What is development? Growth, capabilities and inequality

Economic growth is a rise in a country’s output over time. The usual measure is the growth of real gross national product or gross domestic product, valued at constant prices, since growth in money terms can come from inflation alone; growth of real income per head allows for population (the answer to the opening question is real GNP, as the paper words it, though per-head figures are the better measure of improvement).

Economic development asks whether people’s lives are getting better. Dudley Seers (1969) put the test as three questions: what has happened to poverty, to unemployment and to inequality? If all three have become worse, he argued, it would be strange to call the result development, even if income per head has doubled. Development in this broader sense also includes structural change (from agriculture to industry and services, and from rural to urban), better health and schooling, and, in the view developed below, greater freedom.

In the 1970s the basic needs approach gave the idea a practical form. The International Labour Organization’s 1976 World Employment Conference, on Employment, Growth and Basic Needs, argued that development should aim first at meeting minimum requirements of food, shelter and clothing and of essential services such as drinking water, sanitation, health and education. Mahbub ul Haq, then at the World Bank, wrote The Poverty Curtain (1976); Paul Streeten and others set out the case in First Things First (1981). The same decade produced the Physical Quality of Life Index (Lesson 2) and the idea of redistribution with growth (Chenery and colleagues, 1974): growth and a fairer distribution can be pursued together.

GDP per head is the easiest number to compare and the least complete. It is an average, so it says nothing about who gets the income. It counts only market output, so it misses unpaid work, much of it done by women, and the value of leisure. It counts spending on repairing damage (a clean-up after a flood) as output and does not subtract the depletion of natural resources (Lesson 16). And it is a measure of means: two countries with the same income can differ widely in what that income buys.

The table, from the Human Development Report data of Lesson 2, shows how loosely income and health are linked. Sri Lanka and South Africa have a similar income per head (about $12,600 and $13,700 in 2021 PPP dollars) but life expectancy at birth differs by more than eleven years: 77.5 and 66.1. China’s income is less than a third of the United States’, and its life expectancy is only about a year and a half shorter.

Amartya Sen (1979, in his Tanner Lecture Equality of What?, and in Commodities and Capabilities, 1985) argued that well-being should not be judged by the goods a person owns or by the satisfaction they bring (utility), but by what the person can do and be. The vocabulary is exact and examined.

• Functionings are the “beings and doings” a person achieves: being well nourished, being healthy, being educated, taking part in the life of the community. Sen’s own sentence, tested in UOH 2021, is that in judging well-being it would be premature to limit the analysis to the characteristics of goods possessed: “we have to consider the functionings of persons”.
• Capabilities are the real freedoms to achieve combinations of functionings: the set of lives a person could choose to lead. A person who fasts and a person who is starving have the same nutrition and different capabilities.
• Agency is the person as someone who acts and brings about change, valued for what they can do for their own goals, not only as a beneficiary.

Two consequences. Poverty is capability deprivation, not only low income (UOH 2020): income matters because it is a means to capabilities, and the conversion of income into capabilities differs with age, health, sex and place. And human capability is broader than human capital (the comprehension in UGC NET 2024): education makes a person more productive, which is human capital, but it also enriches life directly (reading, communicating, informed choice), which the capability view values. Capability is the larger concept (Lesson 10 returns to this). Sen’s Development as Freedom (1999) states the conclusion: development is the expansion of the freedoms people have. Sen received the 1998 Nobel Memorial Prize for contributions to welfare economics; the HDI of Lesson 2 is the practical result of this line of thought.

Inclusive growth is growth that gives broad-based benefits and equality of opportunity to all (the definition asked in CUET 2020): a higher average is not enough, since the growth has to reach the poor, through work, schooling and health. Its rival, the trickle-down view, holds that benefits given to the rich, such as tax cuts, raise investment and incomes, so that the gains spread down to everyone (UOH 2015 asks for this meaning). The evidence on how far the benefits do trickle down is mixed, which is why development economists have looked at the distribution directly, as the rest of this lesson does. Joseph Stiglitz’s The Price of Inequality (2012) argues that high inequality damages growth; Acemoglu and Robinson’s Why Nations Fail (2012) argues that inclusive institutions are what produce prosperity.

