Date: Tue, 30 Apr 1996 10:18:40 -0500
From: Denny Braun <DennyB@vax1.Mankato.msus.edu>
Subject: Questions on Using GDP as an Indicator of Well-Being
To: WSN@csf.colorado.edu
Organization: Department of Sociology, Mankato State University
The following is new material from my revised edition of THE RICH GET RICHER (which unfortunately
for me will not be out until early in 1997). It is germane to our thread about the adequacy of
comparing countries on GDP or GNP per person. The footonotes were stripped when I
cut-and-pasted, and I am unsure if there is any software that might do this for E-mail. If
someone knows of any, I would appreciate the information.
-- Denny Braun Department of Sociology Mankato State University Mankato, MN 56002-8400Voice: (507) 389-5609 FAX: (507) 389-5615
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Income Distribution and Available Data
On a general level, such concepts of economic activity as Gross Domestic Product or Gross National Product leave a lot to be desired. To begin with, there is an inherent prejudice in comparing poor countries to wealthy ones. In order for economic activity and goods production to be measured, the service or commodity must have a price tag, i.e., be valuated in a market economy. Goods exchanged by barter or gift, such as in a subsistence economy, are simply not counted. The informal economy of Less Developed Countries can be vibrant and thriving, yet never show up in formal measurements of GDP. If policy makers truely believe that the only real economy is the measured one, there will be increasing bias and distortion in their conclusions. Women's work and work done gratuitously, on a voluntary basis, never get entered into a GNP or GDP compilation. Especially in Third World countries, the domestic products of women (often consumed in the home) are never entered in the ledgers by the World Bank, although the impact of their contribution to societal well-being is massive. Various organizations have enaged in many attempts over the years to broaden the conception of economic activity to meet many of these defects, with varying degrees of success. The first major effort came from international organizations, such as UNESCO. The United Nations Children's Fund (UNICEF) has maintained for quite some time that GNP per capita is an inadequate measure of a country's well-being, and that it fails to capture real development. The United Nations Research Institute for Social Development (UNRISD) constructed a standard of living index that started out with over 100 indicators. Because of defective or missing data, the number of indicators was eventually reduced to nine--only one of which was GDP per capita. At bottom, many critics emphasize that nations should be judged on how they meet their citizen's basic human needs. This assumption is at odds with the traditional dogma in economics that rising production of goods ultimately translates into a higher standard of living for everyone. Thus, analysts have worked out varying measurements designed to monitor either one of the concepts or a mixture of both. Predictably, the results vary widely. One "Index of Social Progress" based upon forty-four social indicators tapping welfare issues ranks the United Kingdom and the United States lower than some countries in the former East European bloc of nations or Costa Rica. When four different indexes for a large sample of countries are compared:
(Start Quote)
The two based mainly on economic indicators tend to rank the United States very high (first and second) while the other two, more widely based, classifications rank it lower (sixth and twenty-fourth). This is clearly a very controversial question...Basic needs theorists argue that it is more frutiful to stress results rather than inputs in order to measure the adequacy of development policy. For example, life expectancy is a better measure of health services than numbers of doctors per person, and calorie supply per capita is a better measure of nutrition than total production of food.
