lecture 2 the nexus between the growth of gdp and development
TRANSCRIPT
LECTURE 2
The nexus between the growth of GDP
and development
Growth and development: 3 views
Development > growth (GDP): also individual, social, environmental, institutional indexes
Different views of the relation growth ↔ development:
A) ↑ growth → ↑ development: unjustified assimilation
the means becomes an end in itself → main goal of economic policy
B) ↑ growth ≠> ↑ development: must be also sustainable
main goal of economic policy: sustainable development
C) ↓ growth → ↑ development: theory of downscaling (Latouche)
A) assimilation of development to growth
Based on the following arguments:
• Per capita GDP: reliable indicator of individual well-being
↑ well-being (utility) ↑ growth → ↑ development {
↑ health
• Growth GDP necessary condition to conquer poverty
• Kuznets curve: growth increases inequality after the industrial take-off but then reduces it
• Environmental Kuznets curve: growth deteriorates the environment after the industrial take-off but then improves its quality
Per
cap
ita
GD
P t
ho
usa
nd
s $
Per
cap
ita
GD
P t
ho
usa
nd
s £
Fonte: Lomborg (2001)
US per capita GDP
UK per capita GDP
A) Evolution of per capita income
Happiness and GDP in the USA
Happiness and GDP in Japan
Happiness in Italy (1975-2007)
Source: Nicola Lucia, 2008
Relationship between per capita GDP and happiness
lif
e e
xpe
cta
ncy
at b
irth
(ye
ars
)
GDP per capita (costant '95 US$)0 10000 20000 30000 40000 50000
40
50
60
70
80
Cross-country relationship between GDP and health (2000)
Source: World Bank
The first happiness paradox 1
1st paradox: ↑p.c. Y does not → ↑happiness
We know since long that the GDP index is a strongly distorted and misleading index of well-being
- exhaustion of natural resources Not registered { - deterioration of natural and social capital
- social and environmental negative externalities- relational goods
Unduly registered: - defensive expenditures (e.g. conditioning)
The first happiness paradox 2
Alternative measures to correct the shortcomings of the GDP:
• NEW (Net Economic Welfare) suggested by Nordhaus and Tobin (1973)
grew les than the GP in the post-war period in industrialized countries
• ISEW (Index of Sustainable Economic Welfare) by Daly and Cobb (1989):
while the US GDP grew from 1951 to 1986 at an average rate of 1.90%, the ISEW grew much less (0.53%) and became negative since early 1970s
→ the alternative indexes focus on the same neglected factors
stressed by the happiness literature
The second happiness paradox
2nd paradox: ↑p.c. Y does not → ↑ health
Inadequacy of the general health indexes
The health of individuals depends on life length but also on its quality:
- ↑ frequency of depression and suicides
- a long life is not necessarily a happy life
- well known since long: the immortals (“struldbrugs”) are unhappy (Gulliver travels, Swift, 1726)
Also the general indexes of health should be corrected by taking into account the quality of life
→ this would further enhance the decoupling between growth and health
The two happiness paradoxes and economic policy
1st paradox: ↑p.c. Y does not → ↑happinessTwin happiness paradoxes {
2nd paradox: ↑p.c. Y does not → ↑ health
Not true paradoxes: long list of explanatory factors
to measure development with GDPThe real paradox is the obstinacy {
to assume growth as the main policy goal
neoliberal camp (Bhagwati, 2004)Bipartisan consensus reasserted {
Keynesian camp (Benjamin Friedman, 2006)
Extremely misleading position: to be rejected
Inequality
Per capita income
Social carrying capacity
Fig. 9
KUZNETS curve
KUZNETS CURVE (1955)
Plausibility → take-off (triggered by the adoption of outward-oriented policies):-diffusion takes time -urbanisation -growing pressure in favour of redistribution
(progressive taxation, transfers, welfare state)
Optimist message; the problem tends to disappear “spontaneously”
Kuznets conjecture corroborated by econometric studies up to the 1970ssince the early 1980s new econometric studies have progressively weakened the empirical support (emergence of the U-pattern in OECD countries)
historical explanation: the KC described a specific historical process and not general tendencies intrinsic in the process of globalisation→ policy is needed
Gin
i in
dex
Source: Brandolini (2002)Fig. 5
24
28
44
48
52
56
40
36
32
20
1940
1945 195
0
1955 196
0
1965 197
0
1975 198
0
1985 199
0
1995 20
00
1935
16
Inequality in the U.K., 1939-1996 (%)
Source: Brandolini (2002)Fig. 6
1915 19
20
1925 193
0
1935 194
0
1945 195
0
1955 196
0
1965 197
0
1975 198
0
1985 199
0
1995 20
00
16
24
28
36
44
52
20
32
40
48
56
Gin
i in
dex
Inequality in the USA, 1929-1996
Impact of globalisation on the social conditions of sustainability: 2) poverty
we have to reject the optimist message of the Kuznets curve
however, according to many economists, in order to study the social effects of globalisation we should focus
not on inequality but on poverty
Conviction based on the “Bhagwati hypothesis and prescription”:
Countries have similar distribution of income → we can only reduce poverty by increasing the rate of growth of income
(Bhagwati, 2004, p.66)
Impact of globalisation on the social conditions of sustainability: 2) poverty
misleading hypothesis: Bourguignon and Morisson (p.733) calculated that:
“had the world distribution of income remained unchanged since 1820, the number of poor people would be less than 1/4th than it is today and the number of extremely poor people would be less than 1/8th of what is today”
→ we should try hard to realize a more egalitarian growth
Poverty trends (< $2 per diem)
POVERTY
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992
hea
dco
un
t (m
illi
on
s)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
hea
dco
un
t (p
erce
nts
)
poverty poverty %
Source: Bourguignon and Morisson (2002)
Environmental deterioration
Per capita income
Environmental carrying capacity
Fig. 11
Environmental KUZNETS curve
Environmental KUZNETS curve (Panayotou, 1993)
