'Economic Growth Often Accompanies a Decline in a Poor Country's Wealth': Are Developing Countries Really Doing Better, as Orthodox Economists Say? No, Argues Partha Dasgupta. Rises in GNP Are at the Expense of the Average Person's Assets

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As a subject of inquiry, the economic development of poor countries is only a half-century old. Though classical economists were much engaged in identifying the social processes that create prosperity, it was not until the emergence of independent nations in Asia and Africa that economic development became a specialised field. Economists studied the impact of economic decisions on human well-being not only in the present and near future, but in the distant future, too.

Unfortunately, they also became attached to the idea that raising the rate of growth of gross national product (GNP) is the hallmark of economic development. Whenever we talk about growth, it is taken for granted that we are talking about growth in GNP. The central dogma of development economics became the belief that the key to economic progress in poor countries lies in increasing the rate at which capital is manufactured there. The United Nations' Human Development Index has recently been added to the list of economic indicators. But as I will show, the Human Development Index also suffers from myopia.

The word used for the overall worth of an economy's capital assets is "wealth". To say that an economy's wealth has increased is to say that there has been an overall accumulation in the worth of capital assets. By the same token, to say that wealth has declined is to say that there has been an overall decumulation. But economic statisticians interpret wealth narrowly. Wealth should include not only manufactured capital (roads and buildings, machinery and equipment, cables and ports) and what is nowadays called human capital (knowledge and skills), but also natural capital (oil and minerals, fisheries, forests and, more broadly, ecosystems).

I use the term "inclusive investment" for this broader definition of wealth and contrast it with the narrower scope of "recorded investment". Since a great many services obtained from natural capital are missing from standard economic accounts, recorded investment could be positive even if inclusive investment were negative. This would happen if the economy accumulated manufactured and human capital but destroyed or degraded natural capital at a fast rate.

Inclusive wealth reflects something like an economy's capacity to sustain human well-being--today and in the future. In fact, one can say more. Subject to certain qualifications, an increase in inclusive wealth per person corresponds to an improvement in the average well-being of present and future generations. An accumulation of inclusive wealth therefore corresponds to sustained development. Inclusive investment is thus a key to economic progress.

Consider, in contrast, GNP, which is taken to be the sum of an economy's rate of consumption and its (gross) investment in manufactured and human capital. GNP misleads because it does not acknowledge that capital assets depreciate. So it is possible for GNP to increase, even while inclusive wealth declines.

This would happen if increases in GNP were brought about by mining capital assets--for example, degrading ecosystems and depleting oil and mineral deposits-without investing appropriate amounts of output in the accumulation of other forms of capital, such as knowledge and skills. There is, then, little reason to expect movements in GNP to parallel movements in inclusive wealth.

However, a situation where GNP grows and inclusive wealth declines cannot last for ever. If inclusive wealth decumulates sufficiently, GNP will eventually decline also. But the moral is telling: GNP--or, for that matter, the Human Development Index--is not a measure of human well-being. And movements in either index are a poor basis for judging sustainable economic progress. In poor countries, localised natural assets are of the utmost importance. When wetlands, inland and coastal fisheries, woodlands, ponds and lakes, and grazing fields are damaged (for example, because of agricultural encroachment or urban extensions or the construction of large dams), traditional dwellers suffer. …