Flawed Indicators: How Can We Measure Development?

To put it simply, Gross Domestic Product, or GDP for short, measures the total value of all the finished goods and services produced by the country in one year less the costs of their production. It is expressed in monetary units, that is, in any currency such as Polish zlotys, Euros or Dollars, etc. Nominal GDP is expressed in current prices for the entire country (region) while the per capita GDP is the dollar value of a country’s final output of goods and services in a year, divided by its population, facilitating international comparisons. The latter index is estimated based on the purchasing power parity, or PPP for short, that is the actual value of money for which a defined quantity of goods can be purchased.

GDP of the Polesie region?

Economic historians date GDP back to the 17th century and the works of William Petty, a Briton who was the first to calculate the national income of England and Wales. He needed the data to assess if his country could financially manage to engage in a war with the Netherlands. Antoine Lavosier, a French national better known for his discoveries in physics and chemistry, later improved the research methods on GDP. However, the contemporary version of these methodologies was developed by an American economist, Simon Kuznets, for which he was awarded the Nobel Prize in 1971. It is worth noting that he was born at the beginning of the 20th century in Pinsk in the Polesie region, a region of the First Republic of Poland which then was under Russian occupation, from which he emigrated in 1922 to the United States.

Not unlike other economists, Kuznets was wondering about the causes of the Great Depression and the ways to develop a measuring system, the readings of which would alert us to any impending economic crisis. And so GDP, being one of the key indicators of the final output of work done by the population of a given country, came into common use. Since its very beginnings, GDP came under criticism for focusing only on production and exclusively analyzing supply and not human well-being. Furthermore, GDP still does not take social disparities into account and ignores non-productive factors relevant to the level of growth such as health or the weather.

Unequal Ireland

It all appears to be perfect on the surface: all in all, GDP shows how many goods or services we buy or sell. An increased indicator means that we can afford more, or in other words, that we are becoming more prosperous. However, this measurement is averaged, which simply means that even though the proverbial cake to be divided is getting bigger, the largest pieces can go to a very few and the rest must be content with the same meager portions as before.

Ireland can serve here as an excellent example. It is sometimes called the American outpost in the European Union (leading U.S. financial institutions and banks have their registered seats there). On one hand, the Emerald Isle is the fifth wealthiest country in the world in terms of per capita GDP, while on the other, the country has the lowest share of wages in their GDP in the entire European Union (29% in 2019). Hence, only one third of incomes in the economy in Ireland goes to the pockets of working individuals, while over 70% goes to the capital owners.

Should the gray market be included and harmful activities excluded?

GDP only shows what can be expressed in monetary terms – and it omits such factors as the healthcare level, life expectancy and life quality or the condition of the natural environment. Kuznets wrote that the indicator’s increase or decrease ignored vast parts of the economy that could not be monetized including family life, childcare or elderly care, leisure possibilities or job satisfaction. And those factors, in turn, materially affect the level of life satisfaction.

There are a multitude of seemingly paradoxical examples where GDP demonstrably grew, but individual quality of life dwindled. This happened in the United Kingdom after public services, previously free to citizens, were privatized; and similarly, when prices of life saving medications grew (the value of goods produced was higher, but a significant group of patients died while not being able to pay the exorbitant new prices).

GDP also comes under criticism also for ignoring the gray market and the labor of households working toward satisfying their own needs. Usually, the share of those factors is higher in less affluent countries (for instance, in Poland as compared to Germany), which artificially deepens the disparities between them and the wealthiest countries. Additionally, voluntary work and social work are not valued, either.

On the other hand, GDP comprises economically dubious activities, for instance, the growth of bureaucracy, lengthened time of commuting to work, and most of all, armaments. Many economists argue that those expenditures are not socially beneficial and can be even considered to be “anti-goods.” Some even postulate that they should be outright excluded from statistics as values countering prosperity with James K. Boyce, a retired Professor of the University of Massachusetts, being one of the leading voices.

This American economist gives the example of the catastrophic 2010 BP oil spill in the Gulf of Mexico which cost USD 90bn to neutralize, thus raising the average income of a US citizen by USD 300. It was possible due to BP’s demand to employ thousands of people to stop the spill, neutralize the resulting pollution, produce necessary floating vessels, equipment and chemicals, etc. The quantifiable losses related to the decreased fishing were in this context hardly noticeable and the environmental damage was … unquantifiable, and thus, ignored entirely.

A more socially-oriented indicator

As early as the 1960s, GDP’s critique propelled more research into alternative indices. Since 1990 there has been the Human Development Index (HDI) which is a summary measure of average achievement in key dimensions of human development created by Pakistani economist Mahbub ul-Haq and used in United Nations reports.