No historical series of comprehensive indexes of environmental deterioration→ correlation with specific indexes of environmental deteriorationSome of them behave as in the KC → “environmental Kuznets curve”
Plausibility:-take-off: shift of labour from agriculture to heavy industry
then increase of light industry and services-growing pressure of final users and electorate
Econometric studies seemed to corroborate the hypothesis but then it was falsified in many cases:- it works only when the environmental effects are local- recently N-shaped curves
1972
1986
Source: Shafik (1994)
Per capita income (PPP$)
Su
lfu
r D
ioxi
de
g
/m3
Fig. 12
Environmental KUZNETS curve (sulfur dioxide)
DEVELOPMENT
1979
1986
Source: Shafik (1994)
Per capita income (PPP$)
Th
ou
san
ds
colif
orm
s p
er
100m
l
Fig. 14
Environmental KUZNETS curve (coliform bacteria)
DEVELOPMENT
Conclusions on A) growth = development
Not always postwar growth translated in ↑ quality of life:
- the well-being of citizens (measured in terms of subjective happiness) did not increase in industrialized countries
- health in terms of quality of life often did not improve
- poverty in absolute terms increased and in the near future is likely to grow also in relative terms
- inequality resumed growth since the late 1970s
- environmental deterioration grows with limited exceptions
Sustainable development: definitions
Development:
process of expansion of individual economic freedom (Sen, 1999)
Sustainable development:
“Development is sustainable if it satisfies present-day needs without compromising the capacity of future generations to satisfy their needs” (Brundtland Report, 1987)
Sustainable development
Foundations
DISTRIBUTIVE EQUITY CHOICE FREEDOM• Income• Wealth• Resources
INTER-GENERATIONAL
ENVIRONMENTAL CRITERION
SOCIAL CRITERION
INTRA-GENERATIONAL
2 CONDITIONS
Ethical and economic foundations: the social condition
equal access to the basic economic opportunities: ethical foundations
this is also a fundamental condition of economic efficiency
-prerequisite for a well-functioning competitive market: guarantees that the winners of the economic competition are actually the best participants as each of them plays on a “level playing field”
-poverty (malnutrition) implies a restriction of the option set reducing the potential contribution of poor people to economic efficiency and wealth:among poor people who cannot afford a good education there are potentially good scientists, engineers, physicians, managers and so on
-social and political tensions that have negative effects on income growth(Alesina and Perotti, 1996; Benhabib and Rustichini, 1996)
Ethical and economic foundations: the environmental condition
similarly environmental degradation has adverse economic effects:
• ↓ health of people → ↓ productivity
• ↓ land productivity
• poverty-environment trap: the poor rely heavily on the direct exploitation of natural resources:
↑ environmental degradation →↑ poverty →↑ environmental degradation
Crucial requisite of sustainabilty
• Technologic change• Consumption
Calls for:
Reduction rate of ED intensity
Rate of growth of population>
Development is sustainable only if:
Increasingly eco-compatible
More likely in developed countries
The sustainability gap in the current model of energy production and consumption
sustainability gap
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1971-1980 1981-1990 1991-2000 2001-2025
rate
of
gro
wth
gap
Average observed values for each decade (projection 2001-2005)
Source: Energy Information Administration
C) Point of view of de-growth
The concept of sustainable development is considered as an oxymoron (Latouche)
This assertion is based on the misleading assimilation of development and growth
and thus on the confusion between the two preceding points of view
-literal: de-growth as necessary condition of sustainabilityTwo versions {
-provocation to change paradigm
- development depends on the quality of (de-)growth, not on the signCritique{
- focus on the quantitative features
De-growth does not help within the current model of development (recession…)
we have to focus on the qualitative features of growth:
this is what the conditions of sustainability of development invite us to do
Models of development
WITHIN-COUNTRYINEQUALITY
ENVIRONMENTAL DETERIORATION
1945-1971 MODERATE IMPROVEMENT
WORSENING
1980-2010 WORSENINGPARTIAL
IMPROVEMENT
NEITHER OF THE PHASES OF POSTWAR DEVELOPMENT
MAY BE CONSIDERED AS FULLY SUSTAINABLE
ALTHOUGH FOR DIFFERENT REASONS
two phases
Sustainable development and the crisis
The crisis undermines the transition to sustainable development:
↑ short-termism
↓ oil price → ↓ investment in renewable energy sources
↑ variability oil price → ↓ investment in renewable energy sources
↑ trend oil price → obstacle to recovery
↓ attention on the environmental quality when it involves higher costs
↓ concern for ethics if it involves a monetary cost
We should try hard to avoid all these destructive effects:
it is during a crisis that the seeds of future development are planted
Unep report “A Global Green New Deal”
stimulate the recoveryGGND{
strengthen the sustainability of the world economy
Governments invited to invest 1/3 of $2500 Mld anti-crisis
environmental (energy-climate, water, ecosystems)in sustainability{
social (inequality and poverty)
A study of HSBC shows that some countries move in this direction:South Korea 81%, China 38%,
but:France 21%, Germany 13%, USA 12%, UK 7%, Spain 6%
Italy is last in this list : 1,3%
The future development cycle
Each development cycle is pulled by a strategic sector{ -railways: 1840→-electrification: 1900→ -auto, domestic appliances: 1950→
the new cycle is incubated during the great crises: e.g. SME “made in Italy” (1970→)
-renewable energy sourcesThe next cycle: ecologic conversion { -social and environmental consumption
-SRI
It is important to catch the bus on time:
e.g. automotive industry in the US spoiled by the law price of gasoline and lax environmental constraints