Bet­ter ways to mea­sure im­prove­ment Gross do­mes­tic prod­uct is the widely-used in­di­ca­tor for the gen­eral pros­per­ity of so­ci­ety. While use­ful, it has it lim­its, and some ad­just­ments to the mea­sure need to be tabled.

Finweek English Edition - - OPINION - Ed­i­to­rial@fin­week.co.za is as­so­ci­ate pro­fes­sor in eco­nom­ics at Stel­len­bosch Univer­sity.

dur­ingmy first four years of high school, I de­liv­ered the Afrikaans daily Die Burger to about 50 homes in my neigh­bour­hood ev­ery morn­ing. For a fee, sub­scribers would have ac­cess to na­tional and global world news over break­fast. To­day, a printed ver­sion of Die Burger is still de­liv­ered to sub­scribers, but there are far fewer of them. Far more con­sumers, in­clud­ing my­self, don’t buy a printed pa­per any­more. We read the news on­line.

The co­nun­drum for na­tional statis­ti­cians who are in­ter­ested in mea­sur­ing the liv­ing stan­dards of South Africans over time is that the de­cline of news­pa­per sales will regis­ter as a de­cline in gross do­mes­tic prod­uct (GDP) – the widely-used in­di­ca­tor for the gen­eral pros­per­ity of so­ci­ety. And if peo­ple don’t pay for their on­line news ser­vice – but in­stead get the news from free ser­vices like News24.com or the Huff­in­g­ton Post – then there will be no con­comi­tant in­crease in GDP. What would ap­pear like lower lev­els of liv­ing stan­dards, will in re­al­ity be sig­nif­i­cantly im­proved wel­fare; no need to get up for a some­times-late news­pa­per when you can pick up your phone and read up-to-the-minute news in the com­fort of your bed, for free. This, in essence, is the prob­lem with us­ing GDP as an in­di­ca­tor of liv­ing stan­dards. GDP raises many prob­lems that econ­o­mists have known about for a long time. When Si­mon Kuznets (who is most fa­mous for his work on in­equal­ity) first de­signed the mea­sure in the 1940s, he was un­sure whether to in­clude house­work in the mea­sure. If you ap­point a gar­dener, for ex­am­ple, it will be counted as part of GDP; if you choose to do the gar­den­ing your­self, it will not be in­cluded.

But the rise of in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy (ICT) has made mat­ters much worse: our abil­ity to con­nect with friends (Face­book), or make in­ter­na­tional calls (What­sApp) or study any topic on earth (Wikipedia) free of charge has with­out ques­tion boosted our liv­ing stan­dards, but won’t be re­flected in GDP. We may not be con­sum­ing more, but we are cer­tainly con­sum­ing bet­ter, faster, and a greater va­ri­ety with more com­fort.

The fail­ure of GDP to cap­ture th­ese ad­vances is be­gin­ning to worry econ­o­mists. The 30 April edi­tion of The

calls for a “fresh ap­proach”. Sev­eral new books by promi­nent econ­o­mists – of which Diane Coyle’s

is my favourite – have noted on in­comes only may miss the large im­prove­ments in liv­ing stan­dards de­rived from both free public ser­vices and tech­nol­ogy. Even the way we mea­sure poverty may need ad­just­ment to this new world of freeco­nomics.

Sec­ondly, and of­ten ne­glected, mis­mea­sur­ing the im­prove­ment in liv­ing stan­dards also im­plies a mis­mea­sure­ment of the causes of that im­prove­ment. Poor growth sug­gests that tech­nol­ogy has had lit­tle im­pact on our wel­fare. This has be­come known as the pro­duc­tiv­ity para­dox. No­bel-prize win­ning econ­o­mist Robert Solow fa­mously quipped: “You can see the com­puter age ev­ery­where ex­cept in the pro­duc­tiv­ity sta­tis­tics.” The re­mark was aimed at the in­abil­ity of com­put­ers to have the cat­a­clysmic ef­fect of the dy­namo or the steam engine of an ear­lier age. But per­haps it did (and still does), but we are sim­ply not mea­sur­ing it ac­cu­rately. I sus­pect the Dig­i­tal Age has added far more qual­ity to our lives than has been mea­sured in GDP es­ti­mates.

Of course there have been many at­tempts at con­struct­ing a bet­ter mea­sure of liv­ing stan­dards. A few years ago, hap­pi­ness was touted as a bet­ter mea­sure of gen­eral wel­fare. The prob­lem is that, be­yond a cer­tain level of de­vel­op­ment, hap­pi­ness changes very lit­tle. So, too, for light den­sity – a mea­sure of eco­nomic per­for­mance that re­lies on images from satel­lites. Light den­sity does have its uses, though. A new pa­per by Maxim Pinkovskiy and Xavier Sala-iMartin uses light den­sity to show that liv­ing stan­dards in de­vel­op­ing coun­tries have risen much faster, and that the world in­come distri­bu­tion has be­come more equal than pre­vi­ously thought. (This is be­cause the qual­ity of sur­veys in th­ese coun­tries is of­ten poor.)

Charles Jones and Peter Klenow also at­tempt to mea­sure the gen­eral im­prove­ment in liv­ing stan­dards. They con­struct a com­pos­ite in­di­ca­tor that con­sists of con­sump­tion, leisure, mor­tal­ity, and in­equal­ity – the four main things, they ar­gue, that de­ter­mine wel­fare. Al­though wel­fare and GDP are cor­re­lated, there are large de­vi­a­tions – in­clud­ing South Africa. We rank much lower on wel­fare than we do on GDP be­cause of our high level of in­equal­ity and low life ex­pectancy.

And yet, even this com­pos­ite mea­sure fails to ac­count for the im­mense gains from tech­nol­ogy in the Dig­i­tal Age, like free news, com­mu­ni­ca­tion and in­for­ma­tion. GDP will re­main a very use­ful mea­sure, but it is not in­vin­ci­ble. Politi­cians and their elec­torate should take note.

I sus­pect the Dig­i­tal Age has added far more qual­ity to our lives than has been mea­sured in GDP es­ti­mates.

Robert M. Solow Econ­o­mist

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