Sunday, July 20, 2014

What is 'development' -- more thoughts on GDP

[More thoughts inspired by Diane Coyle's GDP: A Brief but Affectionate History]

One of the major problems with the discipline of 'law and development' has been its failure to identify what the 'development'  part of law and development actually refers to.  Because of this, we invariably end up equating development with growth in GDP.  But this is highly problematic, and I suspect severely compromises 'law and development' as a programmatic discipline.

The problem with using GDP growth as a proxy for development is that GDP does not measure development, its measures aggregate quantity of 'production' -- primarily material production.  It was designed as a tool for regulating a Fordist industrial system -- an industrial system that focused on exploiting economies of scale in the production of material goods.  Originally, GDP was only concerned with material production.  It has since been adapted to try take into account production of services and other non-material goods.  But how effective it is in doing so is a matter of some debate.  It is particularly bad at accounting for financial services, as revealed in the North Atlantic Financial Crisis of 2008.  

It is not completely irrational to equate GDP with development.  In consumerist economies, higher GDP equate with more material possessions for the average citizen.  Most developed economies are consumerist.  Therefore, there is a significant correlation between level of GDP and level of 'development' however commonly defined. 

But developing economies tend to be more export oriented (since their consumers have less wealth) and therefore producerist.  Here, the consumerist orientation of GDP becomes problematic, because a much higher proportion of the beneficiaries of production are outside the national economy.  

Put perhaps an even bigger problem is that the global industrial system may be moving away from a system that exploits amount of production more towards a system that exploits diversity and flexibility in production (what is sometimes called 'post-Fordism').  Indeed, a study in the 1990s by Giovanni Arrighi, Beverly Silver and Benjamin D. Brewer (see "Industrial Convergence, Globalization, and the Persistence of the North-South Divide") found that beginning not later than 1960s, industrialization stopped correlating with development.  In fact, just the opposite -- since the 1960s, industrialization in developing countries tended to correspond with developmental stagnation -- functioning as a developmental trap by trapping the developing country into what is now a low-road form of industrial organization.  (The one exception that I can think of to this trend is South Korea, but that's a topic for another day.)

We see a good example of this in China.  China's GDP growth has been legendary, and has been propelled by growth in industrialization.  But since the end of last century, China's industrial growth has decoupled from any growth in human development -- since 2000, China's HDI index has been largely stagnate, despite its high GDP growth.   Since 2000, China has been growing but not developing.  Nor is China unique in this regard: a similar observation can be made about Botswana, whose level of GDP growth over the last 40 years or so has been largely equal to that of China, was fueled by growth in industrial production (primarily diamond mining), has been held up, along with China, as another developmental success story, and whose HDI has been stagnant since the late 1990s.

Ultimately, even if we associate development with simple material benefit, GDP may be increasing measuring the wrong thing.  It is measuring what we might think of as dead-end development -- a kind of development to be sure, but one whose trajectory is ultimately on the wrong side of (economic) history. 

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