Measuring What Matters: Moving Beyond GDP
A consensus has largely been reached in the world that it’s time to move beyond GDP as an indicator of social welfare to a more inclusive metric.
JUST over 50 years ago, Robert F. Kennedy in a speech he delivered at the University of Kansas expressed his concerns about the limits of using Gross National Product to guide policy decisions. In his own words:
“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage... It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl…
“Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play... It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”
For years, governments have focused on increasing Gross Domestic Product (GDP) as a proxy for the health of the economy and economic progress. By GDP standards, their fixation was a success, and since 1950, GDP has increased threefold globally. But has this translated into greater societal progress and increased welfare for a nation’s people?
The Genuine Progress Indicator (GPI), one alternative measurement of societal well-being that factors in 26 components, including health of citizens, environment, inequality, and quality of employment, showed that despite GDP’s constant increase, welfare actually decreased since 1978. Increasing GDP did not account for the costs of global warming, predict the 2008 Great Recession, or warn about the rise in rightwing extremism that is threatening the successes of global cooperation. As such, Kennedy’s remarks were impeccably accurate: GDP is a highly inadequate measure of societal well-being. Better and more inclusive metrics help create nuanced policies that consider the genuine welfare of all members of the population. Reforming how decision makers create and implement policies aimed at improving well-being, growth, and progress through changing the benchmarks of progress must occur in order to best tackle significant global changes that affect national governments and the international community.
Governments have long used measurements as a justification for policies. During the economic crisis of the 1930s and 1940s, governments demanded clearer statistics to measure the health of the economy and identify what policy responses were possible. Economists in the United States and the United Kingdom developed GDP as a measurement of market activity. At the time, the U.S. Bureau of Economic Analysis described GDP in narrow economic terms as an indicator of the speed of economic growth, the pattern of spending on goods and services, the percentage of an increase of production due to inflation, and the amount of income allocated to consumption, investment, and savings.
In 1934, Simon Kuznets, the chief architect of the U.S. national accounting system and GDP, cautioned against using GDP as a proxy for well-being. However, amid the Great Depression and World War II looming on the horizon, President Franklin D. Roosevelt needed easily identifiable numbers to help justify his policies and budgets to bring economic recovery in the U.S. As a result, GDP suited his purposes. The GDP estimates of the time showed that the economy could provide sufficient supplies for fighting WWII while maintaining an adequate production of consumer goods and services. While this made Roosevelt happy, Kuznets argued that
GDP’s limited function of measuring economic output might inaccurately be conflated with welfare and progress. In the following years, GDP was adopted by the International Monetary Fund and the World Bank as an indicator of economic progress.
Over the last few decades, decision makers have relied on GDP as a proxy for well-being in society and have sought to maximize their nation’s GDP. Yet focusing on economic output as a metric of progress has overlooked other aspects of societal welfare. The greatest challenges of today, including climate change, right wing populism, and fair and decent work for all, are the consequences of the pursuit for growth.
As Kuznets’ protests showed, the debate on the misuse of GDP as an indicator of societal wealth is as old as the invention of GDP itself. Scholars, many governments, and the Organisation for Economic Cooperation and Development (OECD) have largely come to a consensus that it is time to move “beyond GDP”
as an indicator for societal welfare to a more inclusive metric. This means taking stock of a larger number of indicators assessed across a number of dimensions, including material living standards, health, education, personal activities, political voice and governance, social connections and relations, environment, and insecurity. Moving beyond GDP requires concerted effort from the national and international community to ensure its success.
There has been significant progress in the last decade. Scholars and policy makers have worked to overcome the conceptual challenges in deciding which indicators should be included. The result has been the introduction of many alternative indicators to measure welfare, with the Genuine Progress Indicator (GPI), Happy Planet Index, Human Development Index (HDI), Gross National Happiness Index, and Index of Social Progress being among the most widely known.
Internationally, the OECD has been the most prominent actor in pushing for a widespread adoption of
Scholars, many governments, and the Organisation for Economic Co-operation and Development (OECD) have largely come to a consensus that it is time to move “beyond GDP” as an indicator for societal welfare to a more inclusive metric.
alternative metrics. In 2011, the OECD established the “Better Life” initiative based on 11 topics in which it identified as essential the areas of material living conditions and quality of life. It provides for a cross-country comparison of the 34 OECD countries and analyzes current government policies that would help or hurt their success in different indicators. While the progress made by scholars, national governments, and international governments is heartening, there is still substantial room for consolidating this shift and implementing the lessons learned.
In my country of New Zealand, we developed a Living Standards Framework (LSF) based on a wide range of wellness indicators from the OECD. The New Zealand budget, set to be delivered on May 30, 2019, will represent this shift in policy track by delivering “The Wellbeing Budget.” This year, New Zealand ranked 8th out of 156 countries in the World Happiness Report, a survey produced by the United Nations Sustainable Development Solutions Network. It is the fifth consecutive year we have been in the top ten, whereas we are ranked 49th by GDP according to the World Bank’s World Development Indicators.
As for China, it is the world’s second largest economy, having experienced an unprecedented growth and development over the last few decades. China’s GDP has grown from US $360 billion in 1990 to over US $12 trillion in 2017, making it likely one of the fastest growth spurts in world economic history. During that same period, according to the broader Human Development Index of the United Nations, China’s well-being also increased by 49.7 percent, a handsome increase with life expectancy going up 7.1 years and years of expected schooling by 5 years. This shows the importance of looking beyond just the economic growth measurements for a fuller picture of the health of a population so that appropriate policy choices can be made.
The InterAction Council will meet this month for its 36th Annual Plenary Meeting in Colombia to explore this topic further. When the Council met in Beijing last fall, it recommended that states abandon GDP as a measuring standard of a nation’s productivity. The Final Communiqué rightly noted that the pursuit of GDP growth has created a vicious cycle that is ruining the planet. Environmental, social, and economic challenges all require changes in how states measure success. Success cannot simply be evaluated on the value of market output; it must take into consideration society in its entirety. C