Social Welfare Functions and Development

Measurement and Policy Applications

Nanak Kakwani,Hyun Hwa Son

• Éditeur: Palgrave Macmillan
• Année: 2016
• ISBN:
  9781137583253
• Sujet: Economía
• Sous-sujet: Economía del desarrollo

Nanak Kakwani and Hyun Hwa Son make use of social welfare functions to derive indicators of development relevant to specific social objectives, such as poverty- and inequality-reduction. Arguing that the measurement of development cannot be value-free, the authors assert that if indicators of development are to have policy relevance, they must be assessed on the basis of the social objectives in question.

This study develops indicators that are sensitive to both the level and the distribution of individuals' capabilities. The idea of the social welfare function, defined in income space, is extended to the concept of the social well-being function, defined in capability space.

Through empirical analysis from selected developing countries, with a particular focus on Brazil, the authors shape techniques appropriate to the analysis of development in different dimensions. The focus of this evidence-based policy analysis is to evaluate alternative policies affecting the capacities of people to enjoy a better life.

© The Editor(s) (if applicable) and The Author(s) 2016

Nanak Kakwani and Hyun Hwa SonSocial Welfare Functions and Development10.1057/978-1-137-58325-3_1

Begin Abstract

1. Introduction

Nanak Kakwani¹ and Hyun Hwa Son²

(1)

Sydney, New South Wales, Australia

(2)

Asian Development Bank, Manila, Philippines

End Abstract

1.1 The Concept of Development

Development is a complex issue and has different meanings to different people. While a common perspective equates economic growth with development, literature notes that the concept is much broader and is linked with living standards—how people live and what they can do or cannot do. To this end, Amartya Sen has made important contributions in introducing a framework for development.

Although India became independent in 1947, its development agenda was already decided in 1938, when the Indian National Congress constituted a National Planning Committee. The committee consisted of 15 members, including renowned industrialists, financiers, economists, scientists, professors, and representatives of trade union congress. Pundit Jawarlal Nehru, who later became the first prime minister of independent India, was the chairperson of the committee. The committee identified the following definitive social objectives to pursue (Nehru 1946, 418):

(i)

Improvement in nutrition, with a balanced diet having a calorific value of 2400–2800 units for an adult worker;

(ii)

Improvement in clothing from the then consumption of about 15 yards to at least 30 yards per capita per annum; and

(iii)

Improvement in housing standards, with at least 100 square feet per capita.

The following indicators of progress were also suggested:

(i)

Increase in agricultural production,

(ii)

Increase in industrial production,

(iii)

Diminution of unemployment,

(iv)

Increase in per capita income,

(v)

Liquidation of illiteracy,

(vi)

Increase in public utility services,

(vii)

Provision of medical aid on the basis of one unit per 1000 population, and

(viii)

Increase in average life expectancy.

These objectives and indicators provide a comprehensive vision of development. To achieve a minimum standard of living, the committee estimated that a typical family would require 15–20 Rupees per person per month. While this amount may seem low compared to western standards, it indicated an enormous increase in existing standard of living in India at that time. The committee viewed growth as a means to provide the minimum standard of living to the population. However, the committee estimated that the country’s output needed to increase by 500–600 % in 10 years to achieve this minimum living standard. In addition to this increased production, there had to be more equitable distribution of wealth.

Pundit Nehru did not have a well-defined framework of development, but his social objectives were clear. His primary goal was to provide an adequate standard of living for the population by getting rid of the appalling poverty. Nehru’s concept of development is simple: it is about enhancing the living conditions of all people.

The most comprehensive framework of development was developed by Amartya Sen who is a Nobel Laureate in Economics (1998) and the leading thinker on the meaning of development. His framework of development, which was much broader than Pundit Nehru’s, was described in a number of papers and books in the 1980s (Sen 1983, 1984, 1985, 1987).

According to Sen (1983), the process of economic development has to be concerned with what people can or cannot do—for example, whether they can live long, get educated, escape avoidable morbidity, be well nourished, or pursue things they value. The possession of commodities or opulence is closely related to the quality of life people lead. With income as the primary currency by which people consume commodities and services, a higher income thus gives people greater command over commodities or services, which in turn provide people with the means to lead a better life. However, income is merely a means to an end. As Sen (1985) writes, “ultimately, the focus has to be on what life we lead and what we can or cannot do, or can be or cannot be.”

