November 19, 2005

Value the walk

More discussion on the GDP, following up to The inefficiency boost and A Good Thing. (Read those first).


When Simon Kuznets worked on his accounting system for the US economy, few people noticed that it completely ignored a number of aspects of thriving economies.

Few people, yes -- but it's something of a tribute to Kuznets that he himself recognized some of the shortcomings of what he had come up with. Writing about his system in his 1934 report to the US Congress, Kuznets pointed out that "the welfare of a nation" is not something that can be "inferred from a measurement of national income" as he had spelled it out.

His unease stayed with him. Twenty-eight years later, Kuznets was writing in The New Republic: "Goals for more growth should specify growth of what and for what." The same article also warned: "Distinctions must be kept in mind between quantity and quality of growth, between costs and return, and between the short and the long run."

Indeed, Kuznets's measure -- what became the GNP -- ignores social and environmental issues. What's more, in its single-minded focus on industrial output, it also completely ignores other kinds of production.

This has had particularly harsh consequences for the developing world in particular. There, significant production happens in the household economy, in the voluntary sector -- all of which is invisible to the GNP. If development aims to raise GNP, as it always has in such countries, it effectively marginalises the household economy. The results were especially clear in countries across Africa and Asia.

In 1991, the GNP mutated into the GDP. Here's one subtle yet insidious fallout of that change. If multinational company Reemock had plants in, let's say, Bangladesh, those plants' earnings counted towards the GNP of the country -- Germany, for example -- where Reemock was owned. But the GDP turned that around. For its calculations, even if Reemock's earnings go back to Germany, they count towards the GDP of Bangladesh, where the plants are.

This peculiar little accounting trick means that some desperate countries can actually seem, on paper, to be booming. Meanwhile, the transfer of earnings to richer countries -- whatever your political feelings about that -- gets called a gain for the poor.

Many economists, aware of the shortcomings of the GDP, have put their minds to finding alternatives. But there is a block they must overcome, a simple principle that is a foundation of their craft. In his famous text on economics, Paul Samuelson puts it this way: "Economics focuses on concepts that can actually be measured."

That is, if something is hard to measure -- family life, open spaces, natural resources, pollution, the impact of fluctuating voltages -- it simply does not count in GDP calculations.

But consider: just because we cannot always give a rupee value to some things, must we assume they have no value? Is that how we live our lives? Think of this: Why does every new parent strive to spend time at home with her child? Surely not because such time spent has no value. Why do we flock to Bandra's seaside promenades for morning and evening walks? We value such walks, and yet who would put a price on them, and what would it be?

There is a challenge here: to find a way to assign values to such things that are more real than zero -- which is how the GDP views them; then to take those values into account in some new measure of economic well-being. This would mean we start accounting for factors, positive and negative, which we all know are crucial to our national health, which each of us cares about every day, but which the GDP deliberately sidesteps.


In a final piece on this subject, I will explore one possible alternative to the GDP that has been proposed.

1 comment:

Ramnath said...

Hey Dilip, nice post. But, two points:

You say "In 1991, the GNP mutated into the GDP" which seems to suggest it happened across the world that year. In fact, most countries have long measured their incomes by GDP, and in 1991, US joined the rest of the world.

You also say, "This peculiar little accounting trick means that some desperate countries can actually seem, on paper, to be booming." I wonder if you thought about employment, technology transfer, development of anciallary industries etc - and these happen not just on paper - foreign direct investment leads to.

There is no doubt that GDP has its drawbacks. (As many others in comments to your previous posts have pointed out - you cant place too much trust on any single number.) But GDP, as an indicator, has its merits.