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Reproduced from HUMAN DEVELOPMENT REPORT 1996, UNDP, 1996,
Oxford University Press (Slightly abridged by Dr. Robinson Rojas)
                     CHAPTER 2
 1 Growth as means to human development
 2 Growth is not the end
 3 The altar of production
 4 A faith in growth
 5 Misplaced optimism
 6 The employment option
 7 From redistribution to basic needs
 8 The era of "structural adjustment"
 9 The human factor
10 Enter human development
11 New growth theories and human development
12 Social reproduction and growth
13 Growth and equity
14 Confusion with human resource development
15 Dimensions of human development
16 Growth for human development
17 Growth of what and for whom?
23 Bibliography

Growth as a means to human development

Is economic growth a meaningful goal? Or is human development the real
objective? If it is human development, growth should be judged not by
the abundance of commodities it produces, but by how it enriches
people's lives.

For many years growth has been a major economic goal of policy-makers
-and political leaders- based on the deeply ingrained view that
delivering a larger and larger quantity of goods and services is the
best way  to improve people's standard of living. And growth is often
seen as a solution to other problems, such as building military strength,
increasing employment and reducing budgetary deficits.

But the questioning of such assumptions has become more insistent, and
criticisms of the fixation on the quantity of growth more vocal. The
critics are not just environmental groups, but also a broad range of
people who recognize from the deteriorating quality of their lives that
growth is not the answer to everything. The quality of people's lives
can be poor even in the midst of plenty.

In low-income countries economic growth is not an option. It is
imperative -for reducing poverty and generating the resources required
for basic human development. But even in these countries the critical
question remains, what kind of growth? What are the benefits to human
development, and what are the costs? Who benefits, and who pays? These
countries have to find the most efficient ways of converting income
gains into advances in human development.

Policies that are merely "pro-growth" ignore the real purpose of growth.
By the same token, to criticize the nature of growth in a country and
to question whether it serves human development is not to be
"antigrowth". It is to place growth in its proper perspective and to
measure it on a human scale.

This Report moves beyond the debate on whether economic policies are
"progrowth" or "antigrowth" by addressing the central issue of the
quality of growth -whether it is genuinely serving human development in
a country, in a region or in the world.

Is the character of growth advancing people's human security, freedom
and empowerment? Is it promoting equity -today and between generations?
Does it respect nature and its life-supporting functions? And is it
leading to greater social cohesion and cooperation among people -not
greater conflict and social disintegration? These are the important
questions (see the special contribution by President Fernando Henrique
Cardoso of Brazil).


The doubts about economic growth may seem new, but they have persisted
for two centuries or more -since the birth of industrial capitalism.
The revolutionary methods of production used by this system did generate
fabulous new wealth. And the priesthood of accumulation -the
industrialists, the bankers, the politicians and the economists- saw
this increase in wealth as a way, for the first time in human history,
to eliminate scarcity.

But from the outset the benefits were concentrated in the hands of small,
elite groups in a few rich countries. For many other people the reality
was a form of enslavement. In the industrializing countries during the
19th century the development of technology, from the steam engine
onwards, turned men, women and children into instruments of accumulation
 -toiling in the "dark satanic mills". And those working in the colonies
on the periphery of the world economy saw their countries and their lives
harnessed to the supply of raw materials to the rich nations.

The classical economists helped to justify this process. They identified
labour as just another commodity alongside capital and manufactured
goods. It had value only to the extent that it produced profits, reducing
people to means, serving the objective of greater production.

Even from the earliest years, however, critics -in the North and in the
South- argued that human beings should be the ends of development rather
than mere means. Such ideas can be traced back through the writings of
most major philosophers. Aristotle provides one example: "Wealth is
evidently not the good we are seeking, for it is merely useful and for
the sake of something else." And Immanuel Kant another: "So act as to
treat every case as an end, never as a means only." These
same concerns were the focus of such political economists as Adam Smith,
Karl Marx, John Stuart Mill and Alfred Marshall.

The great Bengali writer and Nobel laureate Rabindranath Tagore sounded
a similar warning: "We have for over a century been dragged by the
prosperous West behind its chariot, choked by the dust, deafened by the
noise, humbled by our own helplessness and overwhelmed by the speed. We
agreed to acknowledge that this chariot-drive was progress, and the
progress was civilization. If we ever ventured to ask, 'progress towards
what, and progress for whom', it was considered to be peculiarly and
ridiculously oriental to entertain such ideas about the absoluteness of
progress. Of late, a voice has come to us to take count not only of the
scientific perfection of the chariot but of the depth of the ditches
lying in its path."

The early socialists were also vociferous critics of capitalist
exploitation. But while they despised the capitalist system, they were
still enamoured of the machinery of accumulation. Despite rethoric about
workers becoming the masters of production, ownership of the machinery
was merely transferred from capitalists to the state.

Other critics saw the problem as rooted in industrialization itself. In
Europe Thomas Carlyle, John Ruskin and Leo Tolstoy rejected the
modernizing movement as dehumanizing. Mahatma Gandhi also penned a
powerful critique of modern machine technology. In 1907, in HIND SWARAJ,
he distilled the experience of indentured Indians in South Africa, as
well as that of Indians under British rule in India. Rejecting both
industrialization and capitalism as exploitative, he argued that "the
earth provides enough to satisfy every man's need but not every man's


Such views were largely set aside in the pursuit of increased production.
Capitalism often treated people as little more than cogs in a huge
machine, and when the machine started to sputter in the 1930s, it readily
cast them aside onto the scrap heap of unemployment. While socialism in
the Soviet Union aspired to higher ideals, in practice it too sacrificed
people, often brutally, on the altar of increased accumulation.

The aftermath of the Second World War was a period of taking stock and
of new approaches. The world community adopted the Universal Declaration
of Human Rights, celebrating the victory of human freedom and reasserting
strongly and clearly that the principal objective of development was
human well-being. In subsequent years there followed a series of UN
conventions and conferences establishing the principles of people-
centred development.

The postwar period was also the time that many developing countries
fought for independence. These struggles were not just for political
freedom but also to improve human welfare. To accomplish this, many of
the new countries took up variants of socialism. Some took their
inspiration from the orthodox Soviet model. Others looked to China as
an alternative. Mao Zedong rejected the idea that development was
determined by the level of "productive forces" and argued instead that
"the people, and the people alone, are the motive force in the making
of world history."

Later Cuba offered another socialist path. And in Africa countries from
Tanzania to Guinea and Algeria opted for socialism as a way of ensuring
that the benefits of growth were equitably distributed. All these models
aspired to treating people as ends. As President Julius Nyerere put it:
"Every proposal must be judged by the criterion of whether it serves the
purpose of development -and the purpose of development is the people."

Countries with more mixed economies, such as India, still assumed that
the state would take a dominant role in harnessing growth for the benefit
of people -as had been assumed in many countries in Latin America, from
Argentina to Mexico. In these cases, however, the motive force for
development was seen to be the state rather than the people.


Elsewhere, countries developed along more overtly capitalist lines, as
in Brazil, Cote d'Ivoire, Gambia and Liberia. But for both socialist and
capitalist countries the key to development benefiting people and
eradicating poverty was assumed to be faster economic growth. Even at
that stage, however, many economists and development planners knew that
economic growth was not and end in itself, but a performance test to see
whether the means for development were being achieved. In 1955 the Nobel
Prize-winning West Indian economist Arthur Lewis defined the purpose of
development as widening the "range of human choice" -as did the first
HUMAN DEVELOPMENT REPORT in 1990. The difference was that Lewis tended to
equate wider choice merely with greater income -and had more faith that
economic growth would inevitably lead to human development.

The faith in growth was based on the assumption that its benefits would
eventually be widely spread. In the early stages policy-makers in the
more liberal economies accepted that the rich might get richer and the
poor might have to tighten their belts. But they hoped that rewarding
the rich in this way would give them the incentive to innovate, to save,
and to accumulate capital -and that this would ultimately benefit the

Giving theoretical support to this view of the likely path for capitalist
developing countries was the "Kuznets curve", named after Nobel laureate
Simon Kuznets. The statistical association creating that curve showed
inequality rising during the early stages of growth, as labour begins to
leave agriculture for industry. Then inequality reaches a peak and
finally falls as labour becomes more concentrated in industry.

Beyond the presumption that inequality would eventually fall, there was
also a presumption that, during the period of rising inequality,
governments would step in to mitigate the suffering of the poorest. They
would create temporary social safety nets or, in more liberal systems,
use progressive taxation and subsidized social services to distribute the
benefits more fairly.


Neither of these optimistic assumptions matched reality. First, economic
growth alone did not distribute resources more equally. That happened in
only a few countries (and not just socialist ones) whose governments took
deliberate steps to increase equality, such as radical programmes of land
reform, and committed themselves to mass education and health care.
Second, few governments took adequate steps to cushion the impact on the
poor. Many were dominated by people with close social, economic and
political links to the rich, who benefitted from growth and had no desire
to see their wealth transferred to the poor.

Why would inequality and poverty remain high in many countries despite
economic growth? One reason was the initially very unequal access to
land and education. Another was the diversion of resources to the cities,
which caused rural development to be slower than expected. The rise in
agricultural productivity that was a precondition for widespread progress
in industry never occurred. And millions of desperate people in the
expanding rural population left their villages in the hope of a better
life in the cities. But they found few ne jobs there. To some extent the
lack of urban employment was due to slow growth, but it was also due to
labour-displacing technology from the industrial countries.


Faced in the 1960s with ever-larger numbers of poor people -and the
apparent increase in open or disguised unemployment in the midst of
growth -many development theorists and practitioners grew disillusioned
with economic growth as a panacea. They turned their attention to "jobs
and justice". Even so, many people quickly concluded that the main
problem in developing countries was not unemployment but a lack of
productive and remunerative jobs.

In practice, the concept of unemployment pertains only to industrial
countries, where a worker, supported by social security benefits, can
afford to spend time unemployed. Many workers in poorer countries do not
have that option. They must work at anything they can, no matter how
unproductive, no matter how badly paid. Many work long hours for low
rewards in the "informal sector" -a broad spectrum of generally
unregistered workers (street traders, garbage pickers, casual workers)
as well as small-scale producers (blacksmiths, carpenters, weavers).

The problem was thus redefined as the "working poor". Among them, women
were found to be even harder pressed than men, often working in
agriculture or the informal sector while also working long hours in the
home -managing the household, caring for children, cooking, cleaning and
performing other household duties.

