Amending the Measurement of Progress and Welfare

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.

Alternative Indicators                                                                                                                

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.

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(Source: https://newrepublic.com/article/116461/gpi-better-gdp-measuring-united-states-progress)

Looking Forward

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.

 

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Peru’s Educational Predicament

By Roberto Carlos Ventura

How Peru’s failing education system is causing a domino effect on their economy.

Education should not be overlooked as it plays a pivotal role in development, whether it be the development of a single individual or an entire country at large. Peru is experiencing a lack of economic diversity, an underproductive workforce, and major economic inequality, all triggered by a prodigiously poor education system. The quality of its educational system is encumbering the country’s economic growth and overall development.

According to an article by the University of Maryland School of Public Policy in Peru, public education is substandard because the government does not adequately invest in it. If there were more funding, investments would create improvements in human capital, enhancements in labor productivity, and upsurges in economic diversity and growth. However, in a Borgen Project article, an organization devoted to fighting global poverty, it was highlighted that funding from the government is not the only part of the solution. Although the funding is essential, its allocation is key in yielding effective results. The article mentions a perfect example: in 2012, the Peruvian government spent $225 million dollars on 850,000 laptops that were given to schools throughout the country. Despite this funding, the laptop program did not increase students’ levels in mathematics or reading comprehension. This example identifies the possible problem of allocation, but the setback may also lie within the actual use of the tools that were bought. Furthermore, if students were better prepared or trained to use this technology to their benefit there could have been better results. Arguably, the funding could have been allotted to more practical educational instruments.

Inadequate infrastructure poses detriments to the education system. With poor infrastructure, schools fall short on providing an environment with an appropriate atmosphere to engage in learning. It may then be expected that investments made on infrastructure simultaneously help develop the education system. Moreover, it is noted by the University of Maryland post that a deficient education system does not offer workers with skills crucial to prosper. In turn, the massive uneducated, poor population of Peru is inflexible in its employment options. Peru’s undiversified workforce, desperate to achieve greater earnings for their labor, is then attracted to the infamous and lucrative informal sector of the economy.

Despite being illegal, the informal sector is a magnet that entices 75 percent of the workforce in Peru. Additionally, this great percentage of laborers are subject to the absence of social benefits for their work and the government is stripped of any revenue it could have made from this substantial portion of economic activity. In fact, 60 percent of Peru’s GDP is rooted in these informal pursuits. Peru’s unofficial sector includes key economic activities such as gold mining, farming, and fishing, which themselves are not illegal unless they are conducted privately without government awareness. The fact that informalities are non-taxable means that potential government revenue, that could have otherwise funded projects concerned with the advancements of the education system and infrastructure, is unobtainable. On another note, the economic uniformity seen in Peru coupled with the huge profits of informalities have ensued major income inequalities amongst different regions.

According to the Borgen Project and to a ranking conducted by the Program of International Student Assessment in 2009, Peru is near the bottom of the 65 countries evaluated on reading comprehension and science and ranked second to last in mathematics. In another article by the Peruvian In Me, which concerns itself with poverty and education in Peru as well as gender equality, it is stated that only 43 percent of rural women between the age of 20 and 24 had finished secondary school. Both statistics beckon Peru’s failing education system which, as previously remarked, has inevitable ramifications. Yet, there is another factor to this failure in the education system that lies within the layer of infrastructure problems, particularly in rural areas where approximately 6.7 million people live as of 2015. People in rural areas experience a complete absence of transportation; in some cases kids have to walk an hour to get to school, and safety is a concern for students who are at risk of danger while returning home during the night after the school day.

Nevertheless, there is hope to achieve a solution to Peru’s principal economic problem in the long run. The aforementioned School of Public Policy suggests that reducing informalities is absolutely necessary in order to promote overall economic growth. However, to do so there must be improvements in the quality of and access to education. There must also be greater training of workers to then encourage them to participate in the formal economy which would be a more lucrative deal to them than informal endeavors. Investments on Peru’s infrastructure and education system are pivotal. As for funding in education, it is imperative to carefully allocate resources into effective programs promoting educational progress and to ensure students’ ability to make the most of the tools made available to them.

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Maquiladoras: An Equitable Endeavor or Acquisitive Plot?

By: Roberto Carlos Ventura

Multinational corporations are creating more problems for Mexico than they alleviate.

