Institutos Universitarios

Economic Growth, Human Development and Global Socio Economic Imbalances: How do you think the progress of a country can be measured?

Lucas J. M. Alonso Alonso

Abstract

This article gives an overview about GDP as a measure of a country’s economic activity, components that lead to economic growth and may harm human health and/or the natural environment, distribution of economic growth and its contribution to human development… If we consider a country"s progress as a balance between economic and human development, perhaps we should shift the focus to the issue: “Economic growth does not seem to be the problem or the solution, but a fairer distribution of wealth... isn"t it a logical conclusion?”  Because resources are limited on a global scale, to what extent is an economic model based on continuous growth really useful?  “Cheaplabour markets in which to produce, and markets where to sell at high prices” are fundamental axioms of a global economic model that leads to impoverished societies, in which it is necessary to adjust production downwards in response to lower domestic consumer spending, thus generating a vicious circle of economic growth based on exports, precarious jobs, social inequalities and povertyMeasuring a country"s progress beyond GDP taking indexes that measure the extent to which countries contribute to the socio-economic progress of their citizens, such as Human Development Index, Legatum Prosperity Index, Social Progress Index...Global socio-economic imbalances: while a model of equalising welfare opportunities" downwards remains predominant, socio-economic inequalities will be exacerbated by generating a greater consumption of the world’s population classified as extreme-consumerist.  Barriers to global progress: lack of transparency, unequal opportunities, socio-economic measures that depend on the exploitation of disadvantaged groups, unproductive economic structures and state governmental organizations undertaking speculative operations, impunity in corruption...

 

GDP is not everything                                     

GDP (Gross Domestic Product) is a measure of a country’s economic activity, and therefore it should not be considered a measure of a country"s well-being.  Besides, it is necessary to be aware about which GDP components lead to economic growth, because a same amount of GDP does not mean identical situations.

GDP takes into account all income no matter how it is generated, and some GDP components may harm human health and/or the natural environment.  For instance, think about a country in which its government is forced to set lower environmental standards to maintain the country competitiveness.  Consequently, factories freely pollute several zones or inclusive part of the country, but this way of manufacturing generates high economic growth and employment and the country competitiveness is based on this way to produce.  From an economic point of view, economic growth improves the living standards of citizens but at the same time pollution makes its inverse contribution to the life quality of citizens.

Nor does GDP give any indication of how a country"s wealth is distributed.  In some LDCs (Least Developed Countries), many of these resource-rich countries, we have a high rate of economic growth and, at the same time, abject poverty.  The way wealth is being distributed is the most important factor for a country"s well-being, because large social inequalities destroy a country"s progress.

“Progress of a country must be a balance between economic and human development”

 “If economic growth is being distributed on just a few people, it will never contribute to the progress of the countries that generate it”

An increase of social inequality indicates a setback in the progress of a country"s people.  Such a situation is indicative of a reduction in the Human Development Index (HDI).  Therefore, a country can be progressing economically at the expense of a decline in human development.  Obviously, this situation cannot be understood as progress of a country because economic growth has to be a vehicle that supports human development.  It has no sense to talk about economic growth without to take into account its contribution to human development.

Additionally, industrialized countries need to promote sustainable economic development and for that purpose they need to create and/or strengthen core productive sectors, fostering new start-ups and innovative projects rather than competitiveness based only on traditional sectors, such as tourism/construction.

“Economic growth is not the goal itself, but rather a means to reaching the goal: the progress of a country on all fronts”

“Economic growth does not seem to be the problem or the solution, but a fairer distribution of wealth... isn"t it a logical conclusion?”

Because resources are limited on a global scale, it could further be asked: Is an economic model based on continuous growth really useful?  Why the model does not act on a fairer distribution of resources and wealth which is a main cause of global economic crisis?

Additionally, if economic growth is based on a global economic system that essentially is looking for:

  1. Cheap labour countries/markets in which to produce
  2. Countries/markets in which to sell at high prices

Therefore, the success of the global economic system is basically based on socio-economic inequalities among countries, and due to that, it is not possible to reduce large social inequalities meanwhile it doesn"t change at least some essential rules.  We need to achieve sustainable and competitive economies rather than inequalities-based economies.  I am not making explicit reference to interchange-ability between different kind of products and services among countries (for example, if a country needs goods and services that cannot be produced domestically, or importing them from other country is to be recommended, so then both countries trade and gain), but about huge social inequalities in the global economy.  The world economy cannot be based on a search for cheap labour countries in which to produce and countries in which to sell luxury goods, such a system into practice is very basic and it is our current system.

