Beyond GDP: Alternative measures of economic and social progress

Dr Vladimir Yakunin opened the roundtable by explaining that in 2009 the World Public Forum was among the first to point out that the financial crisis pointed to a comprehensive and systematic crisis of the economic system. In his presentation on the ‘Human oriented approach and socio-economic progress indicators’, Yakunin, the chairman of the board of directors of the Dialogue of Civilizations Research Institute (DOC), added that the world is facing a crisis of values.

Yakunin said that because of changing environments, the GDP indicator, which was introduced after the end of World War Two, was not adequate as a measure of social and economic progress. The world is facing a problem in that today’s ‘capitalism’ is far removed from what was earlier referred to as capitalism. At the same time, the dominant geopolitical conception in foreign policy is of a one-polar world, which inaccurately reflects present conditions.

Yakunin voiced concern that economic growth has now been decoupled from social progress, so wealth and income concentration is increasing. Another significant issue is that today’s political crisis might lead us to the brink of war. Moreover, Yakunin stressed that youth unemployment is a severe problem all over the world. This is reflected in high youth unemployment rates, even in European countries such as Greece and Spain (over 40% youth unemployment). Another issue deserving more attention in public discourse is automation, which according to experts from the United States will eliminate an estimated 50 million jobs.

In his conclusion, Yakunin pointed out that education and dialogue are the most important means available to prevent the global political crisis from turning into a third World War.

David Pilling, the Africa editor at the Financial Times and the author of The Growth Delusion: The Wealth and Well-Being of Nations started with the provocative remark that the government of the United Kingdom some years back decided to incorporate prostitution and crime into GDP. As a result, GDP was pushed up by 0.7%. Moreover, when Pilling was reporting from Japan, the country’s GDP had not moved in years and the country was declared economically dead. Yet, Pilling found that Japan was doing well regarding, for example, life expectancy and health, as well as security. Since then, Pilling has taken a critical stance on the validity of GDP for measuring the overall well-being of a society.

Another flaw Pilling noted in GDP was that environmental decay resulting from economic activity is not accounted for in GDP. From his time as a journalist in Africa, Pilling understood that national accounts overstate the role of capital, whereas in contrast, subsistence economies were often not part of GDP at all. He suggested that the amount of light visible from space is a more accurate indicator of the economic well-being of a country than GDP. Pilling also outlined that many things are not reflected properly in GDP (e.g., health), and elements that are included (such as banking services) perhaps should not be. Concluding his presentation, Pilling pointed to two major observations: Sustainability is not reflected in GDP and innovation needs to be measured but continuously drops out of statistics.

Fred Harrison, the director of the Land Research Trust, London, started his presentation, ‘Can indices camouflage the causes of social problems by creating a false knowledge base?’, with the statement that the most important indicator in measuring inclusive growth is missing. This is true, he said, despite the considerable number of indicators being discussed such as, for example, those included in the Better Life Index created by the OECD (including 24 sub-indicators).

Harrison explained from a historic perspective why numbers to measure performance were introduced in the first place. They were first invented to check the flow of rents to rulers and to hold elites accountable for what they used the rents for. Harrison referred to Denmark as a country that is doing extremely well regarding happiness, the level of corruption, and housing ratings. Unfortunately, the ratings do not reveal details about the underlying path to this favourable development. He emphasised that the causal mechanism that delivered these results needed to be identified so that, if transportable, other countries could adapt it to achieve comparable results.

Another example was performance on the Human Development Index. He noted that Ireland was in eighth place, but that ranking did not reflect the large number of young and able-bodied people driven to migrate out of the country for good. This raised questions about the value of the HDI in the absence of a theory that accounted for forced migration.

Harrison referred to economist Martin Weale, who claimed that many economists neglected the concept of land rent, which should not be omitted in discussions about wealth and welfare. Harrison made a point concerning the often-forgotten deadweight losses from taxes. According to his estimates, every year around £500 billion is lost due to the negative impact of taxes in the United Kingdom alone, which is a further reason he recommended a switch to taxes on land rents.

Dr Richard Werner in his ‘Flaws of GDP and traditional growth policies – and how to ensure inclusive and meaningful GDP growth’ presentation pointed to the shortcomings of GDP as a measure of social well-being. Child-rearing, for example, is not counted into GDP, whereas the cleaning of a polluted river might even increase GDP. Moreover, some aspects that may be considered positive in an economic sense could be indicators of detrimental developments in society, such as the increase in spending on healthcare or firefighters.

Werner, a professor of International Banking at the University of Southampton, continued on the link between interest rates and growth. Conventional economic wisdom states that lower rates lead to higher growth, whereas high interest rates indicate lower economic growth. This has been the consensus for 150 years of economic thought. Professor Werner noted that there is no empirical data to prove that claim.

