MacroScan - Measuring Progress

For some time now it has been clear that standard measurements of growth and development are inadequate and possibly even misleading. The problem of looking at only the aggregate gross domestic product (GDP) has been widely noted: its blindness to distributional issues and its inability to measure either the quality of life or the sustainability of any particular system of production, distribution and consumption. Despite these obvious limitations, however, the GDP remains the most widely used indicator of any economy and is generally the benchmark used to determine both performance and policy orientations of most governments.

The more wide-ranging human development index, or HDI, (which is the simple average of income measured by the GDP, health measured by life expectancy and education measured by literacy/enrolment) is clearly superior to the simple per capita GDP indicator. It is particularly useful because it often provides rankings of economies that are quite different from those based purely on per capita income. Nevertheless, even the HDI is increasingly being viewed as limited because it does not fully capture the complex relationships between current levels of income and growth, basic health and education indicators, and quality of life.

Several recent economic processes have made the need to search for alternative indicators of human well-being even more pressing. The global financial and economic crisis has exposed the problems and contradictions inherent in the earlier boom, which were not recognised by the wider public even though they were certainly discussed among a segment of largely unnoticed economists. Meanwhile, climate change and other evidence of ecological damage have highlighted how fragile and eventually unsustainable current patterns of economic activity are. And the distributional issues that were swept under the carpet in the age of dominant finance and resurgent capital are becoming prominent once again.

These may be what prompted President Nicolas Sarkozy of France (whom some may otherwise have considered to be an unlikely candidate for alternative economic thinking) to set up a commission in the middle of last year to deliberate alternative measures of economic and social progress. The commission has Joseph Stiglitz as chair, Amartya Sen as chair adviser and Jean-Paul Fitoussi as coordinator and an impressive list of economists and social scientists from across the world as its members. The commission has now submitted its report, ''Report by the Commission on the Measurement of Economic Performance and Social Progress'', available at http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf.

The commission's terms of reference were nothing if not sweeping: ''To identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement; to consider what additional information might be required for the production of more relevant indicators of social progress; to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way.''

These are huge issues, and not only because of the philosophical and methodological concerns they raise. The empirical and statistical issues may well present the greater challenge. After all, one of the reasons for the continued domination of the GDP as the basic measure despite its many limitations is its apparent simplicity and ease of availability across countries and time periods. This is also why the HDI remains the most popular alternative measure. Any new measure will have to confront the basic problem of providing correct insights on the basis of readily available data across different countries and time periods.

For this reason, the commission's report was eagerly awaited in the hope that it would provide some feasible alternatives that could be used and disseminated and that it would provide both alternative measures for analysts as well as alternative goals for policymakers. However, while the report makes a number of useful and often profound points, it may have failed to fulfil this most urgent of goals. Instead, it seems designed to open up a discussion, thereby leaving some of the most crucial questions unanswered.

The report notes that there often seems to be a marked distance between the standard measures of important socio-economic variables, such as economic growth, inflation and unemployment, and public perceptions about them. It accepts that these differences are often too large and persistent to be simply attributed to money illusion or similar features. Instead, it notes that these differences can arise from flawed measurement processes, inadequate concepts, income distribution effects or because the measures do not capture other phenomena or features that affect well-being. It recognises that conceptual issues and socio-economic inequalities are particularly important.

Therefore, the report advocates a shift of emphasis from a ''production-oriented'' measurement system to one focussed on the well-being of current and future generations. This in turn means shifting from measuring economic production to measuring people's well-being in an overall context of sustainability. This means that when evaluating material well-being it is necessary to look at income and consumption rather than production; to emphasise the household perspective including unpaid labour; to consider income and consumption jointly with wealth; to give more prominence to the distribution of income, consumption and wealth; and to broaden income measures to non-market activities.

The last is a complex and potentially controversial matter. Non-market activities constitute a significant part of both production and consumption in many societies, and the gender dimension of this is well known. The lack of recognition and social reward for such activities has also been identified as a major problem. However, including some valuation of such activities in estimates of income may have the perverse effect of increasing the estimated incomes of households and societies that are currently perceived as poor. In other words, the presence of a high proportion of non-market activities, which are associated with lack of development and greater poverty, may well become a false indicator of better living conditions and thereby do the poor (and women who typically perform a greater part of such non-monetised activities) a double disservice.

In other areas, the conclusions of the commission are certainly not objectionable, but since they are expressed in a general way, they appear to be somewhat banal. Thus, the report states that well-being is multidimensional and includes not only material living standards (such as income, consumption and wealth) but also health, education, personal activities including work, political voice and governance, social connections and relationships, present and future conditions of the environment, and physical and economic security.

This in turn means that quality of life depends not only on people's objective conditions and capabilities but also on their subjective perceptions of life satisfaction. The report argues that statistical offices should incorporate questions to capture people's life evaluations, hedonic experiences and priorities in their own surveys. This is something that has already been attempted by the new economics foundation (nef), London, which recently produced an extremely interesting ''Happy Planet Index'' (HPI), which uses survey-based data on life satisfaction in addition to other ''hard'' variables to arrive at the index as follows:

HPI = (Life expectancy X Life satisfaction)/Ecological footprint.

(According to this index, Costa Rica emerges as the ''happiest'' country, with the United States and several other rich countries rather low down in the list.) However, unlike the HPI, the commission's report does not really present very clear methodological answers on how to go about taking both life satisfaction and hard variables into consideration. Similarly, because the commission recognises the critical role of inequalities, its report notes that quality-of-life indicators in all the dimensions covered should assess inequalities in a comprehensive way. This is certainly desirable but does not provide a useful alternative measure that would incorporate inequalities in a feasible way.

Similarly, the issues of measuring sustainability and environmental indicators are also effectively side-stepped. According to the report, ''Sustainability assessment requires a well-identified dashboard of indicators. The distinctive feature of the components of this dashboard should be that they are interpretable as variations of some underlying 'stocks'. A monetary index of sustainability has its place in such a dashboard but, under the current state of the art, it should remain essentially focussed on economic aspects of sustainability. The environmental aspects of sustainability deserve a separate follow-up based on a well-chosen set of physical indicators. In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage (such as associated with climate change or the depletion of fishing stocks.)''

Once again, this is too general to be really useful. In that sense, the commission has not really been able to provide a conceptual or measurement breakthrough even along the lines of the HDI. It is not surprising that one is left asking for more. The authors of the report seem to be aware of this. In a closing section, they note: ''The commission regards its report as opening a discussion rather than closing it.'' But this discussion has been open, and indeed ongoing, for quite a while, even if not in the rarefied corridors of mainstream economics. The commission must be credited for contributing sensibly and wisely to the existing global conversation on this important matter but cannot be congratulated for making any new advances.