1. Name
:
M. Farhanul Enam
2. ID number
:
542260
3. Programme degree title
:
MSc. Development Studies
4. Course name
:
Political Economy of Development
5. Course code
:
SOAS_15PDSC002_A11-12
6. Tutor's name
:
Mr. Jeff Powell
7. Coursework number
:
1 [  ] 2 [ ] or 3 [ ]
8. Title of essay
:
There can be no improvements in human welfare without
increases in per capita income. Discuss with reference to
the most commonly used development indicators.
9. Submitted on
:
November 25, 2011
10. Word Counted
:
2996
Contents
Introduction:
3
Per capita income Defined:
4
Human Welfare/wellbeing Defined:
5
Analyzing problems with income as measure of human welfare:
5
1.
Statistical and Data Collection Inference
6
2.
Misrepresentation of social class and income distribution
6
3.
Disconnection from subjective and relational well being
7
Discussing alternatives to measuring social well being
10
Conclusion
12
Bibliography
14
Appendix
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To what extent is supporting self-employment and microentrepreneurs the most effective path out of poverty in very poor
countries?
Introduction:
The concept and arguments about the relationship between economic growth and social well being has
been evident since the history of National Income Accounting (McGillivray, 2007:6). There has been
growing literature on such issue since 1974 when Richard Easterlin demonstrated a fact through his
studies that happiness or well being does not have much impact after a level even when income
increases, something that is known as Easterlin Paradox [Easterlin, 1974]. The dilemma of incomehappiness paradoxical correlation suggested by Easterlin is still controversial as countered by Helliwell
(2002), Stevenson and Wolfers (2008. (as cited in Senik, 2011).
Human well being and happiness are quite multidimensional and subjective and it requires more than
one single indicator to measure it if it can be truly measured at all. “Along with wellbeing, the most
common ones include the quality of life, living standards and human development. Others include
utility, life satisfaction, prosperity, needs fulfilment, empowerment, capability expansion, poverty, and,
more recently, happiness”( McGillivray, 2007).
The essay centres round the concept of per capita income and its impact as an indicator to measure
human welfare within a country or economy. The paper is an attempt to establish the much celebrated
argument that economic indicators such as per capita income is not sufficient enough to measure or
derive human and social development.
The paper attempts to establish with empirical reasoning that increase in per capita income does not
necessarily derive improved human welfare of the state.
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The paper is organized in 4 parts. 1) Defining the 2 major key terms ‘per capita income’ and ‘human
welfare’, 2) Analysing problems with income as measure of human welfare 3) Discussing alternatives to
measuring social well being and finally 4) Concluding remarks.
Per capita income Defined: Per capita can be calculated both on the basis of GDP and GNP while both
indicate economic growth of a country or nation. However, there are certain differences in the
implications for real GDP per capita and real GNP per capita when it comes to measuring the economic
and social well being.
As per James M Cypher in ‘The Process of Economic Development’, “income per capita values are at best
an imprecise measure of the actual income received by any particular person, since they are only a
simple average derived by dividing total GNP or GDP by total population. The per capita income
measure does not provide any information about the dispersion of actual incomes around this mean”
(Cypher, 2009). Then in his book Cypher further explains as to why GNP/GNI should be taken as a better
measure over GDP for measuring economic or social wellbeing.
“Real GDP per capita does give information on how output is changing in an
economy, but it does so irrespective of who ultimately receives the income earned
from such production. The GDP per capita measure, then, is not as closely
connected to what remains in the hands of the residents of the nation for current
and future consumption as the GNP per capita measure, and thus GDP per person is
a more imperfect measure of a nation’s overall well-being”(Cypher, 2009, 46).
As per World Bank, “per capita income or GNP per capita is obtained dividing a country's gross national
product (GNP) by its population” (World Bank, 2004).
Therefore this paper will mainly refer to real GNP per capita when discussing per capita income and will
attempt to showcase evidence that the indicator is not sufficient in measuring the well being of the
nationals of the country.
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Human Welfare/wellbeing Defined:
This again refers to the overall living standard of the nationals of the state. Such living standard is
multidimensional when attempted to measure and is subject to various psychic and materialistic
elements of human behaviour. (McGillivray, 2007)
Wellbeing is a composition of material, relational and subjective
dimensions that make a person feel happy. The material refers
to economic assets and income while the relational concerns
social interaction, rules,
identity and finally subjective
represents cultural values, ideologies , beliefs and also people’s own perceptions of their situation.
The triangular illustrates interdependence between material, relational and subjective aspects of human
wellbeing. Such wellbeing are in the interplay of objective (people’s circumstances) and subjective (their
perceptions) dimensions of life. The subjective at the peak makes clear that even material and relational
welfare are derived through values and culture. (White, 2009)
Analyzing problems with income as measure of human welfare:
Before moving into the problems with per capita income or economic growth as an indicator of human
wellbeing, it is useful to gain an insight as to why income was considered as a measure of wellbeing or
happiness.