“Unemployment is worse than create low wage jobs in places in which these are so desperately needed” This is a constantly-repeated mantra in many advanced economies.  But, in my view, such a situation can be an option in a few very specific cases, only for short periods of time, and in economies in transition and can never, therefore, be a variable to formulate long-term economic policy.  Wages must be worthy to improving living conditions of people because this fact leads to the creation of middle classes, which will strengthen purchasing power and domestic business structures.  Advanced economies should compete through the quality and added value in differentiated products rather than trying to gain competitiveness through a strategy of low wages.  Labour productivity is the key.  Countries with high labour productivity have lower unemployment rates, fewer work hours, higher wages, greater investments, higher degree of competitiveness, and strengthening of social solidarity. 

When we hear so insistently talk about GDP growth, we must be aware of its limitations.  So, does it make sense to consider GDP as a country’s progress indicator? Obviously, it doesn’t.

 

Global Socio Economic Imbalances

 

·        High Production Rate: Cheap Labour Markets

A vast cheap labour market leads to an increase in production rate.  However, as a result of precarious employment, there is a weak purchasing power of majority of the country"s population and goods manufactured and/or services provided are bought by a small group of domestic consumers, the rest for export.  In this kind of economies there is a huge concentration of income and therefore a strong socio-economic imbalance, as well as an environmental decay. This economic scenario can be attractive to foreign investors because, besides being places where to hire cheap labour in a highly flexible way, sometimes governments are forced to set lower environmental standards to maintain the country competitiveness.

·         High Consumption Rate: Over-Consumption Markets

A large proportion of the goods and services produced in cheap labour countries are exported to over-consumption countries,thus generating a vicious circle in which worldwide consumption is concentrated around a few markets or countries.  The buying power of wages in these consumer countries (or markets segments of a population) will continue to rise (whereas, the buying power of wages in cheap labour countries will continue to fall or, at best, remain unchanged) at the expense of manufacturer countries.

·         Low Consumption Rate: Under-Consumption Markets

It is clear that the under-consumption into large sections of the world"s population is a direct result of economic policies aimed to encouraging cheap labour markets where to manufacture and greater concentration of consumption around a few markets or countries.  Around 20% of the world’s population consumes most of 78% of the world"s resources, leaving almost 80% of the people living on the remaining 20%.

·         Global Socio Economic Imbalances: Global Consumption Imbalance

Such chain reactions of events show that there is a notorious imbalance in income and global consumption.  A huge percentage of the world’s resources are consumed by a small portion of the world’s population,meanwhile, a high percentage of the world’s population is under a minimum level of consumption.

Therefore, on the one hand we have over-consumption and at the same time under-consumption.  Obviously, because resources are limited on a global scale, we cannot reduce poverty in a sustainable manner by engaging everyone into an over-consumption lifestyle, but by a model that best combines the creation and distribution of wealth; this is the only way in which we can reduce the gap between over and under-consumption.  It is necessary a socio-economic model capable of equalising <welfare> opportunities" upwards by achieving that a majority of the world"s population tends towards a sustainable economy.  In other words, stop the over-consumption concentrated in a small part of the world"s population, and increase the under-consumption predominantly in much of the world"s population.

While a model of equalising <welfare> opportunities" downwards remains predominant, socio-economic inequalities will be exacerbated by generating a greater consumption of the world’s population classified as extreme-consumerist.  “Places where to hire cheap labour force and to sell luxury goods to elite” are fundamental axioms of this latter model, that leads to impoverished societies in which it is necessary to adjust production downwards in response to lower domestic consumer spending, thus generating a vicious circle of economic growth based on exports, precarious jobs, social inequalities and poverty.

It is necessary to reduce the socio-economic gap between developing and developed countries; in other words, in order to achieve a sustainable economy, we have to equalise socio-economic opportunities among countries.  It is a socio-economic model capable of equalising welfare opportunities" upwards, that runs counter to the current global line: An intended “single” model of equalising welfare opportunities" downwards.

