The two preceding columns have presented, firstly, the case made by analysts who believe that, despite its limitations, the GDP remains the most appropriate indicator of economic size, rate of progress and level of welfare or well-being enjoyed by Guyanese. And, secondly, the case presented by those who strongly believe the opposite. That is, the GDP is an inappropriate indicator, if not worse; it could readily lead to misdirection on these matters. This week I shall evaluate these pros and cons, and also offer brief references to alternative measures.
To be clear, it should be observed that it is often those who oppose the GDP’s appropriateness who frequently promote alternative measures to the GDP. Their fundamental plea seems to be that a deeper understanding of development (and further, its promotion) requires “leaving the metrics of the GDP behind”.
In other words, the opposition is arguing, the GDP as a performance construct has outlived its usefulness. While it was appropriate for the expectations and information needs of the 1930s through to the 1970s, these are no longer relevant to todays’ development problematic. As a matter of fact that problematic encapsulates economic considerations, as well as 1) social costs and benefits to society, 2) environmental impacts and 3) issues of equality and inequality.
Such recent concerns have also been merged into the broader global project of the Millennium Development Goals, 2000-2015. And, this has quite recently further morphed into the more ambitious United Nations-led Sustainable Develop-ment Goals, 2015-2030. From this perspective, therefore, indicators of economic size, progress and well-being or welfare must be treated as integral to global development strategy.
At this stage let us consider, albeit briefly, the most challenging alternatives, which have emerged to the premier role the GDP presently holds.
Alternatives to the GDP
As indicated above, those who propose alternatives to the GDP and national income accounting, readily concede that, at the time of its introduction more than seven decades ago, these metrics filled significant information deficits on the workings of economies, some of which remain to this day. It is the items that are ignored and/or excluded from the GDP measure, which give rise to their concern. And, that concern focuses on what the GDP ignores: environmental impacts, social impacts, and inequalities.
GPI
The literature on alternatives to the GDP identifies three broad streams. One of these is aimed at accommodating for the absence of computing social and environmental impacts. Conceptually, such impacts are measured in monetary units and computed alongside standard GDP measures (like income and savings). A good example of this approach is the Genuine Progress Indicator (GPI). This measure has about “70 additions and subtractions to account for the factors such as the value of volunteer work, and the costs of divorce, crime and pollution”. (See Talbeth J., et al 2007: The Genuine Progress Indicator)
Subjective measures
The second group of alternatives relies on subjective measures derived from surveys. Easily the most established of these surveys is the World Values Survey, which ask respondents about how content they are in nine domains: psychological well-being; standard-of-living; governance; health; education; community vitality; cultural diversity; time use; and, ecological diversity. Some analysts believe this is the most appropriate measure of societal progress. It is typically presented as the Gross National Happiness Index, and is used principally in Bhutan.
Weighted composite measures
The third group of alternatives to the GDP relies on composite measures of several indicators. Here, the best known of these composite indices is the United Nations Development Programme’s (UNDP) Human Development Index (HDI). Originally developed from Mahub ul Haq and Amartya Sen’s work back in 1990, the HDI has been refined over the years, with the last major refinement taking place in 2010.
The HDI combines three dimensions of social life, namely: 1) A long and healthy life, or life expectancy at birth, for the population on average; 2) education, measured by multiplying mean years of schooling by expected years of schooling; and 3) a decent standard of living or gross national income (GNI) measured at purchasing parity per capita in United States dollars. I have discussed this index in several previous columns and will not repeat here, as it is not necessary for present purposes.
I should observe though that the Inequality Adjusted Human Development Index (IHDI), which was introduced in 2010, measures the average level of human development of persons in society. That is, taking inequality into account in all three basic dimensions of social life, given above: income, life expectancy, and education.
Assessment
I do not believe that any of the arguments for and against the use of the GDP that were previously presented should be disregarded, no matter which side of the debate readers adopt. I am, however, convinced that the GDP is so well-entrenched, it cannot be displaced in the foreseeable future. I arrive at this conclusion, not because of vested interests, as some would claim, but for the two reasons briefly indicated below.
First, today’s universal usage of GDP is entirely voluntary. All the dominant schools of economics: classical, neo-classical, Keynesian, macroeconomics and socialist (Marxist) have applied the GDP methodology as the most appropriate measure. Second, as a result of this, the GDP measure is treated as ‘neutral’, which means it is not seen as serving a particular ideological or political agenda.
However, despite this situation, a case can be made for the use of alternative measures, (such as those cited above) as supplements or complements to the GDP. Parenthetic-ally, readers should also note that all the alternatives, which have gained prominence thus far, have been publicly challenged by several analysts/critics as being ideological or agenda-driven!
Next week I shall pursue the issue of alternatives.
