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economies. Inclusive investment during 1970“2000 was modest,
but then so was population growth low. Growth in total factor
productivity was low. Although the ¬gures imply that the
productive base per capita expanded in both countries, we should
be circumspect because, as noted earlier, the World Bank costed
carbon emissions at too low a rate. GDP per capita increased in
both countries and HDI improved there.

The ¬gures we have just studied are all rough and ready, but they
show how accounting for natural capital can make a substantial

difference to our conception of the development process. In Table 2,
I have deliberately made conservative assumptions about the
degradation of natural capital. For example, a price of $20 per
tonne of carbon in the atmosphere is almost certainly below its true
social cost (or negative shadow price). If we were instead to take the
shadow price to be the not unreasonable ¬gure of $75 per tonne,
all the poor countries in Table 2 would show a decline in their
productive base per capita during 1970“2000. The message we
should take away is sobering: over the past three decades,
sub-Saharan Africa (home to 750 million people today) has become
poorer if judged in terms of its productive base per capita; and
economic development in the Indian subcontinent (home to over
1.4 billion people today) was either unsustainable or just barely
sustainable. That said, it would be wrong to conclude that people in
poor countries should have invested more in their productive base
by consuming less. We have noted repeatedly in this book that in
Desta™s world the production and distribution of goods and services

are highly inef¬cient. It would be wrong to regard consumption and
investment in the productive base there as competing for a ¬xed
quantity of funds. Better institutions would enable people in Desta™s
world to both consume more and invest more (inclusively, of

Chapter 8
Social well-being and
democratic government

During the 1970s, the economist Peter Bauer frequently wrote that
if governments in today™s poor countries had been diligent at what
they are supposed to do “ protect citizens from external threat by
diplomacy, enforce the rule of law, provide public infrastructure
(durable roads; ports; reliable administration; access to potable
water and power), and enable markets to operate unhindered “ they
would have had no time nor resources left to mishandle their
economies by interfering with trade, subsidizing favoured
industries, procuring agricultural products from farmers at
administered prices, and installing public industries that turned
into white elephants. Bauer™s was something of a lone voice among
development economists; and although his list of government
responsibilities was incomplete, by drawing attention to them he
showed other development experts that economics has much to say
about governance.

There are many pathways by which societies can muff their chances,
but only a few by which they are able to prosper. In this monograph
we began by identifying the contexts in which people who have
agreed to do something can trust one another to keep their word.
We then studied two micro institutions “ households and ¬rms “
and two wide-ranging institutions within which households and
¬rms are able to interact among one another, namely, communities
and markets. We have now come close to getting a sense of the type

of interplay among institutions and public policies that best enables
people to ¬‚ourish. In this chapter we will study the desirable
motivation, reach and scope of an institution that in its ideal form
supplements other institutions and arches over them in order that
they are able to function well. That institution is government.

Freedom and democracy
The government is an agency of its nation™s citizens. It is answerable
to them. (In contemporary democracies the term ˜civil servant™ is
applied to some of the most powerful people in the country.) Today
we take those strictures to be self-evident, but it wasn™t always so
taken. In his 1949 (Alfred) Marshall Lectures at the University of
Cambridge, the sociologist T. H. Marshall codi¬ed the modern
concept of citizenship by identifying three social revolutions that
took place in Europe: that of civil liberties in the 18th century,
political liberties in the 19th, and socio-economic liberties in the

20th. Marshall™s historical account could suggest that ˜freedom™ is a
fetish peculiar to Becky™s world, but that would be a mistake. I don™t
know of any evidence that people in Desta™s world don™t wish to
choose their political leaders or that they appreciate being ordered
to move on by the authorities when congregating to discuss life in
general and the quality of public services in particular. It is true that
intellectuals ask whether poor countries can afford political and
civil liberties “ in common parlance the term democracy is
frequently taken to subsume both “ but that question has to do with
the possibility that democracy hinders economic growth (worse,
that it encourages unsustainable economic development),
something citizens in poor countries would be expected to care
about and would be justi¬ed in doing so.

The political scientist Seymour Martin Lipset famously observed
that economic growth promotes democratic practice. The converse,
that democracy promotes material prosperity, has been suggested
by a number of social thinkers. So democracy has been seen not only
as an end in itself, some have seen it also as a means to economic

progress. Given their predilection for autocratic behaviour, rulers in
Desta™s part of the world have thought otherwise. That democracy
and economic growth involve trade-offs when countries are poor has
been the stated belief of those in power in many of today™s poorest

Authoritarianism is super¬cially attractive because it™s capable of
offering ¬rm governance. That a government should be ¬rm isn™t
to be doubted; the dif¬cult question is what the government
should be ¬rm about. The rule of law is a prime candidate. Among
other things, it enables citizens to pursue their projects and
purposes. Unhappily, in Desta™s world authoritarian regimes have
routinely violated that most fundamental of state obligations:

Social well-being and democratic government
respect for the rule of law. Earlier we noted that social norms of
behaviour holding communities together can collapse if the
government is bent on destroying them. Rulers have long known
that terrorism is a means by which they could impoverish
relationships within communities so as to prevent any challenge to
their rule. In many instances autocracies in Desta™s world have
maintained their power by instilling fear among citizens. In more
benign political climates, cronyism among public of¬cials and
government theft have kept citizens impoverished and those in
authority in splendour.

