23 June 2009

Getting beyond the GDP

Gross Domestic Product. The total value of all the good and services produced in a country annually. The GDP is not only the most common measurement of our economic well-being but often of society’s overall health. It is quoted ad nauseam as “our standard of living.”

This was not the intent of Nobel Prize winning economist Simon Kuznets, the inventor of the forerunner of the GDP. Kuznets had grave reservations about applying such an instrument too broadly. In his first report to the U.S. Congress in 1934, he warned, “The welfare of a nation [can] scarcely be inferred from a measurement of national income as defined above.” He later added, “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run. Goals for ‘more’ growth should specify more growth of what and for what.”

Kuznets cautions have been long forgotten and the GDP is applied very broadly indeed. Yet its weaknesses are as obvious as they are dangerous. For starters, it only values in terms of money, so those activities in which money doesn't change hands, including some of the most important work done in society, volunteer work for instance, or housework, are considered worthless. Unlike sensible accounting, it fails to include negatives as well as positives. Forests cut down are counted when they are sold for lumber, and later for finished products, but the cost of the loss of a forest, economically and environmentally, is ignored. Nature is not paid for her losses, so Her contribution doesn’t count. The planet could be sucked dry while the GDP soared merrily upward and our progress celebrated. The GDP has no interest in the future even though responsible accounting would insist that depleting Nature is depreciating an asset. Nor is polluting Nature a debit even thought its costs may prove catastrophic.

And many of the positives in the GDP are socially destructive. For example, a major growth industry in the U.S. in recent years has been incarceration. Imprisoning ever-increasing numbers of young men would seem to represent a failure in society, but the GDP notes the boom in expenditures on prisons, police, lawyers, courts, etc. and declares it a success. According to the GDP, crime definitely pays.

Factors that illustrate social progress may be of little account or even negative. Falling crime rates may lower the GDP. Reducing disparity between rich and poor is irrelevant. In Canada, while our GDP has steadily risen over the past two decades, income distribution has become increasingly skewed, living standards have been stagnant, housing affordability has diminished, job quality has deteriorated, and Canadians' own rating of their health has declined.

Some economists and others have called for better yardsticks to measure human progress -- or lack of it. The San Francisco-based group Redefining Progress has created a more comprehensive measure of progress which they call the Genuine Progress Indicator (GPI), an instrument that starts with personal expenditures similar to the GDP but then deducts social and environmental costs such as crime, pollution, loss of leisure time, unemployment, etc., adds in non-monetary contributions such as housework, volunteerism and natural resources, and also adjusts for income disparities. It represents something closer to the economy that people actually experience as opposed to an economist’s abstraction such as the GDP. Indexes such as the GPI have shown that when the GDP is rising, overall quality of life may well be falling, i.e. that our belief our standard of living is improving may be an illusion.

Now Canada has come up with its own yardstick. Former Saskatchewan premier Roy Romanow has spearheaded the creation of the Institute of Wellbeing, an organization dedicated to reporting on the quality of life of Canadians and promoting a dialogue on how to improve it through "evidence-based policies that are responsive to the needs and values of Canadians." The institute recognizes a growing consensus about "the need for a more holistic and transparent way to measure societal progress – one that accounts for more than just economic indicators such as the Gross Domestic Product and takes into account the full range of social, health, environmental and economic concerns of citizens."

The institutes's "signature product" is the Canadian Index of Wellbeing (CIW), which will evaluate the quality of life of Canadians overall and specifically in areas such as health, quality of the environment, education and skill levels, the use of time, the vitality of communities, participation in the democratic process, and the state of our arts, culture and recreation. It will provide detailed reports on the various areas and ultimately a composite index, a single number that will give a snapshot of whether the overall quality of life of Canadians is getting better or worse. At long last we will have a single, national instrument, designed from a Canadian perspective, that shows whether our quality of life in all of its dimensions is getting better or worse. The institutes's first report entitled How are Canadians Really Doing? can be found here.

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