Taking a wider view of progress
Perhaps one of the biggest weaknesses in traditional economic thinking is the belief that GDP per capita is the only relevant benchmark of economic performance.
Yet, there is compelling evidence to show that increases in GDP have little impact on happiness or life chances.
It is surprising that economists appear seduced by what many people would regard as an unsophisticated approach to measuring progress. Simply focusing on measured increases in GDP tells us little about the quality of life enjoyed by the citizens of a country. It tells us nothing about the distribution of incomes, nothing about differences between rich and poor in terms of health and life expectancy, nothing about social mobility, nothing about environmental sustainability, and little or nothing about the quality of life. Most importantly, it tells us nothing about whether most citizens have the capabilities they need to choose lives that they have reason to value.
Despite this, GDP growth has remained a virtual obsession for economists, government policymakers and most of the world’s major intergovernmental organisations. For example, the OECD’s Going for Growth approach for the past decade initially explicitly and subsequently implicitly took the US GDP per capita as the benchmark against which the performance of all OECD countries should be measured. The fact that measured US GDP per capita is the highest in the major economies has also been used to promote what was seen over the first part of the 2000s as the “US model” of deregulated labour markets, financial market hegemony and shareholder value systems of corporate governance. It is these very features that have been identified as contributing to the September 2008 financial collapse that sparked the financial crisis.
A relentless focus on GDP offers us a distorted view of general economic performance. One issue that is obscured rather than illuminated by the measure of GDP is the financialisation of the economy. Financialisation is essentially a process in developed country economies by which the financial sector grows in weight and importance, as the process of restructuring leads to a focus on financial engineering as the most significant source of “wealth creation”.
In the US, the share of the financial sector in domestic corporate profits rose from 19% in 1986 to over 40% in the mid 2000s. Following the financial collapse it has become clear that a significant part of the transactions and assets on which those profits were made were, in fact, worthless. Nevertheless, the policies of financial deregulation that permitted this financialisation process were justified by the expansion of measured GDP in the US, irrespective of the fact that the wealth creation was to a significant extent an illusion.
GDP tells us nothing about sustainability, the quality of life or life chances. Despite having the highest measured GDP per capita in the OECD, the US model depends on unsustainable energy intensive growth; GDP figures have failed to measure the excessive energy dependence of the transport sector based on comparatively low energy prices in transportation compared to other OECD countries. They have also failed to measure the excessive expenditure on health care (16% of GDP in the US in 2009 compared to an OECD average of 8%). Furthermore, this expenditure is not reflected in better health outcomes in terms of life expectancy and infant mortality compared with average OECD countries.
Most importantly, the figures of GDP per capita fail to take account of how income is distributed and how that changes over time. The US is one of the most unequal countries in the OECD in terms of income distribution. Moreover, inequality has actually increased over the past two decades. From 1980 to 2005, more than 80% of the total income increase in the US went to the top 1% of the population. The growth of inequality and the failure of low incomes to rise were major factors in driving the credit-based model of growth in the US and, behind that, the bubble economy.
Beyond the immediate crisis there has been recognition of the gap in measurement of growth as seen in GDP per capita and the sense of economic well-being of the population. The OECD itself has acknowledged that “for a number of years there has been evidence of a growing gap between the image conveyed by official macroeconomic statistics, such as GDP, and the perceptions of ordinary people about their own socio-economic conditions” and that “addressing such perceptions of the citizens is of crucial importance for the credibility and accountability of public policies and the very functioning of democracy” (“The Statistics Newsletter”, OECD, 2010).
If analysis and performance were less obsessively based on levels and growth of GDP per capita, more care would have been taken in interpreting the strong growth of the first years of the 21st century. And most likely, there would have been less triumphalism in promoting the very policies and models that led to the crisis.
How might we go about devising better measures of economic performance? An important first step must be to build the OECD Better Life Index initiative into a dashboard of indicators that tell us something about the following: median GDP rather than GDP per capita; the equality (or inequality) of income distribution measured by the Gini coefficient; the employment rate broken down by population groups; life expectancy indicators; measures of economic security; and the carbon-intensity of economic activity. Second, these indicators must be seen as credible and legitimate by all stakeholders, including business and the trade unions. Third, the information must be updated on a regular basis so that evaluation can be made of the impact of policy. Finally, the trade-offs between the objectives should be stated clearly and the indicators themselves should be integrated into policymaking in finance ministries and treasuries, as well as in other ministries.
A great deal of weight is to be placed on a range of indicators measured by official statistics. But there is real doubt about whether all OECD countries collect the information needed to develop this more sophisticated approach to measuring economic progress. Similarly, there may be doubts about the veracity or accuracy of the data, and governments are notorious for manipulating statistics to tell a positive story. One clear recommendation, then, is that the authority responsible for gathering and publishing the data must be independent of political influence. Otherwise, the whole ambitious enterprise could risk being undermined. The public in some countries already has little confidence in conventional measures of economic performance. It would be disastrous if the more sophisticated approach outlined here met the same fate.
Trade Union Advisory Committee to the OECD
The OECD Statistics Newsletter
Create Your Better Life Index
©OECD Yearbook 2012
Where are we in the current economic crisis?
- Women in work: The Norwegian experience
- Clinical trials for better health policies
- Policy can brighten the economic outlook
- Information society: Which way now?
- Asia’s Challenges
- Study abroad
- The EU fish discard ban: Where’s the catch?
- Homo Economicus: An uncertain guide
- Knowledge is growth
- “Made in the world”