Factors affecting economic and social development

Factors affecting economic and social development

This section considers the economic and social development of the non-industrial world from two perspectives.

First, we review what is known about development, both social and economic. The perspective that we take upon this is closely similar to the view that we advance elsewhere about the fundamentals behind economic growth anywhere: that this is a manifestation of the working of a complex series of interlocking systems, of which the economic component is an essential part. There is, however, a long way to go in the development of these systems. In purely economic terms, the poorest 80% of the world's populations created around 2.6% of the tradable wealth in 1960. By 1980, this had fallen to 1.1%, and appears to be around 0.9% of all value added at the turn of the century. Today, around 1.2 billion people inhabit the wealthy nations, but around the same number live on less than US$1 per day. About the same number lack access to safe water and twice as many live without adequate sanitation. Achieving anything resembling catch-up is, evidently, some way off. Success stories such as Singapore and Hong Kong stem from a rich history of complex institutions, human resource and the pursuit of the best. However, the key limits to creating a more complex framework within which to generate wealth seems limited more by internal institutional issues than by factors such as capital or human resource.

Second, we consider the relationship between development and sustainability. We do this in the light of the growth in population, which will rise from something over 6 billion in 2000 to, perhaps, 8 bn by 2020. The relations between the poor and the rich will be closer-coupled than ever before in history. The relationship will remain lopsided insofar as wealth, power and access to knowledge will also be asymmetrical. Each will, however, want things of the other and both will have the capacity to do the other harm.

Disparities and similarities.

There are various ways of segmenting the situation in which people finds themselves: by income and by attitude, by age and by nationality. We discuss some of these approaches elsewhere. However, how we think about divisions often define our approaches to solutions. Economic differences around the world are typically thought about in national terms: that country A is richer than country B. We collect statistics which re-enforce this view. However, it may well be that the nation is the wrong focus, and that we need to think in a more subtle way in order to see what is going on.

In the period up to the industrial revolution - and, indeed, probably to the middle of the C19th - social class was the key discriminator. A Chinese mandarin and British country squire may each have enjoyed a standard of living which was closer to the other than it resembled that of their nation's peasantry. Since around 1840, however, national wealth has become sharply more differentiated, and the most effective segmentation has been that of political boundaries: the mean and statistical way points by which wealth was distributed amongst - say - Americans became increasingly distinctive when compared to most of the rest of the world. Whether co-incidentally or not, this event coincided with the growth of national identity and nationalism. Per capita incomes are thought to have differed between nations by, at most, a factor of three in 1820. This had risen to 35:1 in 1950, 44:1 in 1970 and 72:1 in 1992. The disparity is around 100:1 in 2000.

A century ago, 'development' was seen as something extraordinary, and poverty the norm. Today, the wealthy world spends around a third of its income on internal poverty relief, and there is a growing tendency to view poverty as something to be eliminated. Great progress has indeed been made: in the twenty years since 1980, the proportion of stunted children in the poor world fell from 47% to 37%, according to the UNDP, whilst those with access to safe water rose from 13% to 71%. Life expectancy in the poor nations has risen by 10 years and adult literacy has also risen, from about half to three quarters of the population. School enrolment has risen by similar proportions.

On the negative side, people are still treated as property in many parts of the world and there may be more de facto slaves alive than ever before in history. Around 100 million children live on the streets and about the same number, in settled accommodation, have no access to schooling. There are about quarter of a billion child labourers at work, often under extreme conditions. Some 1.2 million girls are used in prostitution and 300,000 children are currently fighting as soldiers. Six million have been injured in armed conflicts during the 1990s.

Sub-Saharan Africa has grown less rapidly than its population since 1950, and its citizens are thus individually poorer than they were half a century ago. Forest have been felled, mines exhausted and the natural wealth lessened in this period. Asia, by contrast, was of a similar wealth to Africa in 1950. Its economic wealth per capita has increased substantially. Studying this, the World Bank was able to show a pervasive influence of institutions and social organisation in what had happened. Africa had failed to organise itself to grow its capabilities and to extend its options. Asia had, in part, succeeded in doing this. The next section reviews what this may have entailed

The development process.

