Economic Policies for Human Development: A Neglected Domain

In the early 1950s, conventional thinking identified development with growth in gross domestic product (GDP) or GDP per capita. The early 1970s witnessed the emergence of a heterodox literature which suggested other indicators of development such as a reduction in poverty, inequality and unemployment that would capture changes in the quality of life.¹ This thinking moved further in the early 1980s. Development, it was argued, must bring about an improvement in the living conditions of people. It should, therefore, ensure the provision of basic human needs for all: not just food and clothing but also shelter, healthcare and education.² It was stressed that this simple proposition is often forgotten in the conventional concerns of economics. In the mid-1990s, such thinking culminated in writings on, and an index of, human development.³ Amartya Sen provided the broadest possible conception of development as freedom: a process of expanding real freedoms that people enjoy for their economic wellbeing, social opportunities and political rights.⁴ Such freedoms are not just constitutive of development as the primary ends but are also instrumental as the principal means for attaining development. The purpose of development, in this worldview, is to create a milieu that provides people with the rights, the opportunities and the capabilities to exercise their own choices for a decent life. In this conception of development, people are not just beneficiaries but are centre-stage in the process of development, as the main actors, that empowers them to participate in the decisions that shape their lives.

This people-centric perspective on development was, to some extent, reflected in the agenda adopted by the United Nations at its Millennium Summit in 2000 with a Declaration that articulated, in the form of commitments, a shared vision for the international community. This vision acquired a narrower focus with the eight Millennium Development Goals (MDGs), announced in 2001. The goals sought to eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality, reduce child mortality, improve maternal health, combat old and new diseases, ensure environmental sustainability, and develop a global partnership for development. A fifteen-year time horizon (2001-2015) was specified for achieving the MDGs. The targets were defined with reference to 1990 as a performance benchmark. However, the MDGs, which intended to address problems in developing countries without any stakeholder participation, were perhaps designed from the perspective of donor countries. Moreover, the concern with ends rather than means was devoid of any strategic clarity for implementation.⁵ The outcomes in 2015 were no surprise. For most indicators, in most countries, progress may not have been discernibly better than expected before the MDGs were announced. Some important limitations of MDGs were addressed when the UN Sustainable Development Summit in 2015 adopted the SDGs, which were designed to complete the task that the MDGs left unfinished. The SDGs, seventeen in number, emerged from an extensive consultation process, involving governments, civil society, local stakeholders and experts. Human wellbeing was situated in the wider context of economy and society in development. SDGs emphasised social inclusion, economic growth, better health, reduced inequality, equal opportunities, human rights, and a sustainable environment. The critical importance of formulating economic and social policies at the national level, as well as the financing needs, combined with a supportive international context, was also recognised. A monitoring framework to track progress was created. The time horizon, once again, is fifteen years, expecting that the goals would be attained by 2030.

It would seem that the objective of advancing human development has received attention in development thinking, as well as the international community, since the turn of the century. Even so, economic policies for human development within countries continue to be a neglected domain. They are essentially limited to social protection or safety nets and, at best, to improved access or coverage in social sectors such as health or education, for the poor, the marginalised and the excluded. There is interdependence. And there are linkages. In fact, mainstream policy formulation in governments, macroeconomic policies for example, matter for human development because these determine the level of employment, the degree of social protection and the provision of public services such as healthcare and education.⁶ This is just as true of industrial, trade and technology policies, which exercise an important influence on the creation of, and growth in, employment. But that is not all. The sequence of developments that has unfolded in the world over the past fifteen years has made the quest for advancing human development more elusive.

It began with the financial crisis in the United States that surfaced in late 2008, which spread rapidly across the world through contagion. Its transmission to the real sectors of economies was just as rapid. This led to a sharp contraction in output and employment. The downturn moved quickly into a recession. Even if cycles are embedded in the nature of capitalism, it is clear that the Great Recession that followed in the aftermath was the deepest crisis in capitalism since the Great Depression during the 1930s. In response, most governments in industrialised countries and emerging economies, attempting coordination, adopted counter-cyclical macroeconomic policies. This pre-empted protectionist responses and beggar-thy-neighbour policies. But it was not long before orthodox policies returned to focus on balancing budgets and managing inflation. The recovery was fragile and slow. In sharp contrast with the boom in the world economy during the mid-2000s, there was a distinct slowdown in economic growth during the early 2010s. This economic challenge was compounded by a political challenge.⁷ Economies might have become global but politics remained national. There was a political backlash in the form of resurgent nationalisms riding on populist and nationalist sentiments, in many industrialised countries and some emerging economies, exploiting the discontents created by unequal outcomes, associated with rapid growth driven by markets and openness, which were exacerbated during the Great Recession. The consequent rise in protectionism disrupted the smooth sail of globalisation further. And the slowdown in growth across much of the world economy persisted through the late 2010s.

