SEPT 20 — It has swept away banks and governments, and obliterated jobs, homes and careers. Now, a year after it whirled into motion, the global financial crisis is threatening one of the most totemic institutions of global economic discourse: the hallowed notion of gross domestic product, or GDP.
GDP is a basic measure of a country’s economic performance and is the market value of all final goods and services made within the borders of a nation in a year.
Revered for 60 years as a benchmark of performance, progress and prosperity, and referred to slavishly by politicians eager to point to a number going upwards, this measure of economic output has itself fallen on hard times, embarrassed by the crisis it failed to foretell and discredited by the large disconnect between the ‘growth’ it suggests and the grubbier realities of everyday life.
To put it bluntly, few people really trust GDP as a measure of anything any more. The fact that it has started rising again in most developed countries while millions struggle joblessly onwards merely underscores the point: GDP is anachronistic, a throwback to an era last century when the material privations of life meant it was important to know how much stuff we were producing.
Nowadays, it’s just a Grossly Dated Parameter. As one analogy puts it, measuring progress by calculating GDP is like measuring a person’s health purely through the amount of food he takes in.
Many leading economists have been suggesting this for years, but until now only one country — Bhutan — has moved to a more qualitative measure of life, incorporating factors as diverse as pollution, noise, serious illness, divorce rates and democratic freedoms into its assessment of social progress.
Now, however, French President Nicolas Sarkozy says he wants France to move beyond GDP — and will urge his Group of 20 counterparts this week to join him in what he calls “a great revolution” in which economic performance will be measured in terms of happiness, sustainability and social well-being.
“The crisis not only makes us free to imagine other models, another world. It obliges us to,” Sarkozy said last week, as he received a report from a commission headed by Nobel economics laureate Joseph Stiglitz which called for measures of growth to be expanded to include concepts such as work-life balance, environmental sustainability and mental health.
“There often seems to be a marked difference between standard measures of socio-economic variables like growth...and widespread perceptions of these realities,” the report said.
Contributors said that governments trying to devise policy based on GDP movements were like pilots trying to steer a course without a reliable compass. They called for “a new dashboard of indicators” that factor in income distribution, health and education, among other elements.
And tellingly the report contended that one of the reasons the financial crisis broke with such startling ferocity was that “our measurement system failed us and/or market participants and government officials were not focusing on the right set of statistical indicators”.
“Had there been more awareness of the limitations of standard metrics like GDP, there would have been less euphoria over economic performance in the years prior to the crisis,” the report said.
Take traffic jams. Not everyone’s favourite way of spending an afternoon. But in the GDP measure, they are a positive: all that petrol consumed will add to the bottom line. Now take a volunteer who puts in an hour reading to children at a primary school. Smiles on small faces, a virtuous win-win for all concerned — but not a measurable event that will register in the GDP figures.
“GDP by definition omits many important things,” said British economist Andrew Oswald, who contributed to the Stiglitz report. “It only values market activity. If I do something for my community, that counts as nothing to GDP.”
He said GDP was relevant when societies were poorer and more basic issues like getting food on the table or basic household goods into homes were important. “In our society now,’ he said, ‘caring about mental health is a more important thing.”
Professor Oswald said mental health, happiness and life satisfaction surveys should be incorporated to give a broader view of social well-being.
Nic Marks, founder of the centre for well-being at London’s New Economics Foundation (NEF) which has pioneered work on post-GDP statistics, said: “To dethrone GDP from its 60-year reign, we need a headline measure of overall progress...that captures succinctly the success of a society.”
The NEF has devised its own index of happiness which incorporates factors such as life expectancy and ecological footprints, and assesses how close countries come to achieving happy, healthy lives while staying within environmental limits.
Its latest survey this summer threw up a surprising list of the nations best at supporting well-being in an environmentally efficient way: Costa Rica was in the top spot, Cuba, Brazil and Vietnam were all in the top 10, and the top 20 was packed with countries from Latin America and South-east Asia. Singapore came in 49th, Britain 74th and the United States 114th.
Most of the fastest-growing economies were all greener and happier 20 years ago than they are today, the study found. A slew of other studies have found that, in the rich Western world at least, people are no happier now than they were 50 years ago despite incomes tripling in that time.
Once a society’s income per capita moves above US$20,000 (RM69,610), economists believe, there is a diminishing return the higher the income — particularly given the sacrifices that must be made for bigger salaries.
And then there is the inevitable bitterness that sets in when people who are getting wealthier more slowly watch others getting richer faster.
Financial markets will continue to trade on GDP figures for years to come, but for governments at least, it may be time to move beyond this headline figure and use a different set of key performance indicators to help shape policy.
“I do see traction for this idea,” said Prof Oswald. “Many people around the developed world are asking themselves if it is really worth trying for the third BMW when other things aren’t going so well.” — Straits Times
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GDP is now missing many factors.
If it is outdated, a new metrics can be formulated. The PPP is the superset of GDP, but this new metrics is a dynamic reference. In the age of computer power, it is possible to device this measure.
The new metrics will measure the aggregate of the nation's real economy, social justice, quality of life, infrastructures, services, patents, human capital and assets that has real value to mankind like the WHO, CDC, Bell Labs (now defunct), James Webb telescope, ITER, R&D, technologies, primary produces, ...