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A New Framework for Economic Development Policy

Based on Sen’s Capability Approach and Rawls’s Maximin Equity Criterion

Wilatluk Sinswat∗∗∗∗

1. Introduction

In recent years, doubts have been cast on the effectiveness of the neo-liberal1 income-

based top-down approach to economic development, following the dissatisfaction

with the structural adjustment programmes in the 1980s in many parts of the world

and the financial crises in the 1990s. The inadequate attention paid to the

multidimensional nature of human well-being and the egalitarian development

process under the aggregate income maximisation policy framework has become

increasingly problematic, particularly as the within-nation inequality has deepened in

many developing, developed and transitional countries in the past 20 years (Cornia,

G.A, et al. 2004).

In addressing the multidimensional aspect of human well-being and distributional

issue of resource allocation, the pioneering works by Rawls (Rawls, J. 1972; 1974;

1999; 2001) and Sen (Sen, A. K. 1979; 1981; 1982; 1984; 1985; 1992; 1993; 1997;

1999a; b; Sen, A. K. and J. Dreze 1989) have been increasingly employed to shift the

development policy orientation from focusing solely on an income space to a more

multidimensional aspect of human well-being and development process, paying

explicit attention to the equality issue.

Rawls’s principles of justice has significantly expanded the notion of human well-

being and analysis of development to include basic rights and liberties, freedom of

movements and occupations, social bases of self-respect as well as income and

∗ The author is greatly indebted to Professor Ajit Singh, Professor Amartya Sen, and Dr. Gay Meeks for their invaluable comments and suggestions as well as their kind encouragements. The author would like to thank Gates Cambridge Trust and St. John’s College, Cambridge for their financial supports; and the Bank of Thailand for granting the author the opportunity to take leave from work to conduct this research.

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wealth, which, according to Rawls, are the ‘social primary goods’ that every rational

man is presumed to want (Rawls, J. 1972: 62). He also explicitly addresses the issue

of inequality by proposing the difference principle, of which maximin equity criterion

is a main part2, in his second principle of justice.

While Sen does not intend to put forward a rival distributive justice theory or an

alternative allocative rule in place of the maximin equity criterion (Sen, A. K. 1995),

he proposes to extend Rawls’s principles of justice to explicitly distinguish means

from ends of human well-being and development, thereby introducing the capability

approach as an appropriate space for well-being analysis and policy objective-setting

and evaluation, instead of the social primary goods which comprise elements of both

ends and means. According to Sen, income is merely a means, not an end, to

development process of promoting human well-being, defined as an enlargement of

human capability to lead the live he or she values (Sen, A. K. 1999b).

Indeed, both Rawls’s principles of justice and Sen’s capability approach are among

the most influential concepts in the distributive justice and equality aspects of

development. This paper does not set out to argue the superiority of one approach

over the other. The novel endeavour of this paper, however, lies in its attempt to

operationalise Sen’s capability approach, by integrating it with Rawls’s maximin

equity criterion, for the purpose of formulating an economic development policy

framework for the short-to-medium-term timeframe.

The two prominent economic development policy frameworks that can be said to be

based on the capability space thus far are the basic needs3 and human development

approaches. The aim of the basic needs approach is to provide a minimally decent

life defined in terms of health, nutrition, and literacy (Stewart, F. 1996: 48) to those

who fall below the specific minimum level; while the human development approach

has the aim of enhancing people’s freedom to lead the lives they value and views

development as a process of enlarging people’s choices (Fukuda-Parr, S. 2003; UNDP

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1990), offering short-to-long-term development strategies to all countries at various

stages of development.

Maximin capability framework for economic development policy objective-setting

and evaluation proposed in this paper is formulated with the aim of trying to fill in the

gap in the economic development strategy and evaluation framework based on Sen’s

capability perspective between the basic needs approach and human development

paradigm. While basic needs approach focuses on the short-term strategy for the

elimination of severe deprivation and human development paradigm is concerned

with the short-to-long-term development process, expanding human capability of all

individuals in a variety of dimensions, the maximin capability framework is

developed with the aim to serve as an economic development policy framework,

which, similar to basic needs and human development approaches, is able to take into

account the multidimensional aspect of human well-being, but at the same time offers

a short-to-medium-term framework for development strategy for the countries whose

mass deprivations may have been eradicated, but are not yet at a level where they can

afford to expand capability sets of all individuals equally.

The paper also attempts to develop an analytical framework for policy evaluation and

a method through which a context-specific list of valuable capability variables can

potentially be drawn up for each study, allowing for human diversity and uniqueness

of each individual.

2. Sen’s Capability Approach, Rawls’s Maximin Equity Criterion, and Economic

Development Policy Framework

In formulating an economic development policy framework for the short-to-medium-

term economic development policy objective-setting and evaluation framework for

developing countries with high levels of inequalities4, it is helpful to first select an

appropriate evaluative space and then to choose an operating mechanism. In this

regard, the justification for selecting Sen’s capability approach as an information unit

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or an evaluative space is first presented. Subsequently, the argument for combining

Rawls’s maximin equity rule as an operating mechanism to be combined with the

capability space is provided.

2.1 Sen’s Capability Approach as an Evaluative Space

The important constituents of Sen’s capability approach (Sen, A. K. 1982; 1985;

1992; 1993; 1999b) are functioning and capability. Functionings refer to the ‘beings

and doings’ of a person, while a functioning vector is a combination of ‘beings and

doings’ that represents a person’s actual or realised achievement. Capability is a set

of all combinations of different functioning vectors that a person can choose to

achieve (Sen, A. K. 1999b: 74-76). Under this framework, well-being of an

individual is assessed by their capability. Accordingly, the fundamental objective of

development is to enhance people’s freedoms in terms of capabilities (Sen, A. K.

