The Hindu Business Line : New ways of measuring growth

A country's state of development is normally a function of its economic growth which, in turn, is measured all over the world by means of gross domestic product (GDP). But is GDP all?

The President, Mr A. P. J. Abdul Kalam, does not think so. And rightly. GDP, he says, is only one aspect of growth. He has proposed adopting a National Prosperity Index (NIP) which he defines as the sum total of GDP, a minimum stipulated level of quality of life and value systems derived from the country's cultural heritage and ancient civilisation.

Economists themselves have long been feeling doubtful about the reliability of GDP as a measure of growth. Welfare economists of the likes of A. C. Pigou had always held that a mere rise in the GDP alone did not guarantee improvement in the quality of life, viewed in terms of access to basic amenities conducive to human welfare and happiness as a pathway to prosperity for all within a foreseeable future.

Sometime in the mid-1990s, 400 leading economists, business leaders, and other professionals, including Nobel Laureates, issued a joint statement in which they demanded that "Policy-makers, economists, the media, and international agencies should cease using the GDP as a measure of progress and publicly acknowledge its shortcomings. Since the GDP measures only the quantity of market activity without accounting for the social and ecological costs involved, it is both inadequate and misleading as a measure of true prosperity."

Ironically, as has been noted, even ecological disasters such as the Exxon Valdes oil spill improve the GDP, because the calculation of GDP adds as a bonus economic activity the lumpsum of labour and capital expenditures required to mitigate the ecological damage!

NEW, GPI and GNH

The sense of uneasiness arising from all this led to the exploration of a number of alternative concepts that could serve as more accurate and appropriate indices of growth. For a time Net Economic Welfare (NEW) held the field, explained in the UN economic glossary as "the adjusted measure of total national output, including only the consumption and investment items that contribute directly to economic well-being," calculated by adding to GDP the value of leisure and the underground economy, and making deductions for factors such as environmental damage.

The idea was carried forward by three bright California researchers in 1995 who hit upon a Genuine Progress Indicator (GPI) based on 26 social, economic, and environmental variables. The GPI improves upon GDP by assigning explicit value to environmental quality, population health, livelihood security, equity, free time, and educational attainment, putting a value on unpaid voluntary and household work as well as paid work, counting sickness, crime and pollution as costs not gains, and appraising the economic value of non-market social and environmental assets not generally valued in the conventional economic statistics.

For example, agricultural activity that uses replenishing water resources, such as river runoff, will score a higher GPI than the same level of agricultural activity that drastically lowers the water table by pumping irrigation water from wells.

Some years ago, the Bhutan King coined the novel term of Gross National Happiness (GNH) based on the premise that true development of human society takes place when material and spiritual development occur side-by-side to complement and reinforce each other. The four pillars of GNH are the promotion of equitable and sustainable socio-economic development, preservation and promotion of cultural values, conservation of the natural environment, and establishment of good governance.

Economists should lose no time in taking up these challenges to their ingenuity and finding a substitute for GDP more reflective of human welfare and happiness.

B. S. RAGHAVAN