China has gone from being the world"s factory to become a major consumer, both in the domestic and international markets.  In the last 15 years, the performance of the China economy has been characterised by a policy of high labour productivity combined with higher wages.  This fact led to the creation of powerful middle classes, increased people’s purchasing power and strengthened domestic business structures; as a result, the social differences have been reduced, as well as the growing middle class is making China more competitive.  The Chinese middle class is around half a billion people with a higher buying power per household than that of the Eurozone’s middle class.  Obviously, there are still large regional and socioeconomic disparities; there are three hundred millions of super rich and farmers are the poorest social sectors.  A strong point would reside in the fact that the growth of modern cities was capable of including more people within the middle class, as well as encourage a model based on clean, renewable energies.  Here we have a sample of how the reduction of huge social inequalities has a direct impact on purchasing power, consumption and competitiveness of the country in the international markets.  We have an opposite example in the Eurozone’s Mediterranean countries where a policy of poorly paid jobs is generating enormous social inequalities and making these countries uncompetitive in global markets when it comes to labour costs.

 

Measuring a country"s progress beyond GDP

There are several indexes that measure the extent to which countries contribute to the socio-economic progress of their citizens, such as Human Development Index, Legatum Prosperity Index, Social Progress Index...These indicators are tools that measure the extent to which countries contribute to social, economic and environmental progress of their citizens within a society.  Consequently, they take into account factors such as basic human needs, level of income, cost of goods and services, working conditions, quality and availability of employment, access to quality healthcare, life expectancy, poverty level, incidence of disease, quality and availability of education, cultural, political and religious freedom, economic and political stability, infrastructures quality, environmental quality...

All of them aim to develop a more meaningful measure, separating economic growth from social and environmental wellbeing.  Thus, some developed countries perform well in terms of GDP and poorly on some other measures and therefore, the findings of these indexes illustrate that economic growth does not always lead to social and environmental progress.

Perhaps, the underlying fascinating question to be asked could be: To what extent a developed country with a very low social progress score can be categorized as a true developed country?

Pressing issues to be tackled:

First of all, for the correct determination of the indexes mentioned, it is essential that the governments of the different countries permit information to flow freely in order to ensure that the implementation of such important tools be able to properly asses the different issues outlined herein.  With regard to these indexes and progress, I would like to express my opinion, focusing more in particular on social progress made by the advanced economies.

In the past few years, we have experienced a huge setback in the indexes related to social progress in many developed countries.  Take, for instance, the issue of basic human needs and we might well ask: How many people in developed countries are below a minimum nutrition and basic medical care?  How many people in developed countries are below the poverty line?  Particularly the more vulnerable groups, such as:

1. Child poverty (it is on the rise in several developed countries, some countries within the Eurozone -mainly Mediterranean countries- are a good case in point)

2. Abject poverty (the same as that described in the preceding point)

3. Growing number of food banks in many advanced economies...

About issues like satisfaction with housing, access to electricity, personal safety...etc.  It raises questions, for instance: How many people in developed countries are satisfied with the availability of good affordable housing? How many people in developed countries, as a result of higher energy prices, are suffering energy poverty?

And obviously as a consequence of this global deep crisis, triggered by an economic system based mainly on financial speculation jointly with inappropriate economic measures and structural reforms, the income gap between a country"s richest and poorest people is enlarging, and thus personal safety and rights are under serious threat in some developed countries, as well as the real entrepreneurial spirit (genuine enterprises) strongly discouraged.  Why am I saying "genuine enterprises"?  The answer is very simple: There are many "enterprises and entrepreneurs" arising from political clientelism (cronyism and patronage), and that kind of enterprises and entrepreneurs do not generate wealth and prosperity in our societies because they are not competitive.

As a result of the current and future economic situation in several developed countries (European Mediterranean countries are a good example of this), the solution lies in drastic spending cuts in education, research & development, health and other public necessary services, whilst, paradoxically, at the same time, unnecessary public spending increases, for example, unproductive public infrastructure development and bureaucratic wastage.  We might well ask: How many people in developed countries don’t have (and likely they will not have it) access to competitive education, information, communication, internet, freedom of speech and press, health, wellness...?  Reducing unproductive public structures rather than cutting key government functions (education, public health, social security, unemployment support...) may signify one step towards progress and equity.