Low-productivity work predominates in developing countries partly because
workers are hampered by poor nutrition, health and education. But workers
can also be held back by an unsupportive environment. They usually lack
adequate access to credit facilities, marketing organizations and labour
exchanges -and in rural areas they often face an unequal system of land
ownership or tenancy that provides neither the means nor the incentives
for efficient production.

Government policies may also be biased against maximizing employment. In
the organized sector, policies may overprice labour and underprice
capital, while sustaining an overvalued exchange rate that discourages
labour-intensive exports. To placate the urban populace, governments
often try to keep food prices low -thus discouraging small-scale,
labour-intensive food production.

Under these conditions even creating a few formal sector jobs can cause
more problems than it solves. People in the rural areas hear about these
well-paid jobs and are even more tempted to migrate in search of them,
further swelling the ranks of the urban poor.


Given these difficulties, the focus of the development debate shifted
from formal employment towards income distribution. One of the landmarks
was a 1974 book, REDISTRIBUTION WITH GROWTH, which suggested ways in
which the increments of growth could be used for investment in services
and assets for the poor, thereby improving distribution without reducing
the incomes and assets of the rich.

A more direct approach was developed in the mid-1970s. Known as Basic
Needs, it emphasized ensuring for all people the basic means of well-
being: food, health, education. In many ways this was a return to
fundamentals. Such pioneers as Ptambar Pant in India said in the 1950s
that development must be concerned with meeting minimum, or basic, needs.
But in the following decades the debate sometimes got lost in technical
discussions of growth rates, saving ratios, capital-output ratios and
so on -concentrating on the means, losing sight of the end. Basic Needs
returned to the central purpose of development -promoting human
well-being, especially that of the poor.

Basic Needs had three main parts. First, it emphasized the importance of
increasing incomes through efficient, labour-intensive production -for
countries with a labour surplus. Second, it assigned a key role in
reducing poverty to public services -mass education, safe water, family
planning and health services. Third, it started to shift people's
attention to participation -public services were to be financed by the
government, often through international aid, but their planning and
delivery should take place with the participation of the beneficiaries.
The shorthand description of Basic Needs was Incomes plus Public
Services plus Participation.

In practice, however, many governments and agencies focused only on
the middle item -the delivery of basic public services. As a result,
Basic Needs came to be criticized as a prescription to "count, cost and
deliver" -count the poor, cost the bundle and deliver it to them. It thus
became strongly identified with top-down state action. It was also
criticized for leaving out the less material dimensions of human well-
being and for not empowering the poor economically, since it did stress
their access to productive assets and credit.

The Basic Need strategy became controversial for a second reason. Some
developing countries regarded industrial countries' support for Basic
Needs as a mean to divert attention from discussion of international
policy and the need for a new international economic order. In fact,
international reform had always been seen as part of the strategy for
ensuring basic needs, though the measures that should constitute that
reform were inevitably a matter of lively debate.


Whether or not these criticisms were valid, the Basic Needs strategy was
soon overtaken by events. In the late 1970s and early 1980s the slowdown
of growth, the debt crisis and worsening terms of trade overwhelmed many
countries -and most thoughts of human-centred development were pushed
into the background as programmes of stabilization and later of
structural adjustment took centre stage.

Initially, the aim of these programmes of the World Bank and the
International Monetary Fund (IMF) was to help developing countries
respond to external shocks -the rise in oil prices, the decline in
growth in the industrial countries, the rise in interest rates and the
drop in capital inflows. The "stabilization" measures of the IMF and the
World Bank aimed at reducing both budget deficits and trade deficits and
usually involved cutting public spending, reducing wages and raising
interest rates. Restoring growth, an objective on paper, was rarely
achieved in practice. Although these policies reduced deficits in some
countries, they often did so at the cost of inducing recession. In short,
they often balanced budgets by unbalancing people's lives.

Soon, however, the emphasis switched to longer-term "adjustment", a
fundamental realignment of developing country economies along free-
market lines. This involved reducing the role of the state, removing
subsidies, liberalizing prices and opening economies to flows of
international trade and finance. Whether this was actually "structural"
was another matter. It excluded many measures previously identified as
critical for changing social and economic structures -such as land
reform or a radical redistribution of power.

For many countries the age of adjustment brought other external pressures
and changes in economic philosophy. Countries came under strong outside
pressure to privatize state-owned industry and to end central planning.
State control of industry and centralized planning, after some initial
successes, proved increasingly inefficient -imposing substantial burdens
on government budgets. And attempts at radical egalitarism often bore
little fruit. Despite laudable ideals, managed communal living
experiments -such as AUTOGESTION (self-management) in Algeria and UJAMAA
(freedom) villages in Tanzania- proved less popular than expected.

Experiments in workers' self-management in the former Yugoslavia did not
provide a viable alternative. Even China, one of the more successful
socialist experiments, started to break up its 50,000 agricultural
communes after 1979 and link rewards more directly to individual effort.
And Viet Nam, which had fought a long and bitter  war to defend a
socialist system, started to transform itself into more of a market
socialist economy -with a mix of socialism and socialism.

In many countries more limited forms of social democracy are still
flourishing combining bottom-up cooperative organizations with public
provision of basic social services. Forms of central planning that are
indicative rather than directive also continue to be used with great
success, notably in the high-growth countries. The model of development
followed by Indonesia, Japan, Malaysia and the Republic of Korea, for
example, has used industrial policy to channel resources into the sectors
of the economy with the most growth potential.


During this whole process of liberalization, adjustment and
privatization, concern for the poor was pushed into the background.
Policy-makers assumed that even if poverty increased in the short term,
this was a price that had to be paid for long-term stability and growth.

Many voices were raised in protest, including those of trade unions,
churches, non-governmental organizations, the International Labour
Organization and UNICEF, which published ADJUSTMENT WITH A HUMAN FACE.
While not questioning the need for some kind of adjustment, UNICEF called
on the IMF and the World Bank to give more attention to poverty and to
human concerns. Among a wide range of proposals, it argued for
maintaining basic minimum services, especially for the most vulnerable,
and for sharing the burden of adjustment more fairly. But the underlying
principle was that human concerns should not be "added on" to an
otherwise unchanged package of adjustment policies. Instead, they should
be incorporated into a new, integrated framework of long-term, people-
centred development.

Some of the calls for new approaches to adjustment came from the women's
movement. Women often had to bear the brunt of adjustment, yet their
needs and concerns were rarely considered in making adjustment policy.
Single-parent families, usually headed by women, were among the hardest
hit. All this emphasized the need for "engendering adjustment policies."

Throughout this period the cause of the poor and the need to focus on
human concerns was aided tremendously by the theoretical work of
Amartya Sen and his central concept of promoting human "capabilities".
In his view a society's standard of living should be judged not by the
average level of income, but by people's capabilities to lead the lives
they value. Nor should commodities be valued in their own right -they
should instead be seen as ways of enhancing such capabilities as health,
knowledge, self-respect and the ability to participate actively in
community life.

Sen also emphasized that at the core of human well-being is freedom of
choice. Both the fasting monk and the starving pauper may be hungry -the
difference  is that one exercises a free choice, and the other does not.
The expansion of human capabilities implies greater freedom of choice -so
that people can explore a wider range of options that they find


In 1990 UNDP took up the challenge of incorporating these and other ideas
in a new development vision when it published the first HUMAN DEVELOPMENT
REPORT. The times were ripe for a broader approach to improving the human
condition -an approach that would cover all aspects of human development,
for industrial and developing countries, for men and women, for current
and future generations. Human development went far beyond income and
growth to cover the full flourishing of all human capabilities. It
emphasized the importance of putting people -their needs, their
aspirations, their choices- at the centre of the development effort.

Human development can be expressed as a process of enlarging people's
choices. Obtaining income is certainly one of the main means of expanding
choices and well-being. But too often the expansion of income is confused
with the enhancement of human capabilities.

Investigations of the priorities of poor people have often discovered
that they put a high value on many things besides higher income
-including adequate nutrition, accessible safe water, better medical
services, more and better schooling for their children, affordable
transport, adequate shelter, secure livelihoods and productive and
satisfying jobs. Generating private income helps meet some of these
needs, but it certainly does not guarantee all of them.

Beyond these needs, people also value benefits that are less material.
These include, for example, freedom of movement and speech and freedom
from oppression, violence and exploitation. People also want a sense of
purpose in life, along with a sense of empowerment. And as members of
families and communities, people value social cohesion and the right to
assert their own traditions and culture. Money alone cannot buy these

The choices cannot, however, be unlimited, since one person's freedom
can constrain that of many others. The acceptance of this principle is
evident from the recent reaction in many countries against the extreme
individualism of the free market and the desire for a more socially
responsible and communitarian form of development. Choices without limits
and constraints can become mindless and destructive. Choices must be
combined with obligations -rights with duties.

One of the concerns of the first HUMAN DEVELOPMENT REPORT was to define
the relationship between human development and economic growth. It
countered the conventional wisdom by asserting that there is no automatic
link between the two. Economic growth might be essential for human
development, but specific policy measures are needed to translate
economic progress into human progress. This Report builds on that
beginning analysis.

The 1990 Report also presented a new way of measuring human progress
-the human development index (box 2.1). Ranking countries by this index
produced very different results from ranking them by per capita GNP.
Relative to their income rankings, some countries -such as Brazil,
Nigeria and Pakistan- slipped down the list when it came to human
development. And some countries with more modest incomes -such as
Costa Rica, Cuba and Sri Lanka- climbed up the rankings when evaluated by
the HDI.


During the late 1980s and early 1990s new theories of economic growth
underpinned the human development position that the real motive force of
economic progress is people. Developed by such economists as Paul Romer
and Robert Lucas, these theories tested the effect of human capital on
countries' long-term growth rates. The theories did not consider the full
range of human capabilities, merely people's productive capacities.

The earlier, conventional "neoclassical" theory of growth had held that
economic growth was a result of the accumulation of physical capital and
an expansion of the labour force -combined with an "exogeneous" factor,
technological progress, that makes capital and labour more productive.
But it could not explain how to accelerate technological progress.

In the new theories what increases productivity is not an exogeneous
factor, but "endogeneous" ones -related  to the behaviour of people
responsible for the accumulation of productive factors and knowledge.
Significantly, this behaviour can be changed by policy.

Some of the new models argue that one of the crucial factors is an
across-the-board increase in human capital. Others argue that the key
source of productivity growth is research and development (R&D) -though
this too depends on human capital.

