The term ‘Economic Growth’ has, in the collective consciousness, rapidly evolved into the answer towards all social issues, from poverty to unemployment. The term has flooded the popular narrative to such an extent that even laymen tend to use it frequently and quite facilely. In effect, it has become such a natural and ‘common sense’ term that no one deems it necessary to critically unpack it. Undoubtedly, it was the historical process of theoretical and practical ideas about how capitalism ought to work that made this term such a popular one. But this begs the question: When we speak of economic growth, do we intend a rise in GDP or rather socio-economic development? Are we referring to an increase in output or to the way this impacts on the socio-economic welfare of society?

For the purpose of this discussion, and in order to distinguish between the two, it is necessary to provide a definition of both terms. Economic growth refers to an increase in output (of services and goods) and is usually measured by the Gross Domestic Product (GDP). On the other hand, economic development refers to the standard of living and economic health of a region, including factors such as human capital, level of education, infrastructure, social inclusion and the quality of healthcare among others. It is usually measured by the Human Development Index (HDI). Economic development is therefore a wider concept than economic growth, which is why Amartya Sen argues that “economic growth is one aspect of the process of economic development.”

Although GDP could be quite useful as a measurement of analysis, at other times it suffers from serious limitations. A critical understanding of what it means and when it should be used or not is crucial in order to generate an objective picture of what is being measured. A cross-country comparison by GDP would immediately suggest which country is faring better economically and which less so. A comparison of countries by GDP over a period of years would seemingly show which countries are growing most/least economically over the years measured. At face value, statistically, it would seem to generate a perfectly adequate picture (and for an initial, crude idea it would probably be sufficient). Yet if one means to scrutinise the object of investigation in an intellectually honest and nuanced way, the rather simplistic GDP measurement would be simply insufficient, which is why it is only an indicator of a country’s economy.

Economic growth, therefore, only considers the overall amount of products and services. It fails to provide an understanding of the way these resources are allocated. Whether it is the distribution of income or access to services such as healthcare and education, the measure of growth is simply not capable of measuring for them. Let us consider the latter example. If both healthcare and education are privatised to their large extent, a portion of the social stratum of those under the poverty line could potentially be driven into a situation where it would be incapable of gaining access to such resources. From a macroeconomic point of view, the economy might be growing (because hospitals and schools are being built, and services diversified); yet because they are privatised, access to them is partially restricted. Apart from the social injustice argument, from a socio-economic point of view, this is not tangibly improving the standard of living of every stratum of society. Incidentally this is one reason why economically liberal countries such as the U.S are falling behind countries such as Norway (when it comes to social progress), even if Norway does not even begin to compare with the U.S in terms of GDP.

To be sure, economic growth does hold the potential for bettering human development. In most cases it in fact does manage to translate into a higher human development index (and therefore it is, generally speaking, a good indicator of the level of development). Yet, potential does not imply certainty; it is not a logical cause-effect phenomenon. Let us take another example for consideration: If economic growth does manage to increase employment, but this employment is not regulated and/or is not up to standard, poverty will not decrease. Technically economic growth did lead to higher employment but tangibly it did nothing to improve the lives of the people. So quantity is not synonymous to quality. Neither does productivity automatically increase wages. In the last 30 years, in the U.S, the gap between productivity and wages keeps soaring, while the cost of living also kept rising. This means that one factor of economic growth could fail to improve the standard of living. A better measurement of the standard of living is, in such cases, the GNI per capita (Gross national income as divided by the number of people).

The problem with the GNI per capita (even when adjusted for inflation and/or for purchasing power parity – PPP) lies in its being an average. The relationship between economic growth, inequality and poverty is, in the context of such a discussion, of a crucial nature. The GNI per capita, just like the GDP, ignores the distribution and allocation of resources – in this case income. Let us imagine a scenario where a country is experiencing wide income inequality between the rich and the poor. Even if at a point in time economic growth is realised it could, hypothetically speaking, get absorbed into the top stratum of society, and neither the average GNI nor the GDP would account for the welfare it has achieved, or lack thereof (see Piketty’s argument where the rate of return on capital is higher than the rate of economic growth). Not only would they not account for it but, on the one hand, the GDP would show a healthier state of the economy, while from the GNI per capita, because of its being an average, one could erroneously infer that per capita (for each head/person) income has increased. For this reason, generating a median GNI rather than average would be more accurate in depicting the income distribution of a country or region.

If growth is absorbed by a small percent of society, its benefits could fail to materialise in a more distributed way. The rest of society, therefore, experiences no positive effects from this generated growth. This argument is reminiscent of critics of trickle-down economics who argue that the whole concept of trickle-down economics was absurd at best and Machiavellian at worst. They contend that a reduction in taxes for the sake of generating investment (which positive effects would then trickle-down onto the rest of the populace) would only be of benefit to those investing. The practical experiences and long-term effects of the liberal market economies such as the U.S and the U.K  generally seem to support this argument- a significant argument if there ever was one, especially in the context of growing economic inequality in developed countries.

The crux of the argument is, however, that economic growth is no guarantee of across-the-board welfare. Indeed, rising income inequality in tandem with economic growth throws light on the ‘paradox of economic growth’. The case of Indonesia shows how a country could experience a significant level of growth, yet be plagued by income polarisation (measured by the GINI coefficient). This is not simply a problem of developing countries, but is also acute in developed ones. Even if one argues that income equality should not be something to strive for, especially if everyone is becoming better off, one should posit the question: Is the statement ‘everyone is becoming better off’ embedded in factual data? Because the one thing that the experiences of more economically liberal countries have taught us in the last few decades is that even in peak periods of growth, it is possible for wages to remain stagnant – certainly not in tandem with productivity and even more so with the cost of living.

Further concerns with regards to the implications of the GDP measurement are environmental issues (where a higher ouput level could affect negatively the environment – eg. in coal and gold mines, see the Ok Tedi Mine in Papua New Guinea or the controversial Newmont Corporation in Peru); corruption issues (where a higher GDP could be absorbed by elites in rents through a corrupted system ); and incarceration issues (where the privatisation of the prison industry could create a situation where a higher rate of incarceration translates into a higher GDP level). What this essentially means is that a country could experience economic growth while at the same time human development and the standard of living become sluggish or at worst deteriorate.

The mantra ‘growth for growth’s sake’ therefore seems, in such a discussion, rather irrational. The policy towards the pursuit of economic growth has become so natural to our way of doing things, and such an automatic response to any ailment and problem of society, that somewhere along the way the end-goal of development was lost into its means. In order to regain the purpose, the sensible answer would be to take a step back and think critically on what we mean by ‘economic growth’; on the limitations of ‘economic growth’; on what the GDP measures and implies; on how to provide for the best institutional environment in which the positive effects of ‘economic growth’ could be achieved and distributed to all; on, after all, why ‘economic growth’. As the Human Development Report 1996 underlines, “human development is the end – economic growth is the means”.

Image Source: Simon Cunningham