Measuring well-being

GDP possesses many shortcomings and needs to be complemented with alternative indicators which act as a proxy to economic, social and environmental well-being

Measuring well-being

The recent release of the back-series data by the Central Statistics Office (CSO) has ignited a series of debates and discussions between academics, politicians and several other experts engaged in the field. This is an outcome of a global significance that has been historically accorded to the Gross Domestic Product (GDP) by various governments and researchers for the purpose of economic decision-making. The GDP number features the total market value of goods and services produced within a region, in a time period, i.e., market economic output. This, however, does not sing well with the prosperity and wellness of citizens. Therefore, a debate on measuring wellness and prosperity holds the key to future development and sustainability, not some rhetoric around GDP figures if notched up or down by a simple change in methodologies.

Nobel laureates like Amartya Sen and Joseph Stiglitz, IMF head Christine Lagarde and academics like Erik Brynjolfsson, Richard Easterlin, Thomas Piketty and Angus Deaton have time and again underlined the inefficiency of GDP figures in measuring social welfare and the cumulative capabilities of individuals and households. Easterlin, a Professor of Economics at the University of Southern California said, "GDP is an abstraction that has little personal meaning for individuals." In 2009, a commission under the Organisation for Economic Co-operation and Development (OECD) (headed by Joseph E. Stiglitz, Amartya Sen and Jean-Paul Fitoussi) through its report Mismeasuring Our Lives: Why GDP Doesn't Add Up, very well questioned the true efficacy of GDP numbers. It chalked out a series of recommendations for building a set of indicators which, along with the GDP, would act as a proxy to economic, social and environmental well-being. Underpinning the idea for a small set of alternatives, the document has extensively discussed various indicators which would depict the overall wellness of the economy and its people.

Limitations of GDP

The limitation of GDP to measure the overall economic and social welfare has been widely discussed in the past. As commonly known, GDP numbers showcase the growth in economic activities and income generated from it. It was developed to measure market activities but over the years, experts have been using it as the sole indicator to reckon the progress and health of nations. GDP cannot capture the impact of widespread market production on resources, Climate Change, economic disparity and quality of life because prices do not account for the social costs and benefits. For example, an increased spending on agriculture to boost crop yields implies higher GDP but it would degrade resources like water, soil and increase methane emission – diminishing the quality of life and overall well-being of society. The negative externality is not tapped by GDP figures because of market failure. The incapacity of GDP to measure sustainability and distribution of income is another shortcoming.

Further, the focus on rising GDP figures in the past has not done much to reduce income and gender disparity in India. As per the World Inequality Report 2018, income inequality is rising rapidly in the country. The share of the top 10 per cent earners in the total income has risen continuously to reach 55 per cent in 2016 from around 30 per cent in 1980. Similarly, a rising GDP has not been able to uplift the female labour force participation rate in the country, which has fallen from 35 per cent in 1990 to 27 per cent in 2017, one of the lowest in the world. A policy design, therefore, based only on GDP estimates clearly misses the welfare maximisation target and ends up creating policies which overlook social and environmental well-being as well as differences in opportunities.

In 2013, OECD introduced a composite index called 'Better Life Index' that captures a set of 10 indicators namely housing, income, jobs, community education, environment, civic engagement, health, life satisfaction, safety and work-life balance to present a broader picture of progress in the nations. Recently, OECD published another report {A Commission under OECD (2018), headed by Joseph E. Stiglitz, Jean-Paul Fitoussi and Martine Durand} as a sequel to its 2009 report. In the following report, Beyond GDP: Measuring What Counts for Economic and Social Performance, experts highlight human capital, trust, insecurity, inequality and sustainability for measuring the overall well-being of a society and its citizens. As per the report, it was due to the absence of adequate well-being metrics that GDP forecasts were overestimated during the post-2008 crisis in the United States (US). Even though the recovery period recorded a faster growth, it came at the cost of growing inequality and economic insecurity.

Alternative measures of happiness or well-being

To arrive at a definition for these wellness metrics is an arduous and time-consuming exercise. However, once accomplished, the new indicators, unlike GDP, would bring a better perspective to policymakers and drive societal well-being. Several countries in the past have taken initiatives to measure and record the economic well-being and happiness of its citizens, Bhutan being a prime example. Bhutan has been using Gross National Happiness (GNH) Index as an alternative to GDP since 1972. Australia began to assess the well-being of its citizens with an initiative called Measures of Australia's Progress (MAP) in 2002 under which the government rolled out questions based on 26 indicators related to society, economy, environment and governance. Other nations like New Zealand, Sweden, UAE and Italy have also adopted GDP alternatives. Many states in the US have deviated from GDP estimates and have officially adopted the Genuine Progress Indicator (GPI) to observe whether economic growth results in sustainable prosperity. The United Nations through its Sustainable Development Goals has also laid down metrics to measure its several indicators (17 goals and 169 targets). These indicators are large in number and are difficult to track and consolidate. Many such exercises as alternatives to GDP are being carried out at national levels around the globe without a common consensus.

Today, despite the growing support for an idea of new indicators to measure overall growth and economic well-being, no such official metric exists in India. GDP as a measure of economic growth possesses many shortcomings and needs to be complemented with alternative indicators. The idea is to use a set of metrics which are quantifiable and, together with GDP estimates, can act as a tool for policymakers to determine the state of the economy, for which it is important that India develops an official wellness index which is robust, inclusive and captures the distribution of well-being in society. The OECD Report 2018 can be used as a blueprint in this direction. Such a wellness indicator will help the government in making better financial decisions and retaining the trust and confidence of its citizens.

(The author is Young Professional, Economic Advisory Council to Prime Minister, NITI Aayog. The views expressed are strictly personal)

Ritika Singh

Ritika Singh

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