Elsewhere, we have reviewed the fundamentals of economic growth, noting that this is one easily-measured facet of something much more complex: the growth of the general capabilities and complexity of a society. The economic element depends markedly on the functionality of all of the other facets.

Development appears to occur when a number of necessary components are put in place, and the equivalent checks have been removed. To grow, a plant needs air, light, water, the correct temperature, mineral nutrients and the like. Any one of these can be a limiting factor and restrict the plant's growth. When the supply of any one of these is limiting, then adding what is needed or otherwise adjusting the system to correct the limit will produce a burst of growth. Injections of capital, the creation of security or a change in political balances may correct something which was limiting in the social fabric of a nation, and a burst of activity will follow. Much of the early literature on development extrapolated from individual events of this sort to general - usually economic - prescriptions. We now know that his is an inadequate approach. Nations which are limited in one particular manner - as was, perhaps, China during the cultural revolution and its aftermath - may show rapid and multifaceted growth once this constraint has been removed. Nations in which very few of the required features are in place will, by contrast, prove refractory to almost all interventions. Nothing happens because too many links in the necessary systems have yet to be put in place.

What, in broad terms, are these features? They fall into three major categories: the maintenance of stability, constructive economic change and overall social cohesion. We examine these in detail in a moment. Each of these elements consists of many contributory parts. Most of these form cross-links between these categories. Taken together, however, these factors create a system which gives rise to the phenomenon of development. In essence, a complex system - the society - is able to become more even complex only when all of the parts that are necessary to is adaptability are firmly in place. When they are not, then local systems of governance and the scope of individual aspirations are limited to relatively simple and established horizons.

Malfunction or weakness within the individual parts of the overall developing system naturally put a brake on development. Removing one of these limitations may create a spurt of activity. Such responses have led to many false dawns, in which the key to development is seen to be anything from rural credit to female emancipation. Each of these has a role to play, but it is a role within the evolving complex system, not a magic bullet that will kill all ills. In addition, however, there are specific pathologies - such as the pervasive influence of corruption - which create their own, self-contained systems, and these actively oppose constructive change. We discuss corruption later.

External events may help development or they may hinder it. The terms of trade which are currenlt expereinced by the exporters of primary products - that is, by most of the poor or agrarian nations - are worse than they have been for fifty years. The developed countries have often established tariffs against manufactured goods, making it harder for the poor nations to add value to primary products, such as leather, cotton or metals. In addition, many industrial nations subsidise their domestic agriculture, often to the extent of over-producing food which is then placed on world markets or shipped as aid. As a consequence, world food prices are depressed, to the detriment of the world's peasant farmers. In addition, where food aid is made available over protracted periods, local producers may be driven out of business. Nevertheless, both the world's spectacular development successes and its failures have been conducted against against this backdrop, so it cannot be entirely or even primarily responsible for either of these.

Let us return to the factors which drive development. Statistical analysis shows that stability is the most influential of these three components. The term 'stability' can be used in two senses. A nation (or firm, or social group) can be unchanging and predictable if it is paralysed by an oppressive force or an intractable problem. By contrast, a structure may be stable because it reacts flexibly to change: its surface manifestations change, but the core is retained and continues to inform its actions. This second kind of stability creates the conditions for economic development . It affords a framework within which individual agents can operate in confidence, knowing that the society will continue to function within well-understood guidelines, despite its continual re-adjustment to meet changing conditions.

Stability and predictability.

Political institutions that generate dynamic stability
Separation of powers: checks and balances, all under the law
Successful management for overall economic stability.
Infrastructure provision, including human skills
Military security and a stable civil operating environment

Competition and renewal.

The 'right' pace of change, balancing erosion with renewal
Appropriate human resources supply, including labour markets
Consumer purchasing power, confidence and saving

Social cohesion and paths to self-betterment.

Cohesion: tolerance across vertical and horizontal divides
Access to political representation and dispute resolution
Policing and security of property, tenure and person.
Access to and equality before the law
Access to education and information
Access to work, security in work, transitions between work
Management of the extremes of inequality

This is a protracted list and it is beyond the scope of this site to explore it in detail. The World Bank development reports, UNDP reports on Human Development and related publications offer detailed insight.

