifted its economy from low labour cost and polluting goods production to highly-skilled and technology sectors. Among its key policy moves were the raising of the minimum wage, heavy investment and subsidy of tertiary training, subsidy of skilled labour via low-cost housing, and the creation of a national fund that collected about one third of incomes and invested them in housing, infrastructure and pensions. Economic growth accelerated, and poverty and unemployment were eliminated. Although prosperity had been achieved in a generation and poverty eliminated, some argue that political opposition and freedoms were severely suppressed at the same time, and that the former does not justify the latter. What are your views about the priority, if any, between economic growth and political freedoms? Are political freedoms likely to emerge with substantial periods of prosperity?

4.6 We are very timid in what we ask for. In the global economy, we asked mainly for average economic growth in the past four decades, and we got it. We did not ask for equity and environmental conservation, and we got inequality and environmental damage in large measure. How could we ask for more and get it? Which countries do you think have the least inequality and greatest sustainability, along with economic growth and material prosperity?

4.7 One of the key reasons for the growth and distribution success of agricultural reforms in Vietnam was that the de-collectivization process was generally done equitably, resulting in the equitable distribution of land. This fact, coupled with a supporting public environment, proved crucial for the uptake of new crops and technologies. Vietnam’s relatively highly developed human resource base and education/research system at the time of economic liberalization, have also been essential assets in managing the thousands of private and public sector adjustment processes. To move to a virtuous development path, do countries weak in education and human capabilities need to focus on these first, or can they pursue fast market economy growth and policies at the same time?

4.8 ‘I believe that economics would be a more productive field if we learned something important from evolutionists: that models are metaphors, and that we should use them, not the other way around’ (Paul Krugman).²⁴ In what ways does your knowledge of the capability approach influence your views about the relationship between economic growth and human flourishing?

Notes

¹ It is worth underlining that potential gains from trade may be shared by trade partners or may be realized by some at the expense of others. The conditions for mutual benefit include full employment in trading countries, perfect mobility of factors of production within countries, immobility of factors of production between countries, negligible transport costs and perfect competition. In other words, these are the standard assumptions that allow the perfectly efficient allocation of productive resources in an idealized free market.

² Standard classifications today list sub-sectors and industries within several broad sectors: natural resources (agriculture, forestry, fishery and mining); infrastructure (energy, communications, transport, etc.); manufacturing (food/resource processing, consumer and capital goods) and services (financial, business and personal). Public services (education, health, justice, etc.) are not separated from private services but are disaggregated.

³ The word ‘gross’ in GDP means ‘gross of depreciation’ – that is, the depreciation of the economy’s capital stock during the year is not netted out, as is done for net domestic product.

⁴ Shoes sold to consumers are produced from many inputs – leather, rubber, lace, tools, etc. Each is made by an industry that adds value to what it acquires from other industries. So the total final value is the sum of the values added at each intermediate stage.

⁵ Such terms (‘neo-classical’, ‘neoliberal’ and ‘neo-conservative’) are often used to refer to those who emphasize the operation and efficiency of markets, and base economic policies entirely on market principles and interests. The term ‘liberal’ in economic thought has generally been associated with market-oriented economic policy, retaining, however, concerns for equity and the corrective role of social policy.

⁶ Microeconomics expresses this equilibrium as a system of differential equations for the utility-maximizing consumers and profit-maximizing producers. At the macro level, (computable) general equilibrium models fit this simplified behaviour and perfectly competitive market structure to the particulars (national accounts) of a given country.

⁷ Public goods are characterized by non-excludability (no one can be excluded from consuming the good), and non-rivalry (a person’s consumption does not reduce the benefits of someone else’s consumption).

⁸ The financial crisis of 2008 has, however, been attributed in large part to insufficient and inappropriate financial regulation.

⁹ Well known contributors include Raúl Prebisch, Paul Baran and Andre Gunder Frank, who wrote Capitalism and Underdevelopment in Latin America in 1967.

¹⁰ Agglomeration economies occur where initial clusters of industries develop, together with their support infrastructure and human capital, making further investment more attractive for both domestic and foreign investors.

¹¹ These insights were mainly taken from both laboratory and field experiments; see Kahneman’s Nobel lecture and autobiography at http://nobelprize.org/nobel_prizes/economics/laureates/2002/.

¹² See the blog of Harvard Professor Greg Mankiw at: http://gregmankiw.blogspot.com/2006/06/behavioral-economics.html

¹³ New Economics Foundation, ‘Behavioural economics: Seven principles for policy makers’, July 2005, at http://www.neweconomics.org/gen

¹⁴ These are mainly: the International Monetary Fund (IMF), World Bank (IBRD) and regional development banks – Asian (ADB), African (AfDB) and Inter-American (IADB).

¹⁵ The balance between protection of and access to intellectual property (IP) is a central debate in an increasingly knowledge-based global economy. Multilateral arrangements under the WTO – in TRIPS (trade-related intellectual property arrangements) – have often been superseded by the more protectionist measures in bilateral free trade agreements of the US and EC. A good IP reference can be found at www.iprsonline.org.

¹⁶ The best known elaboration of this economic policy perspective was set out in Milton Friedman’s Capitalism and Freedom, which was published in 1962.

¹⁷ For GIS maps in the Philippines, see a PowerPoint presentation by Celia Reyes entitled ‘Community-based measurement and monitoring poverty’, at www.ifpri.org/2020Chinaconference/day3/presentations/G2-4_CReyes.ppt.