But authoritarianism comes in all shapes and sizes. There are
authoritarian regimes in the contemporary world that have
enforced the rule of law and enabled citizens to prosper materially
(Singapore is an example). They have been known to install checks
and balances in public administration and correct policy errors.
But they are exceptions. And the problem with exceptions is that
they don™t offer much guidance to others. After all, citizens can™t
be expected to will wise authoritarianism into existence, nor can
they easily remove an authoritarian regime if the political
leadership proves to be unsound or rapacious. On the other hand,
democracy can™t guarantee economic progress either. What
democracy can do is to give citizens the chance to coordinate

among themselves “ say, by civic engagement (Chapters 2“3) “ in
order to make the state enforce the rule of law and provide those
other essential public services that enable people to try to make
something of their lives. But political pluralism can co-exist with
civic irresponsibility even to an extent that no one has an incentive
to do anything about the latter. In the language of Chapter 2,
democracy allied to a chaotic social order is an equilibrium, just as
democracy allied to a social order where citizens are decent to one
another is an equilibrium. We have approximations to both in the
contemporary world.

Statistical analysis of data covering the past four decades suggests
that, among poor countries, those where citizens had enjoyed
greater democracy had, on average, also enjoyed higher economic
growth. Correlation isn™t causation, but the ¬nding hints at the
possibility that democracy isn™t a luxury in poor countries. That
said, there have been few such empirical studies, so we don™t know

whether the ¬nding is empirically robust. More importantly, no one
so far has investigated whether there is a positive link between
democracy and growth in the productive base per capita; which
means that, as matters stand, we don™t know the connection
between democracy and sustainable development in the
contemporary world. Democracy means many things at once “
regular and fair elections, government transparency, political
pluralism, a free press, freedom of association, freedom to complain
about degradation of the natural environment, and so on. We still
have little empirical understanding of which aspects are most
instrumental in bringing about sustainable development. That
being so, a commitment to democracy today can™t be based on
grounds that it promotes sustainable development. We should
favour democracy because (i) it is innately a good thing and (ii) it
isn™t known to hinder economic progress and may possibly even
help to bring it about.

Well-being: individual and social
What kinds of social institutions and what types of public policies
are most likely to enable people to ¬‚ourish? At the core of that
question is the notion of a person™s well-being, by which we mean,
broadly speaking, the degree to which the person is able to exercise
independence, choice, and self-determination. The centrality of
social institutions in the realization of well-being is clear enough:
social life is an expression of a person™s sense of social unity, and
commodities and an absence of coercion are the means by which
people can pursue their own conception of the good. T. H.
Marshall™s three-way classi¬cation of freedom can be read as saying
that the enjoyment of civil liberties, the ability to participate in the

Social well-being and democratic government
political sphere, and access to commodities (food, clothing, shelter,
health care, education “ more generally, wealth) are necessary if
people are to ¬‚ourish.

Constituents and determinants
Marshall™s classi¬cation can be broken up into smaller components.
Various kinds of civil liberty, various aspects of health, and so on,
comprise the constituents of well-being. As well-being itself is an
aggregate, measuring someone™s well-being involves an aggregation
exercise, which means acknowledging trade-offs among the

We have seen that there is another way to think about human
well-being. It involves valuing well-being™s determinants, by which
I mean the commodity inputs that produce well-being. The
determinants include not only such necessities as food and shelter,
but also access to knowledge and information. One may think of the
constituents and determinants of well-being as ˜ends™ and ˜means™,
respectively. In practical applications it proves useful to aggregate
the determinants of well-being into a single ¬gure. In the previous
chapter I argued that a person™s inclusive wealth can be made to
serve as an aggregate index of her well-being.

Revealed and stated preferences

How is one to assess someone™s well-being? There are aspects that
can be inferred from the choices people make. If someone is found
to purchase and read an unusual number of books, it may be
reasonable to assume that her well-being depends, among other
things, on whether she has books to read. This kind of assessment is
known as the method of revealed preference. The underlying logic
here is that, other things being equal, a person reveals her wants
and desires by the choices she makes, whether in markets or in

There are, however, aspects of well-being that can only be
ascertained by asking people to state them. They involve cases
where the determinants are goods and services on which people are
unable to express their preferences and interests because there is no
opportunity for them to do so. Public goods and ecological services

are examples. Care has to be taken to design questions in such ways
as to minimize the risk that people don™t respond truthfully. In
recent years cunning methods have been devised by economists to
ensure that people don™t exaggerate their fondness for those goods,
especially in circumstances where they don™t have to pay for them.

