Tuesday, September 15, 2009
It Is Time To End GDP Fetishism
Most common discussions, by all kinds of media outlets all over the world, of the concept of social welfare of a particular society never fail to mention the state of the Gross Domestic Product, the GDP. This all popular macroeconomic variable has grown, despite its enormous shortcomings, to become a metric of what it was not designed to be in the first place. Very simply stated, the GDP is a money measure of the value of final goods and services that are produced by a particular society. Note that the concept does not pretend to say anything about the level of welfare but is only the summation of all what is produced without even deducting the damage that ensue from such levels of production and consumption . A simple common example might help illustrate this absurdity. If during a particular year, the number of expensive medical procedures undertaken in a state increases then the overall size of its GDP increases also. So if the GDP is such a good indicator of the social level of welfare then why not promote cigarette smoking in order to increase the incidence of lung cancer which will keep the surgeons busy and lead to a large rate of growth in the GDP? Of course such a policy would be rejected by all. But isn’t this exactly what we do when we allow firms to dump their toxic wastes into rivers and when we encourage workers to commute long distances from where they reside to their place of work. The concept is rife with problems that are too many to list and that economists and environmentalists have been pointing out for decades chief among them is the inability of GDP per capita to say anything about the all important income distribution. Wouldn’t it be more important to learn who had access to the increased output rather than to just say that output went up? It has often been the case that the all the growth in the GDP accrues to a small group of privileged economic class when ¾ of the population has in reality lost ground.
Environmentalists in general and environmental economists in particular have been in the forefront of an unremitting attack on the method of assembling national income statistics and in particular the GDP. These efforts have been helped over two decades ago by the work of Amartya Sen, the Noble laureate in Economics, through his pioneering work on how to measure poverty and social well being. His work has led, among other things, to the increasingly popular Human Development Index by the United Nations. The HDI ranks countries by creating an index that takes into consideration the level of GDP per capita but combines that with measures of literacy and life expectancy. As a result it becomes possible to rank a country with high literacy rate and a high life expectancy above one that enjoys a higher GDP per capita but lags in the other two indicators.
Two days ago Joseph Stiglitz, another Noble laureate in Economics, a Professor of Economics at Columbia University and an ex Chief Economist of the world Bank has joined ranks with the above group of advocates for a change in National Income Accounting. He called, in his capacity as a member of a group advising president Sarkozy of France, upon world economic leaders to “avoid GDP fetishism and… to stay away from that.” What a welcome message during these perilous economic times in a world that is clearly not sustainable. Bravo Dr. Stiglitz.
So what are the implications of such a change? You tell me. Is a growing GDP, accompanied by a growing poverty rate, inequitable distribution of income , larger public debt, higher unemployment, less electric power, a construction boom for the super wealthy, privatized public beaches, low minimum wage, environmental degradation in all fields and rampant corruption a sign of social justice and better social welfare?