Economic Growth and Human Development - Yale …

1 World Development Vol. 28, No. 2, pp. 197 219, 2000. 2000 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0305-750X/00/$ - see front matter PII: S0305-750X(99)00131-X. Economic Growth and Human Development GUSTAV RANIS. Yale University, New Haven, Connecticut, USA. FRANCES STEWART. University of Oxford, UK. and ALEJANDRO RAMIREZ *. United Nations Development Program, New York, USA. Summary. The connections between Economic Growth (EG) and Human Development (HD) form two chains. Crosscountry regressions show a signi cant relationship in both directions, with public expenditures on health and education, notably female, especially important in the chain from EG to HD; and the investment rate and income distribution signi cant in the HD to EG chain. This gives rise to virtuous or vicious cycles, with good or bad performance on HD and EG reinforcing each other. Evidence over time has strong sequencing implications: countries initially favoring Economic Growth lapse into the vicious category, while those with good HD and poor EG sometimes move into the virtuous category.

2 Where choice is necessary Human Development should be given sequencing priority. 2000 Elsevier Science Ltd. All rights reserved. Key words Human Development , Economic Growth , income distribution, poverty, health, education 1. INTRODUCTION provides the resources to permit sustained improvements in HD. On the other, improve- Human Development has recently been ments in the quality of the labor force are an advanced as the ultimate objective of Human important contributor to EG. Yet, while this activity in place of Economic Growth . 1 Its two-way relationship between HD and EG may intellectual antecedents may be traced to the now be widely accepted, the speci c factors earlier basic needs approach of the ILO and the linking them have not been systematically World Bank, as well as Sen's concept of capa- explored. Nor has the question of priorities in bilities. 2 Human Development has been de ned the phasing of policy. The purpose of this paper as enlarging people's choices in a way which is to sharpen understanding of the two-way enables them to lead longer, healthier and fuller links between HD and EG at both theoretical lives.

3 3 The de nition of HD as ``enlarging and empirical levels. This in turn permits us to people's choices'' is very broad. For the analyze priorities in the phasing of policy and purpose of exploring the links between HD and to examine the usual assumption that EG must EG theoretically, and especially empirically, we precede progress on HD. 4. need to narrow it down. We shall consider the Section 2 identi es the major links between HD of a country as consisting of the health and EG and HD. Section 3 presents some empirical education of its people, recognizing that this is very much a reductionist interpretation. Clearly, there exists a strong connection * We are grateful for very helpful comments on an between Economic Growth (EG) and Human earlier draft from three anonymous referees. Final Development (HD). On the one hand, EG revision accepted: 19 July 1999. 197. 198 WORLD Development . crosscountry evidence on these links. Section 4 tion of income and its change over time.

4 6 The develops a typology of country cases, some way in which Growth translates into income representing the mutual enhancement of HD distribution and poverty reduction depends on and EG and some demonstrating asymmetric the nature of the Growth process in particular, performance. The nal section investigates the the extent to which it is based on the generation movement of countries from one category to of employment and on increasing rural another and re ects on the implications for incomes, , if the output mix is labor inten- policy. sive and rural incomes rise rapidly income distribution is more likely to improve and poverty reduction to occur than if Growth is 2. THE TWO CHAINS urban biased and capital intensive. 7. Expenditure on HD-related items is strongly We view HD as the central objective of a ected by the rate of poverty reduction. Not Human activity and Economic Growth as surprisingly, if poor households receive extra potentially a very important instrument for income, they increase their food expenditure and advancing it.

5 At the same time, achievements in calorie consumption signi cantly. 8 Empirical HD themselves can make a critical contribution evidence for example, for Bolivia, Brazil, to Economic Growth . There are thus two Chile, C^ ote d'Ivoire, Ghana, India, Indonesia, distinct causal chains to be examined: one runs Pakistan, Philippines, Malaysia, Nicaragua and from EG to HD, as the resources from national Peru also indicates the positive e ects of income are allocated to activities contributing family income change on child schooling. 9 For to HD; the other runs from HD to EG, indi- example, a crosscountry study of the determi- cating how, in addition to being an end in itself, nants of secondary education found that more HD helps increase national income. The two egalitarian countries had higher secondary chains are pictured in Figure 1. enrollment rates. 10 One estimate suggests that if the distribution of income in Brazil were as equal (a) Chain A: from EG to HD as Malaysia's, school enrollments among poor children would be 40% higher.

