Wellbeing, Economic Progress and Comprehensive Development in the Digital Age

Andres Solimano

Andrés Solimano holds a PhD. in Economics from the Massachusetts Institute of Technology (MIT). He is founder and Chairman of the International Center for Globalization and Development (CIGLOB), formerly a Country Director at the World Bank, Executive Director at the Inter- American Development Bank, and directed the UNU-WIDER project ‘International Mobility of Talent’.

A critical theme in both analytical economics and public policy is how to define and measure economic progress, livings standards, wellbeing and comprehensive development. Globalisation, rapid technical change, rising inequality, the pervasiveness of crises and recent tendencies toward de-globalization are starting to challenge traditional views of economic progress and development. A more turbulent and unstable world has various impacts on wellbeing.

In spite of its multiple limitations, comparisons of per-capita GDP remains the dominant device to assess development levels and living standards. To a large extent, organisations such as the World Bank, the International Monetary Fund, the OECD, and Regional Development Banks rank countries according to this criteria (if per-capita GDP in country A is higher than in country B, then country A would be more “developed” than country B).

This approach, though simple (in appearance), contains several shortcomings. GDP is clearly an object -based criteria of human welfare that includes goods that may not contribute directly to human welfare while omitting others that do so. GDP also includes a share of “defensive goods” such as spending on security guards, the armed forces and policeman that do not generate direct wellbeing (although they might be necessary for enjoying other goods).

In addition, “modern” economic growth often produces congestion in big cities and pollutes the environment. The list is long: GDP only measures activities that go through the market and have a price, thus excluding work done at home by husbands and wives. It also leaves aside considerations of inequality in the distribution of income among individuals and regions. A country may have a higher GDP than another, but it also can be more unequal (e.g a higher Gini coefficient, or a larger share of the top 10 percent in national income).

In this case, inter-country comparisons of wellbeing become trickier as ordering countries by GDP per head and by inequality may deliver rankings that are inconsistent among them. This is very relevant for Latin American nations, South Africa and other high inequality nations with income Gini coefficients in the 50-60% range. More recently, income and wealth inequality have been on these rise in large economies such as the United States, Russia, China and India (Solimano, 2017).

Finally, the current level of GDP may conceal the depletion of natural resources compromising the welfare of future generations. Broader concepts of economic progress should include issues of inequality, sustainability, quality of life and social rights.

Evolving Views on Comprehensive Development

The previous discussion is connected with the notion of “economic development”, a concept often related to the economies of backward countries and the periphery of the world economy. However, the concept can be extended to core economies of the center. The term seems to have its origin in the book The Theory of Economic Development written by the Austrian economist Joseph Schumpeter and published in 1911.

One of its insights is that development is different from growth. The former entails qualitative change through the process of creative destruction at the heart of the capitalist process. This entails new products, techniques, industries and organisations that displace old products and obsolete technologies. For Schumpeter, economic growth follows a repetitive circular flow that can yield higher output by using more capital and labour, but without the mark of creative destruction.

In the 1940s, 1950s and 1960s theorists of economic development such as Ragnar Nurske, Paul Rosenstein-Rodan, Gunnar Myrdal, and Albert Hirschman focused their attention on the economies of the periphery and emphasized the process of structural change, discontinuities, market failures and cumulative causation accompanying the dynamics of economic development. In turn, this inspired policies involving economic planning, import substitution, agrarian reform, regional trade agreements and  commodity stabilisation funds. Several of these policies were adopted by countries in Latin America, Africa and Asia from the 1940s to the 1980s.

Then, this paradigm was replaced by free market economics. Three early experiments in neoliberal economics were the Pinochet economic policies in Chile in the 1970s implemented under authoritarian rule, the Thatcher government’s free market/ monetarist revolution in the UK in the 1980s and Reagan’s supply-side and deregulation in the United States (Solimano, 2014).

Chile for example increased GDP per capita from about US $5,000 in the late 1980s to its current $25,000 but Gini coefficients for income are still over 50 percent and the coefficient for total wealth is 78 percent. The top 1 percent captures over 30 percent of national income defined in a comprehensive way. Higher growth comes with higher inequality; a feature also observed in China and India in recent decades.

This coincided also with the onset of economic globalisation, expanding international financial markets, privatisation and growing mobility of human capital, ideas and workers. A further impulse to globalisation and neoliberal economics was associated with the demise of the socialist regimes in Central and Eastern Europe and the dissolution of the Soviet Union in the early 1990s. Socialism was gone, and capitalism was welcomed back. In the development field, the dominant paradigm in the 1990s was the Washington Consensus (WC), a name coined by British economist John Williamson. The WC promoted macroeconomic stabilisation, free trade, capital mobility, privatisation of state assets and labor market deregulation. Conspicuously, objectives of lower inequality, regional development, social participation and economic democracy were absent. A main criticism of the WC was its narrow goals and the elevation of instruments (e.g market liberalisation) to the status of ultimate goals (see Stiglitz, 2018).

The impact of globalisation and neoliberalism on human welfare and living standards are complex. Economic growth since the 1980s accelerated in China, India, some Asian countries and Southern-American countries but growth was not spectacular in North America and Europe. The radical reshaping of economic structures, along with previous trends, became associated with several features that affect wellbeing: (i) a higher frequency of economic and financial crises, (ii) an increase in debt levels of households, corporations and government, (iii) a rise in inequality of income and wealth and (iv) climate change and environmental degradation.

Economic welfare at an individual level has been subject to conflicting forces: on the one hand, trade liberalisation, the reduction of travel costs and the new technological goods increased the variety of goods and has expanded consumption opportunities.

Neoclassic welfare economics focuses on maximising consumption per capita. On the other hand, economies affected by frequent crisis, unemployment and deregulated markets created a sense of insecurity that may be behind the current anti-globalisation backlash. The rise in economic insecurity can be welfare-reducing, and generates anxiety and stress, affecting, adversely, the mental health conditions of the population.

The sense of fragility, along with potential, of a more global economy should not be disregarded. Traditional industries in many countries could not stand competition from low-wage countries creating big pockets of displaced workers. In turn, foreign immigrants were looked at with suspicion by local working and middle classes.

Employment and social protection are also affected by the retrenchment of the welfare state (in core, advanced economies) and the weakening of the developmental state (in the periphery). Rising student debt and higher costs of housing pose new burdens to the younger generation affecting upward socially mobility and the welfare of future generations. Inequality and wealth concentration in small elites have widened social divides. This, along with climate change, may be the more destabilising time bombs ahead. All these trends pose serious challenges for academic economics, social sciences and public policy in the task of generating sound and balanced assessments of what is genuine economic progress and human wellbeing.