(End Quote)
Further impetus for questioning and redefining the basic philsophy behind the GDP measurement comes from the directors of a non-profit public-policy organization called Redefining Progress. The impetus for change from their direction stems from the failure of the continuously rising U.S. GDP to reflect the deterioration in the lives of the great majority of Americans. Specifically, the Gross Domestic Product tallies the value of all money transactions, whether for good or ill. It does not distinguish between costs and benefits, or between productive and destructive activities. A terminal cancer patient going through a costly divorce adds to the GDP, as does the cost to repair the devastation of earthquakes and hurricanes. This group proposes some subtractions from the GDP tally that most people would see as costs and as undesirable: the costs of crime ($65 billion per year in prevention alone), divorce (lawyers fees, new household costs, counselling expenses), resource depletion and degradation of the habitat, loss of leisure, and the jump in income inequality. In addition, it adds in the value of household and volunteer work, which is not now counted in the official GDP. This group's new barometer of economic and social well-being is called the Genuine Progress Indicator (GPI):
(Start Quote)
The GDP would tell us that life has gotten progressively better since the early 1950s--that young adults today are entering a better economic world than their parents did. GDP per American has more than doubled over that time. The GPI shows a very different picture: an upward curve from the early fifties until about 1970, but a gradual decline of roughly 45 percent since then. This strongly suggests that the costs of increased economic activity--at least the kind we are locked into now--have begun to outweigh the benefits, resulting in growth that is actually uneconomic. Specifically, the GPI reveals that much of what we now call growth or GDP is really just one of three things in disguise: fixing blunders and social decay from the past, borrowing resources from the future, or shifting functions from the traditional realm of household and community to the realm of the monetized economy.
(End Quote)
There is even a greater need to be cautious when comparing countries on GDP. In 1989, then-president of the World Bank Barber Conable admitted GDP did not adequately reflect the importance of environmental issues. There are also profound and hidden dimensions to the change from GNP to GDP by the United States in 1991. While the amounts are not greatly different in our own country, using GDP paints a false, rosy picture of life in the Third World. Output from Japanese, American, British and other multinational corporations located in poor Third World countries is now counted in the country where it occurs, despite the fact that profits, tax breaks, loan development costs, etc.all return to rich, core countries. The Redefining Progress group terms this an accounting shift that creates statistical boomtowns out of many struggling nations. While aiding the push for a global economy, it hides the basic fact that nations of the North are skimming off the South's resources. Instead, focusing only upon GDP figures labels this operation as progress, as a gain to Third World countries. There is some indication that the World Bank may finally be confronting at least some of these criticisms. It has lately constructed a new economic yardstick that is in the experimental stage. The measurement breaks down national wealth into three major attributes. "Produced capital" is the economic value of machinery, factories, roads, and the rest of the nation's infrastructure. "Natural capital" consists of the value of natural resources, such as timber, oil, mineral deposits and the like. The third element is "human resources," such as the education level and nutritional standing of a population. "Produced assets" most closely parallel the traditional concept of GDP, but under the new system it accounts for only 20 percent of a nation's real wealth. The major wealth of nations appears to be on the social, human resources side of the ledger. Richer countries stay that way by providing adequate nutrition, health care, and education to their populations. The point is driven home by noting that Madagascar and the United States are dead even, deriving about 16 percent of their wealth from produced assets. The major point is that in evaluating the economic well-being of countries, other indicators in addition to GNP or GDP are needed. A high GDP or GNP per person, as we have seen, is often falsely viewed as a high level of wealth. Yet it is also possible for a country to have a high level of GNP and a very extreme degree of internal income inequality. It is not enough to ask what level of average wealth exists without also asking how a country's economic pie is itself divided up within its borders. How a nation's wealth is distributed among its people is of paramount interest. We can ask whether income is shared relatively equally, so that all may reasonably benefit--or whether rewards are apportioned unjustly, so that only a few benefit while many suffer in poverty. The answer tells us much about the internal dynamics of any country. For example, Brazil is often held up as a model of economic development. Its GNP per person in 1992 was $2770--enviable by Third World standards. Just over one-half of this income, however, was being captured by the highest 10 percent of all households. Only 2.0 percent of all income went to the poorest fifth of all households. Hungary is an equally successful LDC nation with a GNP per person ($2970) roughly equivalent to Brazil's. Yet Hungary shows only 21 percent of its income going to the top 10 percent of all households, while 11 percent of all income ends up in the poorest fifth of all households. In essence, economic development is very questionable if only a small minority of the population benefits. Much of the concern for income inequality must be looked at in terms of how it is spread out within countries. Without this, average GNP or GDP is very misleading.