The key insight to be gained is how complex a process in involved, and how many things need to be 'got right'. The balance between these component parts need to change as development proceeds, and very fast economic growth may, for example, through balances which used to work out of alignment. For example, the informal networks that characterised decision-taking in the public sector in many Asian countries cease to work once the society becomes more complex and more coupled to the outside world. Internally, they cease to work because the now-educated majority are not prepared to be 'managed' by an oligarchy. As the society couples to the outside world, too, the checks and balances amongst the oligarchs weaken. They find capital and partners overseas, and collectively undertake actions - such as borrowing, or capacity extension - which prove disastrous. Previous systems - of quite discussions in clubs, in possessing a shared intuition of who was doing what - no longer function.

New institutions need new systems of governance. Studies of banking crises in developing countries show that these consume the equivalent of decades of economic growth. Their affects may last for decades, as is presently the case in Japan. The Asian collapse of 1998 - and the Japanese crisis of 1987 - stemmed from inadequate controls and from poorly formed views amongst the actors as to what reasonable. "Development" is, for the wealthy as much as for the poor nations, a matter of increasing the social, economic and political complexity of their societies so as to be able to cope with increased volumes and options in each of these areas.

Figure 1: Long-run paths to development.

The figure shows a well-respected index that the United Nations has established for social development: the human development index, or HDI. This has been estimated for the currently-industrial and currently-poor nations for the years 1870, 1930 and 1995. This is plotted against the relevant income per capita for these years. The resulting arc shows that all nations go through much the same stages of human development as they grow richer.

Figure 2: Increasing levels of transparency of governance with income.

The change in governance which is necessary with increasing social complexity is suggested by Figure 2. This plots a reasonably objective measure of probity in public and commercial life against income per capita. A very similar relationship is found with measures of risk, as assessed by capital markets. Low income countries are volatile and risk, have weakly enforced standards and, very often, have poor levels of enforcement of property rights and commercial agreements. Attempting to estimate the impact of this, the World Bank found that nations which had strong laws of contract and strong enforcement of these tended to re-invest about 30% of national income. Nations which scored poorly on one of these measures re-invested around a fifth of national income, whilst nations which scored well on neither of these measures invested at less than replacement rates. That is, they ran themselves down as a wealth-generating engine, for lack of confidence in their own systems of management. Foreign direct investment followed closely similar patterns. Over four-fifths of the net inward investment went to only eight countries of the 150-plus developing nations. These had shown themselves to be 'safe pairs of hands'.

Figure 3: Low income countries deliver 'difficult' work forces.

It is a mistake, too, to imagine that labour relations are somehow more natural in poor nations than in wealthy ones, or to contrast a 'lazy' workforce in the wealthy world with tireless hands elsewhere. Figure 3 contrasts entrepreneurial views of the Asians Tigers, Japan and Chine in 1995, before the economic collapse of the region. The habits of work (and of handling work forces) have to be learned.

We can take from this two thoughts. First, that development is a complex process whereby systems are built to handle increasingly complex societies; and the capacity to build depends on the coherence and integrity of what has been done so far. Second, how societies are integrated into the world community depends on how well they have established these structures and how well the 'sell' themselves. Increasingly, however, even where there is economic predictability, for example, factors such as excessive repression, child exploitation or local environmental damage may damage external relations. Firms will not wish to build relationships where NGOs and others may point to local malfeasance. In general, however, societies which tolerate extreme exploitation are unlikely to prove prospects for long-term growth, or useful short-term partners in anything but a one-off relationship.

Corruption is a significant problem for all nations, but it can hugely undermine societies where complex systems of governance and scrutiny have yet to be put in place. It strikes at four levels.

Funds are stolen and taken overseas, often at levels which are comparable with net investment. Executive power is abused to raise loans, where default either precipitates a banking crisis or leads to unsustainable overseas debt.
Decisions are taken on poor grounds: bridges are built where they are not needed. Such 'pork' projects are almost never given maintenance funding. Nepotism is commonplace: relations are promoted to jobs which they are unable to perform satisfactorily. Ethnic groups come to dominate key ministries and other areas, such as the military, which they then exploit for sectarian purposes.
The population lose trust in civil society: law is for the wealthy, the state is a predator, the police and minor bureaucrats sell permissions to operate and come into the average life in order to extract a fee.
Tax evasion impoverishes the state, and regulatory evasion cripples its capacity to direct and operate. Figure 3 shows the scale of this in the very poor nations.

