Economics
The limits of GDP

The limits of GDP ... Measuring well-being beyond GDP ... The most successful is the UNDP Human Development Index

Burgess COMMENTARY

Peter Burgess

The limits of GDP ... Measuring well-being beyond GDP.

IMAGE (Photo: ToniVC/Flickr) By Tommaso Rondinella.

In 1934, the creator of GDP, Simon Kuznets, warned when presenting it to Congress, that “The welfare of a nation can scarcely be inferred from a measurement of national income.” Yet his warning did not really work: after the Second World War the developed economies experienced an unprecedented phase of economic growth that had extraordinary consequences from the point of view of living standards.

Pro capita GDP therefore became the basic indicator for measuring levels of well-being and development. Since the seventies much research has shown how an increase in GDP might be generated by activities that are considered harmful to individuals, the society and the environment. Policies aimed merely increasing in GDP might, then, fail to meet social and policy objectives linked to well-being and sustainability.

The limits of GDP are widely recognized. They include

• the inability to count goods and services with no market – such as household work, natural resources and leisure;
• insensitivity to the distribution of income;
• the inclusion of socially and environmentally harmful activities as well as so-called “defensive” costs.

In the last few years the debate over the need to find a shared measure (or group of measures) of wellbeing capable of becoming the target for public policies has been steadily growing:

• the OECD, together with relevant international organizations, launched the Global Project on ‘Measuring the progress of societies’ ;
• the influential International Commission on Measurement of Economic Performance and Social Progress, instituted by French President Sarkozy and 5 Nobel prize laureates, published its final report, and
• a Communication by the European Commission in August 2009 outlined an EU roadmap with five key actions to improve the indicators of progress in ways that meet citizens’ concerns.

• Some try to integrate the information contained in GDP, finding solutions to monetize goods and services with no markets and subtracting harmful production;
• others aggregate social, economic and environmental variables into a composite index;
• some use objective measures while others use subjective ones like life satisfaction.

The most successful one is the UNDP’s Human Development Index, which has become the reference index for measuring the development of a country. But even if using GDP as measure of well-being (i.e. using it as normative benchmark) is losing much of its legitimacy, overcoming GDP is a cultural and political process rather than a merely methodological issue.

Even if academics could agree on a widely accepted measure of well-being which solves all methodological challenges, this would not guarantee a rapid switch from GDP to this new measure. The problem stands in the lack of a collective agreement on what well-being and progress are, and, therefore, how to measure them. The construction of aggregate indicators involves stages where an arbitrary judgement has to be made in the selection of sub-indicators and in weighting them.

These are usually done at the discretion of the index constructor, whose choice may be supported by a consultation process (either with experts or, more generally, with stakeholders) and/or by statistical tools which maximize the information of the variables.

In the vast majority of examples the concepts to be measured (well-being, progress, development and sustainability) are made explicit by the variables used to build the composite index and the ability of variables and indicators to well describe the concept is usually taken for granted.

In the vast majority of cases the definition of well-being, the consequent selection of relevant dimensions and eventually the decision on the weighting system is made by academic experts.

In all cases the choice implies a certain degree of arbitrariness which is not easily accepted by most people. In the last few decades, it has been taken for granted that economic growth automatically leads to development and higher living standards. Now, an increasing number of people are accepting the fact that this is not true but there is still no agreement on an effective widely recognized alternative.

If this is to become the target for public policies, a democratic process is needed in order to grant it legitimacy. According to Schmitter (2001), 'legitimacy is a shared expectation among actors in an arrangement of asymmetric power, such that the actions of those who rule are accepted voluntarily by those who are ruled because the latter are convinced that the actions of the former conform to pre-established norms'.

Social development, well-being and environmental sustainability represent some of the goals of all societies, but along with the change in goals comes the change in indicators. Indicators are not only desirable from policy aims, they also help to concretize and mould them. So developing indicators cannot be a purely technical or scientific process; rather, it should be a process of open communication and policy (Valentin and Spangerberg, 2000).

Going beyond GDP represents one of the great political challenges of our times, at any territorial level. Most probably we shall never have a single alternative measure, but acute awareness of the different facets of our well-being (and the sustainability of these) may lead to increased availability of data on relevant phenomena which would allow policy makers to make better decisions, allow the media to better inform their audience and allow citizens to more effectively evaluate and address political choices.

Schmitter, P. (2001). What is there to legitimize in eu and how might this accomplished? Jean Monnet Working Papers 6/01, Jean Monnet Center for International and Regional Economic Law and Justice, NYU School of Law.

Stiglitz, J., A. Sen, and J. Fitoussi (2008). Survey on existing approaches to measuring socio- economic progress. Issue Paper 25/07/08 - 1, Commission on the Measurement of Economic Performance and social Progress.

Valentin, A. and J. Spangerberg (2000). A guide to community sustainability indicators. Environmental Impact Assessment Review 20, 381–392.