Using this logic, Sen’s ideas of functionings and capabilities emerged. While functioning is an achievement, capability is the ability to achieve. Functionings are directly related to what life people actually lead, whereas capabilities are associated with the freedom people have in choosing their lives or functionings that they value. According to Sen, development should be evaluated according to the extent of freedom people have to achieve the functionings that they value. Development is thus a multidimensional concept defined in terms of a set of capabilities that reflect the extent of freedom people have in leading their lives.

Sen’s capability theory of development revolves around people and their capabilities. Since all people cannot enjoy the same capabilities, the distribution of capabilities should be the key to measuring development. A pertinent concern that arises is how individual capabilities can be aggregated to arrive at a composite indicator of development. For instance, what weights should be given to individuals enjoying different capabilities? The problem of assigning weights to capabilities of different individuals has received little attention in the literature.

The United Nations Development Programme created the Human Development Index (HDI) to compare standards of living across countries. It is a composite index reflecting three aspects of well-being: life expectancy at birth, learning, and per capita GDP adjusted for purchasing power parity. Learning is measured by an indicator that gives two third of its weight to literacy rate for adults and one third to the combined gross primary and secondary enrollment. The HDI is composed of three aggregate indicators that are completely insensitive to the distribution of individual capabilities. The literature is replete with examples of the use of aggregate indicators to measure development. Ideally, we should be concerned with the well-being of individuals or groups of individuals. Dasgupta (1990) correctly argues that we should be interested in the distribution of well-being along class, caste, gender, or regional lines. To achieve inclusive development, the indicators of development should not only focus on the average standards of living, but also reflect their distribution across socio-economic and demographic groups. In this book, we derive the indicators of well-being that are distribution-sensitive. To accomplish this objective, this book extends the idea of social welfare function defined in income space to social well-being function defined in capability space.

1.2 The Concept of Social Welfare Function

To examine the distribution of well-being across a population, particularly when designing social programs, social welfare functions are used. In economics, we are often faced with the question of evaluating the allocation of resources that are judged to be economically efficient or distributions of income that are judged to be equitable. Any policy change has heterogeneous effects on individuals. That is, from a public policy perspective, some individuals might lose while others might gain from a implementing a specific policy. In any policy evaluation, normative judgments cannot be avoided and social welfare functions explicitly specify normative judgments by assigning weights to different individuals

The most popular criterion in evaluating economic allocations is that proposed by Pareto in 1897. The simple Pareto rule states that any change in resource allocation improves the welfare of the society if it makes at least one person better-off and no one worse-off. A situation is called Pareto optimal if there are no alternative changes, leading to a Pareto improvement—that is, an economy can achieve its optimality as long as nobody in the society can become better-off without making anyone else worse-off. This condition implies that any given income distribution with fixed total income will always be considered Pareto optimal because the income distribution that makes someone better off will make someone else worse off. Therefore, Pareto optimality has little implication on the distribution of welfare across individuals.

Because of the limitations of the Pareto criterion, Kaldor (1939) and Hicks (1939) proposed an alternative criterion called the net benefit approach. This approach states that a change in the allocation of resources enhances welfare if either (i) the Pareto criterion is met or (ii) the persons who have gained through the resource reallocation could compensate those who have been harmed by it but still be better-off. If the actual compensations are made and there is a net gain in benefits, then winners are still better-off without making anyone worse-off. In this situation, there will be a net benefit to the society and the Pareto criterion will actually be satisfied. If the compensation is not paid and there is a net gain in benefits to the society, social welfare will still increase even if the winners gain more than the losers, provided that the resulting distribution is judged socially desirable. If we are unwilling to make such judgment, we can no longer be sure that the new allocation will make society better off.

Both the Pareto optimality and compensation criteria fail to provide a framework for distribution of welfare. By and large, various types of social tension arise because of the misdistribution of welfare among individuals (see Chap. 3). As such, the two criteria could be rather blunt approaches to assessing any distributional change.

If we are willing to make interpersonal utility comparisons to assess the distribution of welfare, the social welfare function—developed by Bergson in 1938 and further refined by Samuelson in 1947—is the most appropriate tool. It provides a way to aggregate different utilities across consumers. Under certain conditions, the social welfare function offers a legitimate framework for the distribution of welfare across people, thereby suggesting ways in which the welfare distributions can be ranked among the population.

