Name: Vrushali Vivek Chavan

Class: M.com in Accounting & Finance

Roll No.: 31032523004

Subject: International Economics

Topic:

HUMAN DEVELOPMENT AND ECONOMIC GROWTH

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 Table of Content

Page
Sr. No. Topic
no.

1. Introduction 3

2. Economic Growth and its Impact on Human Development 3

3. Human Development and its Impact on Growth 6

The Joint Human Development/Economic Growth Linkages

4. 8

5. Empirical Findings 10

6. Conclusions 15

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 HUMAN DEVELOPMENT AND ECONOMIC GROWTH

Introduction

Human development, which is defined as the ultimate aim of the development process,
has been compared in recent literature to economic growth, which is seen as either a
way to improved human development or an unreliable stand-in for broader wellbeing.
Although the definitions and objectives of development have been expanded in this
discussion, it is still necessary to clarify the critical connections between economic
growth (EG) and human development (HD). Human development will have a
significant impact on growth to the degree that increased freedom and capacities
enhance economic performance. In a similar vein, economic growth will promote
human development to the degree that rising wages will expand the variety of options
and powers available to households and governments. These connections and their
reciprocal interconnections are examined in this essay.

It will examine some of the theoretical discussions on the connections between human
development and economic growth before reviewing the findings of empirical
research. Lastly, it will look at how these connections affect policy. The argument for
human development and its causes are covered in Section II. Similar challenges for
economic growth are covered in Section III, and Section IV closes by examining the
two-way link between them.

Chain A: Economic Growth and its Impact on Human Development

Sen's capacities approach provides the theoretical foundation for human growth.
According to Sen (1985), the best indication of wellbeing is an individual's capacity to
"have various functioning vectors and to enjoy the corresponding well-being
achievements." This viewpoint changes the analysis of development to consider the
vector of potential opportunities that people in a given state may have, in addition to
attributes (as is the more conventional utilitarian or even the original basic needs view
of human welfare, see Streeton, 1979), such as income, education, and health.

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Naturally, there is a connection between the two: a person's prospects are influenced
by certain personal characteristics; an illiterate or malnourished person would have
less options than an educated and healthy one. The capacities approach, however,
examines the influence of the social environment on human choice and agency by
looking well beyond individual characteristics. For example, a person living in an open,
free society would have more opportunities to fulfil their potential than a person living
in a closed, repressive culture. Although capacities are a desirable objective for
development, they are infamously hard to quantify since the entire range of human
functioning is virtually always unobservable.

In the UNDP Human Development Report from 1990, there was a first significant
attempt to convert the capabilities approach into a manageable country ranking. By
offering a quantitative method for integrating many socio-economic variables into a
measure of human development, the HDR aimed to "capture better the complexity of
human life" (UNDP 1990). This stood in stark contrast to the World Development
Reports' "excessive preoccupation with GNP growth and national income accounts,
which has supplanted a focus on ends by an obsession with merely the means" (UNDP
1990). This was the accepted consensus in the field of development economics.
However, it was by no means an easy undertaking to move from a normative theory
of capacities into a quantitative variable.

It is acknowledged that the original capacities theory is roughly proxies and simplified
by the inclusion of GDP, life expectancy, and literacy as parts of a Human
Development Index. Politics freedom and wealth inequality indices were
conspicuously absent. However, the arbitrary weighting of each HD component and
the accounting for the declining marginal utility of income are two more challenging
empirical issues that are brought up by any quantitative ranking. However, the Human
Development Reports (HDRs) have had a significant impact on development theory,
leading developing nations to revise their policies and release their own national HDR
reports and indexes.

Since income growth captures the economy's control over resources, it is evident that
it is the primary factor boosting people's capacities and, in turn, a country's human
development (Sen, 2000). The fact that people in the Indian state of Kerala, for

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instance, cannot enjoy many of the advantages enjoyed by citizens of many developed
nations (such as better housing, transportation, or entertainment), despite having life
expectancies and literacy rates comparable to those of many of these nations,
highlights the significance of GDP as a tool for achieving a wide range of capabilities.
However, via both public and private spending and government initiatives, GDP also
has a significant impact on health and literacy results. Therefore, larger wages also
indirectly contribute to human development inasmuch as they make other important
goals for human development easier to attain.

