The economic growth rate for the first three quarters of the current fiscal now works out to a dismal 4.6 per cent which means the GDP (Gross Domestic Product) growth would have to jump by 5.7 per cent in the last quarter to achieve even the CSO’s (Central Statistical Organisation) scaled down estimate of 4.9 per cent for the current financial year. Thus reads a recent report in a leading business daily. Do such numbers mean that we are all better off with the achievement of 4.9 per cent growth rate and worse off if we don’t achieve that? Is the GDP a clear indicator of the level of well-being in a country?
The basic measure of national output is the GDP. It is the value of all final goods and services produced in the country within a given period, usually one year. It includes the value of goods produced, such as houses and cars, and value of services, such as airplane rides and a physician’s services. The output of each of these is valued at its market price, and the values are added to get the GDP. In 2013, the value of India’s GDP was about USD 1,841.7 billion. Since our population was about 1.27 billion the per capita GDP was roughly $1,106 at constant prices since 2000.
Right from its invention in the early 1930s by Nobel-winning economists Simon Kuznets and Richard Stone, the GDP is considered as a basic social accounting measure of a country’s economic performance. For long it is the most comprehensive measure of aggregate economic activity in an economy that provides a quantified framework of output, spending and income on which an economy can base its forecasting of the level of economic activity.
Since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country. Development was treated as a purely economic phenomenon, a mindless pursuit of higher per capita incomes and greater gross domestic product. But the growth-fuelled selfish capitalism is now driving unprecedented levels of miseries, debt burden, insecurity, unhappiness and mental stress. It also destroys the very elements that actually do increase human welfare such as communities, family life, neighbourhoods and relationships. In many countries, the GDP may continue to increase even though there is no improvement in the human condition.
While constructing an early measure of GDP and NDP (Net Domestic Product) Kuznets, chief architect of the GDP metrics, had warned against equating GDP growth with well-being. To him national income accounts only very imperfectly measure what is produced each year. As Megan McArdle says, GDP “counts the money value of our output, but not the actual improvement in our lives, or even in our economic condition”. The GDP does not adequately capture the development dimensions of societies. It measures mainly market transactions, ignores social costs, environmental impacts and income inequality.
Conventional GDP accounts do not capture the changes in the flow of services from ecosystems like bio-remediation by wetlands, pollination of crops; prevention of soil erosion by forests etc. When a country depletes its natural capital, this is ignored in the national accounts, although depreciation in man-made capital is accounted for. Depreciation in man-made (physical) capital is deducted from GDP to arrive at NDP, which is a better indicator of the performance of the economy. Now, economists strongly argue that a mere estimation of NDP does not demonstrate the real strength of the economy. They now want GNDP (Green Net Domestic Product) to be estimated to serve as a still better and real indicator of the performance of the economy.
In GDP estimation, some outputs are poorly measured because they are not traded in the market. If we bake homemade cake, the value of our labour is not counted in official GDP statistics. If we buy a cake, the baker’s labour is counted. We officially measure the value of commercial day care, but taking care of one’s own kids is valued at zero. Services performed for love, kindness and mercy and not for money have an economic value but no money value. The difficulty is whether these services should be included in national income and how to measure their money value. GDP and other output measures do not include work in the household. Household works demand much more of the time of women than men, and GDP accounts exclude very important production mainly by women.
There have been a number of alternative parameters that have been suggested. The HDI (Human Development Index), for instance, tries to bring in issues like literacy, infant mortality, life expectancy, etc. The Gross National Happiness Index is developed by the government of Bhutan in 1972. It is an index that includes various parameters of social existence other than GDP. This measure uses elaborate surveys that ask how content people feel in nine domains: psychological well-being, standard of living, governance, health, education, community vitality, cultural diversity, time use and ecological diversity. The Happy Planet Index developed by the New Economics Foundation in 2006 multiplies life satisfaction by life expectancy and divides the product by a measure of ecological impact. The GPI (Genuine Progress Indicator) is often considered as a replacement of the GDP. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
By 2015, the UN is scheduled to announce the Sustainable Development Goals, a set of international objectives to improve global well-being. Developing integrated measures of progress attached to these goals is now a concern in most nations. Considering the accumulated failures of GDP to capture all dimensions of human well-being it is time to dethrone it from its current status. The continued misuse of GDP as a measure of well-being necessitates an immediate campaign to develop new indicators that can really help in guiding policies and to evaluate progress. The GDP’s successor should be a new metrics that integrates contemporary developments in ecology, economics, psychology and sociology to collectively contribute to establishing and measuring sustainable well-being. We need an alternative indicator that can foster truly sustainable development that improves the quality of human life while living within the carrying capacity of the supporting ecosystems.
The writer is professor of economics at Christ University, Bangalore, and can be reached at
pmat2012@yahoo.com