According to his research, there is positive correlation between low rates and high growth as well as between high rates and low economic growth. He argued that it is more accurate to say that rates follow economic growth and not the other way around. Werner stressed that the validity of GDP is primarily useful for banks to assess a borrower’s ability to service a loan.

Werner discussed ingredients for successful economic growth and criticised British banks for failing to lend sufficient amounts of money to productive investments (such as investment in SMEs). On the contrary, (British) banks seem to prefer unproductive (consumption, financial credits) short-term investments over productive long-term commitments. The solution that Werner proposed was to guide bank credit to productive purposes, which means changing the structure of the banking sector. He suggested that banking systems should lend entirely to local, decentralised communities, like in Germany where 70% is loaned to SMEs. Therefore, Werner called for community banks to be set up in the UK to channel money away from the financial markets to productive investments. Werner concluded by saying that the financialisation of the economy should be stopped and that investment in the real economy would enhance overall wellbeing and meaningful GDP growth.

Dr Vladimir Popov opened with a reference to happiness economics, which is a growing branch of economics looking into the determinants of happiness (see the World Happiness Report). It is often assumed that higher GDP leads to higher rates of happiness. However, in accordance with the Easterlin paradox, happiness in the United States is not increasing despite constantly rising personal incomes.

The findings in Professor Popov’s presentation on ‘Happiness, inequality, murders and suicides’ were controversial: Income inequality increases happiness rather than reduces it, whereas a decline in inequality makes people more miserable. Popov said there are two possible explanations. If we separate stock and flow effects, with lower inequality people feel unhappy (the dream of being ‘a big fish in a small pond’ is out of reach), but the transition to higher inequality, when the relative position of the majority deteriorates versus the average, makes people even more unhappy temporarily (during the transition). Popov continued that, when the transition to a higher inequality society is over, people (in particular, new generations) start to feel happier.

Popov, the DOC’s research director in Economics and Politics, said there is evidence that happiness is positively linked to the murder rate, especially when it goes hand in hand with inequalities. The possible explanation revolves around the competitive nature of human beings (a modification of the ‘big fish in the small pond’ story) and perceptions of social justice. Not only do people enjoy having a better average position more than an even higher (but below average) position, they also cherish the dream of becoming better than average. Greater equality undermines this dream and results in disappointment for many. If murders occur without high income inequalities (that is, murders are ‘unjustified’) and/or inequalities exist without high murders (inequalities are not perceived as unfair and do not cause social tension), then happiness is not affected.

Popov finished by stating that more research needs to be undertaken, as one researcher cannot examine all the important determinants of happiness.

Prof. Philipp Schepelmann started his speech on ‘Options for measuring progress and quality of life’ by saying that discussions of GDP are often of a statistical nature and that resource efficiency and sustainability are often neglected. Working at an institute that advises governments and EU institutions, Schepelmann expressed his interest in the question of how data and statistics are used in policymaking and how they shape decision-making.

Schepelmann, a senior research fellow on Energy, Transport and Climate Policy at the Wuppertal Institute, strongly opposed the dominant focus on the growth narrative. The reason for his opposition is that the world has reached a tipping point where increasing material wealth is not increasing welfare. He illustrated this by referring to the “age of hockey stick socio-economic curves” regarding economic growth. Unfortunately, hockey stick curves correspond to the increasing use of (finite) resources, which result in exceeding many planetary boundaries. This is further stressed by the assumption that growing material flows will lead to a doubling of environmental pressure every 40 years.

Schepelmann took a critical stance on consumerism and technology as saviours from continuous resource depletion in the equation he presented: (Environmental) Impact = Population x Affluence x Technology. As a way out of this dilemma, Schepelmann suggested a row of alternative indicators that could be divided into three groups: Adjusting GDP (e.g., Measures of Economic Welfare), replacing GDP (Sustainable Development Indicators, e.g., SDI), as well as supplementing GDP.

Schepelmann concluded by expressing hope that a rethink in economics would enable the (unsustainable) growth narrative to be addressed.

Dr Judith Shapiro, an undergraduate tutor at the Department of Economics, LSE, gave a presentation on ‘Taking GDP beyond the production boundary and its impact on gender bias in measurement’. She referred to the fact that women disproportionately do more household work than male counterparts. According to Shapiro, women do 150 more minutes in household work a day compared to men (men do one-third of household work, women two-thirds). This value is not captured by national accounts or by GDP. Therefore, Shapiro argued that GDP as a measure is inherently sexist. She advocated adding ‘satellite accounts’ for households as an additional indicator alongside GDP.

According to her, it is unwise to incorporate household work estimates into GDP as Diane Coyle and other feminist predecessors propose as this is an idealist and not a materialist approach to the problem. The main objection she has is that it will not really help us to better appreciate the value of women’s contribution to the economy, except at the most abstract level. Labelling women as ‘counting’ is an extremely small step towards the reality of gender equality.