More was to come. A novel coronavirus emerged from the wet markets of China in late 2019, surfaced in different parts of the world by early 2020, and rapidly transformed into a global pandemic that persisted for more than two years. The pandemic prompted repeated and prolonged lockdowns across the world, which shut down economic activities – manufacturing and services – thus leading to a sharp contraction on output and employment everywhere. The loss of livelihoods was enormous. The closure of small businesses was widespread. Economic recovery was slow. In many countries, national income in 2022 just about returned to its 2019 levels. The recovery has been K-shaped so that economic inequalities have continued to rise. The pandemic, which turned our lives upside down, has also affected the health and wellbeing of people.

The situation might have improved in early 2022 but that was thwarted by the Russia-Ukraine war, which disrupted global-supply-chains in food, fuels and fertilisers. The sharp rise in food and fuel prices pushed inflation to double-digit levels in most countries. The response of central banks, driven by orthodoxy, which raised interest rates, will stifle investment and dampen consumption, instead of curbing inflation that is caused by supply-constraints rather than excess liquidity. In fact, the prospect of recession in the world economy looms large. For some countries in the developing world, the situation is distinctly worse. The hikes in US interest rates have mounted pressure on their currencies, which have depreciated sharply. Commodity prices have dropped squeezing their export earnings. What is more, the costs of essential imports, not only wheat, crude oil and fertilisers (where prices are already high because of the Russia-Ukraine war) but also consumer necessities such as bread, sugar, coffee or medicines have risen sharply. The brunt is borne by the poor. Such low-income countries, often the poorest, which borrowed abroad to cope with this sequence of adverse developments, now also have an unmanageable problem of mounting external debt denominated in US dollars. Thus, heavily indebted poor countries are once again at the edge of a debt crisis.

The importance of advancing human development as an objective was explicitly recognised in the global context at the turn of the century, which led to the declaration of MDGs in 2001 followed by the adoption of SDGs in 2015. But, even as poverty persists, the first two decades of the twenty-first century have witnessed an exponential increase in economic inequalities among people across the world. Available evidence suggests that the world distribution of income and wealth is most unequal.⁸ In 2021, the share of the top 10 per cent in world income was as much as 52 per cent and that of the top 1 per cent was 19 per cent, while that of the bottom 50 per cent was a mere 8.5 per cent. It is no surprise that the distribution of wealth in the world was even more unequal. The share of the top 10 percent in world wealth was 76 per cent and that of the top 1 percent was 38 per cent, while that of the bottom 50 per cent was a miniscule 2 per cent. Over the past two decades, income inequalities between countries have diminished but remain very high levels, while income inequalities between people within countries have increased sharply in almost every country of the world.⁹ It is clear that progress in terms of advancing human development would have been distinctly better if economic inequality among people had had not risen to such high levels.

The world, in the midst of a difficult conjuncture, is confronted with mounting economic, social, political and environmental challenges. These are attributable to a sequence of developments since 2008 – the global financial crisis, the slowdown in economic growth, the Coronavirus pandemic, and the double-digit inflation – highlighted above. This situation is juxtaposed with more frequent natural disasters across the world – forest fires, excess rainfall, floods, high temperatures, droughts, receding glaciers, rising sea levels and so on – confirming that climate change is a clear and present danger. There are multiple intersecting crises, as a consequence of which the poor and the marginalised are the most vulnerable, everywhere in the world. This provides the rationale for the present special issue of the journal, which seeks to explore the implications and consequences of these challenges for the wellbeing of people, ordinary people, and to discuss how economic policies could be reshaped to advance human development.

