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Time To Go Beyond GDP

BY MARTINE DURAND 8/10/2015

Answering the question of whether or not societies are making progress, and at what pace, is complex. Even deciding what progress should look like is not straightforward, as it involves a value judgment about the desirable goals for a society across multiple economic, social and environmental dimensions. For many decades, this problem has largely been managed by using indicators of economic growth as a proxy measure for overall progress.

 

In the 1930s, the economists Simon Kuznets, in the US, and Richard Stone, in the UK, developed the systems of national accounting, on which Gross Domestic Product (GDP) is based. They were not really concerned with measuring overall welfare or progress – their main goal was to make it easier for policymakers to manage a national economy through financial crises and wars. GDP “compresses the immensity of a national economy into a single data point of surpassing density” (Gertner, 2010), by adding the value of all final goods and services that are produced and traded for money within a country’s borders over a given period of time, typically a quarter or a year. In this respect, GDP represents a good measure of market production, and has the advantage of being able to total entities with different units and to summarize them in one single monetary figure. Moreover, once the figure is adjusted per capita and purchasing power parity, it can easily be used for comparison across nations.

 

The rationale behind using GDP as a proxy measure for overall societal development or progress is that economic growth is correlated with other important aspects of societal progress, such as increased life expectancy, reduced child mortality, and higher literacy rates. This correlation is not perfect however (Boarini et al., 2006). In addition, GDP presents many shortcomings as a measure of well-being (Nordhaus and Tobin, 1973; Sen, 1998; Fleurbaey, 2009). At the level of society as a whole, GDP interprets every expense as positive and does not distinguish welfare-enhancing activities from welfare-reducing ones (Cobb et al., 1995). For example, an oil spill increases GDP because of the associated cost of cleanup and remediation, but it obviously detracts from overall well-being (Costanza et al., 2009). GDP also leaves out many components that enhance welfare but do not involve monetary transactions and therefore fall outside the market. For example, the act of picking vegetables from a garden and cooking them for family or friends is not included in GDP, while buying a similar pre-prepared meal in a grocery store involves an exchange of money and a subsequent GDP increase (Kubiszewki et al., 2013). Moreover, at the level of the person, GDP says nothing about how economic resources are distributed across population groups nor on the many aspects beyond monetary metrics that are important for their well-being, such as the need to feel valued and respected by others, the extent to which aspirations are fulfilled, and the care and affection that are provided by close family and friends (Costanza et al., 2009; OECD, 2011).

 

In 1968, in one of his most famous speeches, Senator Robert Kennedy eloquently highlighted the limitations of traditional economic metrics:

 

“[Gross National Product] counts air pollution, and cigarette advertising, and ambulances to clear our highways of carnage…It counts the destruction of the redwoods and the loss of our natural wonder in chaotic squall…Yet, [it] does not allow for the health of our children, the quality of their education, or the joy of their play… It measures neither our wit nor our courage neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short except that which makes life worthwhile.”

“GDP says nothing about how economic resources are distributed across population groups nor on the many aspects beyond monetary metrics that are important for their well-being.”

When the first criticisms to GDP were raised in the 1970s, amid worries about ecological limits to growth, some attempts were made to correct GDP for its most evident flaws (e.g. Nordhaus and Tobin, 1973). In the late 70s, however, the interest in alternatives approaches to GDP diminished, with other issues taking centre stage, such as stagflation or rapid increase in unemployment rates.

 

Interest in alternatives or complements to GDP resumed progressively during the 1990s. Emblematic of this new trend was the creation of the United Nations’ Human Development Index (HDI), inspired by Sen’s (1998) influential work on capabilities, which combines GDP with measures of health and educational achievement. Although synthesising only a limited amount of information and being more relevant for comparisons of developing countries than for comparisons of more advanced countries, it remains one of the few composite indexes that are regularly compiled and widely disseminated to allow systematic cross-country comparisons. In 1992, the UN Earth Summit in Rio de Janeiro brought the notion of Sustainable Development into the policy debate and promoted the use of sustainable development indicators. This was later followed by a number of more local or country-specific initiatives, often stemming from the research community. According to Gadrey and Jany-Catrice (2010), the number of composite indices of social progress climbed from to two (the HDI and the ‘kids count index’) in 1990 to about 30 in 2001-2002.

 

More recently, the Great Recession has given further impetus to the quest for more comprehensive measures of well-being. The perception that the economic growth of the early 2000s had not lifted all boats, and that the costs of the crisis have disproportionately fallen upon those who had least benefited from the preceding economic expansion has progressively led to a re-assessment of the goals of human progress. The discussion and research on well-being measures has found expression in a number of international initiatives. The report by the Commission on the Measurement of Economic Performance and Social Progress, (the Stiglitz-Sen-Fitoussi report) published in 2009 (Stiglitz et al., 2009) concluded that the time was “right to shift emphasis from measuring economic production to measuring people’s well-being”. Other international initiatives, such as the European Commission’sGDP and Beyond’, added to the impetus to look for – and to use – new approaches to the measurement of quality of life and progress.

“GNP measures everything, except that which makes life worthwhile.”