Economic growth's effect on a country's degree of human development, of course,

also depends on other social factors. The influence of income distribution—both at the
macro and micro levels, inside and between households—is a significant factor in this.
Positive causality has a great deal of potential at the micro level; household and
individual consumption may play a significant role in advancing human development
and may better meet the demands of the populace than official initiatives. Individual
consumption, however, might not necessarily go toward products that have the
greatest potential to further human growth. For instance, in Gambian homes, calorie
consumption increased in proportion to the amount of food under women's control
(Von Braun, 1988). Analogously, research conducted in the Philippines has
demonstrated that the proportion of income that goes directly to women correlates with
an increase in protein and calorie consumption (Garcia, 1990). For further information
on how the distribution of money within a home affects child wellbeing, read Hoddinot
and Haddad (1991).

A macroeconomic factor that will significantly influence human development is how

the extra money from economic expansion is distributed. Economic growth that
primarily helps the poor will have a stronger influence on human development through
increased spending on food and education, as poorer households spend a larger part
of their income on products that directly promote improved health and education.
Birdsall, Ross, and Sabot (1995), for instance, demonstrate that school enrolment
among impoverished children would increase by 40% in Brazil if the country's wealth
distribution were identical to that of Malaysia.

Growth in the economy will inevitably enhance public spending on human

development through private channels. Anand and Ravallion (1993) actually conclude

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that the majority of the benefits of economic development on Human Development are
probably going to come from central or local government budgetary spending. But the
efficacy of spending targeting and delivery determines how strong this influence is.
The government has to determine which key areas, including health and basic
education, have the most chances of improving Human Development. Since low
income individuals and localities would see the greatest marginal benefit, government
spending on Human Development should be directed primarily toward these areas. The
institutional capability of the government to effectively allocate these costs must also
exist. Studies by Rajkumar and Swaroop (2002) have shown that government
accountability is likely to play a significant influence in determining the efficacy of
public expenditure, which is dependent on the calibre of governance. Theory indicates
that a decentralized, locally responsible government structure may have advantages
in resource allocation and service delivery, even if empirical data in this area is more
sporadic.

Chain B: Human Development and its Impact on Growth

In turn, economic growth is significantly impacted by human development. Enhancing

people's skills and functioning should enable more people to select careers in which
they are most productive, since a key component of economic growth is enabling
agents to identify and capitalize on their comparative advantage. This makes it
possible to view human growth as the easing of restrictions that may have prevented
the maximizing of profits. Furthermore, although being a more expansive concept,
human development and the more conventional idea of human capital have a lot of
similarities. Human development will thus undoubtedly have an effect on economic
growth to the degree that the two are inevitably linked and that human capital
influences a country's economic growth.

More precisely, economic growth is probably going to be impacted differently by each

of the many aspects of human development. For example, education has a significant
impact on labour productivity. According to statistics from Malaysia, Ghana, and Peru,
Birdsall (1993) shows that each extra year of education for farmers corresponds to a
2-5% yearly improvement in productivity. According to Duflo's (2000) estimation, for

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every school established for every 1,000 pupils, earnings in Indonesia would rise by
1.5% to 2.7%. Education influences not just productivity but also the rate of innovation
and advancements in technology. Foster and Rosenzweig (1995) show that in Green
Revolution India, higher levels of education are linked to quicker adoption of new
technologies. In a similar vein, research indicates that greater education levels spur
more innovation in Sri Lankan companies. Thus, through its influence on technical
advancement, human development may also be included as a component influencing
growth rates in an endogenous growth model of the Uzawa-Lucas type. For example,
statistical examination of Sri Lanka's textile and engineering sectors (Deraniyagala,
1995) revealed a favourable relationship between the skill and education levels of
employees and business owners and the firm's pace of technical development.
Naturally, education cannot change an economy on its own.

Other significant factors that influence economic success include the type and amount
of foreign and domestic investment, the policy environment generally, and the
technology selected. Furthermore, the amount of both domestic and foreign
investment as well as the rates of total factor productivity will surely be higher when a
system's human capital level is higher. These factors will undoubtedly have an impact
on the quality of private entrepreneurs, public policy-makers, and investment decisions
generally.