Individuals derive well-being from the satisfaction they obtain from consuming utilities, goods or
services. They do not consume money but utilities according to their preferences. Since their
consumption is ultimately determined by their income, this was considered as a proxy for well-being and
had been reliably measured using national accounts income measures. (Bandura, 2008)
But this income is only the material wellbeing of the triangular shape we discussed above while defining
welfare. What happens to the relational and subjective wellbeing remains a question hence income
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evidently (White, 2009) cannot bring into light the other dimensions of human satisfaction derived from
social, esteem, security and cultural norms.
Thus, instead of relying on a single dimension, wellbeing measurements have progressed to encompass
broader dimensions such as social and environmental aspects, and human rights (Sumner 2006, cited in
McGillivray 2007). “It is now widely accepted that the concept of wellbeing is multidimensional:
encompassing all aspects of human life” (McGillivray 2007).
For easier analysis, I shall divide, the arguments against using income as a sole indicator to measure
welfare, into three broad areas as following:
1. Statistical and Data Collection Inference
If for instance, we agree that income per capita is THE measure for welfare, it will still not be able to give
proper picture of the earning per head. Because it is obtained by dividing total value of output by
population which is most of the cases based on an erroneous census and data collection. Again it will
simply give a mean figure that might be higher because of some outliers. This is the simplest and
quickest argument among all. In the very beginning of introducing National Income Accounting, Kuznet
stated that “the welfare of the nation can scarcely be inferred from a measurement of national
income”(Kuznet,1934 cited in Goossens, 2007).
2. Misrepresentation of social class and income distribution
The distribution of income among individuals in each social class is a vital determinant of welfare.
Income per capita when measured, does not give any picture of such social classes including women and
pattern of their consumption. Cypher stated that “the per capita income measure does not provide any
information about the dispersion of actual incomes around this mean. It is thus helpful to also know
something about the distribution of income in an economy if one is to make reasonable sense of the
average income figures” (Cypher, 2009).
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World Bank website in its definition of per capita stated that “it does not show how equally or unequally
a country's income is distributed among its citizens. It does not take into account any unpaid work done
within households or communities or production taking place in the gray (shadow) economy” (World
Bank, 2004).
Since income per capita does not reflect income distribution, it can “disguise the fact that growth may
be flat or even negative for a substantial part of the society while it rises exponentially for a small
proportion of the population in the highest income bracket”(Jacob, 2010).
3. Disconnection from subjective and relational well being
So far the paper has depicted some arguments and problems with the aggregate income (e.g. GNP per
capita) as a measure of material well being. But as per the definition of wellbeing stated earlier in the
essay, income per capita fails to show any correlation with subjective and relational wellbeing of
individuals as well.
Because income per capita figures does not give information on individual’s preference and
consumption on goods that are harmful to health, it does not tell about people with better income
getting affected to drug addiction, it does not give information on divorce rates and above all it does not
tell us about unemployment, debts, increasing incidence of epidemics, that may cause havoc despite the
aggregate income figure shows growth in the graph. Having increased per capita or disposable income
thus does not necessarily lead to improved welfare. (Jacob, 2010)
Jacob (2010) also stated that “rising levels of consumption do not necessarily result in higher levels of
economic welfare or well-being, as in the case when the declining quality of the public water supply
spurs demand for more costly bottled water or increasing crime necessitates rising expenditure on
personal and commercial security”.
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As per World Bank, “it attributes value to anything being produced whether it harms or contributes to
general welfare (for example, medicines and chemical
weapons). And it ignores the value of such elements of
people's well-being as leisure or freedom.”
John F. Helliwell and Robert D. Putnam stated that “although
real per capita incomes have quadrupled in the past 50 years
in most advanced economies, aggregate levels of subjective
well-being have remained essentially unchanged (see figure
1 for the relevant evidence from Britain, a typical case)”
(Helliwell and Putnam, 2004).
Figure 2 shows information on a dozen rich countries
that how high income is positively correlated with the
higher suicide rate. (Oswald, 1997). The twelve countries
are Canada, Switzerland, Japan, Sweden, Norway,
France, Australia, United States, Netherlands, UK,
Germany, and Austria.
But one may argue that it may be a case of
developed country only, so let’s have a look
on what other sources say. Coming back to
the Easterlin paradox (1974 and 2007)
mentioned in the introduction of the essay,
where it was mentioned that income and happiness has a negative relationship after a point of time.
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However it was still a question whether the paradox was a phenomenon for US or developed countries
only. Recently the concept was revisited (Richard A. Easterlin, Laura Angelescu McVey, Malgorzata
Switek, Onnicha Sawangfa, and Jacqueline Smith Zweig, 2010) with broadest range of evidence yet
assembled, demonstrating that over time a higher rate of economic growth does not result in a greater
increase of happiness. The evidence encompasses 17 Latin American countries and, from a different
dataset, 17 developed countries, 11 countries EU, and 9 developing countries. Please refer to appendix
1 for date supporting data.
Further to its findings, the authors also mentioned that “recent critiques of the paradox, claiming the
time series relationship between happiness and income is positive, are the result either of a statistical
artifact or a confusion of the short-term relationship with the long-term one”.
Again to argue with the statement made by Herman E. Daly and John B. Cobb Jr in the book For the
Common Good that “The stronger the economy and the greater the contribution to human welfare”, the
following table can be cited.
