GDP as a measure of economic progress is going under a change

In 2008, French Govt set up a committee under Joseph Stiglitz (with Amartys Sen as Advisor) to review measure of economic and social progress:

Increasing concerns have been raised since a long time about the adequacy of current measures of economic performance, in particular those based on GDP figures. Moreover, there are broader concerns about the relevance of these figures as measures of societal well-being, as well as measures of economic, environmental, and social sustainability.

Reflecting these concerns, President Sarkozy has decided to create this Commission, to look at the entire range of issues. Its aim is to identify the limits of GDP as an indicator of economic performance and social progress, to consider additional information required for the production of a more relevant picture, to discuss how to present this information in the most appropriate way, and to check the feasibility of measurement tools proposed by the Commission. Commission’s work is not focused on France, nor on developed countries. The output of the Commission will be made public, providing a template for every interested country or group of countries.

The report has been submitted and is here. Background papers are here.

Stiglitz has 2 articles on the same – in FT and in Guardian.

In Guardian he says:

In our performance-oriented world, measurement issues have taken on increased importance: what we measure affects what we do.

If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

He explains GDP is a poor measure for following reasons:

For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more – even if inefficiently – output goes up.

Likewise, quality improvements – say, better cars rather than just more cars – account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality.

The same problems in making comparisons over time apply to comparisons across countries. The US spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things.

Another marked change in most societies is an increase in inequality. This means that there is increasing disparity between average (mean) income and the median income (that of the “typical” person, whose income lies in the middle of the distribution of all incomes). If a few bankers get much richer, average income can go up, even as most individuals’ incomes are declining. So GDP per capita statistics may not reflect what is happening to most citizens.

Read the rest. In FT he says:

Flawed statistics may also lead us to make incorrect inferences. In the years preceding the crisis, many in Europe, focusing on America’s higher rates of GDP growth, were drawn to the US model. Had they focused on metrics such as median income – providing a better picture of what is happening to most Americans – or made corrections for the increased indebtedness of households and the country as a whole, their enthusiasm might have been more muted.

No good accountant would ignore the depreciation of a company’s capital, but the standard GDP measure not only does that but also takes no account of resource depletion and environmental degradation. Our increased awareness of the scarcity value of environmental resources makes this lacuna especially troubling.

FT has 2 extra articles on this – here and here. It has some findings of the report. This is pretty interesting:

Mr Stiglitz and Jean-Paul Fitoussi, co-author, said a more comprehensive method for measuring performance would cut the per capita GDP gap between the US and France by at least half. US per capita GDP is 14 per cent higher than France’s. Although the commission did not work out the effects of its proposals on different countries, Mr Stiglitz said the changes would bring “a number of major adjustments. The US spends 15 per cent of its GDP on health and France 11 per cent. But if GDP accounted for outcomes and not just financial inputs, that alone would cut the per capita GDP by a third.

The report has some fairly interesting suggestions and is a must read for policymakers:

Nicolas Sarkozy, president of France, is concerned that gross domestic product, the most popular yardstick of economic performance, does not capture how well societies (in particular, no doubt, France) are doing. Suspicious observers may think he set up his commission on measuring “social progress” mainly to kick Anglo-Saxon capitalism while it was down. In fact, its report is full of sensible, if old, insights.

Hmmm.. Something different to read in these crisis overload times.

From an Indian economy perspective, this report is very very important. All our policymakers just seem to be married to the idea of achieving 9% GDP growth rate. Some even behave as if it is our birth right to have this growth rate.  We have even begun to think we can become an economic superpower on the basis of just high growth rates.

All speeches/statements just talk of this one metric. It is as if nothing else matters if we achieve this 9% growth rate. Despite having 9% growth rate in 2004-08, most indicators of well-being are just as poor or getting worse. I was reading somewhere that there is a report which says Indian povery numbers have actually become worse in the high period of 9% growth rate. We don’t have basic facilities in our metropolitan cities but the fancy-talks don’t end. Not that growth rate is not important , but we are just overdoing it.  

Having an index like this in India would be very useful (though would be difficult to compute, but we can begin small). It will provide some sanity to the economic discussions we have here.

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4 Responses to “GDP as a measure of economic progress is going under a change”

  1. I guys hope you are swell tonight, How much will it cost to get even 6 veneers on my front teeth? | Oak Veneer Furniture Says:

    […] GDP as a measure of scheme advancement is feat low a modify … […]

  2. sjabbar Says:

    gdp measures just what its supposed to measure: the (nomimal or real) value of the growth of output. this has nothing to do with what individuals or groups within the econony experience in their everyday life, wether they are improving their living standards or wether they can lead a fulfilling life. for that we have to look at social indicators, I think….

  3. Do we (Indian policymakers) deserve accolades? « Mostly Economics Says:

    […] growth rates alone? That is why it is important to do a reality check on just the relevance of  GDP growth concept in India. The Stiglitz commission idea needs to become mainstream […]

  4. Reid Picking Says:

    Really Good Articles/posts that you have on this site. Thanks

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