1999b).

Capability approach addresses the issues of interpersonal diversities in converting

means to ends by using functioning and capability as a working space for well-being

evaluation and resource distribution objective. It is important to note, however, that

by focusing on functioning and capability in an evaluative space, Sen’s capability

approach does not necessarily deny the important contributions that income and

commodities can make to human well-being. In their study on India, Dreze and Sen

stress that “we have tended to judge development by expansion of substantive human

freedoms—not just by economic growth (for example, of the gross national product),

or technical progress, or social modernization. This is not to deny, in any way, that

advances in the latter fields can be very important, depending on circumstances, as

‘instruments’ for the enhancement of human freedom” (Dreze, J. and A. K. Sen 2002:

3).

It can be suggested that Sen’s capability approach offers a multidimensional account

of ends of human well-being, and therefore potentially provides a promising

philosophical framework and informational space for economic development policy

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analysis. Firstly, the approach focuses on capability and functioning space—what a

person can be and what he or she chooses to be, and not the means which may or may

not be translated to a sufficient level of well-being. Secondly, the approach explicitly

recognises that different individuals have different abilities to convert means to

achieve ends according to their social and personal circumstances. And thirdly,

capability approach is able to account for the concept of well-being which may be

geographically, culturally, and context specific, thanks to its multifaceted and under-

specific nature. Indeed, among the strengths of capability approach is the fact that it

allows for human diversities.

It can be suggested that the desired valuable capability sets may potentially vary

markedly across individuals and/or contexts. Indeed, this is largely why Sen himself

does not specify any particular or fixed valuable capability sets to be examined under

his approach. Instead, he argues that any capability set to be investigated should be

context-specific and should be derived from an act of reasoning (Robeyns, I. 2000:

14-15). Sen does not refute the universal capability list proposed by Nussbaum

(Nussbaum, M. 2000), but he adds that this is by no means the only route to

operationalise the capability approach.

Since the capability concept is, first and foremost, a framework of thought (Robeyns,

I. 2000), it follows that it can be applied to various cases with varying forms of

operating mechanisms, depending on the characteristics of the society and context at

hand. Sen is aware of the potentially wide applications of his approach and states

that “…., since the capability approach is concerned with showing the cogency of a

particular space for the evaluation of individual opportunities and successes. In any

social calculus in which individual advantages are constitutively important, that space

is of potential significance” (Sen, A. K. 1993: 50)

Due to its deliberately under-specified nature, the approach may indeed be applied to

a variety of circumstances using different operating mechanisms (Sen, A. K. 1982:

369). Sen recognises and welcomes the incompleteness of the approach, as his

primary aim is to offer an alternative working space for well-being analysis and

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evaluation. The approach is sufficiently flexible to be combined with other objective

rules (Sen, A. K. 1982: 369), for example, maximisation rule, equalisation rule,

minimum base-line or maximin rule.

With regard to economic development policy framework for developing countries, it

can be suggested that Sen’s capability approach offers a multidimensional evaluative

information space, taking into account the pervasive inequalities and diversities

among individuals. However, a clear operating mechanism may need to be explicitly

stated in order to make the approach more precise and cost effective as an economic

development policy objective, and more specific as a well-being and policy evaluative

framework.

2.2 Rawls’s Maximin Equity Criterion as an Operating Mechanism

Maximin equity criterion has been most frequently associated with Rawls’s difference

principle (Rawls, J. 1972; 1974; 1999), which states that inequality is permitted if,

and only if, lowering it would make the most deprived group even more worse-off. In

this paper, it is interpreted that the maximin equity rule, as an operating mechanism,

requires the well-being of the worst-off to be maximised under certain constraints of

equal rights, liberties and opportunities in an environment of pervasive inequalities.

Some supporting reasons for the maximin equity rule as the operating mechanism

include: “less demanding information requirements, greater suitability as a public

principle, and weaker strains of commitment” (Rawls, J. 1974: 144). It can be further

added that maximin equity criterion has sufficient sharpness as a re-distributive

allocation rule, while allowing efficiency to be promoted (Rawls, J. 1974).

In applying the maximin equity rule in the capability space, much less information is

needed than, for example, when using the total or average maximisation rule. Under

maximin equity distributive framework, first, the targeted least well-off group needs

to be identified. Once this is done, the policy has the clear objective of maximising

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the capability set of this group under certain constraints of equal rights and liberties as

defined in Rawls’s first principle of justice, and equal opportunities. In relation to

economic development framework based on Sen’s capability approach, the

effectiveness of the policy is then to be evaluated on the basis of how well the least

well-off group can expand their capability set.

However, it has been argued that the maximin equity rule focuses too strongly on the

least well-off group, while disregarding the distribution issue among the better-offs,

which can still be highly unequal. In response to this, it can be argued that under the

assumptions of chain-connection5

and closed-knitness6

in the theory of Justice

(Rawls, J. 1972; 1999), it is assumed that, as the situation of the worst-off improves,

others above them will too. Although this may not explicitly address the issue of the

inequalities among the better-off, it may help to ensure that their absolute positions

are to be improved in line with those of the worst-off.

