Once, GDP was the established benchmark of a country’s progress. Now, new and sophisticated indexes offer a more rounded picture of the condition of society — and IDRC is helping develop them.
Economic indicators are tools of statistical shorthand that summarize complex information, help predict economic trends, and support decision-making. Among them, the standard gauge of national economic health traditionally has been per capita Gross Domestic Product (GDP).
To put it simply, GDP is the total value of goods and services that are exchanged for money. The assumption was that if GDP increased, a country’s standard of living also increased. In recent decades this correlation has been challenged, notably by development economists — some of whom have proposed alternative yardsticks.
Blunt and one-dimensional
Economists now agree that, even as a reckoning of output, GDP suffers from several shortcomings. For example, it fails to tally goods exchanged in the informal or underground economy — a significant sector in developing countries — or to consider the value of volunteer services, unpaid internships, home care, and do-it-yourself work.
As a measure of general well-being — of sustainable living and overall social cohesion — GDP again performs poorly. This blunt, one-dimensional indicator ignores the kind of social, cultural, or environmental activities that cannot easily be calculated in financial terms but that represent the real state of society.
GDP reveals how much each country produces, but it ignores the hidden costs of this production. It makes no distinction between beneficial activities and those that cause harm. According to an IDRC grantee, the Halifax-based research group GPI Atlantic: “An ill-managed pulp mill may bring jobs and profits, for example, but it also depletes the forest and sullies the river. Overtime work boosts production and incomes, but constant overtime infringes on family time and community life.”
Some poor countries have made economic progress in recent years, but many citizens still miss out on the full array of social benefits that increased output can underwrite. Consequently, decision-makers now acknowledge the need to expand and improve on GDP by also measuring sustainability and general well-being.
Indicators of progress, in other words, should more accurately reflect the interconnected nature of the world and make it easier for citizens to weigh all the benefits and costs of their actions.
Already, economists and development experts have proposed a number of alternative indicators. The field is complex and continually evolving, not just in response to improvements in measuring techniques, but also in response to an ever-changing world.
Consequently, today’s policymakers can choose from an abundant menu of benchmarks, ranging from the New Economics Foundation’s buoyant Happy Planet Index to the downbeat Misery Index, created by economist Arthur Okun.
Obviously, more research is required to refine these new tools. Economists need to find ways, for instance, to account for financial transfers within families, and to monetize the informal economy. IDRC has supported these efforts by funding several initiatives that aim to measure human progress. Here are just three.
People and ecosystems: The Wellbeing of Nations
In 2001, following years of IDRC-funded research, Victoria-based development consultant Robert Prescott-Allen launched his ground-breaking analysis, The Wellbeing of Nations: A Country-by-Country Index of Quality of Life and the Environment.
The detailed study sought to address the shortcomings of the GDP and other economic indicators by applying, to 180 countries, the new index developed by Prescott-Allen. This Wellbeing Assessment, as he called it, combined indicators of human well-being, such as health, population, and wealth, with those of environmental sustainability — water quality, species diversity, and energy use — to generate a more integrated picture of the condition of the world.
Much as the white of an egg surrounds and supports its yolk, as Prescott-Allen has put it, an ecosystem surrounds and supports people. Any measure of well-being, therefore, must reflect this interdependence.
Some of the survey’s findings were surprising. While it ratified the widely held belief that the countries with the highest living standards achieved this level at the expense of the environment, other results showed that increases in human well-being do not necessarily cause greater damage to the environment.
Prescott-Allen has intended his book to help teach students about sustainability and how to measure complexity. At the same time, he hopes it will persuade decision-makers to set human and ecosystem well-being as a national goal. One practical step, he suggests, would be the preparation of regular national well-being assessments so that progress can be tracked.
IDRC meanwhile has supported various other approaches to “environmental accounting,” for example through the Centre for Environmental Economics and Policy in Africa.
Active agents: The Human Development and Capability Initiative
Economist and Nobel laureate Amartya Sen has taken a leading role in crafting tools to measure progress. For example, his ideas were used in the design of the Human Development Index, which the United Nations Development Programme has used since 1990 in its Human Development Report.
Sen focuses on the multi-dimensional aspect of well-being, and cautions that “what we measure affects what we do.” He calls for broadening the analysis of development and poverty beyond the question of monetary income to consider also the role of freedoms and “capabilities” — such as being healthy and educated, and able to work and engage in cultural activities. Sen regards people as being more than participants in human development, but also active agents of it.
Since 2004, IDRC and other donors have supported efforts leading to the elaboration of Sen’s vision. The international, Boston-based Human Development and Capability Association promotes multidisciplinary research on the “interconnected areas,” which include poverty, justice, and economics.
In 2010, a key institutional member of the association, the IDRC-supported Oxford Poverty & Human Development Initiative (OPHI), with the UNDP Human Development Report, developed a new Multidimensional Poverty Index (MPI). This gauge complements measures of income by examining the “composition of poverty.” Largely drawn from the UN Millennium Development Goals, the MPI considers severe deprivations that might affect a poor person’s life at the same time, in three key areas: health, education, and public services.
A good example of the continuing evolution and dissemination of these indicators, the MPI already has drawn criticism and debate. It supplants an earlier composite measure, the Human Poverty Index, and is featured in the November 2010 20th anniversary edition of the UNDP Human Development Report.
Pillars of contentment: Gross National Happiness
In a long-running and well-publicized initiative, the tiny Himalayan monarchy of Bhutan continues to develop an index of Gross National Happiness (GNH).
Like other alternative indicators, this one emphasizes social well-being and cohesion, and sustainable growth. According to Bhutan’s government, GNH aims to reflect the cultural and environmental values that dovetail with the country’s dominant Buddhist philosophy.
In contrast, some scholars argue that GNH is one component of a program of ethnic nationalism that, among other outcomes, has disenfranchised and deported Bhutan’s minority Hindu and Nepali-speaking population.
For technical help, Bhutan’s government consulted experts from many countries. These include GPI Atlantic, which had already created its own Genuine Progress Index, and OPHI. These organizations worked with Bhutanese researchers to identify components of “happiness” in the Bhutanese context. The findings informed Bhutan’s new indicator, which was formally adopted in 2008.
Its four pillars are environmental conservation, sustainable development, the preservation and promotion of Buddhist cultural values, and good governance. In 2010 Bhutan’s government began integrating these values into school curricula and textbooks in order to embed GNH principles in the consciousness of the country’s youth.
The GNH idea has been catching on in other places too. Officials in Japan, Thailand, Brazil, and cities on the west coast of Canada and the United States have been exploring the concept.
And in yet another instance of the intertwining of these indicators, in 2010 Bhutan adopted the MPI, which complements its own index of happiness.