In 2011, the OECD, which had been leading the international work on well-being measurement and policy for over a decade, launched a new project to produce better indicators of progress across the different areas that matter for people’s well-being. The OECD Better Life Initiative takes a broad approach to defining social progress by focusing on 11 dimensions of individual well-being, i.e. health status; work and life balance; education and skills; social connections; civic engagement and governance; environmental quality; personal security; income and wealth; jobs and earnings; housing; and subjective well-being. In line with the recommendations in the Stiglitz-Sen-Fitoussi report, the OECD Better Life Initiative : i) focuses on the individuals, rather than on the economy, ii) considers the distribution of well-being in the population alongside average achievements in each country; iii) is multidimensional; iv) balances objective measures and subjective judgments; and v) stresses the need to assess both current and future well-being, considering the latter in terms of a number of key resources (observable today) that have the potential to generate well-being over time.

Durand Fig 1

One of the main challenges to measuring national progress, however, is that people have diverging views about what is most important. This is why it has proven difficult to replace GDP with another one-number index. On the one hand, composite indicators can be very useful tools for comparing progress across countries or over time with a bird’s-eye view. On the other hand, combining data into a single number implies assumptions on how to weigh the different components, which can prove to be controversial. The OECD has addressed this challenge by creating the Better Life Index’, an online interactive tool that allows users to create their own personalised index by rating the importance of each of the 11 well-being dimensions mentioned previously. Users can then compare well-being in 36 countries, and share their index with others. To date, over more than 95,000 indices have been created and shared.

“The Great Recession has given further impetus to the quest for more comprehensive measures of well-being.”

 

The OECD Better Life Initiative is an ambitious undertaking, but an important one, as its aim is not only to produce well-being evidence using the best currently-available data, but also to undertake statistical developments in areas where there are measurement gaps, and importantly, to ensure that over time the new metrics are effectively used to inform policy-making.

 

International efforts, such as the OECD Better Life Initiative, have gone hand in hand with a large number of national initiatives. In recent years, the Kingdom of Bhutan has endorsed the Gross National Happiness index as an alternative measure of progress, and the United Kingdom has compiled a suite of indicators for Measuring National Well-being. Other projects have taken the form of Parliamentary Commissions (e.g. in Germany and Norway), of national roundtables (e.g. in Slovenia and Spain) and of many other types of institutional processes (e.g. in Australia, Austria, Japan, Italy).

 

The initiatives to measure well-being beyond GDP are more and more numerous, reflecting the widespread recognition that well-being statistics are critical for informing policy-making on a range of aspects that matter in people’s lives. The 5th OECD World Forum ‘Transforming Policy, Changing Lives’ that will take place in Guadalajara (Mexico) in October 2015 will provide an opportunity to reflect, debate and showcase concrete examples on how to best put into practice new well-being measures to deliver better policies for better lives around the world.

 

References

Boarini R., Johansson A. and M. Mira d’Ercole (2006), “Alternative Measures of Well-Being”, OECD Economics Department Working Papers, OECD Publishing, Paris.

Cobb, C., T. Halstead and J. Rowe (1995), “If the GDP is up, why is America down?”, The Atlantic Monthly, Vol. 276, No. 59-78.

Costanza, R., M. Hart, S. Posner and J. Talberth (2009), “Beyond GDP: The Need for New Measures of Progress”, Pardee Papers No. 4, Pardee Center for Study of the Longer-Range Future, Boston.

Fleurbaey, M. (2009), “Beyond GDP – The Quest for a Measure of Social Welfare”, Journal of Economic Literature, Vol. 47, No. 4.

Gadrey  J. and F. Jany-Catrice (2010), “Les nouveaux indicateurs de richesses”, Collection Repères, La Découverte (eds.), Paris.

Gertner, J. (2010), “The Rise and Fall of the GDP”, The New York Times, May 13.

Kubiszewki, I., R. Costanza, C. Franco, P. Lawn, J. Talberth, T. Jackson and C. Aylmer (2013), “Beyond GDP: Measuring and achieving global genuine progress”, Ecological Economics, Vol. 93, pp. 57–68.

Nordhaus, W.D. and J. Tobin (1973), “Is Growth Obsolete?” in Moss M. (eds.), The Measurement of Economic and Social Performance, Studies in Income and Wealth, vol. 38, National Bureau of Economic Research, Cambridge.

OECD (2011), How’s Life? Measuring Well-Being, OECD Publishing, Paris.

Sen, A.K. (1998), Development as Freedom, Oxford University Press.

Stiglitz , J.E., A.K. Sen and J-P. Fitoussi (2009), Mismeasuring Our Lives: Why GDP Doesn’t Add Up, the report by the Commission on the Measurement of Economic Performance and Social Progress, The New Press.

 

We would like to use statistics from the OECD better life index to illustrate the article. I have collated data in the “Graphs” section with data for a number of indicators for UK, France and Germany. Could you please try and create a diagram similar to the below showing how the UK compares to the two other countries. If using three countries in the diagram is messy then please use the UK and France only.

 

 

* Gross National Product, or GNP, measures the monetary value of all final goods and services produced or traded by the citizens of a country over a period of time. Thus it is calculated as GDP + income from foreign sources to nationals – income paid to foreign citizens or entities. For all intents and purposes it is very similar to GDP.

 

MARTINE DURAND

is the OECD’s Chief Statistician and Director of Statistics since 2010. She is responsible for providing strategic orientation for the Organisation’s statistical policy and oversees all of OECD’s statistical activities.

 

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