Is percapita income suitaible indicator to measure Economic Development?

This question has many substantial and subtle aspects. These arise from the delusion among various economists, leading them to use GDP per capita as ultimate means and end towards economic development; to the scope of using GDP per capita as a means of signaling development and the signals it sends among policy makers in regard to the importance of GDP per capita as a statistic variable.

Before drawing conclusions from the table in favor of a placid yes or a placid no, one must comprehend the theory as to why GDP per capita can be effective or ineffective to signal development and to the extent to which it can serve a proxy, as well as the purpose, using GDP per capita serves. And it should also be compared with Human Development Index in regard to how much composite an index both serve in order to reflect upon economic development.

Increase in wealth and Economic Development

As Aristotle said, “Wealth is merely useful, and for the sake of something else”, it is precisely that ’something else’, in which the signals and understanding of development issues should be sought.

As one of my friends says, “The definition of development is an ever evolving abstract” (noting the importance of innumerable parameters, and pervasive spheres of economic and social life and the dynamic kinetics involved with the ever evolving issue of economic development), in this light, the most abstract definition is ironically the most precise definition as well.

A precise way to see economic development is seeing in terms of the expansion of real freedoms that the citizens enjoy pursuing the objectives they have reason to value, and in this sense the expansion of human capability can be, broadly, seen as the central feature of the process of development. Human life can be seen as a sequence of things a person does, or states of being, he/she achieves, and those constitute a collection of functionings – doings and beings a person achieves. ‘Capability refers to the alternative combinations of functionings from which a person can choose. Thus the notion of capability is essentially one of freedom – the range of options a person has in deciding what kind of life to lead.[1]

Some of the most important freedoms people have high reason to value are education, health, right to justice, information, equality etc. It is very much possible and evident today that increase in income may not serve that purpose. For e.g. South Africa had a per capita GDP of US $ 11,192 PPP in 2004,managing an HDI rank of 121 from among 177 countries, while at the same time Sri Lanka which had a per capita GDP of US $ 4,390 PPP suffices with an HDI rank of 93.[2] Such variances are not scarcely found in the HDI report. However it is best to keep it for the later part of the essay, as to how much composite an indicator of economic development HDI, in itself is. HDI is one of the most widely used indicators inclusive of variables of primary importance in relation to comprehension of developmental issues and thus in that regard it merits our attention.

As was stated above, wealth in itself is of no use, what is of primary importance is the increase in economic and social opportunities it leads to and it is in this light that economic development should be seen.  The problem of poverty is the essentially a problem of capability deprivation. Thus in the process of development ways and actions of institutions and organizations must lead to augmentation of capabilities of masses (which is amply related to the broadening of sphere of economic and social opportunities prevailing) .  To list these capabilities and have a brief synopsis of each one would take innumerable pages, so in our quest for a composite index of chief indicators of development we land at HDI.[3]

Freedoms and Means and Freedoms as End:

It is very important to see freedoms and means and freedoms as ends to development and to view economic development as increase in human freedoms. The connection between freedom as means and freedom as end would have indeed been trivial had there been only one kind of freedom, but innumerable freedoms of people are  largely interlinked and at the root of this interlinking lies the ability to use one kind of freedom to boost another kind of freedoms. The integral nature of human lives leads to inescapable interrelation between different domains of living. For e.g. lack of freedom in the form of illiteracy can dampen severely a person’s economic opportunities. Apparently increase in wealth may or may not lead to desired objectives of development. At this point it would be useful to point, having sufficient understanding of the scope of development; to some examples (this would also lead to more clarity as to how expansion of freedom as a means of development almost invariably leads to a better and more suitable end):