When a government invests its resources in non-development projects such as unnecessary governmental bodies, unproductive public expenditures…, rather than to invest in education, public health, job creation…, it is creating an unnecessary charge on the government budget and encouraging patronage networks.  It is important to bear in mind...

“An over-dimensioned state structure does not lead to a competitive and prosperous society”

There are fundamental issues related to democracy, political and social stability that are addressed and weighted by these indexes in order to reflect more appropriately a country"s social progress, such as:

1. Opposition parties play an important role and enjoy real power

 2. Minority groups have reasonable self-government and/or can participate in the government through informal consensus

 3. Political corruption

 4. Factors that undermine freedom

 5. Government censorship laws about freedom of speech and press, democracy quality

 6. Independence of the judiciary

 7. Country’s laws protect private property rights

 8. Religious freedoms

 9. Equal opportunities in the economic and social spheres.

 ...etc.

“The quality of these kinds of issues leads a country to stable governments and economies, whilst simultaneously creating a social justice environment which directly implies unity between people”

“A true unity between the people of a country has a direct effect on the progress as a country”

Let’s take Euro area as an example.  The EU implemented painful austerity measures in order to reduce the high level of government debt in many country members.  But it was, and still is, a wrongly-conceived austerity.  In fact, in various European countries the debt to GDP ratio is going onto a firm upward trajectory, thereby creating a possible risk of default.  Government debt is not a problem in itself but the amount of debt (debt to GDP) and the interest rate of the government debt (debt interest payments/GDP).  Additionally, in some cases, in both emerging and advanced economies within and outside the Euro area, a large share of government debt is composed of non-development expenditures (for example tremendous public structures which are intended to place people related to political, economic groups...., wasteful of public funds brought about by opaque contracts...and others unproductive public structures) while, at the same time, expenditure on development aid is being cut back (for example education, research & development, healthcare...)

“Thus, as the result of policy implications, the budget cuts are not being carried out on the necessary items and there is a huge level of government debt that is useless for the productive economy”

How a government invests its resources (government revenues) is a central feature that remains open.  The government revenues can be invested in development or non-development projects.  Development projects are productive and, therefore, they are the ones who boost a country"s socio-economic progress.  On the contrary, non-development projects are a charge on a government budget. 

Global society revitalization (socio-economic progress) should come from, among many other things, a combination of fiscal consolidation (for example, improving equity in tax policy, so that those that have more pay more…) and structural reforms (for example, strengthening or creation of productive sectors rather than indiscriminate austerity plans...).  A wide range of different global recipes, of course very different from the current ones, are needed to find a path to a sustainable socio-economic progress.  Tax burden in many developed countries (some European countries are a case in point) started to increase substantially.  Paradoxically, greater tax burden is placed on households, meanwhile, multinational companies listed on the stock market and great fortunes have less fiscal pressure.  And therefore, a transfer of greater tax burden on consumer prices in combination with lower wages and high unemployment rates are eroding consumer spending in many advanced economies.

In my view, in order to measure a country’s progress, it would be also necessary to take into account other factors such as:

Governments ruled by one-party for enormously long periods of time, laws encouraging the establishment of strong bi-partisanship in policy, religious hierarchies exercising their power in the political, university sphere and public life... In fact, these kinds of actions increase corruption risks and endangering a country"s long-term democratic transparency, because politicians can favour their family, relatives and friends in public or private jobs and, thus, in this way be able to create lobbies that ensure them a large number of unconditional voters, as well as to legislate appropriate laws in order to protect themselves and their clique of collaborators.

 Because some important questions arise in relation to these issues, we could well ask ourselves:

  • “Is a leadership without meritocracy a true leadership?”
  • “Is a country with a low democratic quality a true democracy?”

Concerning these topics a question arises: Is there a global vicious circle?  For example, international organizations and best companies in the world have a clear preference to recruit people who have studied at the best universities of the world.  At first glance, it seems an entirely logical selection criterion, but:

Who has more opportunities to study at the top universities of the world (mainly in the business schools, universities of economics, law and politics universities… and similar fields), people with merit, or those who are related to political, economic or religious power?  I think, unfortunately, the answer is obvious.  Of course, you can say that there are scholarships and financial support.  And this is truth, although these will depend on the country we are talking about.  On this particular point, among many other things, mention should also be made about: What are the selection criteria for scholarships and how much is awarded?  It is also fully clear, at least to me, that there is a clear link between meritocracy and a country"s democracy quality.  And, therefore, the higher the level of democratic quality, the greater is the magnitude of meritocracy and vice versa.

