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Łukasz Baszczak  22 października 2020

Development is not only about the economy, and the economy is not only about wealth

Łukasz Baszczak  22 października 2020
przeczytanie zajmie 11 min
Development is not only about the economy, and the economy is not only about wealth Tumisu / pixabay.com

In order to understand contemporary economic dependencies, one cannot treat the aspects of economic and social development separately. The economy itself, even a highly developed one, is not enough to create prosperity for many citizens. An active role of the state is also required, aimed at increasing the welfare of the whole society and taking care of future generations. For this to be possible, we need indicators that will describe the world accurately. The Polish Economic Institute (PI) in its report Responsible Development Index–version 2.0 shows how modern economists think about development and why the traditional measure, GDP per capita, should not be a relevant determinant of a country’s global position and wealth today.

The ranking published in the report included: Sweden, Denmark, Norway, Switzerland and Finland. Almost all EU countries are in the top 40. Poland came in 32nd, just behind Slovakia and Hungary, but ahead of Greece, Croatia and Lithuania. It is worth noting Israel’s high position (6th place) – according to the ranking it is the most developed country outside Europe and is ahead of the USA (8th place).

How does the Responsible Development Index (RDI) tell us more about the world?

Let us take a look at the mix of factors that make up each country’s score on the Index. These are: consumption per capita, income inequality (Gini coefficient), expenditure on R&D and education (both as a percentage of GDP), life expectancy, number of intentional murders per capita, air quality, CO2 emissions per unit of GDP produced and reduction of CO2 emissions since 1998. These measures have been selected to form the four pillars of development: present prosperity, ability to create future prosperity, non-economic aspects of welfare and climate responsibility.

Such a set clearly shows that today the concept of development does not include only the wealth of the state as such or its economic power. In other words, GDP per capita does not show enough; it does not explain the responsibility associated with economic development. It is the multidimensional responsibility proposed by the report’s authors that seems to be the Index’s main advantage over alternative measures. Apart from GDP – a purely economic measure, or even a purely consumption-production measure, criticised nowadays globally and in the economic mainstream – we also have at our disposal, for example, the Human Development Index prepared by the United Nations (HDI takes into account only four factors, although it does not include the climate issue). More specific measures include the Global Competitiveness Index or the Social Progress Index. The former has a slightly neoliberal tinge: it is dominated by, e.g. the US, which has one of the most flexible labour markets, but is outside the top 100 in terms of income inequality in the PEI ranking, and is ranked eighth. Much like some tax havens, such as Hong Kong, Singapore and the Netherlands (these countries are also relatively high in RDI, but much lower than the top five). The Social Progress Index, on the other hand, is a much more synthetic measure, composed of a multitude of different factors, more or less parameterisable (e.g. equality in the political power of various economic classes and social groups) and less macroeconomic, but its creators are also guided by the principle of going beyond GDP.

What is responsible development?

The authors of the report distinguish at least several aspects of responsibility in controlling state development. In purely economic terms, it is the responsibility for creating future prosperity, as measured by expenditure on education, research and development. In modern economies, these factors generally enhance innovation, providing the ability to keep the economy dynamic. Negative examples of countries in this category – which are also ranked significantly higher in terms of GDP than in RDI – are countries rich in natural resources, especially oil, such as Saudi Arabia, the United Arab Emirates, Qatar and Bahrain. The prosperity gained on such grounds is fragile and unstable.

The level of wealth and consumption per capita would tell us little about what is often more important, i.e. how an ordinary citizen lives. Such measures are averaged, which is why they hide various distortions in modern economies.

For instance, the average salary says little about the situation on the labour market; therefore, the analysis of the median and the dominant in earnings is also important. Therefore, in the case of macroeconomics, it is necessary to take into account not only the level of wealth but also how it is being distributed, particularly checking whether there are glaring income inequalities.

The RDI ranking may inspire optimism, as in this regard the leaders are not only rich countries, but also those enjoying the fairest distribution of prosperity, i.e. Sweden, Denmark, Norway and Finland. Apart from non-wage and climatic factors, these countries are examples of how false the dichotomy of wealth versus (relative) equality, formerly more widely accepted, really is – you can have both. It is therefore worth taking inspiration from these countries (as well as from Czechs and Slovaks who are in the forefront in terms of the Gini coefficient!), which is important for public policy, for example, in terms of a progressive tax system or social solidarity programmes.

Even in very solidarity-oriented states, however, there are fundamental economic differences between citizens. Therefore, contemporary economic development cannot neglect the quality of public services, which are crucial for the well-being of lower and middle-class citizens.

The quality of public services is indirectly reflected, for example, by the average life expectancy, which allows assessing the functioning of the health service and, as in the case of the distribution of welfare, even the best health protection will not improve this indicator if it is not available to ordinary citizens. In a way, these statistics and the number of intentional murders per capita also reveal the issue of security (including the efficiency of the police) as well as the quality of the legal and institutional structure. Expenditure on education partially shows (also indirectly) the quality of education, including universal education. Of course, the factors in question represent not only the condition of various public services and should not be considered exclusively in this context. After all, they are informative in themselves and in conjunction with others. Life expectancy is also an issue of medical technology and its availability, but in the case of a large share of countries, it is linked to the availability of basic products and services: vaccines, drugs, medical infrastructure, doctors (and their training opportunities), and air quality. All these elements can certainly be considered indicators of the country’s development level, but they are not purely economic – macroeconomic indicators may overlook them.

