What is the true measure of development?

25 November, 2011

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What is the true measure of development?

By Karim Rushdy

At a recent Hong Kong forum attended by socially responsible investors a non-executive director at one of the world’s biggest banks concluded that a high price had been paid for rapid growth in the BRICS. He quoted the relatively high Gini coefficients of Russia (39.9%), China (46.9%) and Brazil (55%) to underpin his argument, suggesting that inequity in these countries is higher than in the “civilized” countries of the world. This conclusion is unsound. The reality is that a number of the richest, most mature economies in the west and east have comparable Ginis – Singapore, at 42.5% is just one example. That raises the question of what it truly means to be “developed”.

 

The Gini coefficient, developed by Italian statistician Corrado Gini early last century, essentially measures the inequality of a distribution. It has many applications but has become internationally recognised as a measure of income inequality. A value of 0 (0%) indicates total income equality, while 1 (100%) represents total inequality. Sweden, Denmark and Japan top the rankings as the most equitable nations, while Namibia, Lesotho and Sierra Leone rank as the world’s most inequitable societies.

In the 21st Century the world is clearly divided in two: “developed” countries on the one hand, and “developing” nations or “emerging markets” as they are referred to in boardrooms and business schools, on the other. The United States is the self-appointed global ambassador for the first group, and China the current flag-bearer of the second. A mandate of western-led institutions such as the World Bank Group, International Monetary Fund, and UNDP, and many of the world’s largest corporations is through wide ranging policies and commercial practices to nobly aid in the transformation of “developing” nations into “developed” ones. There are fundamental flaws to this approach.

Before going any further down a development path based on exploitation (and under-pricing) of resources, freeing up markets, and deregulation, which has done much to widen the gap between haves and have-nots and put tremendous strain on the planet, we must redefine what it means to be “developed”. What are some of the true indicators of development? And should the BRICS and other “developing” nations really be aspiring to the models of development that the Washington-led cabal espouses?

There are myriad indicators of development - Infrastructure; education; housing; and healthcare to name a few. But as this piece was inspired by comments that the Gini Coefficient is a good measure of the general wellbeing of a country let us stick with it for now.

Turn for a moment to that stalwart champion of free markets to further development, the United States. Many of the public, private and civil society organisations leading the charge for global development are US-based and US controlled, including those mentioned earlier. The nation’s public and private sector leaders are explicit about their desire to export the market-centric ideology that has largely set the country’s direction in the last hundred years. The 2009 US census found that almost half of the nation’s income was pocketed by 20% of its citizens while the 15% of Americans living below the poverty line shared 3.4% of the national income amongst them. Depending on the source the Gini coefficient for the US as a whole is somewhere between 40-45%.  Many states within the US come in significantly higher. To put this figure into context it is comparable to that of Sri Lanka or Uganda, not the first two nations that come to mind when one thinks of developed and prosperous societies. New York – the financial capital of the world has a Gini of 50.2%, comparable to Zimbabwe, which comes in just below at 50.1%.

Some would argue that New York’s Gini is skewed because many billionaire and millionaire financiers live there. If one of the ultimate roles of the finance industry, as the heads of American banks purported during their congressional hearings in 2008/09, is to allocate capital effectively one would assume that Wall Street would be capable of doing so on their home turf. Apparently not. In another example of the inherent inequities in economies built around the finance industry one only needs to look to New York’s Eastern counterpart - Hong Kong. The financial capital of Asia has a Gini coefficient of 52.3%, one of the highest in the world.

One criticism of the Gini coefficient as a measure of inequality is that absolute incomes are not represented. For example, two countries of vastly differing wealth may have the same coefficient. This may be true to some degree, but surely more equitable societies are what every nation, rich or poor, should strive towards. As the Occupy Wall St. protests that began in September and have spread throughout the US illustrate - inequity, even in the world’s wealthiest country, is cause for discontent, resentment, and social unrest. Absolute wealth is not a sufficient measure of the wellbeing of a nation, to make this claim is utter hubris.

Asia in particular needs to find its own path to development. Going one step further the region must redefine what it means to be developed. Rather than follow the West down the plank of fossil-fueled and consumption-led growth, Asian leaders should pause and take stock of where that has gotten their Western counterparts.