HDI comprises the following three factors: life expectancy, average number of education years and the PPP-based per capita GDP. It is calculated with a taxonomic method, that is, one which groups various values statistically. The HDI is the geometric mean of normalized indices for each of the three dimensions. It is a very subjective method and thus, widely criticized as it is impossible to prove tangibly that any of the dimensions, for instance income, is in terms of figures exactly x-times less (or more) important than another one (for instance, education).

The method for calculating HDI adopted by the UN favors countries with a robust public service sector, which explains a reasonably high ranking of Belarus (53 as per HDI and 66 as per GDP) and a low ranking of the Africa’s wealthiest Equatorial Guinea (141 as per HDI and 56 as per GDP). Another weakness of this index is its uselessness in studying the current economic situation as life expectancy or education-related data is produced with  months-long delays.

Calculate your own index

The Organization for Economic Cooperation and Development (OECD) has been using a separate index for over a decade now. The Better Life Index (BLI) used by the OECD to reflect as many as 11 dimensions contributing to well-being and life quality in each country: housing availability, income, job market situation, community and civic engagement, education, environment governance, health of the residents, their life satisfaction, safety and work-life balance.

The Stiglitz-Sen-Fitoussi Commission (named after three renowned economists) developed the index with a purpose of including such macroeconomic factors which would give the best picture of the current and future well-being of societies. It meant abandoning the economic growth paradigm as the key element and giving a larger share to environmental and health factors, etc.

The BLI differs from other indices in providing individuals with a possibility to calculate the index on their own and judging independently which of the areas of human life are of more significance to them (for instance, residents of Southern countries value the community more, whereas the Northern countries seem to give more value to high income, etc.). Results of personal indices left on the website are then analyzed and published in a semi-annual “How’s life?” report. They should serve governments to adjust their social and economic policy to improve their citizens’ well-being. Unfortunately, it is more of a theory for now as, at least recently, the pandemic and the war in Ukraine changed political paradigms of the Western countries exponentially, driving armaments and security expenditure, which, in turn, has shrunk the social purposes expenditure.

Poland’s own index

When new indices were springing up like mushrooms, the Polish Economic Institute also developed their own model. It was called the Sustainable Development Index and was based on three dimensions (current well-being, creating future well-being and social and ecological factors – life expectancy, air quality, number of murders country-wide, etc.) and additionally, on eight indicators. It was created based on data of 162 world economies taken from the World Bank, the World Health Organization, and others.

Since the Institute is financed by the Polish taxpayer, it comes as no surprise that Poland scored slightly better than other countries. High scoring areas in which Poland ranked high, such as pay disparities (relatively low) or the social benefit system (relatively robust) contributed to the result. They mitigated lower affluency and other pay-related factors where Poland ranked significantly lower.

Gross National Happiness

A classic example of a subjective, national index is the Bhutanese happiness index. When in 1979 the king of this mountainous Asian country, Jigme Singye Wangchuk, was on his way back home from Havana where the Non-Aligned Movement Summit took place (a movement of countries exploring their own economic path between Western capitalism and Soviet communism), he was interviewed by a group of journalists at the airport in Mumbai. One of the Indian journalists asked him about the Bhutanese GDP score. The king’s reply was: “We do not believe in Gross Domestic Product, we value Gross National Happiness more.” This is how the Gross National Happiness term was coined.

Strangely enough, the royal joke was not forgotten and several decades later it became an important measure developed in the spirit of the Buddhist economy. According to its principles, the population’s happiness is more important than the population’s consumption or local production levels.

GDP has not yet spoken its last word

What will then happen to the old technocratic measure of GDP? Probably nothing much, as it draws its strength from the weaknesses of other indices, the subjective nature of them being their biggest flaw. What’s more, its characteristics deemed by many as its flaws – the simplicity and easiness of calculation – are arguably its biggest advantages.

GDP allows for a quick and reliable assessment of the economy’s condition. Even the most fervent critics agree that it is strongly correlated with the majority of other factors affecting the human well-being (including average life expectancy, educational background, access to cultural resources, etc.) And wealthier countries generally intend to handle environment-related issues much better than poorer countries, too.

GDP’s strength is its objectivism and easy comparability between countries or regions as well as the ability to refer to the past and the future. Other indices taking so-called well-being factors into account are more prone to manipulation, including political entanglements.

Last, but not least, it is important to recognize what exactly GDP measures and not to expect too much of the index. It certainly fails to reflect the diversity and wealth of the surrounding reality, but it was never meant to, either. Its creator, Simon Kuznets, emphasized that GDP measured productivity and not well-being. American politician, Robert F. Kennedy, the brother of the famous US President, once said “GDP measures everything except what is worthwhile.”

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