Public services related to health and economic inequalities combine in a particularly dangerous mix in the US. It is a country with the highest consumption per capita but, at the same time, one with enormous inequality, with unconvincing results in terms of safety and life expectancy (as well as CO2 emissions). The authors of the PEI report devoted an additional chapter to the United States in the context of the protests that broke out after the murder of George Floyd by a white police officer.

The United States used to be an unwavering economic power, a symbol of wealth and, well, development. Today, the current situation in the USA is a reality check. The protests in the United States also have an economic basis, which cannot be ignored.

The authors write in the report: „Ethnic minorities in the United States are characterised by a relatively high unemployment rate and low income and wealth. […] The wealth inequalities between ethnic groups in the United States are overwhelming. The median wealth (total assets less total liabilities) of African-American households is approximately $ 3,600, $ 6,600 for Latin American households, while for white households it is over $ 145,000”. Such inequalities, combined with the lack of universal health care in a pandemic translate into a greater risk not so much of getting COVID-19 (the death rate from this virus is „only” twice as high for black people as compared to whites in the US), but of bankruptcy as a result of treatment among minorities. Despite these problems, the US still ranks among the top ten most developed nations, largely due to its high current consumption, good air quality and a high score as regards its ability to create future prosperity. Therefore, it seems crucial for the US to find a better balance of development.

Responsibility for the planet is perhaps the greatest responsibility associated with economic development, because we all bear it, and it seems to be the most crucial opposing value to economic growth we have known to date. The report takes into account two factors in terms of climate: CO2 emissions per unit of GDP generated and the reduction of emissions over the last 20 years (since the signing of the Kyoto Protocol).

Again, an example to follow is Scandinavia – the countries in this region have low emissions and have shown the greatest progress in reducing them further. Overall, the richest countries have achieved prosperity by polluting the environment, but today they are trying to reduce emissions, though it is too late. Even in a pandemic lockdown, with air traffic stopped and restricted, production and supply chains broken, greenhouse gas emissions were still too high (or rather their decline was smaller than expected).

The authors of the report point out that „although most countries are reducing their emissions per unit of GDP, this is still not enough to stop climate change.” Due to the above, supporters of the business as usual approach must now recognise either the necessity of a structural transformation of economies (for example, in the form of the Green New Deal or some alternative to it), which will allow further development without destroying the climate, or support the idea of degrowth – limiting economic growth in order to save the environment.

Poland still has much to work on

Poland ranks 32nd in the Responsible Development Index. It is difficult to clearly assess this result, but it is worth pointing out that this place is higher than our GDP per capita would indicate.

When analysing it in terms of all the categories considered, the authors of the report indicate that ecology is perhaps the most pressing problem. The tragically high level of air pollution, mainly smog in cities, moves Poland back in the ranking (in this respect we are in the world’s top 90) – it may also reduce life expectancy.

The climate aspect is also bad – we are reducing CO2 emissions, but to a lesser extent than the leaders, and at the same time we still have a very large current emission (only 33 countries out of 159 analysed emit more carbon dioxide per unit of GDP generated). Thus, apart from the obvious goal: to emulate Scandinavia and Finland (this assumption should be adopted by many other countries), Poland should draw conclusions and take far-reaching steps in its environmental policy. The authors of the report show that a clear improvement in these areas could lead to equating Poland’s development with Spain’s or Italy’s.

Catching up with the West may be difficult because of a relatively high consumption per capita (the highest in the Visegrád Group), but it does not create conditions for the creation of future prosperity. Poland is falling behind in innovativeness and the state of the modern technology industry, due to low expenditure on education and R&D (although these have finally started to grow in recent years). Scandinavia may seem a culturally and historically distant model to us, but such characteristics certainly do not apply to the Czech Republic. This country is a leader among the countries of the former Eastern bloc and looks excellent compared to Poland (we only exceed it by a slight amount in per capita consumption). The Czech Republic sets an example of what seems to be a more successful economic transformation (which did not take the form of shock therapy but was gradualist and more cautious) and better decisions in further economic policy. According to the RDI, the Czech Republic is 20th in the world, and its development is very well-balanced (for example, it is 2nd in the world in terms of inequality!), apart from, unfortunately, CO2 emissions.

Polish version is available here.

Publication (excluding figures and illustrations) is available under Creative Commons Attribution 4.0 InternationalAny use of the work is allowed, provided that the licensing information, about rights holders and about the contest "Public Diplomacy 2020 – new dimension" (below) is mentioned.

The publication co-financed by the Ministry of Foreign Affairs of the Republic of Poland as part of the public project "Public Diplomacy 2020 – new dimension" („Dyplomacja Publiczna 2020 – nowy wymiar”). This publication reflects the views of the author and is not an official stance of the Ministry of Foreign Affairs of the Republic of Poland.