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THE RIGHT SCALE TO MEASURE GROWTH

A country’s development is an important issue. So much so that a branch of economics devotes considerable attention to quantifying a country’s development. This is not an easy task since development is an abstract concept. The difficulty lies in identifying parameters which can be used to indicate how developed a country is. Several measures have been adopted and discarded, for example per capita gross domestic product and the more recent human development index, which is slowly becoming obsolete. The HDI rightly identified human well-being as an object of development, but had no provision to measure human well-being over time and across generations.

It is being increasingly felt that the use of and stock of natural resources should enter all measures of development. This is because human well-being is partially sourced from the natural environment. Depletion of resources will affect growth in the long-run. Thus development has to meet the needs of the present without compromising the ability of future generations to meet their needs.

Various researchers have tried to find a measure that would encompass this requirement. In this quest, Karl Goran Maler and Partha Dasgupta have identified wealth as an index of present and inter-temporal well-being, which can also be used to measure development. This may sound arcane but the two professors, from the Stockholm School of Economics and Cambridge University respectively, noted that a country’s wealth measures the social worth of its capital assets. Thus, if attention is focussed on the creation of wealth, development will follow.

Wealth index

Wealth comprises the total value of all assets in an economy, including natural capital. Its value is determined by using accounting prices, which reflect the importance of these assets for producing future well-being. Market prices are not used here because they may not reflect future well-being in a market economy. The creation of goods and services is made possible in an economy by the combined help of all its resources, its capital (both manufactured and human) as also its institutions. These constitute the productive base of an economy from which well-being is generally derived.

Take China, India, Pakistan, Bangladesh, Nepal and sub-Saharan Africa over the period 1970-93 — by general consensus some of the world’s poorest and densely populated regions.

The estimation of development changes in these countries alters considerably when measured by different indices. Investment, as a proportion of GDP, has been positive for the first three countries and negative for the rest. The average annual change in per capita GDP has been positive for all except sub-Saharan Africa, with China registering a high 6.7 per cent and India, 2.4 per cent. Interestingly, China was the only country to register a negative annual change on the HDI scale, with Nepal leading at 5.3 per cent and Bangladesh and India at 3.3 and 2.2 per cent respectively.

Different calculations

Now take the projections made for the average per capita annual change in wealth by Maler and Dasgupta, after making adjustments for population changes. All countries, except China, showed negative growth rates. Thus, despite experiencing positive human development and per capita GDP growth, people in these countries have actually grown poorer owing to an erosion of their natural capital base.

India, which showed an annual percentage change of -0.10, is slightly better than her neighbours. But unless India manages its natural capital assets and population in tandem, it will grow poorer in the coming decades.

Of course, in the first place, accounting problems have cropped up about how to measure wealth, because of its heterogeneous character. These need considerable calculation adjustments. But they are not insurmountable and the effort is worth the while to give the concept of development a new definition and character.

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