By: Roberto Carlos Ventura
A step forward gets you closer to your destination if taken in the right direction. GDP does not take us there, it deviates from the course to greater welfare.
Since its founding in the 1930’s by economist Simon Kuznets, gross domestic product (GDP) has served as a tool to measure a country’s production and the size of its economy. Kuznets created this measurement with a warning that one too many institutions have blatantly overlooked: measuring national income should not be treated interchangeably or analogously as measuring a nation’s welfare. While GDP centers itself primarily on income, there are other crucial facets to well-being that are not considered, rendering GDP an imprecise candidate in gauging the progress of countries.
The purpose of reassessing the measurement method of countries’ progress and success is to ensure that as nations meet or surpass their development goals, they are heading in the right direction. If the metric is flawed, it can entail a misallocation of resources and a strayed national and global focus in improving the lives of its peoples. Although income growth can proliferate well-being as it provides fundamental needs, economist Richard Easterlin’s study has revealed that this increase in happiness only occurs up to a certain point. Thereafter, no such increase in income relates to an upsurge in well-being. In fact, in 2010, economist Dr. Paul Lassenius Kramp wrote a monetary review for Danmarks Nationalbank, the central bank of Denmark, that agreed with Easterlin’s findings. Kramp found that happiness and income are more closely related when comparing life satisfaction of rich countries than that of poor countries, as with a developed country like Denmark in contrast to a developing country such as Tanzania. However, it is shown that multiplications in income or GDP do not increase happiness. From 1980 to 2004, despite the United States having a higher GDP per capita than Denmark, the life satisfaction has decreased in the United States and conversely, increased in Denmark. What Kramp concluded was that although GDP per capita was growing in the United States, the median income was much lower, which means that GDP did not consider inequality in the economy. Inequality is one of many indicators not taken into account by GDP that can explain why life satisfaction would decrease for an increasingly rich country like the United States. Following that knowledge, it is no wonder why debates about alternatives to GDP have arisen.
Throughout the years, nongovernmental organizations, the United Nations, national and regional governments, and other institutions have adopted their own set of indicators that are tailored to aspects of development other than income, with aims to measure economic performance more holistically. This process could entail the encompassment of social indicators such as health, education, empowerment of marginal groups, quality of employment and free time, criminality, good governance, and other social factors; environmental indicators like access to water and energy, environmental degradation, biodiversity, pollution, and ecological footprints; and non-conventional indicators as financial transparency, sustainability and economic development, ratio of bank assets to GDP, and so on.
Two mechanisms of indicators are dashboards and single-value measurements. Dashboards lay out different indicators into a platform where users can compare performance within different categories or indicators. A single-value measurement, however, compiles every indicator taken by the index to create a definite value that allows for easier evaluation and comparison of overall economic performance. The only obstacle to a single-value measurement is the challenge to give a specific value to indicators. Some would weigh certain indicators heavier than others, which can be subject to controversy. Nevertheless, a single-value measurement provides for one measure that can help steer policy and provide an accessible report from the media to the public regarding a country’s performance.
The United Nations’ Human Development Index (HDI), for example, functions as a composite index of GDP per person, spending on health and education, and life expectancy. In fact, the UN’s 2010 Human Development Report even adopted a new index titled the Inequality-adjusted Human Development Index that, as the name discloses, now encompasses inequality as part of the HDI metric. Another well-known single-value measurement is the Genuine Progress Indicator (GPI) which combines 26 indicators ranging from economic, social, and environmental well-being all into one numerical value. The GPI covers personal consumption adjusted for inequality using the Gini coefficient, the value of nonmarket work such as child care and housework, the value of leisure and volunteer work, public goods such as education, health care, etc., defensive expenditures, and environmental impact. Maryland and Vermont are the two states in the U.S. that have commenced their shift in focus to GPI, with Washington and Oregon following close behind. Maryland has established new goals outside of what affects Gross State Product but that does apply for GPI, which includes reducing infant mortality, lowering greenhouse gas emissions and planting more cover crops. In 2012, Anthony Pollina, a legislator who developed Vermont’s GPI, stated that GPI can stop the cutting of programs that in turn hurt people and infringe their well-being.
The Organization for Economic Co-operation and Development’s (OECD) Better Life Index (BLI) is an ample example of a dashboard of indicators. The BLI comprises of income, jobs, community, education, housing, environment, governance, health, life satisfaction, safety, and work-life balance. While accounting for aspects of life that are vital for well-being, this dashboard may lead to difficulty in determining whether a country is truly progressing. Users get caught up with comparing indicators one at a time, making dashboards not as friendly as a single-value measurement when it comes to gathering the quality of life of a country annually.
GDP vs. GPI
An article by the New Republic concerning the swing from GDP to GPI reveals the difference between economic growth and economic progress in the graph below. Here viewers see the gap between GDP per capita and GPI per capita. This gap illustrates the discrepancy between an increase in economic output on one hand and a relatively unchanging measure of economic, social, and environmental progress on the other. GPI being the closer metric to well-being that it is, has remained almost the same within the 44-year range of the data. It is an unfortunate shortcoming that output proves to have been a higher priority than quality of life as the gap between the two continue to diverge.
Much discussion has spurred amongst economists, politicians, and leaders in institutions such as banks, governments, etc. concerning the ideal measure of well-being and progress. With a myriad of metrics, choosing one is a challenge. However, not moving away from using GDP as a measure of well-being can hinder true progress since it does not point nations’ efforts in the right direction considering the right facets of welfare. As Dr. Clair Brown, economist and professor at UC Berkeley, stated in her book, “No perfect measure exists,” however, “once countries agree to set and use the identical single-value metric to measure economic performance as quality of life, then each can decide individually what dashboard of indicators to measure and use to evaluate the goals most important to them.” Whether vital institutions around the world adopt GPI or some other single-value measurement, accompanied with a set of varying and specific indicators, they must put an end to the misuse of GDP as a measure of progress and well-being.
- Fox, J. (2014, October 08). The Economics of Well-Being. Retrieved January 27, 2018, from https://hbr.org/2012/01/the-economics-of-well-being
- Kramp, P. L. (2010). Gross Domestic Product and Welfare. Retrieved February 1, 2018, from http://www.nationalbanken.dk/en/publications/Documents/2010/07/gross_2q_2010_A.pdf
- Alternatives to GDP for measuring well-being. (n.d.). Retrieved January 27, 2018, from http://www.activesustainability.com/sustainable-development/alternatives-to-gdp-for-measuring-well-being/
- Brown, C., Ph.D. (2017). Buddhist Economics: An Enlightened Approach to the Dismal Science. New York, New York: Bloomsbury Press.
- Kubiszewski, I. (2018, January 12). Beyond GDP: are there better ways to measure well-being? Retrieved January 27, 2018, from http://theconversation.com/beyond-gdp-are-there-better-ways-to-measure-well-being-33414
- Daly, L., & McElwee, S. (2014, February 03). Forget the GDP. Some States Have Found a Better Way to Measure Our Progress. Retrieved January 27, 2018, from https://newrepublic.com/article/116461/gpi-better-gdp-measuring-united-states-progress