Beyond GDP
Observations by Michael Porter

Better measuring a country ... GDP is not the best way to quantify national success

Burgess COMMENTARY

Peter Burgess

OPINION | MICHAEL E. PORTER Better measuring a country ... GDP is not the best way to quantify national success

EIGHTY YEARS ago, the first holistic measure of a country’s national income – what would later become Gross Domestic Product – was introduced. Developed by economist Simon Kuznets in a report commissioned by Congress to measure economic activity during the Great Depression, GDP quickly became the defining measure of national progress. GDP growth is how we tell whether a country is improving, and GDP per capita has become the definitive measure of the standard of living.

For several decades, however, a growing number of economists have begun to question whether GDP is sufficient to measure national success. Notably, in the aftermath of the financial crisis of 2008, economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi released their report “Mismeasuring our Lives,’’ which argued: “If we have the wrong metrics, we will strive for the wrong things.”

Kuznets himself made clear that GDP was only a limited economic lens through which to assess progress. “The welfare of a nation,” he wrote in 1934, “can scarcely be inferred from a measurement of national income.” Our standard of living reflects social, environmental and community assets, not just economic assets. Happiness and fulfilment rest on factors, such as health, access to knowledge, tolerant communities, and opportunities for personal achievement.

GDP is not bad — it just measures what it measures, and what it measures is limited. The social malaise that resulted in the Arab Spring in many “prosperous” Arab countries is a sign that economic measures alone are inadequate measures of society’s success. The unrest and protests in Brazil, a country that has registered strong economic growth in recent years, tells us the same thing.

The shortcomings of GDP and the need to provide a better measurement have been widely recognized. The United Nations Human Development Index was an important step forward nearly 25 years ago, but it relies on a limited number of indicators, one of which is GDP, and is silent on environmental sustainability. HDI is an incomplete guide to the societal challenges and opportunities that countries — rich, poor, and emerging — face in the 21st century.

This critical need has led to the development of the Social Progress Index, the most inclusive and ambitious effort ever attempted to measure social progress comprehensively. The Social Progress Index defines social progress according to three broad dimensions: Does a country have the capacity to satisfy the basic human needs of its people? Does a country have the institutions and conditions in place to allow its citizens and communities to improve their quality of life? And does a country offer an environment in which each citizen has the opportunity to reach his or her full potential?

Drawing on scholarly research, the Social Progress Index uses the best available data to measure nations’ performances in these three broad areas, using indicators that measure outcomes — such as life expectancy, literacy, and freedom of choice — rather than inputs such as size of government spending or laws passed. This year, the Index will measure social progress across 129 countries representing more than 90 percent of the world’s population.

The Social Progress Index aims to capture the breadth of issues that constitute well-being and identify priority areas for improvement. For the United States, it shows the failings of our health care system, our lagging environmental performance, the lack of personal safety, and our lackluster performance in bringing every citizen into the digital age.

Because the Social Progress Index measures comprehensive social outcomes directly, separately from economic indicators, we are able for the first time to examine the relationship between GDP per capita and social progress. Previously, the assumption has been that economic growth improves well-being. We find that rising GDP per capita, indeed, is correlated with improving social progress, but the connection is far from automatic. For a similar level of GDP, we find that some countries achieve a much higher level of social progress than others. For example, Costa Rica achieves much greater success than South Africa in terms of social progress.

GDP will continue to be a crucial measure of economic progress, but we can now measure social progress in ways that Kuznets and his contemporaries could have barely imagined. As we celebrate today a milestone in national measurement from so many years ago, we can aspire to much more. The ability to measure national well-being will improve dramatically over the coming years, and with it will come accelerated progress.

Michael E. Porter is a professor at Harvard Business School and director of the Institute for Strategy and Competitiveness.