A distributive criterion, as a public policy principle, needs to inspire public

confidence, which will be helped by having a sharp and clear-cut objective. Maximin

equity rule indeed meets this requirement in that it has sufficient degree of sharpness

as the complete equalisation rule may do, while allowing for a certain moderate level

of inequality which may be necessarily in the society on the efficiency grounds

(Rawls, J. 1974: 144).

Moreover, the criterion operates in the way that those worst-off are ensured that

inequality is to their greatest advantage and the better-off should be reasonably happy

that after all they are more fortunate than the worst-off group (Rawls, J. 1974). If

everyone in a society can have a reason to be content with their relative situation, this

then may lessen strains for commitment needed to uphold the distributive principle.

The optimal number of the worse-off groups to be taken into account in the maximin

equity rule can be chosen to give more flexibility in the framework where necessary.

This is particularly relevant for a situation where people are worst-off in many

different dimensions. Indeed, this may be the case when applying the maximin equity

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rule to the capability approach. As people’s diversities are taken into account in the

analysis, it is highly likely that their deprivations may manifest in various and equally

critical aspects of living.

Rawls points out that the maximin criterion is a macro and not a micro principle and

that it is intended to hold only within generations (Rawls, J. 1974: 142). Therefore, it

may be reasonable to suggest that maximin equity rule can potentially offer a suitable

operating mechanism for macro intra-generation economic policy objective and

evaluative framework in developing countries in the short-to-medium-term.

Furthermore, under this distributive pattern, social and economic inequalities are

permitted as long as they benefit the least well-off, given that the constraints of equal

distributions of basic liberties, rights and opportunities are met. It can be argued from

the economic point of view that, with the worst-off having higher living standard,

their productivity may increase more than otherwise, contributing further to better

economic performance which is of a necessity in resource-poor countries. At the

same time, some degree of inequality retains the competitive pressure in the economy,

thereby promoting efficiency and economic growth.

With regard to economic development policy, in practice, it is more likely that the

difference principle, of which the maximin equity rule is an operating mechanism,

may be honoured in a more sustainable manner in a society where inequality is small,

as the opportunity costs of honouring it are less in an equal society than in a highly

unequal one where the better-off has to forego larger amount of primary goods to

support the worst-off. However, despite higher costs, it may still be essential to

implement the maximin equity rule in a resource-poor and unequal economy to ensure

that the worst-off group achieves improvement in their well-being.

It should also be stressed that poverty and social disintegration have negative

externality. Therefore, it may be a mutual interest of the whole society that the worst-

off group has a sufficient control over resources in order to continue promoting their

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well-being. Otherwise the costs from the resulting social unrest and instability may

outweigh the material transfer made to the poorest.

3. Conceptualisation of Maximin Capability Framework

The preceding discussions have suggested that the short-to-medium-term economic

development policy objective and evaluation framework for developing country with

a high degree of inequality in initial resource endowments can potentially be found by

selecting the capability approach as an evaluative working space and the maximin

equity criterion as an operating mechanism. In marrying Rawls’s maximin equity

criterion and Sen’s capability approach, this proposed economic development policy

framework may be able to take into account the diversities among individuals’

characteristics and the corresponding complexity of their well-being by focusing on

ends of human functionings, while economising on resources for achieving the

objective and on information required for policy assessment. This framework is

referred to as ‘maximin capability’.

As a partial economic development policy objective-setting and evaluation

framework, maximin capability may be one of the cost effective ways to promote

equality as well as economic efficiency. By focusing on improving the capability set

of the most deprived target groups, it accommodates a certain degree of inequality

which may be necessary to create competitive pressure in order to generate more

resources which are of great importance for developing countries.

Indeed, under the maximin capability framework, a socially acceptable level of

inequality in capability space may be accommodated as long as it is to the benefit of

the most deprived groups in the society. Such a degree of inequality can vary across

time and place, depending on the initial conditions and underlying characteristics of

society. The optimal and socially acceptable degree of inequality should be within the

range that helps to create and/or maintain competitive pressures, offering sufficient

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incentives for individuals to work hard to raise the level of the resources, while

ensuring the maximum enhancement of the capability set of the least well-of groups.

Policy can be formulated so as to extract the most out of potential productivity as long

as the resulting inequality is no greater than necessary to promote well-being of the

more deprived, at least in the short-to-medium-term. It is argued that high inequality

beyond a socially optimal range has the potential of creating social unrest, political

instability, which can considerably hinder the process of capability expansion.

Maximin capability framework is not in support of any policy which generates

inequality beyond the specified socially optimal range, and is in favour of policy

which generates the lowest level of inequality, given the same capability expansion

outcome.

In principle, according to Sen, the first best solution is to maximise capability of all

individuals. However, due to the resource constraints which can be severe and

prevalent in developing countries, prioritisation of resource utilisation may have to be

made. For the purpose of this study, the maximin equity criterion is taken to imply

that, given the prevailing inequality in the society in the short-to-medium-term, the

focus should be given to improving the situation of the least well-off under certain

constraints.

However, in relation to economic development policy, it may be argued that resources

may be better utilised if they were to be invested in the elite group who may have a

greater chance of generating overall growth in resources which can then be distributed

to the worst-off--a line of reasoning similar to the ‘trickle down’ argument in

development economics.

In response to this, it can be argued that focusing on the elite group may be more

likely to increase the inequality gap, which, as argued earlier, can potentially be

damaging to a sustainable and equitable development path. Therefore, by targeting

resources to improving the capability set of the most deprived, maximin capability

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framework may effectively promote resource growth as well as equality in the

capability set, in line with the bottom-up approach to development.