Figure 4: Poor nations may recovery only 20% of the tax due to the state.

The separation of powers has proven to be a major component in the success of the complex nations. Oligarchic interests cannot capture the reins of power so easily. The various organisations are set into effective competition with each other, forming alliances with the citizens as a whole, offering critique and accessing distinctive views of the world.

Figure 5: Autocracy on the wane?

This necessary pursuit of pluralism is reflected in the political complexion of the nations of the world. Despite an extraordinary increase in the number of political units, the trend away from autocracy has been pronounced since the fall of the Soviet Union and, not independently, since the drive by the international agencies to bring pluralism to the nations which they serve.

Global trade, access to capital and information and the rapid expansion of the basis of educated people will all have a positive effect on economic and social growth. Many nations will begin to play a constructive role in the international community. Most will, however, need substantial injections of capital and managerial talent, intellectual property and other assistance if they are do so rapidly. The growth in expectations, bred by the popular media and the impact of population growth, will demand that this progress is rapid.

Figure 6: An unprecedented expansion in the skilled population.

The very rapid expansion in human talent that will become available is shown in Figure 6. By 2020, here will be more graduates than there were people living in 1900. Despite this, it is idle to suppose that the poor nations will suddenly become rich. It is relatively easy to import the means to add value. It is less easy to train people to play an active role in this potential. Figure 7, below, shows the focus of complex added value on the traditional economies, and the logarithmic expansion of scientific production with wealth. The upper figure shows that the nations which create the top 80% of world product - the one billion or so in the wealthy world - create virtually all of the science that is published. The lower panel shows that only the complex economies undertake complex manufacture. The complexity of which is inherent in various standard UN statistical categories is estimated from the number of processes which need to contribute to the finished good: few, in making hand tools, many in making aircraft. This index is compared to the development stage of the nations for which this activity is of importance in manufacturing industry.

Figure 7: Complex industry and science have been the perquisite of the rich nations.

The figures confirm the impression that complex things are chiefly undertaken in complex economies. It is, however, even harder to create the complex framework within which these economies operate. In particular, it is difficult to manage the transformation of an oligarchic society to one with ever-increasing levels of inclusion. Where there are few educated people and limited sources of wealth, then natural processes imply that oligarchy is almost inevitable. Measures of inequality tend therefore to peak as agricultural consolidation reaches its peak, and then fall with increasing wealth, urbanisation and mobility. Such trends are often resisted by clans and classes which have acquired a privileged position. Change to a more complex society involves ceding political power to the majority. This is not of itself an easy process. However, many nations start from poorly designed political or administrative institutions, often adopted from a central planning model that was prevalent during the wave of de-colonisation. Such models lend themselves to corruption and tend to distance between the state and the governed.

Discussion on the growth prospects of the industrial nations showed the long-run stability of economic performance. Work by Putnam et al on Italian city states (and more recently, on US counties) has shown extraordinary long-run correlation between institutions and subsequent performance.

Figure 8: Measures of civic involvement - courts, drainage provision - in Italian city states affect economic performance many decades later.

The implications of this are threefold.

First, the performance of the developing world is largely contained in the structures which have already been put in place, and foreseeable changes which may occur within these. Modernisation of institutions is a gradual process, and this will set the limits to what can be achieved.
Second, the pace of achievement - and the shocks and irregularities imposed by weak institutions - may well prove frustrating to the citizens of these countries. There may be civil disturbance as a result of this, but without understanding of what change is needed, the likelihood of its being achieved by accident is low.
Third, those wishing to improve the lot of these nations have a complex task ahead of them. Intervention always touches that which matters most if it is to be successful. But some form of intervention - in macro-economic management, for example - are more 'sanitary' than the political reforms which are, in many instances, needed. Appetite to engage in this seemingly bottomless ocean of problems may be limited.