The human capital models show how education allows the whole production
process to benefit from "positive externalities". Educated people use
capital more efficiently, so it becomes more productive. They are also
more likely to innovate -to devise new and better forms of production.
Moreover, they spread the benefits to their co-workers, who learn from
them and also become more productive. Thus, the rising level of education
causes a rise in the efficiency of all factors of production.

This helps explain part of the disparity in income between rich and poor
countries. It also partly explains why poor countries are not catching
up, or are even slipping back. They are failing to make investments in
human capital that can raise productivity and enable the workforce to
adopt new technology. In many cases they lack resources -either domestic
savings or external finance. And some have been deprived of resources by
onerous debt repayments or capital flight.

The spillover benefits of education also help account for important
aspects of the relationship between growth and physical capital. Past
growth theories assumed that capital has diminishing marginal returns
-that as more capital is accumulated, overall efficiency declines and
growth rates slow. But many countries that have accumulated capital have
achieved high growth rates and sustained them. The human capital models
help explain this by showing how decreasing marginal returns to capital
are offset to some extent by increased efficiency from education.

The growth theories that emphasize R&D also underline the importance of
human capital -but suggest that its effects are more indirect. These R&D
models argue that the long-term rate of growth is better explained by
investment in research and development. R&D can clearly increase the
productivity of the firms making the investments. But here too there can
be positive externalities. Many innovations are difficult to keep secret,
so other firms learn of these advances, and total factor productivity

Both types of models depend heavily on expanding human capabilities. Even
if innovations come from R&D, they require an educated workforce -both
people with higher skills to carry out the research and those with more
basic skills to put the results into practice. The new growth theories
thus confirm the human development position that the driving force of
all economic growth is people.

Both sets of new growth theories have important policy implications,
since they suggest ways that growth might be stimulated -by altering
private incentives, for example, or by undertaking certain public

But the new growth theories examine only a limited set of easily
quantifiable factors. Other factors -such as people's habits, their
social groups and networks, and the nature of institutions and government
policies- are more difficult to measure but nonetheless vitally important
in explaining differences in growth rates across countries. The family
and the formal education system, for example, help impart many skills
beyond literacy and numeracy. Such skills -they could be called
"operacy"- include self-discipline, taking pride in one's work and being
flexible, openminded and willing to cooperate.


A limitation of the new growth theories is that they treat workers as
though they appear magically each day, ready-made for their jobs. Nor can
they account for how the next generation of workers is prepared for
productive employment. Preparing workers, both present and future, is
part of "social reproduction", which encompasses a broad range of
activities. It includes bringing forth a new generation -from giving
birth to caring for and raising children. Most of this work is done by
women, who also undertake the bulk of other caring work -managing the
household and looking after those who cannot work, such as the sick or
the elderly (box 2.2).

The contribution of women to social reproduction is not confined to the
home. They are also responsible for certain kinds of community work. A
recent study in the United States found that, even though men and women
do an equal amount of socially valuable voluntary work in the community,
there are clear differences in the kind of work they do. Men are more
active in civic, political and professional groups -women in social
support activities in charitable, health and education organizations. In
the United Kingdom the community care schemes that have appeared since
the 1980s rely mostly on women. And in Lebanon it is women who have
formed the networks of street organizations that provide many vital
social services.

The social importance of household and community labour trascends its
economic impact. This work "reproduces" society, not just workers. And in
this sense it has an intrinsic human value that cannot be reduced to
units of money or of time. Thanks to these activities, family and
community relations are enriched, cultural traditions are maintained,
and human development is enhanced. This is social reproduction in the
broad sense.

The new growth theories can deal with these activities only as inputs
into production -as some kind of "social capital" or a broad form of
"human capital". The human development approach, by contrast, is vitally
concerned with them as crucially important social activities.


In addition to the expanded view of the relationship between economic
growth and human capital, there now is a deeper understanding of the
relationship between growth and equity. Human capital has more impact on
growth, for example, it it is equitably distributed.

It previously was thought that a trade-off existed between growth and
equity -that distributing income too equally would undermine incentives
and thus lower everyone's income. The assumption was that the rich needed
special encouragement to save and invest more.

Recent evidence suggests that this conventional wisdom is wrong. Many
economies in Asia -Hong Kong, Indonesia, Malaysia, the Republic of Korea,
Singapore, Taiwan (province of China) and Thailand- have had both rapid
growth and relatively low inequality. Between 1960 and 1993 the East
Asian economies, excluding China, had annual per capita growth of 7.6%,
while income inequality remained stable or declined. Japan and Sweden
have also combined rapid growth with low inequality (boxes 2.3 and 2.4).

These are important findings, since they contradict the conventional view
that it is better to channel income to the rich, who tend to save and
invest more.

The key to East Asia's success was a relatively equal distribution of
private and public assets -countries there concentrated on redistributing
not income but wealth. What generates income is productive wealth
-including human capital. Some new growth theories claim that
redistributing income more equitably takes income away from people with
capital, lowering their profits and thus supposedly reducing growth. In
fact, a progressive redistribution of assets tends to boost growth
because it has a broad, positive effect on people's incentives. One study
concluded that if in 1960 the Republic of Korea had had Brazil's
inequality, its GDP in 1985 would have been 15% lower.

Some countries in East Asia, such as the Republic of Korea, initiated
growth through large-scale land reforms that broke up feudal class
structures and through the building of rural infrastructure. But all
stressed broadly based investment in education -particularly in primary
and secondary education. In 1985 the Republic of Korea, which has enjoyed
fairly equitable growth, devoted only 10% of its education budget to
tertiary education, while Venezuela, where growth has been more
inequitable, devoted 40% to the tertiary level.

Besides increasing the pace of growth, mass education can ensure that its
benefits are more equitably distributed. When a small elite of workers
loses its education monopoly, it can no longer command a high premium for
its skills -so wage inequality is reduced. In the Republic of Korea
between 1976 and 1985 the premium that those with higher education could
enjoy over those with only primary education fell from an additional 100%
to 66%. This helped reduce wage inequality over this period. In Brazil,
by contrast, where education expenditures tend to favour the rich, the
premium for higher education scarcely changed, and wage inequality rose
over the same period.

But education will not ensure equitable growth on its own. People also
need the opportunity to use their skills. Otherwise, society loses
valuable resources, and people will not invest in education in the first
place. East Asian economies have established this connection between the
supply of skilled labour and the demand for it by first promoting such
labour-intensive sectors as manufactured exports and agriculture. This
provided widespread employment and raised everyone's wages.

The role of agriculture in East Asia's success is often ignored. In
Taiwan (province of China) in the 1950s and early 1960s it was not
exports but agriculture that took the lead in generating domestic demand
and employment. The income generated in agriculture creates more demand
for agricultural inputs and basic consumer goods -both of which require
labour-intensive production. So, employment multiplies throughout the
economy. Indeed, in East Asia a 1 percentage point increase in
agricultural growth tended to generate a 1.5 point increase in the growth
rate of the non-agricultural sector.

Discussions that link equity with growth have frequently neglected the
demand side of the economy. A more equal distribution of income changes
the composition of demand towards more labour-intensive products -and
this stimulates both growth and employment. Public policy must therefore
be directed not only at building up people's capabilities, but also at
matching these capabilities with opportunities -linking the supply of
human capital with the demand for it. Jamaica, the Philippines and Sri
Lanka have enhanced basic capabilities but still had low growth, in part
because of insufficient demand for people's skills.

When the supply of human capital and the demand for it are in balance
-when capabilities match opportunities- a dynamic process of cumulative
causation is set in motion that can raise growth and lower inequality.


Many people often confuse the human development concept with human
resource development. The phrases may appear similar, but there is a
world of difference. While the new growth theories focus on human
capital, the human capabilities that are the focus of human development
are broader than productive abilities.

The key distinction is between means and ends. Hu,am resource development
considers human beings merely as a means to a greater output of
commodities. Human development, by contrast, identifies people as ends
-seeing their well-being as the ultimate and only purpose of development.

Human resource theory treats people as "human capital" -merely another
productive input on a par with physical capital or natural resources.
Thus, when governments "invest" in, say, health or education, the value
of this investment is judged by its economic rate of return, either to
individuals or to society.

Those who advocate human development take a different view. Certainly,
they welcome improvements in health or education. But they regard these
as valuable in their own right, whether they increase production or not.
Human capabilities, such as health or knowledge, are more than MEANS of
achieving human well-being. They are essential COMPONENTS of human

Despite the fundamental differences between human resource development
and human development, there are areas of common interest. Indeed, it
might be argued that if both would result in, say, better health or
education, the distinction is immaterial. The motives might be different,
but the outcome would be the same.

But there are many circumstances in which the different motives would
result in different choices. The human development perspective would be
concerned, for example, with all members of society -highly productive,
less productive, even non-productive. This applies to the old, the
infirm, the chronically sick and those with disabilities. With the
decline of the extended family, such people are often abandoned unless
the state assists them.

Human development and human resource development could also take
different approaches to education. Both would argue for basic literacy
and numeracy. But they might well diverge when it comes to higher
education. Human resource development sees education as making people fit
to work, and so is likely to favour technical or vocational subjects.
Human development, by contrast, regards learning as having value in its
own right. So, as well as promoting science, it would value the
humanities as a means of deepening understanding of the natural and
social world.

There could also be different approaches to health and nutrition. Human
development sees these capabilities as ends in themselves and might
advocate certain investments in health and nutrition even if their
conventional economic rates of return turned out to be zero.

Ultimately, the fundamental distinction is between means and ends. For
human resource advocates the end is the production of goods and services
-while for human development advocates the capabilities are ends in
themselves. Capabilities can certainly result in increased productivity
and income, but these are of value only if they genuinely add to human
well-being. Human development sets the priorities right.


Human development has been an evolving concept. Each year the HUMAN
DEVELOPMENT REPORT has re-examined it in light of criticisms or analysed
it in greater detail. In recent years this work has included extended
discussion of such issues as participation, sustainability and gender
equity. As a result, the basic approach has been broadened and deepened.
The concept now includes the following dimensions:

* EMPOWERMENT -Basic empowerment depends on the expansion of people's
capabilities -expansion that involves an enlargement of choices and thus
an increase in freedom. But people can exercise few choices without
freedom from hunger, want and deprivation. In principle, everyone is free
to buy food in the market, for example, but this freedom means little if
people are too poor to afford it. Everyone may be free to read a
newspaper, but exercising this freedom depends on literacy. And everyone
may be free to travel around the country, but not if bedridden with

Empowerment carries an additional connotation -that in the course of
their daily lives people are able to participate in, or endorse, the
decision-making that affects their lives. People's capabilities could be
expanded by, for example, receiving primary health care, but they might
have little say in how that expansion takes place. People should not be
passive beneficiaries of a process engineered by others. They should be
active agents in their own development. 