Thus, the proposed objective of economic development policy under the maximin

capability framework is to expand the set of valuable capabilities of the worst-off

groups subject to equal right, liberties, and opportunities, and a socially optimal

degree of socio-economic inequality. Indeed, such a valuable capability set and a

degree of optimal inequality may change over time and across places.

Correspondingly, policy is to be evaluated based on its effectiveness in improving the

quality of the already available capability set as well as expanding the number of the

valuable functionings in the capability set of the least well-off individuals subject to

the constraints mentioned above. Although the information required for the well-

being and policy assessment is restricted to these targeted groups, the framework is

demanding in terms of the richness and details of the data.

Importantly, it should be noted that although the maximin capability framework is

developed with the application to developing countries with inequalities and pressing

resource constraint problems in mind, it may potentially have some useful

implications for more developed resource-opulent countries as well. One of the main

advantages of being a developed resource-rich society is that the pressure regarding

resource constraint may not be as severe as in a developing country. As a

consequence, a more developed society may have less pressing needs to prioritise the

limited resource as compared to developing countries. They may choose to maximise,

equalise, or maximin the enriched valuable capability sets for all individuals.

However, the fact that a more developed country may be able to afford to maximise or

equalise the enriched capability set for all does not rule out the possibility that, in

certain circumstances, the maximin equity rule may potentially be preferable or

applicable to such resource-abundant societies as well.

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4. Maximin Capability Analytical Framework for Econ omic Development Policy

Maximin capability framework, following Sen’s capability approach, emphasises

greatly on the differences between ends and means to human well-being and

development. In building an analytical framework for economic development policy

objective and evaluation in line with the maximin capability perspective, it is

imperative to make this distinction clear. Therefore, the main sets of variables in the

analytical framework are categorised into five sets according to their roles in relation

to an end of human well-being, which is defined by an individual’s capability set.

These five sets of variables are: capability set of the most deprived group in society;

direct means; intermediate means; macroeconomic variables; and observed policy

outcome variables. Each set of the variables are then linked together by the

corresponding sets of conversion vectors.

The conversion vector can be derived by taking into account the relevant factors that

may influence the nature of the transmission mechanism from one set of variables to

another. The presence of the conversion vectors in this framework allows for the

possibility that similar policy or resource inputs may deliver different outcomes in

different contexts. The differences in these outcomes (given the same policy and

resource inputs) may be explained by various factors which may be context-specific

to one case but not to another. For instance, the same amount of funding (resource

inputs) for developmental projects may deliver different results in different

environments due to geographical differences.

In a standard case of economic development policy based on maximin capability

framework, there are five main sets of variables in the transmission mechanism and

four main conversion vectors connecting each set the variables.

The first set of variables is the capability set of the least well-off group. Under

maximin capability framework, the end objective of an economic development policy

in question is to enhance the capability set of the least well-off group in a society. It

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is important to note that the number and nature of functionings in the capability set to

be studied are flexible and may vary from case to case according to the context and

personal characteristics and social backgrounds of the individuals in question. In

addition, it is often the case that improvement in a capability set produces positive

feedback effects to other sets of means variables

The second set of variables is the direct means. They are means such as goods,

services and other resources that are directly related to promoting the valuable

functionings in the capability set of the poorest in question. For example, food is a

direct means to the functioning of being nourished, a bicycle may be a direct means to

the functioning of being mobile, a book can be a direct means to the functioning of

being educated, and jobs in the labour market can be a direct means to the functioning

of being employed. Direct means, in this sense, are linked to the desired valuable

functionings in the capability set via a set of personal and social conversion vectors

(Robeyns, I. 2000) Important constituents of the personal and social conversion

vector include, for example, metabolism rate, intelligence, physical conditions

(whether a person is healthy, ill or handicapped), cultural backgrounds, gender role

and discriminating practices (Robeyns, I. 2000).

The conversion vector determines how much, and in which manner, direct means can

be translated into changes in the quantity and quality of functionings of the

individuals in question--the least well-off groups in this framework. For example, the

effectiveness in translating the same amount of food, which is considered as a direct

means, into the functionings of being well-nourished may be quite different for

different individuals depending on their metabolism rate and physical conditions.

Indeed, each person may have a unique personal and social conversion vector due to

the diverse nature of human personal characteristics and social backgrounds. This

ability to be sensitive to the uniqueness of each individual and to take into account of

people’s diversity is among the most pioneering and influential features of Sen’s

capability approach.

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The third set of variables is the intermediate means. They are variables that

contribute to generating direct means for enhancement of the capability set.

Intermediate means come prior to direct means and posterior to macroeconomic

variables. Intermediate and direct means are linked by a set of relative price and wage

conversion vector. This conversion vector determines the amount of direct means that

can be derived from the available intermediate means. The relative price and wage

conversion function may shift over time and vary across places, depending on the

structure of the economy in question.

For instance, in the case where the functioning in question is functioning to be well-

nourished, the direct means can be said to include, for example, rice, clean drinking

water, meat, vegetables and fruits. The intermediate means in this context that

contribute to generating such direct means may include wage income, credits from the

bank, and government cash benefits. Indeed the manner in which these intermediate

means (in monetary unit) can be translated into the direct means of rice, clean

drinking water, meat, vegetables and fruits may depend largely on the prices of these

goods, represented in the relative price and wage conversion vector in the maximin

capability analytical framework.

For another example, the direct means to the functioning of being employed may be

jobs available in the domestic labour market7

. The intermediate means to the

functioning of being employed (in that it is influential in generating the direct means

of job availability in the labour market) may be aggregate demand in the economy.