Beyond its intrinsic value as a goal in itself, health has also shown to have favorable
benefits on economic growth. A substantial body of research demonstrating how better
diet and health boost earnings and productivity is reviewed by Strauss and Thomas
(1998). Schultz (2000) examines data from Ghana, Cote d'Ivoire, Brazil, and Vietnam
and discovers relationships between height and income. Increases in labour
productivity have been linked to increases in calorie intake in developing nations
(Cornia and Stewart, 1995). Research on road construction workers in Kenya
(Wolgemuth, Latham, Hall, and Crompton, 1982), sugar cane workers in Guatemala
(Viteri, 1981), and farmers in Sierra Leone (Strauss, 1986) have all been conducted.
In these situations, increasing calorie or micronutrient intakes seems to be followed
quite quickly by an increase in productivity.

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Through their effects on income distribution, education and health may also have
significant indirect effects on economic growth; the effects of education on health—for
instance, Behrman and Wolfe, 1987b, which show how women's education affects
family health and nutrition—are even more significant. Low-income individuals are
better equipped to look for economic possibilities as long as health and education
continue to improve and become more widely available. For instance, a 1980s study
examining the relationship between education, poverty, and income inequality in 18
Latin American countries discovered that differences in workers' educational
attainment explained 25% of the variation in workers' incomes, leading to the
conclusion that "clearly, education is the variable with the strongest impact on income
equality" (Psacharopolous et al., 1992). Furthermore, it is well recognized that growth
is supported by more equitable income distribution for both political and economic
economics reasons. Through its effect on the denominator, or population increase,
education may also have an impact on the rise of per capita income. A study
conducted in the mid-1980s across 14 African countries, for instance, revealed a
negative correlation between female schooling and fertility in nearly all of them.
Primary education was found to have a negative effect in roughly half of the countries,
while secondary education was consistently associated with lower fertility (Birdsall,
Ross and Sabot, 1995; Jayaraman, 1995; Thomas, Strauss and, 1995; Thomas,
Strauss and Henriques, 1991; Behrman and Wolfe, 1987a).

The Joint Human Development/Economic Growth Linkages

Given the two-way interaction between economic growth and Human Development,
countries may experience either a vicious cycle of low growth and slow rates of Human
Development improvement, or a virtuous cycle of strong growth and significant
improvements in Human Development. These states have mutually reinforcing levels
of Economic Growth and Human Development, which may either drive growth in an
upward cycle or imprison people in poverty. The strength of the previously mentioned
connections between Economic Growth and Human Development determines the
occurrence and longevity of these cycles. Additionally, countries may have a lop-sided
situation where they have very excellent growth and relatively poor Human
Development, or vice versa, at least briefly.

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A number of factors, such as government corruption, poor social spending, or
unequally distributed incomes, may contribute to "economic growth lopsided"
nations—those with high GDP growth rates in comparison to improvements in human
development metrics. The sustainability of this situation is called into question by a
recent examination of similar examples. For example, Ranis, Stewart, and Ramirez
(2000) found that of the eight EG-lopsided nations in 1960–1970, all eight entered a
vicious cycle of low EG/low HD. These findings imply that strong economic expansion
devoid of advances in human development may eventually prove to be unsustainable.

Over the past 40 years, however, "human development lopsided" nations have fared
better, with four entering virtuous cycles and the remaining four entering vicious ones.
Because of their early human development, the 50% of fortunate instances were able
to benefit from governmental improvements that led to growth. Therefore, with the
correct policy choices, a country with a high degree of human development at the
beginning of its history might enter a positive feedback loop where strong growth and
human development reinforce one another. The relevant policies, such as those that
promote increased investment, technological advancement, and better income
distribution, have the potential to transform the achievements in human development
into long-term economic benefits.

This difference makes it evident that human development appears to be a necessity

for long-term sustainable growth, which is a significant finding for the sequencing of
development. Furthermore, human development may show threshold effects,
meaning that before future economic growth becomes sustainable, a country must
reach a particular Human Development level. In endogenous growth theory, human
development is distinguished from human capital by this emphasis on levels. The
degree of human development establishes a country's sustainable growth path, even
though improvements in human capital and labor quality are most important for
endogenous growth.

