G7's focus on trade deals with Africa is not enough

The economics profession widely accepts the validity of `human capital' in the concept of capital. It needs to be extended to incorporate `social capital'

When leaders from the Group of Seven rich countries meet in Denver at the weekend, they will for the first time have the development of sub- Saharan Africa on their agenda. Although Third World debt has cropped up at previous summits, this has in large part been for self-interested reasons - after all, who lent the money in the first place?

This time US President Bill Clinton has launched an initiative to boost growth in Africa. It seems western policymakers have become mindful of the fact that disasters in countries like Somalia and Rwanda do spill over into the rest of the world.

As The Independent reported yesterday, Oxfam has welcomed the US move but criticised its narrow focus on a small group of countries and on trade deals as the mechanism for economic development. They have called for a G7 initiative to focus aid to Africa on primary education.

The Oxfam approach chimes with a paper by the eminent economist Amartya Sen on how the profession thinks about economic development.* Professor Sen criticises the received wisdom that experience proves that state activism spells disaster while undiluted free markets form the one true path to prosperity.

His criticism is centred on the fact that this polarisation, state bad, market good, ignores the part governments have to play in education and health care. "Public education and healthcare have been pivotal in bringing about social and economic change across the world. While governments can err by being over-active and too interventionist, they can also make the mistake of being under-active and too idle." He concludes: "It is not particularly helpful to try to see the lessons in terms of a confrontation between the market and the state."

He extends this critique to what he describes as the "fierce" view of the development process, the notion that in some sense economic progress has to involve sacrifice. That could mean sacrificing consumption spending for the sake of higher investment, it could mean not spending government money on the relief of poverty in order to keep budgets low, or it could mean regarding democracy and human rights as a luxury poor countries can not afford. This was the view of Singapore's former prime minister, Lee Kuan Yew, who argued that civil rights hampered economic growth.

Professor Sen disagrees. Heargues that social development is a cause as well as a consequence of economic development. Wide access to education and health care boosts human and social capital; it not only allows people to lead longer and happier lives but also boost productivity, economic growth and well-being.

This analysis is shared by the recent UN Human Development Report. Statistics presented in the report establish there is a correlation between low levels of income per head and social indicators. The poorest countries tend to have the greatest income inequality, the most unequal treatment of women, lower literacy rates and so on.

The report indicates there are similar links between other inequalities and low levels of growth and development - for example, regional or ethnic inequalities. These disparities, it argues, are linked to unfair access to social services, public spending and productive resources such as land.

The accumulation of capital has always been central to theories of economic growth. The economics profession now widely accepts the validity of including "human capital", as well as machinery and buildings, in the concept of capital. New thinking about development needs to extend it to incorporate the concept of "social capital" also - not just the skills acquired by individuals through their education, but the framework of habits and laws in which they can apply those skills. This notion is beginning to make headway among economists who are reluctant to have much contact with touchy- feely ideas borrowed from sociologists, but is not yet as widely accepted as the concept of human capital.

So Oxfam is right to call on the G7 countries at this week's summit to focus on more than trade preferences and market access as the key to Africa's development. These are important, but not enough.

However, hard-headed economics has its place. If there are dangers in being too triumphalist about free markets, there are also dangers in the influence of the "bleeding hearts". The clearest example of this is in the current push for writing minimum "social standards" into trade deals. The idea, embraced by the New Labour Government, is that countries that do not sign up to minimum standards, excluding child labour or a minimum level of wages, say, will not get free access for their exports to western markets.

Developing countries are unanimously opposed to this idea which they see, rightly, as a vehicle for protectionism by the rich countries. The western unions promulgating minimum labour standards in trade see it as a way of protecting their own members in particular industries. Of course children in developing countries should be at school rather than working. It is better for their own prospects and better for the economy.

But blocking market access to products made by children does not translate into higher investment in education spending. The low labour standards are a manifestation of low past investment in human and social capital. Countries can not be jolted into a virtuous cycle of higher investment in education and higher labour standards by blocking the few economic opportunities they have. A new focus on social development in western aid policy is a far better idea.

* Development Thinking at the Beginning of the 21st Century, Amartya Sen, March 1997. Available from STICERD, London School of Economics, 0171- 955 6691

How the least developed countries compare

Real GDP Access to Adult Gender equality

per capita health services literacy ranking

1994 $ % % (out of 146)

Hong Kong 22,310 90 92 28

Korea 10,656 100 97.9 35

Mali 543 40 29.3 143

Burkina Faso 796 90 18.7 144

Niger 787 99 13.1 145

Rwanda 352 80 59.2 n/a

Sierra Leone 643 38 30.3 146

Source: UN Human Development Report 1997, OUP, pounds 16.99