* COOPERATION -People live within a complex web of social structures 
-from the family to the state, from local self-help groups to
multinational corporations. They are social beings who value
participation in the life of their community. This sense of belonging
is an important source of well-being. It gives enjoyment and direction,
a sense of purpose and meaning.

Human development necessarily involves a concern with culture -the ways
people choose to live together- for it is the sense of social cohesion
based on culture and shared values and beliefs that shapes individual
human development. If people live together well, if they cooperate in a
mutually enriching way, this enlarges their individual choices. So, human
development is concerned not just with people as individuals but also
with how they interact and cooperate in communities.

* EQUITY -Equity is usually thought of in terms of wealth or income. But
human development takes a much broader view -seeking equity in basic
capabilities and opportunities. In this view everyone should have the
opportunity to be educated, for example, and to lead a long and healthy
life. This applies in particular to women, who face substantial
discrimination. They make a major contribution to society, in the
household and in the community (as well as at the workplace). But since
most of their work is not paid, it often goes unrecognized.

Promoting equity may in some cases call for an unequal sharing of
resources. The poor, for example, may require more state help than the
rich. Some people, such as the sick or the disabled, may require more
resources than others to support the same level of capability.

* SUSTAINABILITY -Sustainable human development meets the needs of the
present generation without compromising the ability of the future
generations to meet their needs. It thus involves considerations of
intergenerational equity. But what needs to be passed on is not so much
a specific stock of productive wealth as the potential for a particular
level of human development. What should this level be? Basically, it
must involve the absence of poverty and deprivation. What needs to be
sustained are people's opportunities to freely exercise their basic

* SECURITY -Millions of people in developing countries live on the edge
of disaster. And even in industrial countries people are constantly at
risk from crime or violence or unemployment. Joblessness is a major
source of insecurity, undercutting people's entitlement to income and
other benefits.

For too long the idea of security has referred to military security or
the security of states. One of the most basic needs is security of
livelihood, but people also want to be free from chronic threats, such as
disease or repression, as well as from sudden and hurtful disruptions in
their daily lives. Human development insists that everyone should enjoy a
minimum level of security.


The dimensions of human development can be used to evaluate the quality
of economic growth. What is "good" economic growth? It is growth that
promotes human development in all its dimensions -growth that:

* Generates full employment and security of livelihoods.

* Fosters people's freedom and empowerment.

* Distributes benefits equitably.

* Promotes social cohesion and cooperation.

* Safeguards future human development.

These are objectives, and countries may be succeeding in promoting some
and not others. What is important is to see them as yardsticks by which
to judge progress. Successful countries are efficient in converting
increases in income into advances along these dimensions of human

At every stage policy-makers should question where growth is leading.
Who is benefiting from it? Is it creating employment? Is it sustaining
opportunities for future generations? Are people participating? Is it
responsive to cultural diversity? Policy-makers -often mesmerized by the
quantity of growth- should instead remain acutely conscious of its


New ideas take a while to be absorbed, and human development is no
exception. Many governments pay lip service to human development but in
practice feel that the immediate priority should still be economic

This temptation is understandable, but it is much too narrow an approach.
And its value has regularly been contradicted by experience.

The real questions should thus be: Growth of what, and for whom? Growth
of pollution that calls for more antipollution devices? Growth in crime
that employs armies of lawyers? Growth in car crashes requiring more
repair workers? Growth of incomes only for the richest? Growth of
military weapons? This is not what most people want, yet all of these can
result in a rise in GNP. Clearly, something is wrong with this form of
measurement. Growth in national income is far too general and abstract a
concept to be a sensible policy objective (box 2.5).

To be fair, GNP was never designed to be a measure of human well-being.
It is intended to measure flows of production income and expenditures,
which can be means to human well-being. More direct measures of human
development are needed to determine whether ends are being achieved.

Some of the deficiencies of GNP as a measure of economic activity can in
theory be corrected. It is possible for national income accounting, for
example, to impute a value to the depletion of non-renewable raw
materials. But other weaknesses are less easily remedied. Many elements
of choice defy monetary measurement. The enjoyment of an unspoiled
wilderness, the satisfaction from our daily work, the sense of community
that grows out of engagement in social activities, and the freedom, peace
and sense of security that are common in a good society -all these are
impossible to quantify. They cannot be reduced to dollars or rupees, to
deutsche marks or pesos. Yet they form part of the essence of the essence
of human development.


A vital component of human development is a secure livelihood. For most
people that means a job. But one of the most disturbing trends in both
industrial and developing countries is that economic growth has not been
creating enough employment. In addition to depriving people of a
livelihood, a lack of employment robs them of opportunities to develop
their abilities and undermines their dignity and self-respect.

In some cases jobs may be lacking simply because growth has been to low
to generate employment. Countries undergoing stabilization and structural
adjustment, for example, have frequently been plunged into recession,
putting many people out of work.

But even economies that have been growing faster have often failed to
generate enough jobs. In both the industrial and the developing worlds
many countries are suffering from jobless growth.

This is evident in national trends in the relative growth of employment.
A number of developing countries have had growth but have generated
little employment. In Pakistan from 1975 to 1992, real GDP grew by about
6.3% annually, but employment by only 2.4%. In India from 1975 to 1989,
yearly  GDP growth was about 5%, while yearly employment growth lagged
behind at 2%. While GDP growth was accelerating, employment growth was
declining. During 1977-90 the annual increase in employment in Egypt was
only 2%, while that for GDP was 6.6%. In Ghana between 1986 and 1991,
GDP grew by 4.8%, but employment dropped by more than 13% -a stark

Other countries, by contrast, have achieved rapid growth of both income
and employment. Among countries with annual per capita income growth of
more than 3% between 1980 and 1990, several also had high annual rates
of employment growth -Botswana, China, Indonesia, Malaysia, Mauritius,
the Republic of Korea, Singapore and Turkey. In all of them, employment
grew faster than the labour force. Some combined employment growth with
significant growth in productivity -China, Malaysia, Mauritius, the
Republic of Korea and Singapore. Much of this was based on investment in
human capital.

Developing countries have substantial opportunities for investing in
human capital. Greater human capital can initiate a virtuous circle in
which labour productivity rises and triggers an increase in real wages,
which in turn allows greater investment in human capital. The other half
of the picture is encouraging growth that is labour-intensive
(chapter 4). In most countries labour is the most abundant resource. In
some the best employment opportunities arise from developing agriculture.
In others the key may be to look to export markets. Indeed, most of the
successful growth models have involved industrial policies that
deliberately targeted sectors in which growth could be labour-intensive.

In industrial countries unemployment has been rising despite the recovery
in the world economy in the 1990s. In the European Union unemployment has
been rising since 1974 and was about 11% in 1995. Even in such countries
as Austria, Sweden and Switzerland, where unemployment has traditionally
been low, joblessness is on the rise. In the United States unemployment
has remained lower -fluctuating around 6%- but the proportion of low-wage
service sector jobs has climbed. Jobs are being created, but many are
dead-end, temporary jobs -without security and without a future. As a
result, productivity has suffered.

High unemployment in industrial countries can result from inadequate
growth in demand -due to inordinate fears of inflation or to balance of
payments crises. Or it can be traced to technological change or to
low-cost imports from developing countries. Whatever the cause, it is
creating a polarized society in which millions of people are deemed

Policies must be reoriented to boost employment as a top priority. Full
employment is a feasible objective: until very recently such countries
as Japan and Sweden maintained very low joblessness. When employment is
insecure, society cannot long remain secure.


Economic growth is not always accompanied by greater participation,
empowerment and democracy. Many states that have promoted economic growth
have been far from democratic. The East Asian economies have shown that
trade unions may be repressed and workers' rights denied even where
incomes are rising rapidly and are fairly equitably distributed.

But forgoing democracy is certainly not necessary for growth. Many of
the industrial countries combined democracy with development. And many
developing countries -such as Barbados, Botswana, Costa Rica and
Mauritius- have had democratic regimes and good growth records.

Some argue that an emphasis on the rule of law and on political
accountability conflicts with the value systems of some cultures. This
argument carries little weight. As one example, Daw Aung San Suu Kyi, the
human rights activist and Nobel laureate from Myanmar, cites the Buddhist
view of responsible kinship: "The Ten Duties of Kings are: liberality,
morality, self-sacrifice, integrity, kindness, austerity, non-anger,
non-violence, forbearance, and non-opposition to the will of the people."

Active democracy can aid economic growth in several ways. More open and
transparent forms of governance can reduce corruption and arbitrary rule.
But in many ways the question of whether democracy is good or bad for
growth is beside the point. The real issue is whether growth helps
democracy. Democracy, participation and empowerment are valued in
themselves -whether they enhance growth or not. The movements for change
in the former Soviet Union and Eastern Europe were the result of parallel
quests for democracy and improved economic conditions, each valued

Many people argue that too much is made of the virtues of democracy -and
that the freedom to eat is more important than the freedom to vote
(box 2.6). True, freedom from material want does liberate people to take
greater control over their lives. But much also depends on how greater
material welfare is achieved and on the patterns of production and
consumption it encourages.

When it comes to production, growth may result in a form of enslavement
if it means that people have to do demanding jobs in dangerous conditions
 -and have little control over their working environment, without
independent trade unions or workers councils to defend their interests.
They can also be required to work excessively long hours, leaving little
time to spend with their families or participate in community life.
Political democracy must be complemented by economic democracy.

Some people assume that the battle for democracy has basically been won.
More than two-thirds of the world's people now live under formally
pluralistic and democratic regimes. In 1993 alone, 43 countries held
national elections for the first time. But progress is uneven, and the
gains remain fragile -often more form than substance.