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The aforementioned conclusions have significant ramifications for public policy. If
Human Development advancements are in fact a requirement for sustained EG, then
raising a country's Human Development threshold level may require public policy and
finance. Targeted government investments may be necessary in countries caught in
vicious cycles or low- Human Development poverty traps in order to cover the fixed costs
of HD improvements that would eventually spur economic development. These fixed
cost investments might go toward building schools, hospitals, or enhancing
governance to carry out investment projects in a way that is efficient.

The most important takeaway is that the data does not support the antiquated theory
of "grow first and worry about human development later." Prioritizing or at the very
least advancing in tandem with initiatives to directly promote growth should be the
improvement of health and education standards.

Empirical Findings

Following the foregoing debate, we arrived at a series of conjectures on the

connections between Economic Growth and Human Development for both causal
chains: Economic Growth to Human Development and Human Development to
Economic Growth. Using cross-country regressions for the years 1960–1992, we
evaluate a few of these possibilities below. Only a portion of the relationships are
examined as a result of some of the previously described elements being unable of
being evaluated in this manner, either due to a lack of data or the difficulty of defining
the relationship in question (such as social capital and priority ratios). Sample
included 35 to 76 poor nations, depending on which variables' data were available. In
most cases, the instruments we utilized to lessen the simultaneity bias that would
have come from using OLS were lags of the original variables. Given the lack of
significant connection between the residuals in the two periods under study, lag
values make sense as instruments.

For Economic Growth and its Impact on Human Development

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The variable chosen to measure achievement in human development was life
expectancy shortfall reduction, 1970-92, from a maximum of 85 years. 55 The
explanatory variables selected were:

 Lagged GDP per capita growth rate (for 1960-70);

 Social expenditure (defined as public expenditure on education and health) as
a percentage of GDP for the whole period (1970-92), as well as lagged (1970-
80);
 Several measures of income distribution, i.e. income share of the bottom 20%
or 40%, 1960-92, and the ratio of income share of the top to the bottom quintile,
1960-92;
 Female primary school gross enrolment rate in 1965;
 Regional dummies, with East Asia allocated a zero value.

The result summarizes the results Chain A, GDP per capita growth proved significant
in all of the equations, with higher growth of per capita income leading to better Human
Development performance. According to equation (1), a one percentage point
increase in the average growth rate of GDP per capita is estimated to reduce life
expectancy shortfall by more than 3 percentage points over the period. The social
expenditure ratio also proved significantly positive in all but one case. For every
percentage point increase in the average share of GDP invested in health and
education, when lagged, the life expectancy shortfall decreases by about 1.75
percentage points (equations (1) and (3)). An interesting finding is the mechanism
through which the social expenditure ratio seems to affect human development. As
regressions (4), (5) and (6) indicate, the female primary enrolment rate for 1965 has a
positive impact on the rate of improvement of life expectancy. We attribute this to the
impact on household behaviour of female income, knowledge and control within the
household. Moreover, it should be noted that when this variable is added, social
expenditure becomes less significant, which suggests that much of the impact of social
expenditure appears to occur through its effect on female education. According to
equations (4), (5) and (6), a one percent increase in the female primary gross
enrolment rate is estimated to reduce the life expectancy shortfall by 0.1 percent. The
income distribution variables run counter to our expectations, i.e. a more equal

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distribution does not seem to advance human development. Both the African and Latin
American dummies are negative and significant throughout, as we might have
expected, given that the comparator is highly successful East Asia.