The manner in which the aggregate demand can be converted into jobs available to

the poorest in the domestic labour market may be influenced by the price and wage

structure (the real wage rate is equal to the nominal wage rate divided by the price

level) in the economy expressed by the relative price and wage conversion vector.

The fourth set of variables is the macroeconomic variables, which are potential

resources that may promote the intermediate and the direct means for capability

enhancement of the poor. Favourable conditions and availability of macroeconomic

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variables may be a necessary but not a sufficient condition for capability expansion of

the poor.

For example, the macroeconomic variable that may be relevant in an economic

development policy assessment may include variables such as credit availability,

government revenue and domestic investment level, which are important in

determining the availability of the intermediate means necessary for capability

enhancement. Credit availability and government revenue may be important factors

in generating the credits to the poor and government spending on the poor that can be

considered as intermediate means for the direct means such as food, houses, and

books, which in turn can contribute to the enhancement of human capabilities such as

being well-nourished, being-sheltered and being educated, respectively. Domestic

investment, by the same token, may be an important contributing factor in generating

the aggregate demand in the economy (the intermediate means) which in turns can be

translated into jobs available for the poorest in the domestic labour market (the direct

means) for the functioning of being employed.

The extent and manner in which the macroeconomic variables can be translated into

the intermediate means for capability improvement is largely dependent on the

underlying sectoral policy and institutional conversion vector. Institution, which is a

main constituent in this sectoral policy and institutional conversion vector, can be

defined as “humanly devised constraints that shape human interactions” (North, D.C.

1999: 3). The relevant social policy and institutions that can be argued to facilitate

capability expansion of the poorest which may need to be taken into account when

deriving the conversion vector are, for example, micro-credit institutions and local

government agencies, non-governmental organisations with clear developmental

goals, pro-poor social policy, employment rules and regulations, trade unions,

minimum wage policy, etc..

For instance, it can be said that a developing country where the majority of the

poorest citizens are in the agricultural sector may do better in promoting the capability

of the least well-off if the sectoral policy and institutions are set up with an explicit

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aim to promoting productivity in the agricultural sector, than in the case where an

explicit pro-poor policy aims and institutions are not in place. The differences

between the sectoral policy and institutional conversion vectors in different cases and

time may be due to the variations in the focuses and objectives of the sectoral policies

and local institutions. And such differences may be able to explain the possible

diverse outcomes from similar policies in different cases and time.

The fifth, and the final set of variables is the observed policy outcome variables. This

set of variables may change according to the policy under examination. For example,

if the policy in question is a trade policy, then the observed policy outcome variables

may include variables such as exports and imports volume or value. In a case of

capital account liberalisation (CAL) policy, the observed policy outcome variables

may include variables such as foreign bank lending (FBL), foreign portfolio

investment (FPI), and foreign direct investment (FDI) flows.

It can be argued that the effectiveness of a policy is greatly influenced by the

institutional and infrastructural conversion vector of a particular society.

Furthermore, impact of similar policy outcomes on an economy may vary from case

to case and over time depending on various dynamic factors that constitute the

institutional and infrastructure conversion vector. The differences in the institutional

and infrastructure conversion vectors between cases and across time may be explained

by the variations in the nature of the formal and informal institutions8

and

infrastructure.

Considering the case of CAL policy as an example, the relevant formal institutions

may include factors such as political regime, laws and orders, rules and regulations,

exchange rate regime, and tax system. More informal institutions may include factors

such as social norm and work ethics. The relevant underlying infrastructure of the

economy in the case of CAL policy examination may include: physical infrastructure

such as the availability and efficiency of transportation, telephone and internet

networks; and the banking and financial sector infrastructure such as availability and

efficiency of the internet banking facilities or credit transfer system, etc.. These

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institutions and infrastructures are important in shaping the nature and robustness of

the impact of the observed capital flow variables on the relevant macroeconomics

variables. For example, the institutions like rules and regulations and tax system may

determine the level and nature of the capital inflows, while infrastructure such as

internet banking and credit transfer facilities may facilitate the movements of such

flows. Moreover, it is important to note that in some cases, it is possible that the

relationship between the observed policy outcome variables and macroeconomic

variables is of a dynamic interactive nature, generating feedback effects between each

other.

In constructing this analytical framework, the issues of causality and feedback effect

are of importance. More often than not, improvement in capability of the poorest may

have positive feedback effects on the means variables, covering macroeconomic

variables, intermediate and/or direct means. Moreover, it can also be suggested that

in some cases, it is possible that the relationship between the sets of observed policy

outcome variables and macroeconomic variables is of an interactive nature. They

may influence each other, producing feedback effects. Causality is indeed an

important issue regarding the relationships among the five sets of variables.

The basic constituents of the maximin capability analytical framework are the five

variable sets (four sets on means variables and one set of end capability variables),

and the corresponding sets of conversion vectors. The relationship among them is

summarised in the figure 1. In constructing a framework for policy analysis, each

variable is selected in accordance to its relevance to the policy under examination.

While the variables under the five sets may vary from policy to policy and/or case to

case, the categorisation of fundamental sets of variables remains unchanged. In

selecting the variables for the framework, we work backward from choosing the

relevant functionings in capability set, and deduct them back to the policy outcome

variables.