Shapiro noted that the second important reason to count against this is that GDP is used for many purposes, among which are monetary and fiscal policy. The inclusion of nonmonetary production into the ‘Fisher equation’ (MV=PT) will not help us to estimate the impact of an increased money supply on prices, precisely because it is nonmonetary.

She continued that current moves towards better estimates of household production, including the growing consumption of digital products online – which Coyle classifies elsewhere as voluntary work – do provide a better estimate of trends in social welfare. However, Shapiro concluded that the ‘household satellite accounts’ (meaning supplementary statistics such as those on household work) now kept by most countries will assist us better in the original use of GDP for macroeconomics.

Dr Pablo Ava, the head of Policy and Research at the Argentina Council of Foreign Relations, talked about alternatives to GDP as an indicator in his presentation: ‘Measuring the progress of societies. Alternatives to the Gross Domestic Product per capita as an indicator of the results of economic and social policies’.

Ava reported that there are more representative indicators than GDP per capita. He pointed to the need to study social capital, defined by the OECD as “networks that together with shared norms, values and understandings that facilitate cooperation within or between groups” as an indicator for wellbeing. He continued that, if social capital is positive (bridging social capital), we can evaluate the degree of social development and the interaction that it allows as a proxy to the degree of well-being of a given society, not only assessing the individual dimension, as GDP per capita does, but the whole of that society, as well as its individuals.

Moreover, Ava referred to social cohesion as a measurement instrument and more objective indicator. According to him, this indicator encompasses such aspects as education, the digital divide, health, housing, and social gaps. In sum, these indicators are more objective and are combined with those of institutional evaluation and subjective perceptions of the future and values. Social cohesion as an index is more widespread than social capital and has been used in the evaluation of social policies by the European Union and ECLAC in Latin America. Its strength is the ability to synthesise various indicators which are available individually but which do not allow a holistic diagnosis of the community. Ava mentioned a major weakness, which is the lack of consensus on which indicators should be included in the various measurements assigned to the Social Cohesion Index.

A third set of indicators Ava emphasised as highly relevant were those included in the Consumer Confidence Index, which stands out for its economic nature (it can indicate GDP per capita in a more appropriate manner) and its simplicity. It is a short questionnaire that seeks to learn about the ‘economic mood’ (self-perception) of citizens, and thus better reflects individual economic situations. However, these assessments are subjective and one-dimensional because they only cover the aspect of consumption expectations. Nevertheless, this index has a predictive capacity that other indexes lack because it is the only one that examines the future.

Ava concluded with the remark that we must continue to work in a complementary manner with the three concepts and reach an inclusive consensus on the methodological instruments we use.

Simon Anholt, an independent policy advisor and the founder of the Good Country presented the Good Country Index (GCI). He stated that, as a policy advisor, he was frequently asked to help boost the competitiveness of countries. Over time, it occurred to him that doing humanity a real service would be to address gigantic challenges like diseases, migration, and natural disasters. To achieve this, Anholt said, would require governance worldwide to move to a more collaborative approach. One of Anholt’s initiatives was to create the Good Country Index, relying on 35 UN datasets. The main aim was to start a debate to answer the following question: How much are countries actually contributing to the common good?

In that way, the GCI is the first index that ranks each country’s overall contribution – or its overall debt – to the rest of humanity. Anhalt emphasised that, “By showing people around the world how interconnected we all are, by raising the profile of the challenges we face as a species and as a planet, by naming the countries and people and organisations who are working to make things better, and by naming the free-riders, we will raise awareness of all these topics which are critical for the future of humanity.”

He concluded by saying that it is possible to make policies that respect the needs of the local population and the international community at the same time.


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The views and opinions expressed in this publication are those of the original author(s) and do not necessarily represent or reflect the views and opinions of the Dialogue of Civilizations Research Institute, its co-founders, or its staff members.
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Klemens Witte

Research Associate, DOC Research Institute, DE

Klemens Witte, Research Associate at the DOC, is specifically interested in economic questions, international relations, and policy-making. He holds a Masters in Political Science and Intercultural Communication (Martin-Luther-University Halle-Wittenberg), a second Masters in Baltic Sea Studies (Södertörns University College/Stockholm), and a postgraduate LL.M. in International Economic Law (Southwest-University for Political Science and Law/Chongqing and Martin-Luther-University Halle-Wittenberg). Klemens Witte has gained international experience in universities in Kazan, Moscow, Kaliningrad, Minsk, and Beijing. He has further work experience within the fields of internationalization and education as a desk officer with Swedish government ministries and as a lecturer from the Moscow State Institute of International Relations. He speaks German, English, Swedish, Russian, and Chinese.