The economic crisis has obvious human development implications. They reach beyond the immediate outcomes (contraction of effective demand dragging down output), to include decreasing employment and income opportunities with negative mid- and long-term implications for education, health status, housing security, and other human development indicators. But apart from describing the consequences, the human development approach could be useful for understanding the crisis’s fundamentals and thus designing adequate responses.
 
The crisis is not something unique. It bears the typical characteristics of overproduction fuelled by expansion of ‘fiduciary money’ and resulting in excessive supply. At the core of the current crisis is the ‘explosive combination’ of cheap credit, globalized trade and effective financial systems. In developed countries (like the United States) that reported perpetual current account deficits, these three elements brought about a huge temporal shift in consumption: goods and services were being consumed now against incomes that were to be earned tomorrow (if earned at all).

This temporal shift made possible the rapid expansion of output, employment and incomes in emerging markets, which supplied the imports purchased by American consumers. Today’s recession is largely the price the world is paying for the decade-plus of growth in production and employment in China and other developing economies that produced more than they consumed, with part of the excessive supply absorbed on credit by developed economies. It also suggests a certain inevitable decline in human development opportunities, at least in the short run.¹ Paradoxically, the global economy has replicated one of the features of central planning that led it to its collapse: debt-financed consumption and shifting the burden to next generations.

For years, the set of incentives driving world economic growth has been drifting away from the logic underpinning the human development paradigm. The focus on people and their well-being as the ultimate objective of economic growth is what makes the concept of human development intuitive and appealing. Prospects for the enhancement of people’s potential to be and do are placed at the core of the human development paradigm. In the human development context, to have is a means, rather than the end of human progress.²

The existing economic system has effectively reversed the relationship between output and human development, detaching commodity from functionality and capability. Each consecutive increase of commodities contributes less to human capabilities. The consumer is being increasingly flooded with cheap ‘disposable’ goods that may meet demand, but only less so (if at all) meet real needs. Consumption (economic output) has turned from a means for achieving functionalities and expanding op­portunities into an end in itself.

The moment a commodity acquires a value that is independent of the needs (functionalities) it is supposed to fulfil, we are facing the phenomenon of ‘commodity fetishism’, which starts underpinning the structure of economic incentives. The growth in production and output in the last decade increasingly became an objective in its own right, subordinating consumption needs and thus turning people’s capabilities into a macroeconomic residual. An increase in consumer spending – regardless of its type (does it expand people’s capabilities or not?) and sustainability (is it credit or savings-based?) is still seen as the way out of the crisis. The fact that consumers in most of the world are now reducing spending in order to reduce personal debt (the paradox of thrift) is seen as a disaster from a macroeconomic perspective. In fact, consumers are behaving rationally from a human development perspective–unlike governments, which are attempting to restore pre-crisis consumption patterns, thus reinforcing the very system that brought about the crisis. Shopping for things you never even thought you might need could turn into a patriotic duty and personal input into the rescue of the global economy.

A Roma woman stands with her children in a Sofia slum. Growth is not always conductive to human development; it can be also jobless, ruthless, voiceless, rootless and futurless.
© Scott Wallace/World Bank
 

A radical paradigm shift–not the restoration of the system–is what is needed. The global economy needs to ‘reinvent’ the human development logic, putting human capabilities at the centre of its incentives systems. Seen from this perspective, the crisis could be a unique opportunity to reconsider some basic development paradigms and put economies back on sustainable paths.

A first step in this direction could be answering the question: ‘what kind of growth is indeed beneficial from a human development perspective?’ In 1996 the Global Human Development Report reminded us that growth is not always conducive to human development, that growth can be also jobless, ruthless, voiceless, rootless, and futureless and thus not contributing to people’s capabilities.³ The quality of growth and most importantly, the link between growth and capabilities is of paramount significance today when the global economy is slowing down and ‘resuming growth’ is at the top of policy makers’ agenda. Unless the ‘commodity  functionality  capability’ linkage and ordering are restored, growth will continue to fuel the ‘commodity fetishism’ cycle, which could be devastating from a human development perspective.⁴

While putting economic systems back on a human development track may be easier said than done, it could begin by asking whether policy measures to address the crisis would bring the economy closer to human development principles. A human development audit of ‘stimulus’ or ‘rescue’ packages from the perspective of their fundamental incentives could be a revealing and meaningful exercise. A second step could be acknowledging that the global economic system needs to be redesigned rather than rescued. ‘Saving industries’ cannot save jobs; changing industries and fine-tuning market mechanisms to make them more conducive to principles of sustainable human development can. The global car industry is an example. The highly skilled jobs in the sector can be saved in various ways. One option is to promote state-sponsored programmes for shredding old cars and to boost consumer spending replicating existing demand patterns. Another option is to downscale the sector’s capacity and invest the resources in environmentally sustainable technologies that would require similar skill sets and technological sophistication. The latter may be more difficult and less profitable – but would the former still be profitable without government spending?
Governments are often bound by constituencies’ expectations and the intuitive reaction often is saving the status quo. But when it can’t be saved, such efforts only increase the overall costs in the long run. Clearly communicating the message that the ‘good old times are over’ and radical change is necessary is not easy, particularly prior to elections. However any policy response to the ‘saving jobs’ challenge constitutes such a message.

On the other hand, restoring pre-crisis levels of growth could be unnecessary as well as impossible. It could be unnecessary because of the broken commodity  capability linkage; it could be impossible because of the environmental implications. The latter is a major difference between the current crisis and previous downturns and a critical mass of awareness of the impossibility to follow economic ‘business as usual’ exists today (unlike in 1972 when the Club of Rome raised the ‘limits to growth’ issue). Matching this awareness with clear market incentives and disincentives so that the individual choices of economic actors are aligned with principles of sustainable human development is a major responsibility of governments and international organizations. Adequate costing of ‘externalities’ and factoring them into commodity prices is one way to discharge these responsibilities and communicate the second crucial message–that increasing demand is the key to recovery but not any demand, and thus not any way of boosting it is acceptable and desirable from the human development perspective. Currently commodity prices reflect just the cost of immediate inputs – and we are relatively close to adequate pricing of CO2 emissions. But unless it factors in the entire scale of a commodity’s environmental impact (the costs associated with depleted ‘zero price’ natural resources, the impact on biodiversity, waste discharged etc.) the ‘market economy formula’ – and thus the outcome of the individual consumer/producer choices – would be inevitably wrong. The argument that there is no convincing evidence of the existence and scale of such externalities is widely being used as an excuse for inaction.

Such an exercise would be expensive and painful; many ‘staple commodities’ would turn into unaffordable luxuries. But at least future generations would not be robbed of their chance to make their own choices and enjoy opportunities we are (still) enjoying–as today’s young generation in the region was largely robbed by their parents’ debt-driven consumption in the 1980s.

To summarize: we are facing a unique set of development challenges, requiring responses going beyond orthodox macroeconomic solutions. The crisis is human development in nature; it demands responses consistent with the human development paradigm. A major challenge is not restoring pre-crisis levels of output but assessing how much (what rates of) growth mankind actually needs, can afford and what could be its sustainable drivers. Unless we respond to these basic questions, the immediate responses to the ongoing challenges may be only reinforcing their fundamental causes.

Andrey Ivanov is Human Development Policy Adviser at the UNDP Bratislava Regional Centre.