Several months ago, the French government enlisted the help of Nobel Prize laureates Joseph Stiglitz and Amartya Sen, among others, to draw up a report analysing how economic performance and social progress are measured. The results are now in and the first conclusions drawn. “For a long time, there has been a problem with the way we calculate and use economic indicators, especially gross domestic product,” explained France’s President, Nicolas Sarkozy, on September 14 when the report was unveiled. “For years, statistics have shown stronger and stronger economic growth,” yet they were hiding the ugly truth that “this growth, by endangering the future of the planet, destroys more than it creates.” He added, “Throughout the world, people believe that they are being lied to, that the figures are false and even worse, that they are being manipulated. Nothing is more destructive for a democracy.” The French president also took a swipe at “the religion of statistics,” and described our reliance on them as “a way to avoid ever talking about inequalities.”
The authors of the report believe that while GDP “is not erroneous,” it nevertheless is being used "in an erroneous way,” especially as a measurement of economic wellbeing.
Other economist and academics agree. Rafael Pampillón, professor of economics at the IE Business School, acknowledges that how GDP is calculated is “full of imperfections and defects.” A case in point: its inability to capture productive activities that occur at home, such as housekeeping.
For David Murillo, professor of social sciences and researcher at the ESADE Business School’s Institute of Social Innovation, the current way of calculating GDP is only “relatively” good as an indicator of the economic situation of a country. “The variables that compose GDP are crucial but the economic situation of a country can be measured in a much more complex way. It all depends on how you set limitations on what you understand by the word ‘economy,’" he explains. "If, for example, I believe that the economic situation should reflect and measure the hypothetical happiness of a country, I would feel that [current calculations of] GDP growth of a country do not necessarily correspond with increases in the happiness of its population. Actually, there continues to be a significant disparity between one [indicator] and the other.”
Everyone Join In
The report came up with a number of suggestions. It proposed that statisticians take into account the wellbeing of people, economic sustainability and a country’s natural resources. Stiglitz, Sen and the other experts also made several recommendations about how to evaluate material wellbeing — "analyzing income and consumption beyond just production,” which hides many disparities, they say. They also recommend that when measuring individuals’ prosperity, their socio-economic group should be taken into account rather than just the national average by, say, evaluating the impact of inflation or increasing purchasing power on each group.
When it comes to quality of life, they contend that it should not be limited to adding up the material dimensions of wealth but also social relations, vacations and other free time, the political environment and sense of security, all of which help measure a person’s happiness. As for sustainable development, the study recommends creating financial indicators so that, for example, a decline in production following a natural catastrophe can be immediately known as would any other “depreciation of natural and physical capital” that could have consequences for future generations.
So how far can France go with the report’s recommendations? Sarkozy has asked various national organisations – including INSEE, the country’s statistics institute — to modify France’s statistical models. He’s also encouraging international organizations and other countries to do the same.
Pampillón explains that what they are trying to do, in broad terms, is “to incorporate measurements of everyone’s wellbeing into the process of measuring the GDP of a country or economic region,” which is not the case currently. To illustrate his point he notes how traffic jams can increase GDP, "since they lead to an increase in the consumption of gasoline, but not the wellbeing of people.”
The most striking thing about the report, he says, is that it is very hard to measure many of the variables that the economists say are "indispensable" for gauging economic performance. He says, “It would be too complex a process for each country to measure everything it wants to measure every year, and do that consistently so data can be compared.” Nevertheless, he cites the Human Development Index (HDI), an indicator used by many countries that chimes with what Stiglitz and his group have designed. The HDI, created by the United Nations Development Program, is based on social indicators comprising three parameters: health (life expectancy); education (adult literacy, enrollment in primary, secondary and advanced education, and the number of years of compulsory education); and quality of life (measured by per capita GDP). “It is very simple to calculate; it is accepted worldwide because an organization like the UN developed it for every country; and it is a way to see how economies improve their social development,” he says.
Murillo echoes Pampillón’s assessment. “GDP does not – and cannot – capture the social and environmental factors that are the foundation of the future growth of an economy," Murillo says. "These include contamination of your land, social cohesion, your labor force’s level of education and capabilities, how well social services function, and the strength of your society’s interpersonal ties. These are also key elements of economic growth. The great problem now is how to take giant steps toward [building] an economy of intangibles if our indicators only measure tangible goods – and do so in a deficient way.” Nevertheless, Murillo believes, “we can add the [new variables] to economic variables that already exist,” which is where indices like HDI come in.
A New Economic Order?
The Organization for Economic Cooperation and Development (OECD) welcomed the report. “Economic wealth is not the only thing that matters in the lives of people,” said Angel Gurria, secretary general of the OECD.
What would happen if the study’s recommendations were adopted by France, the second largest country in the euro zone? One effect would be an improvement in France’s economic performance, since its generous health care and welfare systems, long vacation entitlements and the like would be included in calculations. On the other hand, the changes would reduce the economic performance of the U.S.
The panel of experts who contributed to the report note that if their recommendations were followed, the differential between the per capita GDPs of France and the U.S. would shrink. Currently, the U.S. per capita GDP is 14% higher than France’s. But if adjustments were made to GDP calculations taking into account just healthcare spending — the U.S. devotes 15% of its GDP to its healthcare system compared with France’s 11% — the U.S.’s per capitaGDP would be cut by one-third.
Murillo believes “it is likely” that scenarios would play out the way the study predicts. “If we included, for example, the level and coverage of health care, and paid vacations provided to French workers — isn’t that economic development? I have no doubt that it would be that way. And if we also included other variables, such as personal integrity and the right to a free life and one with opportunities [and so on],” country rankings would be much different.
“The GDP figures for European countries would increase a great deal as a result of the French proposal for development of public services and environmental concern,” affirms Pampillón. He refers to the HDI, which show how high some European countries would increase their rankings in a hypothetical new global economic order.
In the latest HDI, which covers 2007 and 2008, three European countries – Iceland, Norway and Austria — are ranked the highest in the world. Canada is fourth and Ireland fifth followed, respectively, by Sweden, Switzerland, Japan, the Netherlands and France. The United States, which has the world’s largest GDP, is 12th. China, one of the great emerging powers and currently the country with the world’s third-largest GDP, is ranked 81st.
How would the new ways of measuring wealth affect Latin American countries? Pampillón says it is a hard question to answer. “In Latin America, there is an enormous underground economy. Depending on the country, it varies from 50% to 60% of the total GDP,” he explains. "Many of these activities would be brought to light because the new measurements would favor them, but at the same time, the calculations for inequality would make these countries fall many rungs on the ladder, like what would happen with China.” In the latest HDI, the first South American country to appear is Argentina, in 38th place. Chile is 40th, Mexico 52nd and Brazil 70th.
“For many countries considered developing nations, there are other indicators that determine economic growth: the quality of their democracy, containment of corruption, respect for the rule of law, legal security, and distribution of wealth. All of these are fundamental," according to Murillo, "The problem with obsessing about GDP is that we put most of our effort into increasing its magnitude, while de-emphasizing other indicators that are probably more important for generating the basis of true growth. The fundamental question behind this debate is: In what direction should we extend our efforts when it comes to economic policy? We have already seen how far it takes us when we use the current compass. Can we do better, starting now? Clearly, we can." Ultimately, he concludes, "Western civilization has been characterized by its capacity to correct mistakes and make improvements over what exists.”