It shows that a country with higher GNP per capita can still be very poor in the achieved quality of
human fife. South Africa, having few times more the GNP per capita than that of Sri Lanka or China, has
a much lower longevity rate. (Sen, 1990)
Last but not the least economic growth or income parameters do not reflect eenvironmental
externalities and depletion of natural resources. Jeroen C.J.M. van den Bergh stated that “if air, water,
or natural areas are being polluted, any resulting damage does not enter GDP, but when pollution is
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being cleaned up this will increase GDP. In addition, the capital depreciation associated with
environmental change (fish stocks, forests and biodiversity) and the depletion of resource supplies
(fossil energy and metal ores) is missing from the GDP calculation. As a result, GDP suggests we are
richer than we really are” (Bergh, 2008).
Discussing alternatives to measuring social well being
Based on the above discussion, it is evident that aggregate figures such as income per capita is not
sufficient to capture the multidimensional aspect of quality of life, wellbeing or standard of living.
Moreover it was identified and apprehended by James Tobin and William Nordhaus (1972) that GNP is a
measure of production than consumption. They attempted to get closer to the well-being by adjusting
the GNP and introducing an index called Measure of Economic Welfare (MEW).
“However, Tobin and Nordhaus realized that it is hard to estimate how well individual and collective
happiness are correlated with consumption. Therefore the authors themselves call MEW a ‘primitive
and experimental’ measure of welfare” (Goossens, 2007).
As MEW considered some non-market activities such as pollution, leisure etc., David Morris from the
Overseas Development Council first attempted to establish an index in 1979 called Physical Quality of
Life Index (PQLI) which was intended as a complement to GNP per capita in the measurement of human
well-being at the national level. This index combined additional elements not included in MEW such as
infant mortality, life expectancy at age one and adult literacy (McGillivray 2007). But this seemed to be
not enough but fulfilling ‘minimum human needs’ (NORMAN and PAUL, 1979).
Short after the MEW (1972) and PQLI (1979), more indices were introduced as follows to replace or
adjust GNP per capita:
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In 1990, UNDP came up with a composite indicator called Human Development Index (HDI), that equally
weighs three indicators, real GDP per capita (measured at PPP in constant prices); life expectancy at
birth; and adult literacy and education enrollment ratios.
“The HDI was created to re-emphasize that people and their capabilities should be the ultimate criteria
for assessing the development of a country, not economic growth” (Goossens, 2007).
Shortly after this, in 1995 UNDP introduced 2 more indices to capture gender freedom named as Gender
Empowerment Measure (GEM) and the Gender related Development Index (GDI). This GDI, which is an
adjustment to HDI, can foster gender inequality by the following formula: (Goossens, 2007)
“While the HDI has received often heavy criticism from researchers on numerous grounds, it is used
extensively in research and policy work, and is quite possibly the best known well-being or human
development index” (McGillivray, 2007:9).
In 1999, famous economist Amartya Sen wrote a book ‘Development as Freedom’ where he introduced
development as a process and pre-requisite of exercising freedom. Such freedom is determined by the
ability of individuals to achieve and perform certain functionalities, something he referred to as The
Capability Approach. The underlying concept of the approach is that individuals don’t seek wealth as a
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good but as a means to attain satisfaction and wellbeing from what they prefer. The income or wealth
should provide them the ability and freedom to choose their living standard. People do not seek illness,
pollution, malnutrition or unemployment but if they are prone to such subjective and relational
wellbeing deficiencies then it can be assumed that little development has taken place and the people
are victim of different forms of unfreedom.
GNP per capita cannot obviously measure such non-market and non-economic variables such as
Freedom neither any of the indices discussed above can. It will take a combination of indices to evaluate
the effectiveness of Freedom of individuals based on practical and statistical information with fewer
errors.
“Informed and intelligent evaluation both of the lives we are forced to lead and of the lives we would be
able to choose to lead through bringing about social changes is the first step in confronting that
challenge. It is a task that we must face” (Sen, 2007).
Conclusion
In light of the arguments examined and alternative indices discussed, it can be assumed that income per
capita solely can never be a precise and reflective indicator for measuring wellbeing. However it will be
also not possible to come up with a measure that does not have income element in it. So it can be
advised or sought that economist and experts of the domain can come up with an index that will
consider an individual’s relative income rather than aggregate absolute income. I agree with the
findings and suggestion made by Mr. Sen in his book called ‘Development as Freedom’ that indices
should be measured based on both the intrinsic and institutional capabilities of individuals to reflect
their relative functioning of the expressions they make to achieve satisfaction. It is evident through this
paper that ‘Money can’t buy all you want’ but it can obviously enable you to live the way (freedom) you
want provided it is channeled and distributed efficiently (income distribution). So the hypothesis made
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in the introduction that increase in per capita income does not necessarily derive improved human
welfare of the state, is tested.
Nevertheless, this paper leaves room for the practitioners to think beyond political economy and come
up with solutions or indices that will reflect Relative Income, Income Distribution, Subjective Wellbeing
and above all Freedom to live in a poverty free world.
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