Ballot box elections do not necessarily signal a healthy democracy.
People also participate in decision-making through the myriad of
institutions that make up civil society -in the people's organizations
that are the cradle of real democracy. But in many countries these vital
organizations are in decline. Trade unions are an example. In the
Netherlands union membership fell from 39% of the organizable workforce
in 1978 to 25% in 1991. In the United States there has been a
three-decade slide in union membership, from 30% to 15%. In many
developing countries the share of the workforce unionized remains
pitifully small: in India, Kenya, Malaysia and Pakistan it is less than

Consumption too can become a form of enslavement, turning people into
nations of passive consumers rather than active participants in their
society. One study in the United States suggests that the spread of
television, which now takes up 40% of the average American's free time,
is responsible for a sharp reduction in voluntary activity. Over the past
30 years participation has declined by 25-50% in such voluntary
organizations as parent-teacher associations, the League of Women Voters
and the Red Cross.

How can growth best be translated into empowerment? In advocating
participation, it is important to avoid both the paternalistic and the
populist fallacies. Participation cannot be imposed from above by
governments. But, equally, it does not emerge spontaneously from below.
The state does have an important role in supporting democratic
initiatives -through actions by the executive branch, legislative bodies
or the judicial system, or by regional authorities. Such action can
ensure that many other institutions of civil society -from trade unions
to non-governmental organizations- are permitted to flourish.


In many countries economic growth has been accompanied by widening
disparities -the rich get richer in the midst of widespread poverty. This
is ruthless growth. In many countries rising inequality is associated
with increased integration with the world economy, as the forces of
globalization intensify disparities within countries (box 2.7).

Some countries in Latin America provide examples of ruthless growth. Few
of the region's countries have made serious attempts at land reform, and
schooling policies have generally helped the wealthy, not the poor.
Moreover, until recently industrial policy had been based on import
substitution, often involving capital-intensive production and a bias
against agriculture. Not surprisingly, the incidence of poverty in the
region rose from 23% to 28% in 1985-90 alone -a period of economic

Many East Asian countries, by contrast, have based their growth on the
redistribution of assets, on investments in human capital and on
employment that is both skill- and labour-intensive -helping them make
rapid strides in reducing poverty. Indonesia reduced its incidence of
absolute poverty from 29% to 17% between 1980 and 1990. And Malaysia
reduced its poverty incidence from 49% to 14% between 1970 and 1993
(box 2.8).

One way of seeing how growth affects the poor is to consider the "growth
elasticity of poverty reduction", derived by dividing the percentage
decrease in the number of poor people by the percentage increase in per
capita income. The higher the elasticity, the better.

Countries in Latin America have some of the lowest elasticity figures
-0.9 in Brazil and Panama, for example, and about 0.7 in Guatemala and
Honduras. Several African countries do somewhat better: the elasticity
of Ghana is 1.7, but for Nigeria, whose growth has been less pro-poor,
it is 1.4. At the other end of the scale is East Asia, where the
elasticities tend to be well above 2 -for Indonesia the elasticity is
2.8, for Malaysia 3.4 and for rural China 3.0.

Both the percentages of poor and the elasticity figures may offer useful
ways of looking at poverty -but they are limited because they look only
at the lack of income. Human deprivation has many other dimensions: poor
people also tends to be unhealthy, malnourished and uneducated. This
is "poverty of capabilities", captured in the new multidimensional
measure of poverty introduced in chapter 1 -the capability poverty
measure (CPM).

Some countries perform much better when ranked by the CPM than when
ranked by income -Costa Rica, Cuba, Jamaica, Mongolia, China and Viet
Nam. But even for some of these countries the CPM shows that capability
deprivation is more widespread than income deprivation. In China 11% of
people are income poor, while 17.5% are capability poor.

Several countries could use their resources more efficiently to reduce
deprivation -among them Guatemala, Algeria, Morocco, Pakistan and
Bangladesh. In Morocco 13% of the people are income poor, while about
50% are capability poor. And for Pakistan the corresponding figures are
34% and 61%.

But even such countries as Indonesia, Malaysia and Mauritius, which
have had relatively equitable growth policies, could do better in
reducing deprivation. While 17% of the people are income poor in
Indonesia, 42% are capability poor. Rapidly growing countries such as
Botswana, Thailand and Turkey could also do much more.

According to national income poverty lines, 21% of the people in the
developing world are poor. The results for the CPM suggest, however,
that 37% of the people are capability poor. Excluding China, the figure
is 45%. The 21% is based on high national poverty lines that reflect
moderate povery, not just expreme poverty. Although results for
individual countries come from similar World Bank studies, they are not
strictly comparable. But the sharp contrast between income poverty and
capability poverty indicates that income poverty is significantly

For certain regions the contrast between the two measures is very
sharp. In South Asia about 29% of the people are income poor, while
more than 62% are capability poor. In India 229 million are identified
as income poor, but more than twice as many, 554 million, are capability
poor. In Bangladesh the corresponding numbers are 55 million and 89
million. Clearly, South Asia needs to concentrate on developing people's
basic capabilities.

Capability poverty results from a lack of opportunity, such as lack of
access to basic health services. Such poverty tends to be more
prevalent in rural areas because of the low coverage of such services
(box 2.9).

As indicated earlier in this chapter, ruthless growth is neither
desirable nor efficient. Far from being essential, it is counter-


Another effect of many forms of modern economic growth has been to
homogenize diverse cultures. There are thought to be about 10,000
distinct cultures -but many are being marginalized or eliminated, some
deliberately. Some national leaders thought that traditional cultures
were a drag on modernization and development. National boundaries may
have been drawn without regard for ethnic groups. And in the pursuit of
nation-building, many countries tried to artificially fuse different
ethnic groups into one cohesive nation by submerging cultural

A pattern of growth that is inclusive and participatory can nurture and
enhance cultural traditions. And it can open tremendous opportunities
for people to share their cultures in a mutually enriching way. But a
pattern of growth that is exclusive and discriminatory can destroy
cultural diversity and thereby impoverish the quality of everyone's
lives. Ghandi


Growth can be physically destructive -laying waste to forests, polluting
rivers, depleting natural resources. While these effects are undesirable
enough for people living today, there are even greater concerns for
future generations -based on a fear that this form of growth cannot last.
Growth may be consuming its foundations. People in many countries are
already in debt to future generations (box 2.10).

Issues of sustainability go beyond the environment. What is needed in
general is a flexible and resilient social and economic system, resistant
to shocks and crises, that can safeguard the possibilities for the well-
being of future generations. Protecting possibilities for tomorrow also
means not burdening future generations with internal or external
financial debts, and not bequeathing them as unstable, undemocratic
political system. This demands foresight and leadership from today's
policy-makers, sine future generations do not have a vote on current
decisions. To illustrate general issues of sustainability, this section
focuses on the environment.

Even countries to be lauded for combining economic growth with advances
in human development have a history of rapidly depleting their natural
resources. Indonesia in the 1980s had an annual deforestation rate of
1%, resulting in a loss of 1.2 million hectares of forest a year. It
responded by outlawing the export of raw logs in the 1980s, but critics
claim that loggin operations continue to expand in the 1990s. Thailand
too has been stripping its countryside: between 1961 and 1988 it reduced
forest cover from 55% of the country to 28%. Faced with disastrous
flooding, Thailand officially banned logging in 1989, but it appears to
continue. To counteract powerful commercial interests, concerted public
action is needed.

Some of the East Asian economies also have had flawed records in air and
water pollution -although recently they have been attempting to reform
their environmental policies. In Taiwan (province of China) less than
1% of human waste receives sewage treatment -leading to one of the
highest incidences of hepatitis B in the world. The Republic of Korea has
similar problems. Much of the tap water is unfit to drink -contaminated
with heavy metals and other pollutants- and Seoul has been  rated as one
of the five worst cities in the world for air pollution.

This kind of pollution and destruction highlights the dangers of pursuing
economic growth without regard for long-term consequences. Growth cannot
be a sensible object of policy because it is too abstract and unbounded
-it implies infinite time horizons and unlimited increases in income. By
contrast, the planet's carrying capacity has definite limits.

Many governments are attempting to reform their policies to minimize
environmental pollution and destruction. China has demonstrated a strong
political commitment to increasing forest cover. It has had an ambitious
programme of afforestation over four decades, has recently boosted the
survival rates of tree plantings and expects to plant 57 million more
hectares of trees during the 1990s.

In many countries grass-roots organizations have played a big part in
increasing tree cover. The Greenbelt Movement in Kenya, organized by the
National Council of Women, has worked with farmers and schoolchildren to
plant millions of trees. Burkina Faso has used a participatory approach
in which community-based committees organize tree plantings, pasture
improvement and soil conservation.

The costs of unreformed policies are high. Desertification's costs, for
example, are estimated to be $9 billion a year in Africa alone, $42
billion a year globally. A quarter of the world's land area, 3.6 billion
hectares, is affected.

Some mistakenly believe that conservation efforts should be aiming for
"sustainable growth" as an end in itself -by maintaining some stock of
physical capital, such as factories or infrastructure, and by preserving
natural capital, such as oil reserves or forests.

But the real objective should not be sustainable growth. It should be
sustainable human development -a goal that is specific, bounded and
attainable. Achieving this would mean, to begin with, taking a much
broader approach to national accounts- incorporating not just physical
capital, along with the institutional capital necessary to organize and
maintain the process of production.

The World Bank is already experimenting with a fuller set of asset
accounts (box 2.11). The initial results are revealing. Many countries
are consuming more than they produce -"dissaving". Sub-Saharan Africa,
for example, was dissaving up to 13% of GNP by the late 1980s- in part
because of debt repayment and capital flight.

Evaluating the total stock of productive assets is a good start. But it
does not go far enough, because it does not consider how those assets are
being used. They should be devoted to human development -which means that
future generations should be afforded at least the same capacity for
human well-being as the present generation.

This means going beyond questions of monetary accounting -setting non-
monetary standards, such as those based on the human development index
and the capability poverty measure, to ensure that everyone has the means
to lead a decent and satisfying life. These standards also have to ensure
that ecological and environmental limits are not violated -especially
important because we do not know the long-term implications of disturbing
many natural systems. Some damage is irreversible. Sustaining many
natural systems supports life and is integral to sustaining human
development -they are not separable.

Eliminating poverty is also closely related to sustainability. Concern
about equity between generations implies that the lack of equity within
the present generation cannot be ignored. Patterns of growth that
perpetuate current levels of poverty are neither sustainable nor worth

If some members of society are enjoying the benefits of its productive
wealth at the expense of the basic human development of others, why
sustain this situation? It is both inequitable and damaging to the
environment. Many poor people rely heavily on natural resources that are
in short supply. Meanwhile, the rich have few incentives to limit their
consumption to a level sufficient for their own well-being.

