Economic growth is a major priority for most governments, and in Britain ‘going for growth’ is a mantra for politicians of all stripes. It is taken for granted that growth in GDP is progress, and therefore success as a nation. But as Ha-Joon Chang describes in Economics: The User’s Guide, growth and progress are not the same thing.
Economic growth, as measures by GDP, is a measure of economic activity. The country’s consumption of goods and services, investment and public spending are totted up, exports are added and imports subtracted, and you’ve got your one big number to rule them all.
But it is possible to have growing GDP without making economic progress as a nation. You can artificially boost the consumption part of the equation by taking on debt, or throwing money at a property bubble, as we’ve done in Britain. GDP can be raised by overinvestment, as China has done, building cities, roads and airports whether or not there is demand for them. A natural resource boom can often lead to higher income without improving economic development.
So what is economic development? Chang’s definition is “a process of economic growth that is based on the increase in an economy’s productive capabilities: its capabilities to organize – and more importantly, transform – its production activities.”
Unlike economic growth, there’s no single headline figure for measuring economic development. It’s a qualitative measure that describes the economy’s increasing capabilities rather than raw activity. Is innovation happening? Are new technologies being adopted? How is value being created? These are more important questions for economic development than the quarterly GDP figures.
For poorer countries, economic development might mean moving from the export of raw materials to manufacturing, raising the value of export, and improving productivity through infrastructure. In a more advanced economy, the focus might be more on education and R&D.
It’s worth noting that I’m talking about economic development, which is a narrower category than development in its full sense. The UN’s Human Development Index puts economic growth alongside literacy and life expectancy for a rounder picture of progress, but that doesn’t capture everything. It’s hard to measure things like democracy or freedom of speech, but we’d all consider them part of human development. And development shouldn’t stop at the ‘human’ either. Development that comes at the cost of the environment isn’t really progress, and will come undone in due course.
It’s with an eye on sustainability that Chang’s distinction between growth and economic development is particularly useful. As Chang says, it is possible for developed economies to scale back consumption, but “this does not mean that the rich countries should stop economic development… They can still increase their productive capabilities but use them not to increase material consumption but to reduce working hours while producing the same amount, or even more than, before. They can develop – and transfer to developing countries at affordable prices – their productive capabilities in activities that combat climate change and other environmental problems.”
Rising GDP doesn’t necessarily mean things are improving. And from a postgrowth point of view, slowing or stopping economic growth doesn’t need to mean an end to economic progress or innovation.