Posted by: mulrickillion | March 3, 2010

The GDP-fetish: A dubious measure of human progress

by M. Ulric Killion.

In recent blog postings at M. Ulric Killion’s space, there are two articles addressing the issue of gross domestic product (GDP) as a measure of progress. The first article is written by Judith D. Schwartz (Times, Jan. 30, 2010), and is entitled, Is GDP An Obsolete Measure of Progress?, and characterizes the now historical use of GDP as a measure of progress as a sort of fetish. Schwartz writes,

Since it became the prime economic indicator during the Second World War (to monitor war production) many have criticized policy-makers’ reliance on the GDP — and proposed substitute measures. For example, there is the Human Development Index (HDI), used by the UN’s Development Programme, which considers life expectancy and literacy as well as standard of living as determined by GDP. And the Genuine Progress Indicator, which incorporates aspects of social welfare such as income equity, pollution, and access to health care. In the international community, perhaps the biggest nudge has come from French President Nicolas Sarkozy, who commissioned a report by marquee-name economists, including Nobel laureates Joseph Stiglitz and Amartya Sen, to find alternatives to what he calls “GDP fetishism”. What exactly have we been fetishizing?

The second article is written by Wang Xiaotian (China Daily, Jan. 30, 2010) and is titled, GDP accounting to be consistent. Wang specifically addresses practical problems of constructing GDP data in the context of China and its National Bureau of Statistics (NBS), thus, also implicitly presenting an example of the practical aspects and problems that arguably associate with using GDP as a measure of progress. Wang writes,

China could wave goodbye to its GDP data discord as the national statistics bureau chief claims that he will unify provincial and central GDP calculation methods and improve grassroots statistical quality this year. Ma Jiantang, head of the National Bureau of Statistics (NBS), has criticized some local officials who inflate the GDP figures they report to the NBS. The problem has affected the nation’s statistical credibility and produced disunity between central and provincial data, Ma said. . . .

There are two notable points from Wang’s article. First, the proposed changes by the NBS will be a “positive signal for macro economic analysis.” Secondly, and more to the point, as Wang writes, “But some analysts warned that if the country pays too much attention to GDP growth and continues to judge local officials’ performance on local GDP growth, the problem of statistical inaccuracy would remain difficult to solve.”

Additionally, the mention of Wang’s article does not intend to intimate that what Schwartz and others characterize as a GDP-fetish is peculiar to China and its polity and economy. Schwartz’s article, impliedly, concurs that this is not a China-specific problem, when writing, “Since it became the prime economic indicator during the Second World War (to monitor war production) many have criticized policy-makers’ reliance on the GDP — and proposed substitute measures.” Thus, Schwartz’s article, arguably, demonstrates the historical significance and even universality of the problem of a GDP-fetish. Schwartz rightly perceived the problem as a historical one, which deserves our attention.

Then there are the problems that associate with the GDP-fetish. According to Professor David R. Henderson (Naval Postgraduate School), GDP is simply “not a good measure of welfare” (David R. Henderson, GDP Fetishism, Mar. 1, 2010). This is because economists, though Henderson is admittedly referring to economic professors, “tend to consider fiscal and monetary policy positive if these policies increase GDP, but they often fail to ask, let alone answer, whether those same policies increase or reduce welfare. I have a term for giving GDP such a sacred a place in economists’ reasoning: GDP fetishism.”

In one of Henderson’s many illustrations of the pitfalls of using GDP as a measure of welfare, or what he characterizes (and uses interchangeably) as simply “wellbeing”, he borrows an example from earlier editions of the late Paul Samuelson’s classic textbook Economics. “Samuelson pointed out that if a man married his maid, then, all else equal, GDP would fall.” In explanation of this unique illustration, Henderson writes:

One of the most careful definitions is in The Economic Way of Thinking, 10th edition, by Paul Heyne, Peter Boettke, and David Prychitko. They write: “The gross domestic product is the market value of all the final goods produced in the entire country in the course of a year.” Most economists would agree with this definition. It turns out, though, as Heyne et al. point out, that even this careful definition does not accurately characterize GDP, let alone wellbeing. It is inaccurate in two ways. First, because there is usually no market for the things that government produces (the U.S. Postal Service being one of the exceptions), government spending on goods and services is valued at cost rather than at market prices. Second, because many goods and services are not bought or sold, even though they would have a market value if they were, these goods and services are not counted in GDP.

In other words, as Henderson explained, “The new bride continues doing the housework without being paid. But that would not mean that the work suddenly had no market value. So, in this case, GDP actually understates the market value of all final goods and services because this particular service is no longer exchanged on the market. Because many valuable goods and services are not exchanged on the market, this inaccuracy imparts a downward bias to measured GDP as a measure of actual GDP.” Moreover, and as earlier mentioned, this is one of the many examples that Henderson employs to illustrate the pitfalls of the GDP-fetish as a measure of welfare or “wellbeing”, and, impliedly, as a measure of human progress.

In illustration of the problems that associate with the GDP-fetish, Schwartz mentioned the example of the United Nations Development Programme, and writes, “the Human Development Index (HDI), used by the UN’s Development Programme, which considers life expectancy and literacy as well as standard of living as determined by GDP. And the Genuine Progress Indicator, which incorporates aspects of social welfare such as income equity, pollution, and access to health care.” The UN Development Programme recognizes the limitations of employing GDP as a measure of progress, especially human progress.

Moreover, the UN Development Programme is only one of many instances of international organizations and their agencies such as the Organization for Economic Co-operation and Development (OECD), and international economic institutions, including the Bretton Woods Institutions (BWIs) such as the International Bank for Reconstruction and Development (IBRD or World Bank), and International Monetary Fund (IMF), recognizing the problem of a GDP-fetish.

Demonstrating the historical significance of the problem, both the IMF and the OECD have recognized the difficulties of using GDP as a measure of human progress. For instance, an earlier IMF study recognized that in the end, it is consumption rather than investment or GDP that serves as a better measure of economic welfare. This same is true with other international organizations such as the OECD. This is because an earlier study of the OECD also concluded that within a national account framework there are much better measurements of economic resources than GDP per capital, such as national product and net income. (Ulric Killion, Modern Chinese Rules of Order, 2007). All of this challenges the efficiency and efficacy of what many characterize as a GDP-fetish.

In the specific context of China, though the problem of a GDP-fetish is admittedly a universal one, “A January 2006 article (Shenzhen Daily) reads, ‘Economists agreed that China had the wind in its sails.’ However, as early as 2003, Li Deshui acknowledged for the first time that China’s economic estimates were flawed, and its research methods ‘did not always reflect the real situation,’ which necessitated that after about twenty years the NBS had to switch from the Soviet accounting system, and not standard international practices of readjusting quarterly and annual GDP growth estimates, to Western accounting standards. In terms of the reliability of China’s statistics published by the NBS, one hopes that the ‘wind in its sails’ is not from the ‘wind of falsification and embellishment’ (jiabao fukuafeng)” (Killion, 2007).

Nonetheless, in the end, during the post-global financial crisis era, as economic recovery became strongly reliant on government policies, especially macroeconomic policies, the order of the day or new era is a new measurement of human progress, rather than continuing to employ GDP as a measure of welfare, “wellbeing” or human progress. This applies to both developed and developing countries and economies.

Copyright © Protected – All Rights Reserved M. Ulric Killion, 2010.

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