Beyond GDP

By the curious standard of the GDP, the nation's economic hero is a terminal cancer patient that is going through a costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site. All these add to GDP, because they cause money to change hands. It is as if a business kept a balance sheet by merely adding up all 'transactions", without distinguishing between income and expenses, or between assets and liabilities.

(Source)

It's only fitting that on the day market-based principles failed spectacularly, French President Nikolas Sarkozy named Nobel winner Joseph Stiglitz of Columbia University to head a panel tasked with finding new measures of economic growth that will include non-monetary components.

As described in the quote above, the biggest criticisms against using Gross Domestic Product as a proxy for well-being is that it's solely based on market transactions.

So, taking an extreme imaginary example, if one year Brazil tore down the entire Amazon as inputs for products sold on the market, merely looking at the GDP figure for that year would lead someone to believe that the country was an economic powerhouse. But, of course, the damage done to the environment would mean that GDP would plummet the following year.

In other words:

GDP does not reflect the consumption of capital during the production process, and thus overestimates the value of output that actually contributes to well-being without lowering future production.

(emphasis mine)

And what about happiness? Although recent research has shown that national income is correlated to feelings of well-being among countries of different income groups, it's less the case among countries of the same group. Robust GDP growth can also mask growing incoming inequality. (And let's not forget that housework is absent from GDP too.)

Stiglitz tells the AFP that any new indicators developed by his panel might not "be a replacement of current measures, but may be a construction of complementary measures."

There is no shortage of alternative GDP measures, but in order for them to be taken seriously they must try to marry market activity with measures of health, inequality, well-being, and environmental impact -- plus they should be comparable internationally.

So, as inspiration for Stiglitz's panel (which will also feature Nobel laureate Amartya Sen of India), and for the visually minded, here is a Venn diagram from Deutsche Bank research that illustrates what GDP measures, and what it doesn't (click to enlarge):

And here is a list of alternative GDP measures that are out there already (organization that developed it in parenthesis). For a review of their strengths and weaknesses, see here (the biggest weakness for measures that go beyond market transactions is finding a universally agreeable way to put values on environmental impact, well-being, etc.):

Intended to adjust GDP:
- Genuine Progress Indicator - tries to correct GDP by monetizing environmental and social factors (Redefining Progress)
- Green GDP in China - tries to correct GDP by monetizing environmental factors (Chinese Government)
- Genuine Savings - provides estimates for savings by considering environmental and social factors (World Bank)

Intended to replace GDP:
- Human Development Index - combines GDP with social indicators (UN)
- Carbon Footprint - measures the ecological pressure of humanity in the biosphere (WWF and Carbon Footprint Network)
- Happy Planet Index - Life satisfaction data combined with environmental footprint data (new economics foundation)
- Environmental Sustainability Index/Environmental Performance Index - Tracks a society's capacity to improve environmental performance (Yale, WEF)
- Regional Quality of Development Index - combines social, environmental and economic data (Sbilanciamoci!)

Intended to complement GDP:
- System of Economic Environmental Accounts - combines environmental and economic data (UN)
- German Environmental Economic Accounting - German version of the above (German Government)
- National Accounts Matrix including Environmental Accounts - keeps track of how inputs and outputs in GDP affect the environment (Netherlands Government)
- System of Economic and Social Accounting matrices and Extensions - Similar to above but includes social welfare measures (Netherlands Government)

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