GDP v GPI: Why GPI is a fairer measure of growth?

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GDP v GPI: Why GPI is a fairer measure of growth?

By factoring in wellbeing, GPI (Genuine Progress Indicator)provides a more objective and ethically sound measure of an economy’s real performance. Still in its infancy, the concept is catching on fast, argues Gordon Sharpe, a lecturer in economics and a former senior banker.

When I studied macroeconomics at university in the early 1970s, there were only a few standard measures we could use to compare the economic condition of a group of nations. By far the most important of these was Gross Domestic Product (GDP), for which quarterly statistics have been produced by The Office for National Statistics for many years.

GDP is the cumulative total value of goods and services which are produced by all sectors within the economy. This includes the diverse industries such as manufacturing, finance, agriculture and of course, the Government itself. GDP could also be measured as the total value of expenditure by households and the Government on goods and services, plus investment in buildings and machinery, plus the total value of exports less imports for the entire economy.

Therefore, we can use GDP statistics as a credible yardstick to discern whether a nation is in economic good health as a rise in total expenditure should also equal a like-for-like increase in the form of profits and wages. Taking an annual snapshot of GDP for each major nation, we can then compare and contrast the world’s largest economies using Purchasing Power Parity (PPP), by re-calculating statistics in equivalent currency exchange rates. Further extrapolation will enable us to measure the proportion of Global GDP which each major trading nation generates. Recent International Monetary Fund (IMF) projections for the current calendar year have thrown up a number of surprising changes, as China has topped the GDP table for the first time ever on the basis of PPP toppling the US from its long-held perch.

Despite its limitations, GDP has emerged as the principal guide to national economic performance, in effect measuring how the four main domestic factors of production – land, human resources, capital and entrepreneurship – have been combined to produce both national income and growth. The world-wide web now provides a fifth production factor in technology. GDP statistics have historically been used to trigger important Government decisions on fiscal and monetary strategy. The IMF/OECD and World Bank all use GDP statistics to compare the performance of different economies and the EU bases member country budget contributions on estimates of GDP.

But the GDP method is far from perfect. There are obvious limitations in the ways that we measure international performance using quantitative methods that do not inform us in any way about the relative disparities across income-earners within a nation, nor the total of any voluntary work production or the so-called ‘black economy’ where trade is carried out illegally.

As there are no qualitative measures included in the calculation of GDP, we cannot infer any data accurately concerning the nation’s growth in relation to the actual wellbeing of its citizens. There are wide divergences across nations in the number of citizens in abject poverty, or earning inordinately high incomes.

The emergence of Genuine Progress Indicator (GPI)

Since the turn of the century, much work has been completed to develop a new measure – GPI – with the objective of relating a country’s economic progress to include the fullest qualitative study of the wellbeing of the people who live and work there. GPI is actually GDP with extra measurements of a range of welfare statistics. It considers the impact of natural disasters, pollution effects and deterioration in ozone in the way that Green Economics measures the implications of large-scale production on a nation’s natural resources. It recognizes major adverse effects on future generations.

‘As there are no qualitative measures included in the calculation of GDP, we cannot infer any data accurately concerning the nation’s growth in relation to the actual wellbeing of its citizens. There are wide divergences across nations in the number of citizens in abject poverty, or earning inordinately high incomes,’ Gordon Sharpe

It includes voluntary work undertaken as though the volunteers are being paid in full. It increases in value when citizens in general enjoy more leisure time. A monetary value is attached to leisure. The proponents of GPI believe that it is developing into a diverse, adaptable, localized and resilient measure of the new ‘sustainable economy’.

Its usage is fast-increasing as a principal measure of progress in the US, and the states of Vermont, Minnesota, Ohio and Utah have been using it for some years. In Maryland, the state’s GPI developers have identified 26 contributory elements and populated these with verifiable data in order to measure prosperity more accurately. Major factors include urban sprawl and its impacts on the community; traffic congestion; rate of conversion of greenfield sites; rates of crime; health issues.

These factors cumulatively provide a more realistic analysis of the effects of progress on the wellbeing of state residents in a weighted index of Sustainable Welfare (ISEW). According to GPI theory, economic growth has not improved the welfare of US citizens in the past 30 years.

Growing popularity

GPI concepts have since been taken up by Australia, Canada, Chile and Japan, whilst in Europe, Austria, France, Italy, Holland, Scotland and Finland are also early adopters.

Whereas GDP statistics go back some 80 years, GPI is still in its relative infancy. One could for example, take account of factors on the public provision of education, physical health facilities, transport  and housing to identify which countries are most in need of urgent assistance to build a sustainable future.

Inputs to key performance indicators can be localized through survey research, too. Laura Musikanski , former executive director of ‘Sustainable Seattle’ has created a GNH Survey which seeks to measure well-being for over 30,000 respondents over the past two years. This survey continues to attract the attention of numerous local governments and commercial concerns across the US.

This is a good time for SALTs to have a strong influence on the factors they would like to see incorporated within GPI measures. There is increasing pressure on favouring ethical choices for investments made in emerging nations. There now exists a method of making foreign governments accountable for their own business environments in a direct measure which is visible to all inward investors.

The usage of GPI is set to increase exponentially. There is growing worldwide pressure to harvest more energy from renewables, to increase energy efficiency and to eliminate the vast differentials from the top to the bottom of the income-earning spectrum. New targets will be devised by the early adopters of GPI indicators, and non-user nations will be forced to follow suit  to generate comparable GPI parameters.

GPI is actually GDP with extra measurements of a range of welfare statistics. It considers the impact of natural disasters, pollution effects and deterioration in ozone… The proponents of GPI believe that it is developing into a diverse, adaptable, localized and resilient measure of the new ‘sustainable economy’,” Gordon Sharpe

The global poverty line – often referred to as ‘the dollar-a-day line’ – will also receive increased focus from the major developed nations and international scrutiny will continue to all upon improving overall quality of life.

The most lucrative investors whose capital and entrepreneurship fast-emerging nations seek to attract must always make discerning, ethical choices which are in the best interest of their shareholders. There have been many examples of reputational damage arising which could have been avoided with the benefit of hindsight.

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