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Figure 1: Basic Structure of Maximin Capability Framework for Economic Development Policy Analysis

Personal and Social

Conversion Vector

Institutional and Infrastructural Conversion Vector

Relative Price and Wage

Structure Conversion Vector

Sectoral Policy and Institutional Conversion Vector

Observed Policy Outcome Variables

(Means)

Macroeconomic Variables

(Means)

Direct Means

(Means)

Intermediate Means

(Means)

Capability Set of the Poor

(End)

------> implies possible feedback effects

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Capability set of the most deprived, the space in which we base our evaluation, can

include numerous and diverse functioning vectors, and they may vary from case to

case. For the purpose of examining the economic development policy, corresponding

to figure 2, let the capability set of the poorest include the following three main

groups of valuable functionings:1) a, b, c, being well-nourished, being educated,

being healthy, being sheltered, 2) h, …, n; o,.., being employed, having self-respect,

being skilful, being socially integrated, ..,t; and 3) u,…, being a part of a loving

family, being able to express one’s opinion freely, enjoying nature,…., y, z.

Furthermore, let the first group of functionings, a-n in figure 2, be the functionings

that can be the direct outcomes of the consumption of goods and services (direct

means). Let the second group of functionings, o-t in figure 2, be the functionings that

can be resulted from the availability of jobs (direct means), while the third group of

functionings, u-z in figure 2, are the functionings that may be the outcomes of the

direct means which are less directly related to economic activities such as peaceful

community, democratic system, and sustainable environment. Personal and social

conversion vector is the key factor in determining manner in which direct means are

translated into the achievements of functionings in the capability set.

For the purpose of illustration, CAL policy is selected as an example to demonstrate

how a specific policy framework can be derived from a basic maximin capability

analytical framework outlined in figure 1. With respect to CAL policy, it can be

argued that the relevant functionings are those functionings whose outcomes

correspond to the consumption of goods and services (the first group of functionings)

and obtainment of jobs (second group of functioning). It can be suggested that while

the links between CAL variables and these two sets of direct means (good and

services, and jobs available) can be evidently observed, CAL variables’ connections

to other direct means such as peaceful community, democratic system, and sustainable

environment can be said to be more indirect and complex. Therefore, in this case, the

selected variables for direct means are goods and services, and jobs available for the

poor in the domestic labour market. Correspondingly, the selected functionings under

the capability set are those which are the outcome of consumption of goods and

services, and obtainment of jobs. Other functionings, though vital for human well-

20

being, are not discussed in detail here for simplification, as they can be argued to be

less directly related to economic policy in question.

The next step is to determine the variables in the intermediate means set. Continuing

to work backward, we choose intermediate means variables in accordance to the

chosen direct means variables. The contributing factors that may help promoting

consumption of good and services of the poorest may include credits to the poor,

government spending on the poor in terms of social benefits, wage income, rents

generated from wealth. By the same token, an important contributing factor that may

help promoting the job availability for the poor is the aggregate demand in the

economy. Such intermediate means are translated into direct means via the set of

relative price and wage conversion vector, which can vary over time, following

structural changes, or across cases.

The relevant macroeconomic variables can be selected according to their relationships

with the intermediate means and the policy outcomes in question. Those variables

which are more directly related to the chosen intermediate means and the policy

outcome variables are to be chosen. In the case of CAL policy evaluation, such

variables may include credit availability, government revenue, and domestic

investment. Credit availability and government revenue may be translated into the

intermediate means of credit to the poor and public spending on the poor,

respectively, while domestic investment may affect the intermediate means of

aggregate demand in the economy, wage income as well as wealth of the poor. The

effectiveness of the conversion from the macroeconomic variables to the intermediate

means depends largely on the sectoral policy and institutional conversion vector.

The last step in selecting the variables is to choose the observed policy outcome

variables which can have an impact on the chosen macroeconomic variables. In the

case of CAL policy, all three types of capital flows, namely FBL, FPI, and FDI, can

be suggested to have impacts on credit availability, government revenue, and

domestic investment, and hence can be included in the policy outcome set to be

examined. The nature and degree of the impact the policy outcome variables may

have on the relevant macroeconomic variables may vary according to the institutional

21

and infrastructural conversion vector of the economy. Such a conversion vector may

vary across places and shift over time.

Importantly, when selecting the variables it should be recognised that relationships

between each sets of variables may exhibit feedback loops and non-straightforward

causation. Figure 2 outlines the maximin capability analytical framework with

particular respect to CAL policy. Vectors (a), (b), (c), and (d) represent the

corresponding conversion vectors for each relationship; namely, institutional and

infrastructural, sectoral policy and institutional, relative price and wage structural, and

personal and social conversion vectors, respectively. The variables below the dotted

line are those which are less directly related to capital flow variables.

22

(1) (2) (3)

(7) (8) (9)

(4) (5) (6)

(d) (c) (b) (a) Direct Means Capability of the Poor

Intermediate Means

Macroeconomic Variables

Capital Flows

Foreign Bank Lending (FBL)

Foreign Direct Investment (FDI)

Foreign Portfolio Investment (FPI)

Credit Availability

Government Revenue

Domestic Investment

Credit to the Poor

Aggregate Demand in Economy

Govt. Spending on the Poor

Wealth of the Poor

Wage Income of the Poor

Figure 2: Capital Account Liberalisation Policy and Maximin Capability Framework

Capability-

Enhancing Goods

and Services

(such as food,

medicine, clothes,

books, house etc.)

Jobs available for the poor

A,.. Well-nourished, Educated, Healthy, Well-sheltered, D, ….., N

O, Employed, Skilful, Having self-respect, Socially integrated, Q,.., T., ..