¹⁸ These definitions are taken from the 1997 OECD report on national innovation systems at www.oecd.org/dataoecd/35/56/2101733.pdf.

¹⁹ For more information, see the work of LIRNEasia at www.lirneasia.net/projects, of Research ICT Africa at www.researchictafrica.net, and of Dialogo Regional sobre Sociedad de la Informacion at www.dirsi.net/english.

²⁰ The Commission on Growth and Development is tackling this matter directly, through study and interaction among leaders of advanced and failed countries. Analyses and experience in overcoming conflict and governance failures have grown substantially in the past decade. Paul Collier (2007) assesses conflict, governance, resource revenue and landlocked traps, making recommendations for international and advanced-country actions.

²¹ Sequencing of trade and financial ‘liberalization’ are often analysed, but sequencing also involves a more pervasive, micro and ongoing set of timing questions under (severe) resource constraints – privatization and competition policy, development of different sectors/areas of comparative advantage and growth potential, education priorities, health-care and services priorities.

²² The software ‘gap minder’ shows that countries that have experienced economic growth have not necessarily made much progress in terms of human development. See http://hdr.undp.org/external/gapminder/2005/2005.html.

²³ This summary of the 1996 HDR was written by Seeta Prahbu.

²⁴ ‘What economists can learn from evolutionary theorists’ at www.mit.edu/~krugman/evolute.html.

Readings

Barro, R. and Sala-i-Martin, X. (2003) Economic Growth, MIT Press, Cambridge

Boozer, M., Ranis, G., Stewart, F. and Suri, T. (2003) ‘Paths to success: The relationship between human development and economic growth’, Economic Growth Center Discussion Paper 874, Yale University, www.yale.edu/leitner/SSRN-id487469.pdf

Collier, P. (2007) The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done about It, Oxford University Press, Oxford

Commission on Growth and Development (2008) The Growth Report: Strategies for Sustained Growth and Inclusive Development, www.growthcommission.org

Cornia, G. A., Jolly, R. and Stewart, F. (eds) (1988) Adjustment with a Human Face: Ten Country Case Studies, Oxford University Press, Oxford

Galbraith, J. K. (1991) A History of Economics, Penguin, London

Harvey, D. (2005) A Brief History of Neoliberalism, Oxford University Press, Oxford

Nelson, R. and Winter, S. (1982) An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA

Prahalad, C. K. (2006) The Fortune at the Bottom of the Pyramid, Wharton School Publishing, Philadelphia, PA

Ranis, G. and Stewart, F. (2002) ‘Economic growth and human development in Latin America’, www.eclac.org/publicaciones/xml/2/19952/lcg2187i-Ranis.pdf

Ranis, G., Stewart, F. and Ramirez, A. (2000) ‘Economic growth and human development’, World Development, vol 28, no 2, pp197–219

Rothschild, E. (2001) Economic Sentiments, Harvard University Press, Cambridge, MA

Samuelson, P. (1948) Foundations of Economic Analysis, Harvard University Press, reprinted as P. Samuelson and W. D. Nordhaus (2004) Economics, 18th edn, McGraw-Hill, Columbus, OH

Schumpeter, J. A. (1987) History of Economic Analysis, Routledge, London

Sen, A. (1999) ‘The possibility of social choice’, American Economic Review, vol 89, no 3, pp349–378

Solow, R. (1987) ‘Growth theory and after’, Nobel Prize Lecture available at http://nobelprize.org/nobel_prizes/economics/laureates/1987/solow-lecture.html

UNDP (1996) Human Development Report: Economic Growth and Human Development, Oxford University Press, New York

Further Readings

Acemoglu, D. and J. Robinson, (2008) ‘The role of institutions in growth and development’, Commission on Growth and Development paper, www.growthcommission.org

Aghion, P. and Howitt, P. (1997) Endogenous Growth Theory, MIT Press, Cambridge, MA

De la Croix, D. and Michel, P. (2002) A Theory of Economic Growth, Cambridge University Press, Cambridge

El-Erian, M. and M. Spence, (2008) ‘Growth strategies and dynamics: Insights from country experiences’, Commission on Growth and Development paper, www.growthcommission.org

Green, L. and Kagel, J. H. (1996) Advances in Behavioral Economics, Volume 3, Greenwood Publishing Group, Santa Barbara, CA

Hodgson, G. M. (2007) ‘The revival of Veblenian institutional economics’, Journal of Economic Issues, vol 47, no 2, pp325–342

Kahneman, D. and Tversky, A. (1979) ‘Prospect theory: An analysis of decisions under risk’, Econometrica, vol 47, no 2, pp263–291

Kanbur, R. (2008) ‘Globalization, growth and distribution: Framing the questions’, Commission on Growth and Development paper, www.growthcommission.org

Mkapa, B. W. (2008) ‘Leadership for growth, development and poverty reduction: An African viewpoint and experience’, Commission on Growth and Development paper, www.growthcommission.org

Rodrik, D. (2008) ‘Normalizing industrial policy’, Commission on Growth and Development paper, www.growthcommission.org

Romer, P. (1990) ‘Endogenous technological change’, Journal of Political Economy, vol 98, no 5, ppS71–S102

Schmid, A. A. (2004) Conflict and Cooperation: Institutional and Behavioral Economics, Blackwell, Oxford

Seers, D. (1983) ‘Structuralism and monetarism in Latin America: A reappraisal of a great debate, with lessons for Europe in the 1980s’, in K. Jansen (ed.) Monetarism, Economic Crisis and the Third World, Routledge, London

Document(s) 5 of 16