The article by Nayyar and Malhotra analyses the role of economic and social policies for human development in the contemporary world. In doing so, it considers not only low-income countries but also high-income countries, as most countries have been buffeted by frequent global or local economic crises, including a health pandemic of alarming proportions, where mainstream economic policies have often been detrimental, rather than conducive, to advancing human wellbeing. The authors recognise that economic and social policies of governments could improve or worsen the wellbeing of people, so that their impact on human development could be positive or negative, to suggest that such public policies should be an integral part of national economic policy formulation and must not be confined to social protection and social sectors. The article revisits the human development framework and anchors it in an interpretation of the capability approach that helps in delineating policy pathways to desirable outcomes, for an effective operationalisation of the approach. Building on that, it explores the nature of economic and social policies that might constitute an appropriate policy-mix for advancing human development. It shows that, while human development problems in poor and rich countries are similar, the choices, sequencing and prioritisation of policies will inevitably be determined by the country-context and government-objectives. Thus, the framework of SDGs at the national level could enable a focus on human development in the policy design and strategic response of countries.

The article by Cornia reviews the trends in income inequality across the world over the past four decades to consider the underlying factors. In doing so, it makes a distinction between the traditional causes of inequality such as concentration in land-ownership or human-capital, and possible new non-traditional causes associated with a widespread increase in instability that could have affected income inequality and human capabilities, or even the human development index. The author suggests five possible manifestations of the sharp increase in instability: financial sector volatility and crises; the ongoing technological revolution, especially in the development of robotics and artificial intelligence; diseases such as Ebola, HIV Aids and the Coronavirus pandemic; the rising number of conflicts; and the mounting environmental crisis. Available evidence confirms that the traditional causes of inequality have remained relevant for explaining the rising or high inequality, and are obviously relevant from a policy perspective. The evidence on the non-traditional causes of inequality – the five drivers of rising instability – is not conclusive in providing conformation, largely because such evidence is incomplete, if not sparse, and is characterised by statistical measurement problems. However, the hypotheses about instability driving inequality are intuitively plausible and robust, which deserve attention from policymakers. It is hoped that this article will also stimulate further research that explores the impact of instability on inequality, capabilities and human development.

The article by Stewart analyses the importance of macroeconomic policies in the quest for sustainable development. It starts from the premise that the urgency of the climate crisis is such that it needs to inform policy design. Yet, while the existence of the crisis is broadly accepted, it is frequently set aside. This is particularly true of macroeconomic policies which are almost invariably formulated as if the environmental crisis does not exist or matter. But climate change has major implications and consequences for macroeconomic policies, including stability and growth. The author explores how macroeconomic policies need to change so that sustainability is an integral part and an essential objective. It is argued that the objective of economic growth should be replaced by sustainable, or green, economic growth, while measurement of GDP should incorporate climate externalities to estimate a green GDP. Further, it is suggested that there is need for increasing the weight assigned to the wellbeing of future generations, particularly in relation to the interest rate and the investment rate, because individuals born in the future, who will bear the burden of climate change, must be treated as equal to those alive at present. Just as important, government expenditures and public debt would both have to rise to provide the finances needed for mitigation and adaptation. Similarly, taxes and subsidies would need to be climate-friendly. The approach and priorities of multilateral financial institutions – IMF and World Bank – would also need major change to create innovative financing mechanisms that support resource transfers.

The article by Fukuda-Parr and Donald starts from the proposition that macroeconomics and human development constitute two different worlds that seldom intersect despite the significance of each for the other characterised by an interdependence (Nayyar 2012). It explores what keeps the two worlds apart in policy-formulation, to ask why macroeconomic policies are typically neglected in national strategies for inclusive and sustainable development. It suggests that, in implementing the SDGs agenda which emphasises equity and inclusion, most national approaches rely on social protection, while neglecting macroeconomic policies. The authors identify four systemic barriers in policy-making that might explain this reality: institutional silos and gaps, informational deficits, ideological biases, and influence of vested interests, to highlight how these structural obstacles play out in mutually reinforcing ways to construct resilient barriers that are difficult to overcome. The essential underlying factor is the different contexts for different policymakers and different stakeholders. For example, institutional silos and informational deficits are particularly important for social and environmental ministries, while ideological biases and special interests shape the structures of decision-making in finance ministries and central banks which have narrowly defined policy-objectives and mandates. This observed reality reveals a clear need for further research on why policy-making in the spheres of macroeconomics and human development continues to remain in separated silos.