6 11 While the GNP contributes to HD mainly through evidence on the relations between income and household and government activity; civil soci- health is less extensive, studies in Brazil, Chile, ety, , through community organizations and C^ote d'Ivoire and Nicaragua suggest that other nongovernmental organizations (NGOs), household income also has a signi cant e ect on also plays a role. The same level of GNP can the demand for health, 12 some showing a much lead to very di erent performance on HD higher relative response for low than for high- according to the allocation of GNP among and income households. 13. within these institutions and variations in their Where women control cash income, it behavior. appears that expenditure patterns are geared Households' propensity to spend their after- relatively more toward HD inputs, such as food tax income on items which contribute most and education. For example, among Gambian directly to the promotion of HD in poor coun- households, the larger the proportion of food tries, , food, potable water, education and under women s control the larger household health, varies, depending on such factors as the calorie consumption.

7 14 Similarly, in the Phil- level and distribution of income across house- ippines it has been shown that consumption of holds as well as on who controls the allocation calories and proteins increases with the share of of expenditure within households. In general, income accruing directly to women. 15 In the poor households spend a higher proportion of C^ote d'Ivoire, an increase in women s share of their incomes on HD items than those with cash income was associated with signi cantly higher incomes, and similar results ow from higher spending on food and reduced spending greater female control over household income. on alcohol and cigarettes. 16. When levels of poverty in a country are high, Turning to the government, the allocation of either because per capita income is low or badly resources to improving HD is a function of distributed, the expenditure of many house- total public sector expenditure, of how much of holds on HD is bound to be low.

8 While evi- this ows to the HD sectors, and of the way in dence 5 indicates that, in general, poverty is which it is allocated within these sectors. This reduced with Economic Growth , the extent of can be expressed in the form of three ratios: 17. the reduction varies greatly with the distribu- the public expenditure ratio, de ned as the Economic Growth AND Human Development 199. Figure 1. The HD-GNP cycle. proportion of GNP spent by the various levels across countries in each of these ratios, which of government; the HD-allocation ratio, means that the same level of GNP may be de ned as the proportion of total government associated with very di erent levels of govern- expenditure going to the HD-sectors; and, ment spending on HD priorities. 18. nally, the HD priority ratio, de ned as the The underlying determinants of these three proportion of total HD-sector expenditure ratios are complex, but include the following: (i). going to ``priority areas.

9 '' Within the HD-sec- the tax capacity of the system; (ii) the strength tors, some expenditures are clearly much more of the demand for military expenditure and for productive in terms of achieving advances in other non-HD priorities of the government; (iii). HD than others; for example, basic education, the varying interplay between bureaucratic especially at an early stage of Development , is forces, vested interests and popular pressures. It generally recognized to have a larger impact on should be noted that all three ratios are a ected HD than tertiary education. But the precise by the extent of decentralization of government: de nition of what constitutes a ``priority area'' country evidence suggests that real decentral- will inevitably vary according to a country's ization, devolution, tends to increase the stage of Development , rendering this third ratio total revenue available; it often raises the HD- more arbitrary and di cult to measure than the allocation ratio; and it almost always improves other two.

10 There are very large variations the HD-priority ratios. 19. 200 WORLD Development . The signi cance of public expenditure choi- e ectiveness of these expenditures in raising ces for improving HD is illustrated by a HD levels, what type of provision is most comparison between Kenya and Malawi. In the productive at what level of Development , and 1980s, a similar proportion of national income how di erent combinations e ect a change in went to public expenditure (27% in Kenya; 30% HD. We shall call this link in the chain the in Malawi) but Kenya had a signi cantly higher ``HD improvement function'' (HDIF); it social allocation ratio (47% compared to 35%) resembles a production function in that it and social priority ratio (34% compared to relates the inputs into HD, such as public 14%) so that the proportion of GDP going expenditure on health services or water, to the directly to HD-improving priorities in Kenya HD objective of achieving better health.