The best soultion is to invest in the human development of the poor -by
building their human capital and giving them access to credit and to such
productive assets as land. This can have a dramatically positive effect
on the environment.


CHAPTER 2 draws on the following:

Anand, Sudhir, and Amartya Sen. "Sustainable Human Development: Concepts
and Priorities." Human Development Report Office Occasional Paper 8,
UNDP, New York, 1994.

Anand, Sudhir, and Amartya Sen. "The Income Component of the Human
Development Index". 1996. Background paper for Human Development
Report 1996.

Bartelmus, Peter. "Environmental Accounting: A Framework for Assessment
and Policy Integration." Paper presented at International Monetary Fund
seminar on Macroeconomics and the Environment, Washington D.C., 10-11
May, 1995.

Berry, Albert. "The Social Challenge of the New Economic Era in Latin
America." FOCAL/CIS  Discussion Paper. Toronto: Centre for International
Studies. 1995.

Birdsall, Nancy, David Ross and Richard Sabot. "Inequality and Growth
Reconsidered: Lessons from East Asia." WORLD BANK ECONOMIC REVIEW 9(3):
477-508. 1995.

Birdsall, Nancy, David Ross and Richard Sabot. "Inequality as a
Constraint on Growth in Latin America." In David Turnham, Colm Foy and

Bourguignon, Francois. "Equity and Economic Growth: Permanent Questions
and Changing Answers." Occasional Paper for Human Development Report
1996. 1995.

Chenery, Hollis, Montek S. Ahluwalia, C.L.G. Bell, John H. Duloy, and
Richard Jolly. REDISTRIBUTION WITH GROWTH, London, Oxford University
Press, 1974.

Cornia, Giovanni Andrea, Richard Jolly and Frances Stewart, eds.,
GROWTH. London, Oxford University Press, 1987.

Desai, Meghnad. "Capabilities, Functionings, Opportunities". 1996.
Background paper for Human Development Report 1996.

Desai, Maghnad. "The New Paradigm of Development." 1996. Background paper
for Human Development Report 1996. 

Floro, M. Sagrario. "Economic Restructuring, Gender and the Allocation
of Time". WORLD DEVELOPMENT 23(11); 1913-29. 1995.

ILO (International Labour Office). YEARBOOK OF LABOUR STATISTICS 1995.

Lee, Jong-Wha. "Human Development and Economic Growth: Theory and
Evidence". 1995. Background paper for Human Development Report 1996.

Lewis, Arthur W. THE THEORY OF ECONOMIC GROWTH. London. Allen and
Unwin, 1955.

Ozler, Sule. "New Growth Theory and Social Reproduction". 1995.
Background paper for Human Development Report 1996.

Sen, Amartya K., "Development as Capability Expansion". JOURNAL OF
DEVELOPMENT PLANNING, No. 19; 41-58. 1989.

Sen, Amartya K., "Wrongs and Rights in Development". PROSPECTS (October)
28-35. 1995.

Streeten, Paul. DEVELOPMENT PERSPECTIVES. London. Macmillan. 1981.

Streeten, Paul. "The Path to Human Development". 1996. Background paper
for Human Development Report 1996.

Streeten, Paul, with Shahid Javed Burki, Mahbub ul Haq, Norman Hicks and
DEVELOPING COUNTRIES. New York: Oxford University Press. 1981.

Tabatabai, Hamid. "Poverty and Inequality in Developing Countries: A
Review of Evidence." In Gerry Rodgers and Rolph van der Hoeven, eds.,

UNITED NATIONS. "The World's Women 1995: Trends and Statistics". New
York: UN, 1995.

UNDP (United Nations Development Programme). HUMAN DEVELOPMENT REPORT
1990. New York, Oxford University Press. 1990.

UNICEF (United Nations Children's Fund). "The State of the World's
Children 1996". New York: Oxford University Press. 1996.

World Bank. "Monitoring Environmental Progress." Washington D.C., 1995.

World Bank. WORLD TABLES 1995. Johns Hopkins University Press. 1995.

World Commission on Culture and Development. "Our Creative Diversity".
Paris. 1995.

World Resources Institute. WORLD RESOURCES 1994-95. A GUIDE TO THE GLOBAL
ENVIRONMENT. New York: Oxford University Press. 1994.

Zaldua-Gorostegui, Enrique. " Sustainability and Human Development". 
1995. Background paper for Human Development Report 1996.

Humand Development Report Office data.

The quotation from Tagore is from Tagore, Rabindranath, "Crisis of
Shantiniketan, India: Vishya Bharati;
those from Gandhi are from Ghandi, Mohandas K., "English Learning", and
"Hind Swaraj or Indian Home Rule", in COLLECTED WORKS OF MAHATMA GHANDI,
Vols. 20 and 3. Delhi: Government of India, Publication Division;
that from Mao is from Mao Zedong, "On Coalition Government", in SELECTED
WORKS, Vol. 3, Beijing: Foreign Languages Press, 1977;
that from Nyerere is from Nyerere, Julius K., MAN AND DEVELOPMENT, New
York: Oxford University Press, 1974;
that from Aung San Suu Kyi is from Aung San Suu Kyi, "In Quest for
Democracy", in Michael Aris, ed., FREEDOM FROM FEAR AND OTHER WRITINGS,
New York: Penguin Books, 1991.
Special contribution:

When we juxtapose the current debate on economic growth with the notion
of human development, the first impression is that the two concepts
belong to different worlds -that they don't connect. It is as if the
demise of real socialism coincided with some kind of Marx's "revenge".
The economy reigns supreme, determining political choices and the
limits of social action. And the free market emerges as a leading
ideology, fostering competition and an exaggerated, narcissistic
individualism that equate the realm of values with the dictates of

Realism obliges us not to ignore efficiency. But for any development
to be human, we must go beyond the logic of economics. If growth is an
indispensable prerequisite, particularly in poor countries, human
development will have to be sustained by values that show how economic
gain acquires social meaning.

The problem is that growth based on modern technology does not always
generate employment, and adopting social safety nets of a corporatist
nature may jeopardize competitiveness. These difficulties are compounded
by the need to reform the state, which is traditionally responsible for
welfare policies and actions. Although the economic environment can
change the size and management of the state, the purpose of modern
governance -the well-being of citizens- must never be forsaken. Despite
the criticisms and despite the weakening of social solidarity,
constructing a "state that cares for the well-being of citizens" is a
necessity. True for developed countries, this is even more true for
developing countries, which are far from a welfare state.

Another significant issue is that solutions to social problems are no
longer only national. Globalization limits state action and has
ambivalent consequences for the development of national societies. For
example, the easy transfer of capital flows can enable better resource
allocation at the global level, but their volatility can provoke
speculative runs on currencies, threatening the stability of entire

So, we face a paradox: the demand for equity is on the increase, partly
as a result of the globalization of information, yet it is directed to
a state that is reducing its functions and has less control over its
economic policy options.

This demand for equity -a key concept in the transition from the
imperatives of economic efficiency to the realm of values- is not new.
As a result of the Enlightment, which propagated the very idea of human
progress, one of the traits of Western civilization has been its
permanent dissatisfaction with its social conditions.

Inherent in the ideal of progress is equity, seen as the convergence of
standards of equality of opportunities -or social justice. This idea of
equality has nurtured all modern utopias -from the liberal, centred on
political equality, to the socialist, concerned with socio-economic

Today's demand for equity -denser, more powerful- is searching for new
institutional vehicles. It is no longer the monopoly of one group or
class. It is now a collective task -to give a human sense to development.
It is a dispersed, fragmented exercise -a composite of partial utopias.

The development concept has to be amplified to include the protection of
human, ecological and social rights. Such complexity must be sustained
by a wide participation, enabling a variety of social groups to be heard.
The multiplication of non-governmental organizations, the contribution
of social movements, the renewal of the meaning of political
representation -all should contribute to society's redefinition of
development as a way of truly humanizing growth.

Democracy and freedom, the keys for a balanced transition from growth
to human development, have broadened the demand for equity -which is no
longer the province of a few privileged owners. Equity is a wideranging
social construct, and to respond to it is fundamental for building modern

In the 1960s the Third World countries searched for a new international
economic order to correct the roots of international inequality, with
limited success. Today, global North-South negotiations have lost force
exactly when the economy is being globalized, and a homogenizing
superstructure more concerned with the freedom of flows than with the
reduction of inequalities is emerging. At the international level, must
we accept that the economic reality predetermines the realm of values?
Globalization is an economic given. But it is essential to ensure that
it attains a human dimension and responds to the demand for equity.

Obviously we cannot return to the ideas of the 1960s. The world has
changed. The possibilities for mobilization have shifted, particularly
because the Third World's own ability for action has weakened. And yet
inequalities have not been reduced.

The role of states in the international community and the way they manage
multilateral institutions remain fundamental. Consider the UN global
conferences, which to some extent offered hope to the poorer countries.
Their ideals are almost always impeccable. Their great challenge is
implementing them to transform reality -by reducing inequalities in a
world where paths are chosen through uncountable, fragmented decisions,
proposed by numerous actors, both public and private, both national and

The biggest challenge for multilateral organizations is to reinvent the
sense of community and to give room for international solidarity. We need
a real democratization of international relations. It will not be easy,
given the individualism of our time. But it is the only way to ensure
that history's greatest transformations will be ethical. It is the only
way development will again have a human face.

Fernando Henrique Cardoso (President of Brazil)
________________________________________________________________BOX 2.1__


If income is only a means to human development, why is it part of the
human development index? Average per capita income is meant to register
"the command over resources to enjoy a decent standard of living".

Longevity and education are clearly valuable aspects of a good life, but
"command over resources" is more a means to a good life. Many important
capabilities, such as being well nourished or enjoying a comfortable
life, depend crucially on a person's economic circumstances. The income
that people receive, especially close to the poverty line, can tell
something about these circumstances.

Longevity and education cannot serve as proxies for all basic
capabilities. Going hungry, for example, is a deprivation serious not
only because of its tendency to reduce longevity, but also because of
the suffering it directly causes. Similarly, resources needed for
shelter and for travel may be quite important in generating the
corresponding capabilities. Thus, the income component of the HDI is
used as an indirect indicator of capabilities not reflected in the other
two components of the index.

Source: Anand, Sudhir, and Amartya Sen. "The Income Component of the
        Human Development Index." 1996. Background paper for Human
        Development Report 1996.