Have you ever been in an unbalanced relationship, where one partner seems to be consuming all the good that is within the other? It is a toxic association entailing the fortune of one affiliate at the cost of the other’s well-being. However, what happens when the partners in the relationship are each an entire country? The continuing rise of one country through this relationship imposes threats to the standard of living for unfortunate countries as they are used as stepping stones to achieve even more prosperity. The United States and Mexico share this intimate, virulent relationship. The economic inequality between these states, let alone that of Mexico in and of itself, is poignant. Since the founding of the infamous maquiladora program in 1965––US owned factories on the Mexican side of the  border––neoliberalists have praised the growth of multinational corporations and foreign direct investment. We must then ask, are maquiladoras as generous to Mexico as they are to the United States? Or do maquiladoras foist more detriments on Mexico?

Ideally, with economic globalization–the increasing interconnectedness of world economies due to an intensification of cross-border transactions–both the host country and multinational corporation should benefit from the relationship. According to Matthew Krain, a professor of political science and international studies and the author of the Globalization Briefing Paper, improvements in wages, working conditions, and the national employment rate are expected for the host country. However, this has not necessarily been the case for Mexico. Maquiladoras: All You Need to Know, an informative website sponsored by Weebly, a web-hosting service provider, revealed that Maquiladora workers work anywhere from 48 to 60 hours per week, earn only 50 cents to 1 dollar per hour.  To understand the purchasing power difference between what a Mexican maquiladora worker and a US minimum wage worker make, it takes a maquiladora worker 1 to 1 and a half hours to buy a single kilogram of rice while it takes a US minimum wage worker 10 minutes to buy that same bag of rice.

Working conditions are appalling. Maquiladora workers are either poorly trained or not trained at all, work with malfunctioning, weary machinery and equipment, and are exposed to dust-born chemicals and dangerous vapors. The only facet of the ideal outcomes of economic globalization that has technically remained true is the increase in national employment. According to Trading Economics, an online platform that offers historical data, forecasts, and trading recommendations, Mexico has a steadily growing employment rate since its last relatively large drop nearing 2010. This growth makes sense considering that introducing foreign factories would undoubtedly increase the amount of jobs available, but it is Mexico’s sustainability that has not correlatively increased with this employment rate trend. Key differences between a country like the United States and a country like Mexico are discernible. Predominantly, the former is developed while the latter is developing. Therefore, it would make sense as to why Mexico faces the conditions it does. But, does it really make sense? Was Mexico’s cross-border relationship with the United States considered? Maquiladoras pose a greater threat to Mexican society and its development than was initially expected.

Though disastrous to the environment and to the people of Mexico, the United States has much to gain from this globalized relationship. Investing in the maquiladora program has lowered the labor costs of manufacturing products, which in turn has made U.S. firms more competitive in the global market, produced more profits for U.S. companies, generated more jobs requiring skilled workers, and, perhaps the most imperative outcome, lowered the price of products for consumers in the U.S.. Maquiladoras have technically improved Mexico’s employment rate, employing nearly a million people, and have enabled Mexico to make enough foreign exchange to stay afloat in the global economy. Nonetheless, it is established that the United States reaps more benefits from the maquiladora program than Mexico. While having more jobs available and remaining relatively stable in the global market, the detriments of maquiladoras outweigh the advantages.

The effects of maquiladoras are apparent beyond the workplace, in fact these effects have altered the composition of Mexico entirely. According to the Mexico Urbanization Review, published by the World Bank Group, Mexico is at an advanced stage of urbanization, with about 77 percent of its population living in urban areas in 2010, having experienced a rapid urbanization throughout the mid-20th century. This period is around the time that maquiladoras became prominent in Mexico. In fact, Mexico in the early 1990s saw rapid economic growth in the north of the country due to an influx of capital and the development of maquiladoras. With the growth of economic activity in the northern megacities, urbanization follows. However, the concentration of economic activity in cities with maquiladoras has fostered an ever-growing economic inequality between regions such as the industrialized north and the less-fortunate, rural south of Mexico. Northern Mexico is favorable to the United States since it is closer in proximity to the US-Mexico border. Therefore, it would be expected that Mexicans seeking employment would pack their bags and migrate to the north.

Nevertheless, in a developing country like Mexico, migration is not feasible for everyone. With the economic disparities between the north and south arise social ramifications, especially gender inequality. Since structural adjustment programs allocate funds from social welfare programs to export sectors and profit-producing endeavors, money spent on health, food, and housing subsidies are almost, if not entirely, eliminated, affecting women the most since they are the ones dependent on these programs. They suffer most from these cutbacks because they are typically the caregivers in the family. Moreover, they are not as mobile as men because women tend to nurse children and the elderly. Consequently, it is not as practical for women to migrate to the northern, maquiladora-abundant cities. Though when women do move to these urban areas, they make up a great sum of the employment in low-skilled, low-waged factories with worsening conditions.