Merit goods
There are aspects of well-being that can be measured objectively.
The medical, nutrition, and education needs of people are routinely
assessed by experts. We may express doubt that experts know what
they are talking about, but deep down we know that they know
more about certain aspects of ourselves than we do. The economist
Richard Musgrave argued many years ago that inferring well-being
exclusively from revealed preference is wrong because of the
presence of what he called merit goods. Merit goods protect and
promote human interests, they don™t merely serve our preferences.
Merit goods are therefore worth more than what would be revealed
from the choices people make. Philosophers have argued, for
example, that we shouldn™t seek to justify democracy exclusively

from the intensity of the desires citizens display for democracy.
Democracy is a merit good. Relatedly, human rights constitute a
class of merit goods, among which ˜fundamental™ rights are an
extreme form, in that they aren™t tradeable. Rights don™t go against
preferences, of course; what they do is to reinforce some
preferences (such as the preference not to be coerced) against the
claims of other, less urgent or vital, preferences and interests.

It isn™t always possible to discover the merits of goods from stated
preferences either. The problem in part lies in the possibility that
individuals don™t tell the truth when asked, but in part it lies
elsewhere. It would be an odd thing, for example, to say that there
is little need to invest in women™s reproductive health programmes

Social well-being and democratic government
in Desta™s world because poor women there are resigned to their
fate and don™t appear much to insist on them; or that governments
there ought not to invest in primary education because parents
there don™t care for education, and the children, being unaware of
education, don™t care either. Nor have I ever heard anyone so

That said, it is salutary to be cautious when attributing ˜merit™ to
goods. An enthusiasm for seeing merit in goods can be a code for
paternalism, even authoritarianism. The notion of ˜false
consciousness™ has been used by both secular and religious
tyrannies in Desta™s world to justify their actions (˜My people
don™t know what is in their real interest™, or ˜My followers depend
on me to explain the Holy Book to them™). In an opposite vein,
rights have proliferated in Becky™s world to an extent that the
very notion of rights is now debased. It is one thing to insist on
the right not to be imprisoned inde¬nitely without being charged,
it is quite another thing to claim that a 35-hour work week is a
human right. The latter is an agreement won over the bargaining
table, allied to some agitation; but it is a misuse of the term to
call the outcomes of such agreements ˜rights™ without further

Aggregation across people and policy evaluation

Social well-being is an aggregate of individual well-beings.
Economists have generally speaking aggregated individual well-
beings by summing them. In the previous chapter I had adopted
that viewpoint by regarding social well-being as the sum of the
current generation™s and all future generations™ well-beings,
although nothing conceptual depended on that mode of
aggregation. We noted there that movements in inclusive wealth
over time measure changes in intergenerational well-being over
time in terms of the commodity determinants of well-being. Those
determinants are valued in terms of their shadow prices. It can be
shown that in order to evaluate policy (for example, a new public
investment; a change in the structure of taxes), the government
should value alterations to the mix of goods and services brought
about by the policy in terms of shadow prices. Such an evaluative
exercise is called social cost-bene¬t analysis. The idea is to estimate

the (social) pro¬tability of the policy in terms of shadow prices and
to recommend the policy if (and only if ) the net social pro¬t is
positive. Thus, shadow prices are of use both in assessing
sustainable development (Chapter 7) and in evaluating policies.
This is one of those beautiful facts that economists are fortunate to
unearth from time to time.

Functions of government
The government is a major actor in every economy today. Its
expenditure as a share of GDP is 18% in Desta™s world and 28% in
Becky™s world. (The corresponding share in the European Union is
37%.) The ¬gures include public production (roads, mail service,
defence, the law, and so on), transfers (social security,
unemployment bene¬ts, and so forth), and servicing government
debt. The overwhelming portion of that expenditure is ¬nanced by

One notable duty of government is to correct market failure.

Stabilizing the macroeconomy (Chapter 4) is part of that duty. But
communities can fail too. Both markets and communities suffer
from an inability to supply adequate levels of public goods; the rule
of law, as opposed to the restraint of social norms, being a
prominent example. Similarly, neither the market nor the
community is able to restrict the production of public bads to the
extent society would wish. Both institutions harbour externalities,
be they bene¬cial or harmful. The role of the (ideal) state in each
such case of institutional failure is clear enough.

Families can also fail. Although it may seem altogether too intrusive
of the state to enter the family™s domain, in Becky™s world they do
that regularly. And for good reason. Dysfunctional households in

Social well-being and democratic government
Desta™s world are counselled by the community; but because there
is often no community in their neighbourhood, Becky™s world no
longer has that option. That™s one reason why government social
workers and counsellors in Becky™s world intervene on behalf of
children against abusive adults and offer help to improve the

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