To obtain a measure of welfare change in many consumer economies, there appears to be no alternative but to employ a social welfare function. The Bergson‒Samuelson social welfare function is widely used in economic analysis, particularly in the areas of cost-benefit analysis and optimal fiscal policies. While social welfare is seldom discussed in development economics, the relationship between inequality and social welfare has been extensively discussed in the literature (see Chap. 2). With the publication of Atkinson’s (1970) and Kolm’s (1969) seminal papers on inequality, the idea that inequality measures should be derived from a social welfare function has been increasingly accepted. If inequality has any policy relevance, it should be evaluated based on some social welfare function. This book extensively utilizes social welfare functions to derive measures of social tension in various dimensions (see Chap. 3).

Although the debate on inequality is largely dominated by income inequality, non-income disparities also exist. As Sen (1995) pointed out, society should also be concerned with inequality in different dimensions of well-being such as health, education, employment, and living conditions, among others. To measure the inequality of well-being, this study extends the idea of social welfare function to social well-being function. The inequality in well-being is then derived as a proportional loss of social well-being function (see Chap. 6). The same idea is used to measure equity in social opportunities (see Chap. 7).

1.3 Inequality and Social Welfare Functions

The concept of social welfare is often associated with inequality, but their linkage has yet to be thoroughly examined. Based on the theory of relative deprivation, individuals and households assess their welfare against the incomes of others. Given this, high inequality is deemed to have a negative effect on social welfare.

Chapter 2 derives the social welfare function so that it can be made operational using household surveys. In deriving these applied social welfare functions, normative judgments about assigning weights to different individuals are clearly specified.

Inequality is no longer viewed as a statistical device that measures the dispersion of a frequency distribution. If inequality has a close relevance with policy, measures of inequality need to be derived from some normative notion of social welfare function because any inequality measure must incorporate society’s preferences. Atkinson’s seminal paper on inequality, published in 1970, brought social welfare to the forefront when measuring inequality. Chapter 2 discusses the linkage between inequality and social welfare function. Every social welfare function has an implicit measure of inequality, which means that every inequality measure can be judged by the normative properties that are incorporated in its social welfare function.

Atkinson (1970) derived a class of social welfare functions based on the concept of an equally distributed equivalent level of income. Instead of measuring the actual proportional loss of welfare caused by inequality, he estimated the proportional loss of income that would be incurred by having the actual distribution of income rather than a completely equal one. The concept of equally distributed equivalent level of income has been found to have a wide range of applications (Kakwani 1995; Kakwani and Son 2008; Son 2012).

Normative judgments in Atkinson’s social welfare function are incorporated through the value of ϵ, a measure of inequality aversion. Inequality aversion captures the relative sensitivity of inequality to income transfers at different income levels. As ϵ rises, more weight is given to transfers at the lower end of the distribution and less weight to transfers at the top. If ϵ = 0, social welfare becomes equal to mean income. This case reflects an inequality-neutral attitude in which the society does not care about inequality at all, but is mainly concerned about increasing its average standards of living.

To capture the idea of relative deprivation, Sen (1974) developed a social welfare function by making welfare ranks dependent on the individuals’ ranking of their welfare. The lower a person is on a welfare scale, the greater is this person’s sense of deprivation with respect to others in the society. Thus, according to Sen’s rank order axiom, the weight of income level x depends on the percentage of persons in the society who are richer than the person with income x in the given income vector

. This social welfare function is extensively used in this study to derive a wide range of indicators of economic development (see Chap. 3).

Chapter 2 also brings out an important distinction between relative and absolute measures of inequality. Relative measures imply that inequality remains constant if every income is altered by the same proportion. Such measures, according to Kolm (1976), are referred to as relative (or rightist) measures of inequality. As an alternative, Kolm has proposed absolute ...

Table des matières

• Cover
• Frontmatter
• 1. Introduction
• 2. Applied Social Welfare Functions
• 3. Measuring Social Tension
• 4. Relative Deprivation and Social Groups
• 5. Growth and Shared Prosperity
• 6. Income Inequality and Social Well-Being
• 7. Measuring Equity in Opportunity Using Social Opportunity Function
• 8. Global Poverty Counts
• 9. Measuring Food Insecurity: Global Estimates
• 10. Social Rate of Return: A New Tool for Evaluating Social Programs
• Backmatter