We have made some estimates in the potential change in per capita income over the period to 2020. The result of doing this is shown in Figure 9. The nations are divided into a number of homogenous groups. Individual nations are projected forward, based on their economic performance and population growth during the past 20 years. The three cases shown have these rates adjusted progressively to the best in their group's historical performance, the worst or a median position. The aim is to give a sense of the dispersal that it is reasonable to anticpate, not a forecast.

Figure 9: Prospects for 2020.

The figure shows nations stacked from the poorest (left) to the richest (right) in 1997. The line shows how income per capita stood in 1997. The three cases are as explained above. The population of the wealthy world is contracting and so incomes rise rapidly, despite modest growth. The field opens for the middle income nations, but the four billion or so people living in the poor world see scant improvement on a per capita basis, much as Africa has stagnated during the previous half century. One billion get richer, two billion undergo unstable fast change that is highly policy-dependent and about four billion see life getting progressively less tenable.

Stability and sustainability.

We have reviewed the impacts of instability and poor international security elsewhere. We have also discussed environmental issues elsewhere. In brief, close-coupling of the world means that what occurs in one part of the globe - a biotechnological accident, and economic miscalculation - can impact widely and rapidly. It may well be that that the prospects that have been outlined in the previous section prove difficult for those not previously connected to the poor world.

Figure 10 poor nations tend to be less sustainable than rich ones.

It is a fallacy to imagine that poor nations operate innately sustainable economies. World Bank estimates, shown in Figure 10 suggest otherwise. Plant run at very low levels of efficiency. Machinery and vehicles are often obtained second or third-hand from Western sources (or form the former Soviet bloc) and the efficiency of these reflects their age. Primary activities, such as agriculture and mining, are often conducted in damaging ways. Traditional slash and burn agriculture, for example, leads to erosion, soil impoverishment and the destruction of the resource. Most of the Mediterranean was covered in lush forest after the last period of glaciation. The craggy, limestone-dominated appearance which we have learned to expect is human in origin, as are the downlands and moors of Northern Europe

By 2020, in the order of two billion people will have shifted from the use of theoretically-renewable sources of energy, such as wood and dung, to traded energy such as oil, electricity and coal. They will do this from preference, because the sources of wood have been destroyed or because they have moved to cities, where there is scant alternatives. A person living on the edge of survival uses around half a tonne of oil equivalent per annum in order to cook, light their nights and get about, as well as embodied in the plastics and metals that they use. Two billion people therefore use nearly 20 million barrels of oil equivalent per day. The capital implications of the required plant are devastating. The foreign exchange needs to pay for imported fuel will be huge (energy prices may well be higher than they are today.) These are, however, only proxies for the housing, water and sewerage, transport, health, education and other needs that must be afforded by some of the poorest people on the planet.

Energy demand is the product of economic activity and the effectiveness with which value is added with respect to energy - the so called 'energy intensity'. The industrial world has cut its intensity for a long period, and its demand for energy has remained static. Much the same can be said for its use of other primary goods: metals, for example, are efficiently recycled in most economies. The absolute volume of economic activity will more than double in the industrialising nations over the period, and these nations have yet to make corresponding efficiency gains. Indeed, they celebrate their new wealth with air conditioners and vehicles, increasing their demand. Figure 8 shows the trajectory of a number of countries in the 1960-92 period, during which time both tier income and their car populations normally increased. All follow broadly the same 'salmon leap', with some undershooting (Korea, since corrected) and some overshooting (Argentina, due to the peculiarly isolationist policies of successive government.

Figure 11 vehicle populations tend to expand in a common manner with increasing wealth.

Sustainability demands efficiency. Efficiency - particularly in the economic context which we have discussed - demands immense investment, far more than either aid or domestic saving can provide. Thus sustainability requires the opening of developing economies to global drivers to best practice, inward investment and rapid economic change. Unfortunately, as we have seen, such processes are predicated absolutely upon credible domestic institutions, political and economic predictability and minimal corruption. These may be slow to arrive unless actively encouraged by those able to deliver the impetus and the oversight that is needed.

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