Let us make an in-depth study of the net national income and per capita income as growth indicators.
Net National Income:
Net national income, thus, is a crude index of measuring development on the ground that it does not consider population growth of a country.
A faster growth of net national income in a year may be eaten away by a much faster growth rate of population, thereby nothing is left for saving and capital accumulation. Further, this index of net national income does not say anything of the standard of living of the people. In spite of economic growth, the standard of living may be eroded because of high growth of population, income inequality, etc.
Another limitation of this index of development is that it does not say anything about the composition of goods and services produced. If ‘public bads’ (e.g., pollution) are produced more, society’s welfare will decline. In this sense, how much national income figure impinges ‘cost’ on the society following environmental pollution remains unaccounted. Any economic activity say, use of natural resources for extracting our needs damages environment. Since such is not deducted from the net national income figures, a good measure of human welfare is denied.
Per Capita Income as a Growth Indicator :
Dividing GDP/GNP by the total population one gets per capita GDP/GNP. Conventionally, per capita income is used as an index of development. Economic development involves something more than economic growth. Economic development emphasises on the qualitative aspects of economic expansion processes.
Anyway, this view says that increases in per capita income over a long period of time are suggestive of economic development. Greater the income, higher the standard of living of people, and lower the incidence of poverty and inequality. The only thing that has to be taken into account is that the growth rate of per capita income should exceed the country’s population growth—to have more growth and development.
However, the reality is not so simple as it has ‘been painted here. Although there may be a positive association between high income and higher level of development and between low income and a state of un-development, there are many reasons that suggest per capita income is not an acceptable criterion of development.
In the first place, per capita income is a ‘crude’ index of measuring economic performance of a nation as it throws no light on income distribution within countries. In other words, per capita income does not necessarily indicate equity and justice.
If there is inequality in income distribution, then, in spite of a rise in per capita income, the income gaps between the rich and the poor would be larger—rich would become richer and the poor poorer. There are some countries in the world whose per capita incomes are comparable with the high-income economies; but the majority of population live in abject poverty.
This per capita income criterion speaks very little about economic development. To measure the living standard of population, what one should know is the nature of distribution of income in tandem with national per capita income—that is, how much of it is shared between the rich and the poor.
Secondly, economic well-being is measure by income –higher the income, greater is the living standard. However, per capita income figure does not give an idea about the composition of goods and services produced in an economy. This means that whether society produces more of consumer goods or capital goods or public goods like health, education, etc., is not known from this conventional criterion of development. Further, many human needs like security against crime and violence, political and cultural freedoms, democracy, grassroots participation in decision-making process extend far beyond economic well-being.
In this since, per capita income is an inadequate index of development. However, consumption of these commodities increases human well-being. That is why modern development economists describe the state of development/underdevelopment in terms of accessibility of people to these goods that do not get reflected in per capita income. The basic purpose of development is to enlarge people’s choices. Per capita income cannot ‘buy’ all pleasures of life (e.g. law and order, good governance, democracy, etc.)
Thirdly, per capita income does not reveal, naturally, a country’s economic and social environment under which goods and services are produced in an economy. Whether such goods and services that are marketed in an economy are the result of market economy, or a planned economy, or the military economy, cannot be known from income figures. In fact, the influence of the entire environment upon which per capita income is dependent remains totally obscure. On the contrary, standard of living or the quality of life largely depends on such environment.
Fourthly, growth measured by per capita income is good since such is equated with progress, advancement, higher consumption, and a better quality of life. Thus, growth in that sense is desirable. But can economies grow indefinitely? Answer is: There are ‘Limits to’ Growth’ since economic growth is not compatible with environmental quality.
As per capita income grows, the economy’s productive base shrinks. Such depletion of resources involves huge social cost —future generations get less resources to meet their needs than the present generation. Attempt to have more economic growth through the use of more resources and energy of an economy ultimately leads to environmental degradation. Growth will then suffer—cost of damage to the environment is not deducted from the per capita income. Growth in per capita income is not compatible with the concept of sustainable development.
It is now clear that this traditional notion of per capita income as the criterion of development reflects nothing but the differences in potentialities for development between countries, distribution of income, poverty, state of unemployment, and qualitative indicators of living standards. Above all, this conventional measure is conspicuously silent on economic, social and political freedoms/ un-freedoms that a country’s citizens experience.
Thus, the per capita income figure does not throw light on the holistic approach to development. One may then conclude that this index is a ‘crude’ one; it may be a necessary condition for nation’s economic and social uplift but not a sufficient condition. This is because increase in income involves both costs and benefits. Costs arising out of economic activities (e.g., pollution) do not get reflected in the per capita income figures.
In spite of these limitations of per capita income as an index of development, it is used widely as a measure of growth. Per capita income figures of different nations are ‘used as a starting point for classifying levels of development, and can certainly be used to identify the need for development.’ The World Bank classifies different countries in accordance with per capita income data. It ranks countries in four categories on the basis of per capita income measured in U.S. dollars. Further, such data has the merit of devising policies to close the gaps between different economies as far as practicable within a period of time.
Finally, since per capita income figure alone fails to capture the living standards, the United Nations Development Programme (UNDP) has devised an index to measure the standards of living. This index is most popularly known as Human Development Index (HDI).
HDI takes into account
(i) per capita GDP,
(ii) life expectancy at birth, and
(iii) access to knowledge.
Since people- centred HDI is a “summary measure” of key human development outcomes, the distinction between growth and development becomes clear. However, HDI supplements per capita GDP (goods-centred) notion. Even then, ‘One does not have to “rubbish” economic growth.’