Simon Kuznets, in his presidential address to the American Economic Association (1955), noticed from long series for the United States, England and Germany that inequality seemed to have risen in the early stages of industrialisation and fallen later. His explanation was the movement of workers from low-income agriculture to higher-income industry: the same mechanism as the dual economy of Lesson 3, which gives a rise and fall in the Gini coefficient as workers shift (JNU 2016, the five-worker example). He added scraps of evidence for India, Ceylon and Puerto Rico and was cautious: it was a hypothesis, not a law. The relationship between a country’s per capita income and its inequality of income distribution is the Kuznets curve (CUET 2024; UOH 2012: inequality and income), an inverted U (GATE 2021).

The chart tests it on 163 countries. Each dot is a country’s Gini index from a recent survey against its income per head, with the best-fitting inverted U drawn through them. The curve does bend, with a peak at an income of about $4,400, but the fit is weak: R² is about 0.11 against 0.08 for a straight line. Countries at similar incomes have Ginis from the low 20s to the high 50s, so something other than the level of income, such as history, land ownership, taxes and public spending, matters more. Gabriel Palma (2011) went further and argued that the “inverted U” has ended: the middle of the distribution looks much alike everywhere, and the differences are in the share of the top tenth and the bottom four-tenths (below).

The Gini coefficient and the Lorenz curve have a page of their own (Gini coefficient and Lorenz curve); here is how it compares with three other measures. All of them satisfy a minimum set of properties: they do not change if everyone’s income is multiplied by the same number (scale invariance), if people swap places, or if the population is replicated. They differ in how they weigh transfers and in what they can see.

• Gini coefficient: from 0 (equality) to 1. It is a sensible summary but two distributions with crossing Lorenz curves can have the same Gini (JNU: Egypt 0.403 and Australia 0.404 need not be alike).
• Theil index (Theil, 1967): T = (1/n) Σ (x_i/μ) ln(x_i/μ). From information theory; zero at equality. It can be split exactly into inequality between groups (regions, states) and inequality within them, which the Gini cannot.
• Atkinson index (1970): A_ε = 1 − (1/μ)((1/n) Σ x_i^1−ε)^1/(1−ε). The parameter ε is the aversion to inequality: a larger ε puts more weight on the poor. A is the share of income that could be given up if, in return, incomes were shared equally. For ε = 1 it is one minus the geometric mean over the arithmetic mean.
• Palma ratio: the share of the richest 10% divided by the share of the poorest 40%. It looks at the tails and ignores the middle, which is the point of Palma’s argument.

All four obey the Pigou–Dalton transfer principle: a transfer from a richer person to a poorer one, which does not reverse their ranks, must lower measured inequality (the statement “a progressive transfer makes the distribution more unequal” is therefore false; JNU 2020). A transfer from a not-richer to a not-poorer person is a regressive transfer (GATE 2024). The calculator takes five income shares and returns all four measures, with ten real countries preloaded.

The Delhi School entrance tests the transfer principle on welfare functions. A progressive transfer moves income from the richer to the poorer person without reversing their order. A welfare function W is a good measure of social welfare if a progressive transfer raises it. Take two people with incomes x₁ and x₂: the sum W₁ = x₁ + x₂ does not change, so it is not good; the product W₂ = x₁x₂ rises (with 100 and 300, a transfer of 50 raises the product from 30,000 to 37,500). The reasoning is the same as for the concave welfare functions behind the Atkinson index.

Questions on growth against development, Sen and the capability approach, inclusive growth and the Kuznets curve. Questions on the Gini coefficient and Lorenz curve are on the Gini page; those on the HDI and its family in Lesson 2.