______________________________________________________________BOX 2.2____


Much work in society goes unrecognized and unvalued -work in the
household and in the community. And most of it is done by women. In
industrial countries roughly two-thirds of women's total work time
-but only a third of men's- is unrecorded. In developing countries the
proportion is similar for women, but for men it declines to less than a

HUMAN DEVELOPMENT REPORT 1995 estimated that, in addition to the $23
trillion in recorded world output in 1993, household and community work
accounts for another $16 trillion. And women contribute $11 trillion of
this invisible output.

In most countries women do more work than men. In Japan women's work
burden is about 7% higher than men's, in Austria 11% higher and in Italy
28% higher. Women in developing countries tend to carry an even larger
share of the workload than those in industrial countries -on average
about 13% higher than men's share, and in rural areas 20% higher. In
rural Kenya women do 35% more work than men.

In some countries women's work burden is extreme. Indian women work 69
hours a week, while men work 59. Nepalese women work 77 hours, men 56.
In Moldova women work about 74 hours a week, and in Kyrgyzstan more than
76 hours.

Efforts are under way to begin incorporating household work into the
United Nations System of National Accounts. The 1993 revision of the
accounts includes as economic output all goods produced in households for
their own consumption. This revision proposes setting up satellite
accounts to record the full extent of non-market work, including
household services.

Only when household and community work is fully quantified and its
monetary equivalent value estimated will women's work receive the full
recognition it deserves.

Source: UNDP, Human Development Report 1995, New York: Oxford University
        Press, 1995, and UN, "The World's Women 1995: Trends and
        Statistics", New York, UN, 1995.

____________________________________________________________BOX 2.3______


Japan's postwar recovery combined record and sustained economic growth
which leaps forward in human development. In 1955-70 real GDP per capita
was rising at around 10% a year. At the same time there was a big
reduction in poverty and a narrowing of income gaps. Between the early
1960s and the mid-1980s the share of national income received by the
wealthiest 20% of households fell from 50% to around 45%, while that of
the poorest 20% rose from 5% to 10%. One crucial reason for this double
success in growth and human development was a commitment to equity in

The base for this egalitarian development was built in the postwar
period, when radical reforms were introduced to ensure that fascism did
not resurge and to transform Japan into a more democratic society.
Reforms included the abolition of the aristocracy, a new constitution
based on democratic government, land reform, a wealth tax and equal
rights for women.

The postwar government based its macroeconomic policy on low interest
rates, mild inflation and a disciplined policy of budget surpluses, along
with protective tariffs and preferential credit for selected industries.
It also aimed at low unemployment, promoting vigorous job creation by
fostering countless small enterprises. Throughout the period of very
rapid growth, at least 55% of non-agricultural workers belonged to
enterprises with fewer than 100 employees. And wage levels rose steadily
with productivity.

Through a virtuous circle, progress in human development has both been
stimulated by economic growth and contributed to it. In many respects
human development was already high. Beginning with the Meiji reform in
1868, primary school enrolment was raised from 28% of school-age children
in 1873 to 96% in 1905, providing a solid foundation for rapid

After the Second World War the government continued to invest in the
social sectors, helped by keeping defence spending to a minimum (below
1% of GDP). This produced dividends in education and health. Between 1960
and 1990 the proportion of the working-age population completing
secondary or higher education doubled. Since the late 1950s infant
mortality has fallen almost tenfold, from around 40 per thousand live
births to 4.3, one of the lowest rates in the world. Life expectancy
increased from less than 70 years in 1958 to 80 years in 1993. And today,
those who need social safety nets tend to be disabled rather than poor.

In 1990 Japan's public expenditure on education and health was among the
highest on a per capita basis -about $2,208, while the world average was
only $336. The emphasis on education extends to a strong emphasis on
research and development and on training workers in industry.

Japan's record is not perfect, however, and challenges lie ahead. Growth
has slowed, and unemployment is now rising above 3%. Inequality is also
on the rise -with a growing number of elderly poor. Japan lags behind in
gender equality and women's participation in decision-making outside the
home remains low. Environmental concerns also challenge policy-makers,
though more progressive measures are now being pursued. An the Japanese
people may choose more leisure rather than long hours of work.

Source: Ishikawa, Tsuneo. "Country Study on Japan", 1995. Background
paper for Human Development Report 1996.

_______________________________________________________________BOX 2.4___


In the century following 1870 Sweden's successes in economic growth and
human development were spectacular and sustained. Its per capita income
growth rate was second only to Japan's -and its progress in human
development even more notable.

In the early stages export industries -timber, iron ore, paper and steel-
were the country's engine of growth. Most export revenues were invested
domestically, to strengthen the economy and promote human development.
Economic growth was remarkably stable, averaging more than 3% a year
from 1890 to 1930.

This success depended on laying a solid foundation of basic human
development during the late 19th century. The number of primary school
students more than doubled between 1850 and 1870, and universal literacy
was achieved by 1875. Technical education also expanded rapidly during
this period.

The Great Depression of the 1930s and its aftermath marked a dramatic
change in the Swedish model of development. In 1952 the Social Democratic
Party swept to victory, ushering in a new era of equitable growth, low
unemployment and expanded social protection (pensions, child allowances,
rent controls and health insurance). The state intervened in the labour
market and to help workers find new jobs. As a result, unemployment
remained below 3% until the 1990s.

From 1930 through the early 1970s Sweden experienced a golden era of
development characterized by both rapid growth and increasing equity
through substantial redistribution of income. Sweden's Gini coefficient
fell from 0.31 in 1967 to a historic low of 0.20 in 1982.

The government actively intervened in the economy to keep downturns
infrequent and moderate. It maintained a liberal trade regime, strong
incentives for business investment and an activist industrial policy,
channelling credit into priority sectors.

But in the 1970s warning signals began to appear that such development
could not be sustained. Public spending, already high at 43% of GDP in
1970, ballooned to 67% by 1982. Transfer payments, such as family
allowances and housing subsidies, grew rapidly.

Slow economic growth could not support continued increases in government
deficits. While Sweden's rate of per capita income growth was 3.4% from
1961 to 1974, it slipped to only 0.6% in 1974-93. By the early 1990s
Sweden was plunged into an unprecedented socio-economic crisis. Growth
turned negative, and unemployment leapt from 1.7% in 1990 to 8.2% in

Despite the slowdown in growth and an overhaul of the welfare state,
human remains high in Sweden. In the past 30 years advances in human
development have outpaced increases in income. The country ranks among
the top ten in the human development index. It has one of the most
impressive records of equitable development, especially in gender
equality. It ranks number one in the gender-related development index
and number two in the gender empowerment measure.

Source: Stefan de Vylder. "Country Study on Sweden", 1995. Background
        paper for Human Development Report 1996.

____________________________________________________________BOX 2.5______


GNP needs to be improved to reflect all important economic transactions.
But even with such improvement, it cannot be taken as a measure of human
well-being, mainly because its focal variable is inappropriate for this
purpose. It measures means, not ends. In addition, GNP has the following

services that can be exchanged for money. Thus, it leaves out of
consideration the large amount of work done within the family and
community. Last year's Report estimated that, on average, two-thirds of
women's work and a quarter of men's work never enter into GNP

* IT EQUATES GOODS AND BADS. It considers valuable services such as care
for children or the elderly as having the same significance as the
manufacture of, say, cigarettes or chemical weapons.

* IT COUNTS BOTH ADDICTIONS AND CURES. Addictive eating and drinking, for
example, are counted twice: once when the food and alcohol are consumed,
and again when large sums are spent on the diet industry and cures for

pollution and resource depletion are not accounted for. The earth is
treated, it has been said, "like a business in liquidation".

* IT PLACES NO VALUE ON LEISURE. When GNP records the lower income
associated with, say, fewer working hours or earlier retirement, it does
not compensate by adding increased leisure hours to the other side of the
ledger. Nor does it subtract the leisure lost when people are forced to
take on second jobs.

* IT IGNORES HUMAN FREEDOM. National income accounting puts no value on
freedom, human rights or participation. It would, for example, be
perfectly possible to attain high per capita incomes and satisfy all
material needs in a well-managed prison state.

____________________________________________________________BOX 2.6______


Some policy-makers maintain that governments should concentrate on
meeting basic needs, such as food, shelter and clothing, rather than
ensuring people the right to vote. They regard political rights and
freedoms as "luxuries" that poor countries can ill afford.

But economic and political opportunities tend to reinforce each other.
As Amartya Sen has pointed out, serious famines rarely occur in
independent, democratic countries with a free press. One simple reason is
that although famines can kill millions of people, they do not kill
rulers. Kings and presidents, bureaucrats and bosses, generals and police
chiefs -these people never starve.

If there are no elections, no opposition parties, no forums for public
criticism, those who rule do not have to worry about the political
consequences of failing to prevent a famine. That Botswana and Zimbabwe
have been successful in preventing famine, and Ethiopia and Sudan have
not, is testimony to the importance of political participation and
democracy in helping people meet their basic needs.

Source: Amartya Sen. "Wrongs and Rights in Development". 1995. PROSPECT,
        October. 28-35.

___________________________________________________________BOX 2.7_______


Globalization is a two-edged sword. A number of countries in East Asia
are success stories of export-led development -combining rapid growth
with low inequality and high human development. By contrast, many
countries in Sub-Saharan Africa have become increasingly marginalized by
global forces.

There are also winners and losers within countries. Income inequality is
clearly on the rise in many countries that have opened their economies.

In 1970 income inequality was fairly low in Sri Lanka: the Gini
coefficient was 0.35. (This coefficient ranges from 0 to 1, with 0 being
perfect equality and 1 complete inequality.) When the country began to
liberalize its economy in the late 1970s, inequality rose dramatically.
By 1990 the Gini coefficient was 0.51 -an increase of almost half.

In the late 1970s China began to unleash market forces, privatize its
economy and rapidly open up to international trade and finance. In 1979
its Gini coefficient was 0.33 -lower than that in any other in any other
East Asian country. By 1988 it had risen to 0.38 -surpassing those of
Indonesia and the Republic of Korea. And inequality continues to rise,
especially along the coast, which is most directly tied to the world

Income inequality has also increased in Mexico, which liberalized its
economy rapidly beginning in the mid-1980s. In 1984, before the reforms,
its Gini coefficient was 0.43, but by 1992 it had risen to 0.48. And in
Chile, one of the most open economies in Latin America, income inequality
has been rising markedly since the 1970s. In 1970 its Gini coefficient
was 0.45, but by 1990 it had increased by 27% to 0.57.