The article by Pollin analyses the implications of phasing out the fossil-fuel energy infrastructure and replacing it with a zero-emissions renewables-dominant energy infrastructure in high-income countries, to focus on the consequences for displaced workers. The author suggests that it is essential to evolve just transition programmes that would protect workers when their jobs are eliminated and ensure that there is no major decline in their living standards. For this, it will be necessary to move beyond statements of good intentions that provide only modest support for workers, in terms of assistance for job search, retraining and relocation. This is necessary but not sufficient. It is argued that robust just transition policies that provide displaced workers with three critical guarantees – employment, compensation and pensions – are essential. Given this framework of broad principles, the article reviews the experiences with such transitional policies in Germany, the UK, the EU, and more briefly Japan and Canada. The conclusion that emerges is that these transition policies do not provide displaced workers any assurance that they will not experience a significant erosion in their living standards. The author then discusses an illustrative just transition programme for workers that that includes employment, compensation and pension guarantees, using a case-study of West Virginia in the US, which estimates the annual cost at 0.2 per cent of the State GDP. For the US as a whole, the annual cost would be significantly lower at 0.02 per cent of GDP, which is perfectly affordable.

The article by Ocampo and Titelman considers human wellbeing in the wider context of economic development in Latin America where, during the past four decades, performance in terms of economic growth, investment and productivity has been poor. This has made it impossible to reduce the dependence of the region on low value-added production activities and commodity-dependent export structures. Although there has been a positive advance in human development, high levels of inequality, poverty, social exclusion, combined with high labour-market informality, have persisted. This is juxtaposed with the need to address problems associated with climate change. The authors argue that Latin America is at a crossroad which demands profound changes in its development paradigm. The new framework should prioritise domestic resource mobilisation (through public revenues that have been historically insufficient to meet public expenditure), streamline efforts to encourage private investment, create adequate tax incentives for low-carbon investments, and foster green investment (private and public) using national and international financial markets. Most importantly, proactive policies are required to renew the positive trends in human development, for overcoming structural obstacles embedded in high levels of inequality. Tax and fiscal policies would be essential to reduce inequalities, while appropriate social-security and labour-market-regulation would be essential to guarantee that informal workers get access to social protection systems and to reduce informality in labour markets.

The articles in this special issue provide a modest beginning in thinking about advancing human development at this difficult conjuncture in the world economy, when multiple intersecting crises are affecting the wellbeing of people everywhere. The poor and the marginalised are most vulnerable. Although the literature on human development tends to focus on developing countries, the problems exist, and matter, even in industrialised countries. Economic policies for human development are a largely neglected domain, mostly confined to social protection and social sectors. Yet, national economic policies in other domains exercise a significant influence on the wellbeing of people. Thus, it is essential to integrate thinking about public policies for human development with the formulation of national economic policies as a whole. Taken together, the articles address questions that span a wide range. But the subject is vast in scope. There are unanswered questions. And there are unasked questions. It is hoped that this special issue will stimulate thinking and motivate research on the theme.

Acknowledgements

I would like the thank the Chief Editor of the Journal, Enrica Chiappero Martinetti, not only for the invitation to commission and edit this special issue, but also for setting aside her valuable time to help reduce my burden as Guest Editor. In addition, I would like to thank the contributors who were understanding and responsive through the process, as well as the anonymous referees who were generous with their scarce time.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Deepak Nayyar

Deepak Nayyar Emeritus Professor of Economics, Jawaharlal Nehru University, New Delhi, and Kluge Chair in Countries and Cultures of the South, United States Library of Congress, Washington, DC.

Notes

1 See, for example, Baster (1972), Seers (1972) and Morris (1979).

2 See Streeten (1981) and Stewart (1985).

3 There is an extensive literature on the subject. For a discussion on the conceptual foundations, see Sen (1999) and Haq (1995). For an analysis of issues related to methodology and management, see Anand and Sen (1994). For selected readings on human development, including these, see Fukuda-Parr and Shiva Kumar (2003).

4 For a detailed discussion, see Sen (1999).

5 For an extensive discussion on, and critical evaluation of, the MDGs, See Nayyar (2013).

6 The relationship between macroeconomics and human development, where the causation runs in both directions, is analysed at length in Nayyar (2012).

7 For a detailed discussion, see Nayyar (2019).

8 World Inequality Report 2022, https://wid.world, 2023-03.

9 The figures cited in this paragraph are drawn from the World Inequality Report 2022. Global inequality is measured in terms of purchasing power parities. It would be significantly higher if measured at market exchange rates. This source also provides more disaggregated evidence on inter-country and intra-country inequalities.