Growth in gross domestic product (GDP), the rate by which the value of output from production of goods and services in a country8.1 increases, has always been a widely used indicator for measurement of human development. This is mainly because output from production activities determines the capabilities available for the satisfaction of needs in society. If not outweighed by population growth or inflation, GDP growth can serve a wide range of ends that are relevant to monitoring development. It provides resources that can be used, for example, for promotion of health care, education, employment, public infrastructure, environmental protection and, not least, for overcoming absolute poverty (Commission on Growth and Development, 2008). In fact, the World Bank establishes that
economic growth has been the single most important instrument for the decline in poverty observed during the past 25 years (World Bank, 2014).
However, using GDP as a direct measure of welfare has limitations. These have been thoroughly reviewed by the Stiglitz Commission. First, the calculated value of output from production can be different from the value of consumption by private households resident in a country. Differences result, for example, from depreciation of capital, from changes in household wealth, and from income flowing out of and into the country. To calculate GDP, economic output is measured in production prices, but these may not accurately reflect consumption value. Second, GDP covers only goods and services traded on markets, although welfare can also be generated from consumption of non-market goods and services. Third, while GDP per capita provides an indication of the resources available per member of society on average, the level of social welfare should be assumed to be dependent also on the way these resources are distributed among them (Stiglitz et al., 2009). Using GDP as a measure of welfare is further complicated by the fact that consumer prices tend to increase over time, so that private households’ real consumption possibilities associated with a constant value of nominal GDP diminish and GDP growth, expressed in nominal terms, turns out to be greater than the actual increase in welfare. A common method to correct that effect is by deflating nominal GDP through a consumer price index, an index that reflects the relative increase of the price of a representative consumption basket. However, consumption is subject to changes over time. The quality of existing products improves, and new products are developed and used. Reflecting these changes accurately is difficult, as a comprehensive study commissioned by the Unites States Senate Finance Committee has exemplified (Boskin et al., 1996). The effects of such bias on the measurement of welfare can be significant. Consider, for example, the ubiquitous use of the Internet, which has generated an improvement in welfare at a negligibly low price, and which former generations could not even dream about (The Economist, 2016).
Even though GDP should not be interpreted as a precise and direct measure of social welfare, economic growth is nevertheless an important, widely available summary indicator of an economy’s advancement in its capacity to produce resources for the satisfaction of people’s needs, and one which is comparable across countries. As such, it is of high value in the context of measuring progress in sustainable development. However, the Sustainable Development Agenda does not call for economic growth by all means. Rather, economic growth should be sustained, inclusive and sustainable.
The call for sustained growth follows from the insight that overcoming obstacles to human development mostly requires some constancy in the availability of funds. Escaping from poverty traps, for example, usually requires actions implemented with a time horizon of several years, as an evaluation of the progress in achieving the Millennium Development Goals by the United Nations Development Programme (UNDP) (UNDP, 2005) has confirmed. Sustained growth usually does not evolve as an outcome of monetary expansion or government spending programmes. It rather requires structural changes, such as technological innovations, formation of know-how and knowledge, transformation of institutions or modernization of infrastructure. Such changes can be self-reinforcing and thereby stabilize growth over a longer period of time, as the various models of endogenous growth theory8.2 have shown. In practice, conditions for sustained growth are often set by future-oriented policies targeting managed consumption, a build-up of savings and investment, particularly public investment in infrastructure (Commission on Growth and Development, 2008).
While economic growth increases the resources available for consumption in an economy as a whole, it is often accompanied by a rising inequality in the distribution of resources among individuals. This was first observed by Kuznets (1955). In his model, waves of economic growth do not sweep over the whole society at the same time. Growth is instead initially confined to narrow segments of the economy, leading to an increase in labour productivity and a rising dispersion of wages within these segments, so that income inequality in the economy as a whole increases8.3. The requirement for inclusive economic growth set out in the Sustainable Development Goals imposes a responsibility on governments to ensure that inequalities arising from economic development do not result in individuals, particularly those most vulnerable, being excluded from the material benefits to the extent that they become incapable of observing social norms and common lifestyles of their country8.4. Education policy plays an important role in avoiding income inequality, as it can help to reduce skill gaps between workers in higher- and lower-wage sectors. Deliberately designed and efficient tax and transfer systems and social protection schemes, influencing market actors’ incentives as less as possible, as well as universal access to basic services constitute important additional means to adjust the distribution of market incomes and to ensure that economic growth does not increase social exclusion. In that regard, globalization has imposed new challenges, as with rising geographic mobility of capital and higher-skilled workers, national governments have entered into intensified (fiscal) competition8.5 with each other, which reduces their scope of financing redistributive and social policies by means of taxation. Social inclusion as an objective for sustainable development is dealt with in greater detail under Goal 10, target 10.2.