Ironically, these conditions of maquiladoras, both internally and externally, continue to degrade while more foreign direct investment is situated in Mexico. The reason for this paradox lies in the race to the bottom, referring to a dynamic whereby companies seek the lowest level of regulation and taxation, forcing competing governments to lower their standards of labor, human rights,  environmental protections, taxes, and other regulation. Basically, Mexico keeps lowering its standards to continue attracting multinational corporations. But of course, as Mexico competes with other developing countries to secure an influx of capital, it sacrifices essential facets of quality of life for its inhabitants. Developing countries are defeating themselves to entice multinational corporations and in Mexico, maquiladora workers bear the brunt of these effects. The internal conditions of maquiladoras comprise the worsening wages and working conditions. The external conditions predominantly include housing conditions and environmental degradation. Mexican workers typically live as squatters near the maquiladoras where they work. The Maquiladoras: All You Need to Know website unveiled abysmal truths of these squatters, stating that these workers live in shacks which they built on unclaimed land with unpredictable living conditions. These shacks typically are made with leftover maquiladora materials, and are surrounded by mud, contaminated rivers, and highly toxic air. The common consequent health issues that arise range from headaches, stomach pains, and chest pains to even birth defects and cancer. Additionally, the race to the bottom prompts the Mexican government to disregard environmental policies and concerns to remain appealing to multinational corporations. Holding these foreign companies accountable for their pollution through regulation and taxation would be a disincentive for any more foreign investment to be allocated to Mexico. In fact, if Mexico enforced or formulated environmental laws, companies could easily move to other developing countries that are willing to not hold them responsible for their not-so environmentally-friendly practices. Therefore, Mexico turns its cheek and allows these companies to do as they please with the environment. Ultimately, Mexico will be on the losing end because multinational corporations are mobile and when they decide to move on, Mexico will have to pay the cost of years of environmental abuse. Industrialization in Mexico has already led to more emissions, contributing to global warming and a deterioration of air and water quality. These corporations have also failed to dispose of their waste properly, instead dumping it into the rivers or nearby colonias where most maquiladora workers live. The water nearby is undrinkable, the skies are filled with brown smog, and the people are ill. Regardless of the effects of maquiladoras, foreign investment continues to influx into Mexico and the unsustainable, reckless practice persists.

As of now, the United States continues to be instrumental in the disorder of Mexico and as consumers of the products manufactured in maquiladoras.We cannot continue to disregard the intolerable acts of multinational corporations on the developing world simply because it does not occur in our own backyards. In an ever-globalizing world, we must think globally and act locally. In other words, take into consideration your everyday actions for they may indirectly contribute to the injustices within the international community. The point has been reached where relationships amongst countries are as common and vital as relationships amongst individuals. A secure, balanced relationship between two countries in the lens of economic globalization can be achieved. A resolution that ensures the benefits of free trade to both parties in the transaction and dodges its potential detriments lies in establishing regulations and abiding by laws that safeguard countries, their people, and their environments.

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Economic Salvation: Can Privatization Prove to be Prudent for Brazil?

By: Roberto Carlos Ventura

“In the midst of economic downturn, President Michel Temer is spearheading Brazil’s biggest privatization package. However, will this alone save Latin America’s largest economy?”

Brazil is currently fighting through a gruesome recession; it is the worst in more than a century. Ironically, Brazil attracts almost half of all South America’s foreign direct investment (FDI) influx, and these investments continue to increase despite Brazil’s evident economic turmoil. A large chunk of the blame for this turbulence falls on former president Dilma Rousseff’s leftist practice of government intervention, as stated in an article by The Economist, a magazine-format newspaper. Expectedly, leadership in Brazil shifted elsewhere in hopes of achieving economic alleviation.

In the wake of a vacant presidency, following Rousseff’s impeachment at the end of 2015, pro-business President Michel Temer and his contentious administration have come into power and are spearheading the biggest privatization package Brazil has ever seen. Privatization refers to the transferring of ownership and control of a business, industry, or service from the public to private sector. However, the new reform agenda proposed by Temer entails an auctioning off of an overwhelming number of state-owned enterprises. According to an article by the U.S. News and World Report, a multi-platform publisher of news and information, 57 state assets are included in the privatization drive, encompassing Eletrobras–a major Brazilian electric utilities company and, in fact, Latin America’s biggest power utility enterprise. Additionally, as provided in a Financial Times article, Petrobras–a former state-owned oil company–has been shedding assets and selling them to international investors. Petrobras is now deemed as a semi-public Brazilian multinational corporation.

