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3.3. Economic and Social Development
3.3.1. Introduction
Economic and social development comprises many dimensions and a number of indicators
have been devised to assess progress and setbacks in human development (see
Box 3-1). The UN defines development as the furthering of human choices.
Such choices are neither finite nor static. Yet, regardless of the level of
development, the three essential choices are to have access to the resources
needed for a decent standard of living, to lead a long and healthy life, and
to acquire knowledge (UNDP, 1997). Other valued choices range from political,
economic, and social freedom to opportunities for being creative and productive,
and to enjoy human rights (UNDP, 1997).
Arguably, choices are only possible once basic human needs for food, shelter,
health care, safety, and education have been met. Poverty is therefore an important
indicator of the absence of satisfactory economic development. Alleviation of
poverty is an essential prerequisite for human development. Beyond the satisfaction
of basic needs, the issue of what constitutes "development" involves many cultural,
social, and economic dimensions that cannot be resolved by scientific methods,
but are inherently a question of values, preferences, and policies.
Box 3-1: On Measures of Human and Economic Development
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Writing 220 years ago in The Wealth of Nations, Adam Smith noted
that: "whatever the soil, climate, or extent of territory of any particular
nation, the abundance or scantiness of its annual output fundamentally depends
on its human resources - the skill, dexterity, and judgement of its labour"
(Smith, 1970). Although economists recognized the importance of land, labor,
and capital in explaining economic growth and national wealth, in the post-World
War II period national well-being has usually been measured by GDP or gross
national product (GNP). GDP is defined as the monetary equivalent of all
products and services generated in a given economy in a given year. GNP
equals GDP plus the net balance of international payments to and from that
economy. Few questions were asked about the underlying resource base for
GDP growth and whether or not it was sustainable. Further, since GDP does
not reflect all economic transactions it does not provide a full measure
of human well-being. Nevertheless, GDP is very widely used because it is
universally accepted as the monetary indicator of all products and services
generated in a given economy within a given year.
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Environmental and Social Modifications to GDP
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More recently, several new approaches have been developed to address the
inherent shortcomings of GDP measures. These include "green" national accounts
that incorporate the role of the stocks and flows of renewable and non-renewable
resources, and the related concept of genuine savings (UN, 1993). "Green"
GDP is the informal name given to national income measures that are adjusted
for the depletion of natural resources and degradation of the environment.
The types of adjustment made to standard GDP include a measure of the user
costs of exploiting natural resources and a value for the social costs of
pollution emissions. In terms of measuring the sustainability of development,
the green accounting aggregate with the most policy relevance is "genuine
saving." This represents the value of the net change in assets that are
important for development - produced assets, natural resources, environmental
quality, foreign assets, and human resources, which include returns to education
and raw labor and the strength and scope of social institutions. Human resources
turn out, not unexpectedly, to be the dominant form of wealth in the majority
of countries (World Bank, 1997a).
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Purchasing Power Parities
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A further problem arises in international comparisons, in which economic
indicators are converted from local currencies into a common currency,
such as dollars. Traditionally, market exchange rates are used to make
these conversions. In theory, exchange rates adjust so that the local
currency prices of a group of identical goods and services represent equivalent
value in every nation. In practice, such adjustments can lag far behind
changing economic circumstances. Policies, such as currency controls,
may further distort the accuracy of market-based rates. Moreover, many
goods and services are not traded internationally so market-based exchange
rates may not reflect the relative values of such goods and services,
even in theory. An alternative approach is based on estimates of the purchasing
power of different currencies. The International Comparison Project compared
prices for several hundred goods and services in a large number of countries.
On the basis of this comparison, the relative values of local currencies
are adjusted to reflect PPP (see UNDP, 1993). In effect, the PPP currency
values reflect the number of units of a country's currency required to
buy the same quantity of comparable goods and services in the local market
as one US dollar would buy in an "average" country. The average country
is based on a composite of all participating countries. In 1996 the World
Bank initiated the ranking of countries by GDP converted at PPP rates;
the effect was to reduce the income spread between the poorest and richest
countries (WRI, 1997a).
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UN Human Development Index
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The UN has tried to address the shortcomings of GDP by developing The
Human Development Index (UNDP, 1997). This index, produced since 1990,
combines three factors to measure overall development:
- Income as measured by real GDP per capita at PPP to represent command
over resources to enjoy a decent standard of living.
- Longevity as measured by life expectancy at birth.
- Educational attainment as measured by adult literacy and school enrolment.
The UN has also developed other measures, such as the Gender-related
Development Index (GDI) and the Gender Empowerment Measure (GEM) to assess
conditions such as gender equality.
The difficulty of incorporating these alternative measures into long-term
scenarios is that, with the exception of life expectancy, underlying data
or base projections (e.g. on future PPPs, levels of educational attainment,
etc.) needed to develop these alternative indicators for future projections
are not available. Therefore, this report largely focuses on traditional
measures of economic development like GDP. Projections of PPPs are calculated
by one of the six SRES models and are presented in Chapter
4.
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Given the inherent ambiguities of such a complex, multidimensional issue, it
is easiest to define and develop indicators of no development. Estimates indicate,
for instance, that 1.3 billion people in developing countries live on incomes
of less than US$1 (PPP based) per day, a level used to define the absolute poverty
cut-off in international comparisons (UNDP, 1997). An equal number of people
are estimated to have no access to safe drinking water (UNDP, 1997) and 2 billion
people are estimated to have no access to services provided by the use of modern
energy forms (WEC, 1993).
Income is not an end in itself, but a way to enable human choices, or to foreclose
them in the case of poverty. Therefore, levels of per capita income (GDP or
GNP) have been widely used as a measure of the degree of economic development,
as in many instances such levels correlate closely (as lead or lag indicator)
with other indicators and dimensions of social development, such as mortality,
nutrition, and access to basic services, etc. Average income values also do
not indicate the distribution of income, which is an important quantity. Composite
measures, such as the UN Human Development Index, are also used in historical
analyses (see Box 3-1). Note, however, that the overall
nature of scenario results may not vary much even if some other measure could
be used, because often-used components, such as literacy rates, are generally
correlated with income levels.
In fact, per capita income is the (and often only) development indicator
used in the literature for long-term energy and GHG emissions scenarios. This
explains why this review chapter, while recognizing the importance of alternative
dimensions and indicators to describe long-term human development, almost exclusively
embraces an economic perspective.
The widespread use of GDP or GNP per capita (however measured) should not distract
from the fact that, while a powerful indicator, it does not describe all aspects
of economic development (see Box 3-1). GDP and GNP
are indicators of financial flows (see Box 3-1),
and are not designed to measure stock variables such as the size of the capital
stock in an economy. GDP and GNP relate only to goods and services that are
subject to market transactions, that is only those activities that are part
of the formal economy. Subsistence and other "gray" economic activities and
socially important obligatory activities, such as childcare or household work,
are not included; also, depletion allowances for natural capital and resources
are not considered.
Although PPP comparison (see Box 3-1) is considered
a valid indicator of relative wealth, it is sometimes quite uncertain and dependent
on detailed comparison exercises. As a result, even if studies and scenarios
consistently use the same indicator of economic development, numeric values
are often not directly comparable because of large differences in base-year
values. Comparison of growth rates are more robust, but even here many difficulties
exist (see, e.g., Alcamo et al., 1995, and Chapter
2).
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