09 January 2013

Shifting Away from GDP to Measure Growth

Rob Dietz and Dan O'Neill make the case for no longer using GDP as a measure of well-being in the Stanford Social Innovation Review.
Gross domestic product has become the most watched and most misinterpreted of all economic indicators...

And while the United States leads in GDP, it also leads in military spending, the number of people in prison, and the percentage of people who are obese. These other first-place finishes seem at odds with America's position atop the GDP standings—that is, until you realize that spending on war, incarceration, and disease, as well as other "defensive expenditures," all count toward GDP. The arithmetic of GDP doesn’t consider what the money is actually being spent on, and over time, we’ve been spending more and more money on remedial activities and calling this "progress."

...So long as the economic system calls for growth, GDP will continue its reign as the primary economic indicator, a situation that sets up a chicken-egg conundrum. On the one hand, consigning GDP to the dustbin of history would help shift the focus of the economy away from growth and toward human well-being. On the other hand, shifting the focus away from growth would impart a demand for adoption of better measures of progress.
The post is a promo for their new book, Enough is Enough, in which they "lay out a visionary but realistic alternative to the perpetual pursuit of economic growth—an economy where the goal is not more but enough."

GDP and well-being both matter in a development context since the former can be linked with the latter. Critics will point out that economic growth driven development can lead to higher inequality that does not translate to significant gains in well-being.

Is it possible to move away from GDP as the main benchmark? Francios Lequiller said no in an interview with the OECD Observer back in late 2004. "The times of major change, such as the one to include non-market production in GDP some 30 years ago, have passed, so do not expect any radical upheavals," he argued.

Lequiller may have been wrong to some extent. Joseph Stiglitz chaired ‘The Commission on the Measurement of Economic Performance and Social Progress’ in 2009 that produced a report outlining how to better measure well-being. Stiglitz wrote in the Financial Times:
GDP will, of course, continue to be used as a measure of market activity – though hopefully the reforms that we propose will make it a better measure of that. But there will be increased focus on sustainability – on what is happening, for example, to broad measures of society’s wealth, including its natural assets. When it comes to measuring societal welfare, we will have to look to other metrics. Some already exist; others will have to be constructed. Our report provides guidance on what is required.

Too often, we confuse ends with means. One of the criticisms of our economies in the years prior to the crisis is that they did exactly that – a financial sector is a means to a more productive economy, not an end in itself. Even worse is to confuse an improvement in a measurement of well-being with an improvement in well-being itself. Our economy is supposed to increase our well-being. It, too, is not an end in itself. Hopefully, the work of our commission will have increased the impetus to align the metrics of well-being with what really contributes to quality of life – and, in so doing, help us direct our efforts at those things that really matter.
Of course it is always worth giving a mention to the Bhutan Gross National Happiness index.