Source: Tabatabai, Hamid. "Poverty and Inequality in Developing
        Countries: A review of evidence." In Gerry Rodgers and Rolph
        van der Hoeven, eds., THE POVERTY AGENDA: TRENDS AND POLICY
        OPTIONS. Geneva, ILO, 1995; and Berry, Albert. "The Social
        Challenge of the New Economic Era in Latin America." FOCAL/CIS
        Discussion Paper. Toronto: Centre for International Studies. 1995

_____________________________________________________________BOX 2.8_____


Malaysia's real GDP growth averaged 6.9% a year between 1960 and 1985,
and more than 8% in the past decade, among the highest in the world.
Growth has been associated with full employment, low inflation and
Malaysia's economic transformation from a producer of primary
commodities to a manufacturer of sophisticated industrial goods. It is
the world's third largest exporter of semiconductors, after Japan and
the United States.

In a continuous chain of cause and effect, rapid growth and human
development have been mutually reinforcing. Health standards improved
-with life expectancy rising from 53 to 71 years between 1960 and 1993,
and infant mortality dropping from 72 to 13 per thousand live births.
In education, primary enrollment increased by about a third between 1956
and 1960. Almost every child between 6 and 11 years old was enrolled in
primary school by 1993.

Gaps between ethnic groups widened after independence in 1957. While the
richest tenth of the population (mostly of Chinese background) increased
its share of national income by 18% in 1957-70, the poorest half (mostly
Malays) saw its share fall by almost a third. By 1970 the per capita
income of Malays (54% of the population) was about half that of non-
Malays, and they accounted for only 25% of industrial employment.
Economic and human development disparities between ethnic groups were
seen as the root cause of the racial tensions culminating in the riots
of 1969.

After the riots the government took a two-pronged approach to
translating rapid economic growth into human development for all. It
adopted a 20-year perspective plan for promoting growth and human
development, reducing poverty and increasing equity, all with
quantitative targets. The government also made efforts to end racial
discrimination in employment.

Govenment policy targeted Malays and others for human development and
antipoverty programmes. Scholarships and racial quotas helped increase
their enrolment in schools and universities. Antipoverty measures
(irrigation, land reclamation) focused on the rural poor -rubber and
coconut smallholders, estate workers and fishermen, as well as padi
farmers, 90% of whom did not earn enough to meet their basic needs.

Growth, the expansion of people's capabilities and poverty reduction
programmes helped reduce the proportion of poor households from 49% in
1970 to 14% in 1993. The real incomes of Malays increased by 89%,
compared with 60% for Malaysians of Chinese origin and 50% for those of
Indian background. The income of the poorest 40% of the population
increased by 9% a year in 1973-1993.

Greater equity helped boost growth. It contributed to social stability
and harnessed the contributions of all Malaysians for their collective
development. With the success of the first 20-year perspective plan,
Malaysia developed further plans in 1990, within the long-term
perspective of "Vision 20-20". Growth with equity continues to
characterize Malaysia's rapid progress as it aims for the status of a
fully developed nation by the year 2020.

Source: Henry Bruton. "The Political Economy of Poverty, Equity and
        Growth: Sri Lanka and Malaysia". A World Bank Comparative Study.
        New York: Oxford University Press, 1992. 
        Zainul Arifin Mohd Isa. "Malaysia: steady progress towards
        'Vision 20-20'." INSTITUTIONAL INVESTOR 29(12); 13-22, 1995.
        Santosh Mehrota and Richard Jolly, eds.. "Development with
        a Human Face". Oxford: Oxford University Press, 1996.
        Teh Hoe Yoke and Goh Kim Leng. "Malaysia's Economic Vision:
        Issues and Challenges". Selangor Darul Ehran, Malaysia:
        Pelanduk Publications, 1992.

_____________________________________________________________BOX 2.9_____


The capability to lead a healthy, well-nourished life or to give birth
under safe and healthy conditions depends on access to health services.
A well-functioning society provides people this basic opportunity. Thus,
poverty can be measured not only directly (by lack of capabilities), but
also indirectly (by lack of opportunities).

In many developing countries there is a strong urban bias in access to
potable water, adequate sanitation and health clinics. In Sierra Leone
90% of the urban population has access to health facilities, compared
with only 20% of the rural population. Even in a higher-income country
such as Argentina, 77% of the people in urban areas, but only 29% of
those in rural areas, have access to safe water.

To illustrate this disparity, an "equally distributed health services
index" was calculated for the percentage of the urban and rural
populations having access to safe water, adequate sanitation and health
facilities. For 50 countries with recent data the index was constructed
in a way similar to the gender empowerment measure in HUMAN DEVELOPMENT
REPORT 1995. The percentage of the total population with access to each
of the three services was discounted by the degree of disparity in access
between the urban and rural populations. The three discounted percentages
were then added together with equal weight.

The top five countries in this limited sample are Trinidad and Tobago
(0.983), the Republic of Korea (0.977), Tunisia (0.901), Costa Rica
(0.884) and Syria (0.858). The bottom five are Zaire (0.201), Liberia
(0.212), Sierra leone (0.213), Mozambique (0.270) and Madagascar (0.272).

For a sample of the 50 countries, the health services index was compared
with 1993 real GDP per capita. Relative to income level, the countries
most successful in providing people with basic opportunities to lead a
healthy life are the Republic of Korea, Trinidad and Tobago, Tunisia,
Cuba, the Philippines and Tanzania. Costa Rica, Syria and Zimbabwe also
have good records. Relative to the resources at their disposal,
Argentina, Ecuador, Morocco, Zambia and Zaire have been the least
successful in providing people with access to critical health services.

Source: UNDP, "Human Development Report 1995", Oxford University Press;
        UNICEF, "The State of the World Children 1996", Oxford University
        Press, and Human Development Report Office data.

_____________________________________________________________BOX 2.10____


Conventional national income accounts do not fully cover the depletion
of natural resources and the degradation of the environment. They thus
send the wrong signals to policy-makers.

To correct this, the Statistical Division of the United Nations has been
working to supplement the System of National Accounts with a satellite
system of integrated economic and environmental accounting. These
experimental accounts contain some innovations. One of the most important
concerns expenditure for environmental protection. Since such spending
compensates for the negative impact of economic growth, it is considered
to be a cost, to be deducted from national income.

These satellite accounts involve supplementing both standard balance
sheets and income accounts. The first step for each country is to draw up
a comprehensive balance sheet of natural resources measured in physical
quantities. For some, but not all, it is also possible to impute a
monetary value that can be added to physical capital to form an expanded
capital account. If the resources are not scarce, their value is zero.

Depletion of capital can now include not just depreciation of physical
capital but also depletion of natural resources, along with the
deterioration of environmental quality. When drawing up national income
accounts, these environmental losses can then be subtracted to produce a
new measure of growth -environmentally adjusted domestic product.

Once these deductions have been made, environmentally unsound production
and consumption patterns can be identified -offering early warnings of
economic growth that may be leading to unsustainable human development.

This new system has been tested in several countries. For Mexico in
1986-90 it was found that the environmentally adjusted domestic product
was 13% less than the conventionally measured net domestic product. The
new accounting measures also showed that net investment -which
conventional measures showed as positive, at 4.6 billion pesos- was a
negative 700 million pesos. Net savings, also assumed to be positive,
were actually close to zero.

A case study for Papua New Guinea over the same period produced similar
results. There, consumption exceeded output, so net savings were negative.

When such findings are more widely known, both by the public and by
economic policy-makers, the nature of economic growth can be evaluated
in new and more realistic terms.

Source: Bartelmus, Peter. "Environmental Accounting: A Framework for
        Assessment and Policy Integration". Paper presented at
        International Monetary Fund Seminar on Macroeconomics and the
        Environment, Washington, D.C., 10-11 May 1995.

_____________________________________________________________BOX 2.11____


The World Bank is experimenting with a new way of measuring national
wealth. Although the methods of valuation are crude, they have produced
some startling results.

Economists had long assumed that the main component of a country's
productive wealth is physical capital ("produced assets"). But according
to the World Bank's assessment of 192 countries, physical capital on
average accounts for only 16% of total wealth. More important is natural
capital, which accounts for 20%. And more important still is human
capital, which accounts for 64%.

The dominance of human capital is particularly marked in high-income
countries. In some, such as Germany, Japan and Switzerland, it accounts
for as much as 80% of total capital. But in Sub-Saharan Africa, where
human resources are poorly developed, more than half the wealth is still
in natural resources. This underlines the importance in poor countries
of using income from natural resources to develop human capabilities.

The Bank has also begun to apply a way of assessing whether total wealth
is rising or falling. This measure of sustainability, called "genuine
saving", represents what a country adds to or subtracts from its net
worth. From output, the measure subtracts consumption, depreciation of
physical capital and net depletion of natural resources. Depletion of
human capital, unfortunately, is not included.

The countries with the best records include Hong Kong, Japan, the
Republic of Korea and Singapore. Indeed, East Asia has had a rapidly
increasing  genuine savings rate since the early 1980s, rising in the
late 1980s to 15% of GNP. South Asia too has had a positive rate, though
somewhat lower. At the other end of the scale, Sub-Saharan Africa has
been dissaving since the late 1970s. By the late 1980s its annual rate of
dissaving had reached an astounding 13% of GNP. During the late 1980s and
early 1990s the Middle East, North Africa and Latin America and the
Caribbean also were dissaving.

While the wealth measure is illuminating, it has shortcomings. Of natural
capital, for example, it measures only land, water, forests and subsoil
assets -and considers their value to humankind only in monetary terms. It
thus excludes such items as species diversity, which has no recognized
economic function. A further weakness is that human resources are not
estimated directly. Instead, a country's future income is estimated,
then a discount rate is applied to calculate current total capital.

But there is a more fundamental limitation to the whole exercise.
Equating people's well-being with the monetary value of their capital
risks making the same mistake as equating income with human development.
Productive wealth has to be converted into human wealth -enhancing
people's capabilities to lead healthy, well-nourished, educated and
satisfying lives. It cannot simply be reduced to a monetary value,
whether of income or of wealth.

Composition of National Wealth:
      Human capital       64%
      Physical capital    16%
      Natural capital     20%

Source: World Bank, "Monitoring Environmental Progress", Washington,
                     D.C. 1995.

Copyright 1996, by the United Nations Development Programme,
1 UN Plaza, New York, New York, 10017, USA.