U, Being in loving family,.. ….,

V,.., Expressing view freely,…, ….,

X,…., Enjoying nature,…,

Peaceful Community,…,

Democracy,.., …

Sustainable Environment,…,

Variables Less Directly Related to Economic Policy

..Y,…,Z,. .., α, µ, ∞,..

23

Indeed, the maximin capability analytical framework developed here can be used to

examine other economic development policies. In applying the framework to other

economic policies, it is important to note that variables under capability set can vary

unrestrictedly in accordance with personal characteristics and preferences of the most

deprived group of individuals undergoing an assessment. Variables under the

intermediate means, direct means sets may change according to the chosen capability

set, while the variables under macroeconomic and policy outcome variable sets may

change according to the chosen capability set and policy being studied.

The maximin capability framework can also potentially be extended to offer a

framework for analysing the effect of other non-economic changes on capability of

the poor. The influences of the policy and/or external changes may work through the

intermediate and direct means before affecting the capability set. The relevant means

and functionings here may differ from the case of economic policy examination. In

this regard the variables of interest under the intermediate and direct means sets may

alter in accordance with the non-economic policies or changes as well as the selected

capability set under consideration.

5. Methodological Framework

Maximin capability framework is proposed to function as a partial policy objective-

setting and evaluation framework for developing countries in the short-to-medium-

term. The objective by which the policy is to be assessed is the ability to maximise

the valuable capability set of the most deprived groups subject to certain constraints.

It can be noted that people with different geographical and cultural environments may

be deprived in a variety of ways, making it difficult to compare. Therefore, in the

analysis under the maximin capability framework, more than one least well-off group

may be classified as the target groups.

The first step in trying to operationalise the maximin capability framework is to select

the most capability deprived individuals as a target group. This can be done by using

the already available capability indicators as a benchmark, be they Human

Development Index (HDI) and/or other official aggregate statistics. This first

24

capability set has a drawback of compromising on the context-specificity of the

framework. However, the initial set may be selected in the way that may reflect the

basic capabilities--such as ability to live a long and health life and ability to be

educated—necessary to enjoy other more diverse capabilities.

The second step, once the groups of the deprived individuals are identified, a context-

specific set of valued capabilities can be drawn up based on findings from first-hand

individual or group interviews in natural setting and direct observations. Such a

participatory capability selection process enables the capability set to be contextual,

geographical, and cultural specific, as the selected capabilities indeed may vary

greatly from case to case depending largely on the preference of the most deprived.

There are four main steps in drawing up the context-specific capability set. Firstly, the

targeted individuals are asked to list all the capabilities that they think are valuable to

their lives. All the capabilities that are mentioned by the most deprived are then

listed, by the order of frequency. Secondly, the frequently mentioned capabilities are

selected to form a separate capability set. Thirdly, another round of interviews is

conducted, asking the individuals involved to rank or put value to each capability

variable on the list. Finally, after two rounds of interviews, we now have a list of

frequently mentioned capabilities together with their ranking or valuing scores. A set

or index of context-specific capabilities can then be formulated based on these

findings.

For the purpose of well-being and/or policy evaluation, all or most of the mentioned

capabilities on the list may be used to compile a case-specific capability index.

Alternatively, one or a few most frequently mentioned and highly valued capabilities

can be used as a case-specific evaluative space. This largely depends on the time,

resources, and objectives of each study and project. This list of capabilities may be

similar to other existing lists already available; however, such a list has more

democratic legitimacy to a particular environment and is more context-specific.

The third step is to evaluate the impact of the policy on the chosen capability set of

the most deprived groups. This can be done by employing both qualitative and

quantitative data and analytical tools. The participatory qualitative methodology is

used to obtain the rich and detailed insights of the quality of life of the deprived,

25

while the quantitative methodology, including regression and statistic analyses, may

be able to shed light on the channels and extent to which the policy has an impact on

the well-being of the deprived groups and other sections of the population.

The last step is to draw policy implications in light of the findings from the previous

steps. In deciding which policy is beneficial for the economy, it is the policy’s ability

to promote the valuable capability for the bottom section of the society which is of the

interest. Similarly, policies are ranked by their effectiveness to improve the quality of

life and expand the valuable capability set of the most deprived.

It must be stressed that maximin capability framework, in its current form, is

proposed to function as a partial policy objective-setting and evaluation framework

for development, and not a comprehensive development strategy where policy

packages can be advocated in order to achieve long-term development goals. It is

formulated with the aim to serve as a policy objective-setting and evaluation

framework that may potentially be applied in many contexts and locations in

developing countries. Moreover, maximin capability framework may be used as a part

of, or to supplement, other development paradigms in assessing a socioeconomic

development policy.

6. Limitations of Maximin Capability Framework

The potential challenges for an attempt to employ the maximin capability framework

at the empirical level may include the two important and interrelated issues regarding

1) data limitation and 2) capability selection, measurement, valuation, and

aggregation.

The main difficulties stemming from the limited data availability are twofold.

Firstly, while capability index, capability set, or a single capability-enhancing

functioning can all potentially be used as an evaluative space, provided that they are

case-specific and derived from the first-hand information collected from the poorest

in the society affected by the policy, it would indeed be more complete and

26

informative to construct a capability index or set comprising all of the relevant and

influential capability-enhancing functionings mentioned by the poorest and to employ

this capability index or set as an evaluative space. However, due to the limitations on

the accuracy of the valuation and weighting methods and on data availability, a

capability index or set may not be straightforwardly constructed and employed.