The best universities and business schools in the world are going to prefer people related to power, because they are always going to undertake prominent roles in different parts of the world (governments, world organizations, top world companies…) and, therefore, these universities get prestige because their graduates get the best jobs in the world.  But many of these people who have studied in such prestigious study centres and next, as a consequence of this, they get top positions, it is not for grounds based on merit, but by their relationship with some kind of economic, religious, or political power. 

It is in fact apparent that in most, or at least many, cases, the access to the best education and subsequently prestigious positions is a matter of wallet size and relationship with the political, economic or religious establishment rather than merit, then: Talent crisis is not a logical global consequence?  How to recruit talented people without a real meritocracy?  What is the sense, not to mention exhausting to talk about justice, transparency, equal opportunities, eradication of corruption, democratic values, global poverty...and so on, if we are not choosing people under a merit criterion?

“A lack of meritocracy will generate a huge level of injustice in the social and economic spheres, which would then result in imbalances societies, where prizes/ achievements are not a consequence of merit but a matter of patronage”

 

Boosting investments in human development:

Some countries may have a similar per capita GDP and marked differences in their social progress indicators.  Therefore, a good question to ask is: To what extent is GDP contributing to improve a country’s social progress?  A key issue for policymakers should be to carry out necessary investments to promote human development with greater equity.  As it says on page 20 of the 2013 Human Development Report: “...Investments in human development are justified not only on moral grounds, but also because improvements in health, education and social welfare are key to success in a more competitive and dynamic world economy...”  In the light of this sentence, I think some important questions need to be considered: What kinds of investments in human development are being carried out in some developed countries (for example, with particular reference to the Eurozone)?  Isn"t it a short-sighted policy?  Isn"t it necessary a shift in attitudes?  Can we say that we are on the path of progress?

 

Deep barriers to global progress:

Lack of transparency, unequal opportunities that cause high unemployment rates among highly skilled professionals and brain drain, socio-economic measures that depend on the exploitation of disadvantaged groups, unproductive economic structures and state governmental organizations undertaking speculative operations, impunity in corruption and illicit gain cases are, among others, factors that erode the faith of citizens in democratic institutions.

“The higher the degree of corruption in a country, the lower the level of progress”

 

A crucial step forward to genuine social progress:

Can we talk about a country"s progress if we do not link it with better living conditions of all inhabitants?  I think, no social progress will be achievable if the governments of each country and international community do not prioritise people and encourage the real economy rather than speculative stock market profits.

 

Conclusions:

Economic growth can coexist with high levels of poverty and unemployment.  An economic growth figure per se does not say much, but must take into account which GDP components lead to economic growth and that it is not being generated in speculative sectors or prone to bubbles, but in expanding economic sectors that allow developing a sustainable economy.  GDP is a measure of a country’s economic activity, and therefore it should not be considered a measure of a country"s well-being.

Wages must be worthy to improving living conditions of people because this fact leads to the creation of middle classes, which will strengthen purchasing power and domestic business structures.  “Unemployment is worse than create low wage jobs in places in which these are so desperately needed”…this constantly-repeated mantra usually leads to precarious, poorly-paid jobs, large socio-economic inequalities and high levels of poverty.

A vast cheap labour market leads to an increase in production rate.  However, as a result of precarious employment, there is a weak purchasing power of majority of the country"s population.  A large proportion of the goods and services produced in cheap labour countries are exported to over-consumption countries,thus generating a vicious circle in which worldwide consumption is concentrated around a few markets or countries.  Therefore, on the one hand, we have over-consumption and, on the other hand, under-consumption.  It is necessary a socio-economic model capable of equalising welfare opportunities" upwards by achieving that a majority of the world"s population tends towards a sustainable economy.

There are several indexes to measure a country’s progress.  These take into account factors such as basic human needs, level of income, cost of goods and services, working conditions, quality and availability of employment, access to quality healthcare, life expectancy, poverty level, incidence of disease, quality and availability of education, cultural, political and religious freedom, economic and political stability, infrastructures quality, environmental quality...

Progress of a country must be a balance between economic and human development.  If economic growth is being distributed on just a few people, it will never contribute to the progress of the countries that generate it, thus creating socio-economic imbalances.