For Human Development and its Impact on Growth

The dependent variable chosen was GDP per capita growth, 1970-92. The
explanatory variables selected were: - log GDP per capita in 1960, to test for
convergence;

 Initial levels of Human Development, using three different measures, log life
expectancy in 1962, adult literacy 1970-72, and a combined index of life
expectancy and literacy for 1970 (HDI*) ;
 Changes in Human Development over time for two of the measures of Human
Development, the change in the log of life expectancy, 1962-82; and HDI
shortfall reduction 1960-80.
 Gross domestic investment as a % of GDP for the period as a whole (1960-92);
 Income distribution, lagged, (1960-70), using three alternative measures, the
ratio of the income share of the top to bottom quintiles, the income share of the
bottom 40% of the population, and the income share of the bottom 20%;
 Regional dummies

The results are summarized measures of the initial level of human development
invariably proved significant, i.e. the initial level of life expectancy in equations (10),
(11), and (12), as well as (18), (19), (20), (21) and (22) were highly significant. Adult
literacy 1970-72 was significant in equations (13), (16) and (17); and the HDI* for 1970
was significant in equations (14) and (15). The change in life expectancy (1962-82)
was positive and significant in all cases but one (see equations (18) to (22)). The
change in HDI* shortfall reduction, 1960-80, was significant in equation (23), but the
initial level of HDI* was not significant. The domestic investment rate was always
significant except when the regional dummies were included (equations (15) and (22)).
The lagged income distribution variables virtually all gave results with the expected
sign (i.e. a more equal income distribution is associated with higher economic growth),
and were almost always significant except when the regional dummies were included.

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Moreover, income distribution is apparently more strongly related to GDP growth when
changes as well as levels of human development, however measured, are included.
The ratio of income shares of the top to bottom quintiles, 1960-70, showed significance
in equations (11), (13) and (21); the share of the bottom 40% was significant in
equations (14), (17), (19), (20) and (23), but the lagged income distribution variable
was not significant in equations (12), (15) and (22), although the signs were in the
'right' direction. Regional dummies for Latin America were significantly negative in both
instances when deployed and, in one case, also for Africa. In all equations, except
when the regional dummies were introduced (equation (15)), the initial level of GDP
per capita was significant, with a negative sign, indicating weak convergence, i.e. with
a low coefficient. In summary, the two chains, taken as a whole, showed a significantly
positive effect of economic growth on Human Development and a significantly positive
effect of Human development on economic growth. With respect to specific links in
each of the chains, our findings broadly confirmed our hypotheses, except for income
distribution. The higher social expenditure, the higher adult literacy, and the higher the
female education enrolment for a given level of GNP per capita, the larger the
improvement in Human development. The most surprising finding, counter to our
expectations, was that a more equal distribution of income did not improve HD
performance; indeed, in some equations the opposite result obtained. One explanation
of this may well be that we restricted the definition of Human Development in our Chain
A regressions to life expectancy shortfall reduction which is mainly affected by public
expenditures on health and education, particularly female, and less by household
expenditures. For Chain B, the relationship between Human development and
economic growth was stronger the higher the investment rate and the more equally
distributed the income. The regional dummies were generally negative for both Africa
and Latin America in both chains but with small coefficients. Since, on average, Africa
experienced a decline in GDP per capita over the period, this indicates that the fall in
per capita incomes was not proportionately translated into a slowdown or reversal in
Human development improvements.

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Conclusions

Our study of the factors that influence Economic Growth and Human Development
progression has amply illustrated the significance of their reciprocal interaction. The
study's empirical research validated the importance of several connections between
the two chains, such as the distribution of wealth, the investment ratio in Chain B, the
social expenditure ratio and female education in Chain A, and the crucial inputs of
Economic Growth and Human Development, respectively. Furthermore, it is feasible
to make significant progress in a chain even with some weak connections if certain
links in the chain perform really well.

Our most significant finding, nevertheless, relates to sequencing. Due to the close
reciprocal link between Economic Growth and Human Development, growth in either
requires the support of the other. Even though economic expansion is a crucial
component of Human Development improvement, it cannot be sustained on its own
in the absence of Human Development advancement. Examining how a nation has
changed throughout time has a big impact on how policies are phased in. Economic
policy has a tendency to prioritize improving the economic fundamentals as an
essential prerequisite for economic development, contending that Human
Development improvement cannot occur until after such growth, as shown by the
traditional "Washington consensus." Quite the contrary, our results refute the theory
that Human Development enhancement may wait until more economic resources
made it feasible. If this kind of delay is placed on Human Development
enhancement, Economic Growth itself will not be sustained.

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