Furthermore, some desired capability variables such as individual’s health status,

living conditions, the nature of family (whether or not it is of a loving kind), and

generosity among the community network are not readily available or could not be

quantified.

Secondly, although the concept of the conversion vector is central to the maximin

capability framework, it is not always possible to quantify the values of the factors

constituting the conversion vectors and/or develop a mathematical model based on

these vectors in order to estimate and/or forecast the impact of certain policy or

resource input on the capability of the least well-off. Conversion vectors may be

derived from a large spectrum of variables which are considered relevant to a

particular case and question at hand, ranging from factors such as political regime,

physical infrastructure, legal framework, stock of human capital, accounting standard,

and rule and regulations to more personal and individualistic variables such as

metabolism rate, gender, health conditions, and social norms. Not all of these factors

can be straightforwardly quantified and calculated.

With regard to the difficulties associated with capability selection, measurement,

valuation, and aggregation; it can be suggested that the maximin capability framework

may potentially be able to incorporate all the important capability variables valued by

the least well-off in a given context (instead of focusing only on the observable

achieved functioning outcomes) by relying on the findings from the case-specific

first-hand qualitative data collection on what constitutes the well-being, in terms of

capability, of the poorest. However, at the practical policy and measurement levels,

the maximin capability framework still suffers from three immediate limitations.

The first limitation is the fact that it may be too costly to ask every individual

involved to define their desired valuable capability set. A more practical and cost-

27

effective method may be to ask a certain selected number of individuals instead of the

whole population in question. The potential loss of information and possible sample

bias may occur in the process of making this practical compromise.

The second limitation is that even if the desired capability set of the relevant

population can be defined, it is difficult to quantify every possible capability variable

mentioned by the poorest and construct a complete capability index. Therefore, at the

empirical level, the capability analysis may need to rely on quantifiable proxies which

may often be the more conventional means-based variables, as opposed to the end-

based capability variables.

And the third limitation concerns the lack of a standard and well-established method

for context-specific functioning and capability valuation, weighting, and aggregation.

The maximin capability frameworks proposes one of the possible ways in which a

context-specific capability set can be constructed, however, it has not offered a

precise method and mechanism for well-being comparison and aggregation.

Thus, it may be suggested that further work in trying to link the theoretical and

conceptual framework to the practical policy assessment based on the maximin

capability approach may be worth considering. They may include efforts 1) to

improve the quality and availability of the data on individual’s desired capability sets

(such as individual’s health status, education opportunities, nature and characteristic

of family and community network, and quality of living environment; 2) develop a

specific and cost-effective method for well-being comparison and aggregation which

also takes into account the issue of human diversity and context-specificity; 3) to

investigate and quantify the values of the factors which may have influential roles in

translating means into an end of capability expansion.

7. Concluding Remarks

Despite the limitations and difficulties in its operationalisation at the practical level,

the maximin capability has important and valuable characteristics of being able to

take into account the context-specific multidimensional nature of human well-being

28

and development in a cost-effective and clear-cut manner in the short-to-medium-term

particularly for developing countries with high levels of inequalities.

In view of the fundamental importance of the egalitarian, multidimensional, and

context-specific aspects of the development process as well as the prevailing

uniqueness and heterogeneity among individuals in a society, maximin capability

framework may offer a sound example of one of the ways in which Sen’s capability

approach and Rawls’s maximin equity criterion can be combined to form a

development economic policy framework for the short-to-medium-term timeframe,

particularly for developing countries with high levels of in equalities.

29

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Endnotes 1 For the purpose of the paper, the term neo-liberal economics is used to refer to an economic

framework which advocates free-market on the national and international levels in order to achieve maximum profits and income growth.

2 For the purpose of this study, Rawls’s difference principle is divided into 2 main components: social

primary goods as a working evaluative space and the maximin equity rule as an operating mechanism or objective function. 3 It is noted that when it was first established in 1976 by the International Labour Organisation (ILO),

the basic needs approach mainly argued for the promotions in the provision of basic goods and services in order to provide “the opportunities for full physical, mental, and social development of human personality” (Streeten, P., et al. 1981: 33). It was later that its advocates brought the basic needs approach into line with Sen’s capability framework by focusing on the basic functionings in the capability space and employing the concept of meta-production function [Stewart, 1985 #208; 1996 #136], which puts a decent life as a development policy objective. For the purpose of this paper, the discussions concerning the basic needs framework henceforth refer to its characteristics after the meta-production function was introduced. 4 When no other specifications are made, the terms ‘inequality’ or ‘inequalities’ refer to inequalities in

the initial resource endowments. 5 The idea that inequalities in expectations are chain-connected means that “if an advantage has the

effect of raising the expectations of the lowest position, it raises the expectations of all positions in between”(Rawls, J. 1999: 69). 6 The assumption that expectations are close-knit means that “ it is impossible to raise or lower the

expectation of any representative man without raising or lowering the expectation of every other representative man, especially of the least advantaged” (Rawls, J. 1999: 70) 7 It can be noted that only a certain fraction of the total number of jobs in the labour market is relevant

to the poorest. It may be suggested that low-skilled and labour-intensive jobs may be more suitable for the poorest as these jobs may require less education and training than the highly-skilled jobs. 8 Institutions include any form of constraints that human beings devise to shape human interaction.

They can be in the forms of formal and informal constraints. Formal constraints include rules and regulations that human beings create and informal constraints include conventions and codes of behaviour (North, D.C. 1999: 4)