In addition to being sustained and inclusive, the present Sustainable Development Goal also sets out that economic growth should be sustainable. The question about whether sustainable economic growth is possible or not, in the sense that it does not compromise
the ability of future generations to meet their own needs8.6, was at the heart of a debate in the 1970s which gave an important impetus to the idea of sustainable development. At that time, a simulation study commissioned by the Club of Rome (Meadows et al., 1972) had shown that under unchanged circumstances, growth in economic output could not last forever, as over time it would necessarily exhaust the limited stock of natural resources on earth. In response to that study, approaches calling for
de-growth (advocated by Georgescu-Roegen, 1975) or a
steady-state economy (advocated by Daly, 1974) gained popularity. The idea of sustainable economic growth developed as an alternative concept, emphasizing the need to use natural resources more efficiently than at present while upholding the idea of promoting economic growth as a means to overcome poverty and underdevelopment (Hopwood et al., 2005). In theory, if resource efficiency increases with the same rate as GDP or more, then the stock of natural resources passed on to future generations does not shrink. This state, commonly referred to as
green growth, can be achieved by, for example, technological innovations or changes in consumption patterns (Victor, 2010). In fact, a number of empirical studies find that for several types of environmental damage, when GDP per capita rises over a certain level, environmental damage ceases to grow further and finally diminishes. This has led to the hypothesis of the "environmental Kuznets curve", which assumes a bell-shaped relationship between GDP and environmental damage (Dinda, 2004). Looking at natural resources in general, studies indicate that in the medium term, "brown growth", characterized by resource efficiency increasing at a lower rate than GDP, appears more realistic to achieve (Victor, 2010). Research in this field is difficult, as measuring the extent of resource depletion is a complex task, both from the conceptual and methodological perspectives. In that regard, the setup of guidelines for the measurement of greenhouse gas emissions by the Intergovernmental Panel on Climate Change (2006) and of the System for Environmental Economic Accounting (United Nations Statistics Division (UNSD), 2016) constitute important steps.
Complementary to natural resources, labour is another important input factor of GDP. Labour has, apart from its technical contribution to production, a substantial social dimension arising from the fact that it determines people’s status and their ability to consume, and because people devote such a substantial amount of their lifetime to it. Full and productive employment and decent work are therefore defined as objectives of the Sustainable Development Goals.
Full and productive employment necessitates a demand for and corresponding supply of labour; that is, a sufficient number of people prepared to supply work under the conditions being offered. Labour demand is dependent on a number of factors that influence the business environment, such as local availability of input factors for production, closeness to sales markets, infrastructure, efficient institutions and tax burden, as well as employment protection legislation, State subsidies, and the degree to which human labour can be substituted by machine labour. Labour supply is dependent on factors such as the proportion of persons of working age, their skills and the conditions under which they accept working. Labour supply not met by labour demand generates unemployment, a state that implies a waste of productive resources and often a risk of poverty for the affected people.
Decent working conditions cannot be taken for granted. In a market economy, capital owners’ interest to maximize profits often stands in conflict with their moral (and in many parts of the world, legal) duty to provide adequate conditions of work. In advanced economies, at the national level, this conflict is regulated by institutions that have evolved under the influence of labour movements. These institutions are under pressure for change, as globalization increases capital owners’ possibilities to relocate production from one country to another and thereby bypass regulations that protect workers’ rights at the expense of reduced return on investment. At the global level, conventions pursued by the International Labour Organization (ILO) and ratified by national governments have provided a basis for minimum rights for workers in many countries concerning a wide range of problem areas (ILO, 2014). With the Decent Work Agenda8.7, ILO is engaged to further enhance protection from unacceptable conditions of work and to promote productive employment (ILO, 2008).