• When one looks at countries like Albania, Armenia and Philippines, having HDI ranks of 73, 80 and 84 respectively in contrast to their counterparts at respective positions, these countries with per capita income of less than US $ 5000 outlive them who have per capita incomes of the magnitude to US $ 13000 PPP as in case of Saudi Arabia (Albania has higher rank than Saudi Arabia). This tells us amply that using per capita income as a proxy can send quite elusive signals in terms of development issues.
• Another most important point one should look at are the lack of substantial freedoms in many high income countries. For e.g. the lack of education in Saudi Arabia, Trinidad, Tobago, Oman, Turkey, Iran etc. (based on GER) severely hinders political voice of the deprived, a government in such situation may be immune to public pressure in many devastating cases in such a situation.
• Another most important point is the lack of substantial political freedoms and basic human liberties such as the freedom of speech, right to equality to simply absence of a democracy which is profound in various high income countries like Saudi Arabia, Iran etc. Unfortunately these imperative freedoms do not get reflected either in per capita GDP nor in HDI.
• There have been experiences in our near history, with favorable economic growth and unfavorable consequences. The example of USSR, which did favorably well in department of having a high GDP per capita, but witnessed severe unfreedoms.[4]

It should be now understood that seeing per capita income as a primary signal for development can send quite elusive signals. However focus on augmenting freedoms and capabilities and study of development issues in that light facilitates not only right signaling but also facilitates better policy making and better results. This is most importantly why countries like Sri Lanka etc, with per capita income lower than their corresponding counterparts in HDI index outlive them. As Debraj Ray points out:

Countries that pursue policies to broad based infrastructure and resources, such as health services and education, in all likelihood would find that economic growth is distributed relatively equally among various groups of society. Countries that neglect these features will show a greater tendency towards inequality

The above point is of critical importance because usage of a particular proxy for economic development also often signals developmental goals and objectives in that discrete direction Such an allocation of resources is often visible in India’s economic policies, which often show discrete obsession towards market liberalization and privatization.

In Terms of Concise Statistical Signals

Why a NO?

Human Development Index is a composite index of life expectancy, educational attainment and per capita income in an economy. The question is whether HDI in itself is a complete indicator of economic development? The answer is NO. The creation of composites from various fundamentally different indicators as life expectancy and literacy is like adding apples and oranges. It is arguable that these indicators should be read independently and interlinked according to context. This would obviously help in better understanding of how these relative capabilities are inter connected and the further impact they have on augmenting other freedoms people have, instead of creating a statistical index on first hand which assigns fixed weights to various variables in context. And inarguably HDI index can not act as a holistic indicator of substantial freedoms people have. For e.g. if people lack basic democratic rights, or right to justice or information, which are very important in themselves, it wont get reflected in a high HDI.

Why a YES? And in which CONTEXT?

However we also have to accept that there is consensus among development economists that per capita income is not the end to economic development. It is the quest for a precise variable to illustrate the multifaceted process of economic development. In words of Debraj Ray, “It is really about the view of the world – of the possibility of finding a smaller set of variables that correlates well with the multifaceted process of development. Note well that, saying too much is saying too little”[5]

In his study, Debraj Ray, plots scatter diagram of independent human development variables, taking per capita income on the x – axis and the development variables (life expectancy, adult literacy rate, Infant Mortality Rate) on the y – axis in 3 independent scatter plots. The result was found that the three variables did show high correlation and even higher rank correlation (rank correlation was done by Dasgupta (1993) Countries were ranked according to their GDP level and corresponding ranks in the three other variables).

The study positively asserts that there is high, albeit not perfect correlation between per capita GDP and economic development and per capita GDP can be used as a precise variable to show developmental discrepancies among various nations, but this use must always be done with caution and comprehension of context. Policy makers should always be heedful of proper objectives, which we have stated above as expansion of human freedoms and it is in that direction that decisions and assessments of policies should be made.

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[1] Jean Dreze and Amartya Sen (2001)

[2] Human Development Report 2006.

[3] Always in development studies there has been a quest for a concise way of representing multitude of information, with a statistic variable, or a concise composite index; it is in this light that the use of Per capita income as a proxy should be seen and discussed, which we shall do at the end of the essay.

[4] Epoch Times Commentaries on the Communist Party – Part 8; December 26, 2004, The Epoch Times

[5] Chapter 2, Development Economics, Debraj Ray, OUP