The Brazilian government justifies its privatization agenda with promises of increasing efficiency, attracting more foreign investment, and lifting the economy out of its dreadful pit. Nevertheless, the plan comprises deregulation, which, for many companies, can invite excessive risk-taking and disregard for social responsibilities. Another article by The Economist highlights Temer’s constitutional amendment proposal which would freeze public spending. This amendment is the centerpiece to his plan and could be unmerciful to health and education, which consumes more than a fourth of the country’s revenue. Brazil’s high taxes are also faulted as paying for its past fiscal profligacy.

Michel Temer’s goal is to strike out every barrier listed in Brazil’s foreign investor profile. According to the U.S. Department of State: 2014 Investment Climate Statement, Brazil is considered friendly for FDI, however, taxes, local content, and regulation are its impediments. Therefore, it makes sense as to why the president’s agenda targets these three facets of the economy, as it would allow for greater attraction of foreign investment and Brazil to proceed with privatization. But, is this plan of action enough? Does privatization ensure efficiency and can it singlehandedly lift Brazil’s economy out of its economic downturn?

In the same statement by the U.S. Department of State, it was noted that Brazil had begun a Logistics Investment Program worth 240 billion dollars with the aim of attracting private capital and managerial expertise to upgrade the country’s infrastructure–including roads, ports, airports, energy, urban mobility, etc; all infrastructure concessions are especially open to foreign companies. Notably, this program’s ambition had been put in place right on time as Temer’s government set its intention to sell off everything from the mint to the state lottery in order to raise revenue and boost infrastructure investment, as written in the Financial Times article. Steven Horwitz, the Schnatter Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, explains this favor of privatization as one that stems from the private sector’s ability to provide goods and services at a lower cost and higher quality than the government can. Sounds ideal, except, as Horwitz points out, privatization is only the first step and alone cannot achieve this efficiency that Temer and his government so urgently want to reach.

According to Horwitz, there is an essential stepping stone to attaining the paybacks of privatization and it lies not necessarily in private ownership, rather in competition amongst private owners. He also claims efficiency may require private ownership but it alone is not enough, that is, until de-monopolization is introduced. Changing from a government monopoly to a private monopoly apparently does not lead to clear economic solutions. Horwitz distinctly underlined in his account of privatization, “notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not consumers.” Therefore, de-monopolization is vital in the initiation of competition, which then enables a country to attain the private sector’s fruitful efficiency–providing greater quality, lower cost goods at the benefit of consumers instead of government agents reaping political benefits.

With the wave of ownership shifting to the private sector, Brazilians grow worrisome and skeptical. The U.S. News article reveals Brazilians’ suspicion regarding the selling of state-owned assets to private hands, for these private, foreign entities are accused of making corrupt deals with the government in the first place. In fact, Temer was apparently taped participating in a discussion of bribes with former chairman of JBS, a major meat packing company, as brought to awareness by a Financial Times article. Moreover, there has been talk about corruption scandals in both Eletrobras and Petrobras. Nevertheless, these allegations may not come as a surprise to Brazilians for even the U.S. Department of State has referred to corruption scandals as regular features of Brazilian political life.

Still, there are great severities directly affecting Brazilians on a day-to-day basis. According to last week’s The Economist magazine, state governments–such as Rio de Janeiro–are experiencing failure of policing, financial mismanagement, and economic misfortune, which give the state no other option but to turn to the federal government for aid. However, the helping hand that is the federal government places certain conditions on its support, specifically on cuts in spending. This has lead the state of Rio de Janeiro to cut 30% of security spending–a vital necessity for an area filled with ever-increasing gang violence–as well as the halt of salary payments for public workers, especially policemen. With law enforcement winding down and violence increasing at a quicker rate, many Brazilians are at the center of a chaotic catastrophe. Citizens are going missing and flying bullets are becoming so common that victims can barely be distinguished. Are Brazilians supposed to wait until the privatization process takes effect and foreign investment improves infrastructure, and with it a possible end to what is still an ongoing violence within favelas? Government has its plan set but action is gradual and may prove to have gaps in its implementation.

After almost 6 years of leftist government interventionism by Dilma Rousseff, President Temer and his government have shifted gears and set Brazil in course for privatization. Although this course of action may possess potential for Brazil to finally overcome a pernicious recession and government meltdown, its execution is questionable. If Steven Horwitz’s exposition holds true, Brazil’s leadership may be overlooking a crucial aspect of the process that can ultimately direct Brazil to a much needed economic salvation. Brazilians anticipate the day when they no longer live in anxiety and amid corruption.

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