If Not GDP, Then What?

In 1937, the US Congress commissioned economist Simon Kuznets to measure economic activity during the Great Depression. He developed Gross Domestic Product (GDP), which has become the main economic indicator despite its limitations. Kuznets noted that national income is not sufficient to measure national welfare. Only economic assets are counted, while social, environmental and community assets are ignored, explains economist Michael E. Porter.

GDP is a controversial metric, comments the Organisation for Economic Co-operation and Development (OECD). “It measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment,” claims the organization.

In 2012, a group of environmental scientists led by Bob Watson released a report in which they called for more sophisticated wealth measurement: “[…] governments should recognise the serious limitations of GDP as a measure of economic activity and complement it with measures of the five forms of capital: built, financial, natural, human and social capital, i.e., a measure of wealth that integrates economic, environmental and social dimensions.”

The dissatisfaction with GDP has given rise to alternative welfare measures. One of them is the United Nations Human Development Index (HDI). It is the geometric mean of 3 normalized indices which reflect the main dimensions of human development: (1) life expectancy, (2) education and (3) gross national income (GNI). However, GNI is based only on a few indicators. One of them is GDP itself. In addition, it does not include environmental sustainability, and does not fully reflect social challenges and opportunities.

The next alternative to GDP is the Social Progress Index (SPI). It is based on 3 dimensions: (1) a country’s capacity to satisfy the basic human needs of its citizens, (2) institutions and conditions for improving the quality of life and (3) an environment for complete self-development for each citizen. The index measures social outcomes rather than inputs in each area. For example, it uses data on life expectancy or literacy, but ignores government spending or new laws. It also does not include economic indicators. As a result, it is possible to analyze how social progress correlates with GDP. Contrary to popular belief, rising GDP per capita does not automatically improve welfare. In other words, economic progress does not always go hand in hand with social progress.

Since GDP alone cannot capture wealth loss, François Lequiller, Counselor to Director of Statistics at the OECD, suggests developing a national accounts system to record all national assets. One of the biggest challenges is setting a price for each asset component. Without this evaluation, it is not possible to put all welfare indicators, including GDP, together. There are only a few examples of such balance sheets. One of them is Measures of Australia’s Progress (MAP), a publication of the Australian Bureau of Statistics released between 2002 and 2014. It covered the following areas: the society, economy, environment and governance.

Finally, The Economist has introduced GDP-plus, a revised version of GDP, which should be of special interest to services-dominated countries. It would be based on the principle ‘stop counting, start grading’. It would include unpaid domestic work just like any regular form of production, “measure changes in the quality of services” as well as take into account the benefits of new products and an increased product choice. It would also aim to recognize spending patterns across different income groups. In addition, GDP-plus would be supplemented with a balance sheet which would list all public and private assets. It would be updated once a decade. In addition to material capital, it would assess non-material capital such as brands or designs. It would also record the depletion of capital, including environmental damage.

References:  [1] Michael E. Porter, Boston Globe / [2] OECD Observer / [3] The Blue Planet Prize laureates, Environment and Development Challenges: The Imperative to Act via SciDev.Net[4] UN Development Programme / [5] wikiprogress.org / [6] The Economist