GDP is no longer the gold standard for measuring a country’s progress.
On March 30th an historic gathering of thought leaders, non-governmental organizations, philanthropists and representatives from federal and international agencies met in New York City with an ambitious yet long-overdue goal: to replace GDP as the nation’s most common measure of economic progress.
The “Dethroning GDP” strategy session, hosted by Demos, WRI, and the Institute for Policy Studies, in partnership with the Rockefeller Brothers Fund, featured Nobel Laureate Joseph Stiglitz, WRI Founder Gus Speth, former WRI economist Robert Repetto, Gund Institute’s Robert Costanza and former Bureau of Labor Statistics Commissioner Katharine Abraham, and RealNetworks founder and chairman Rob Glaser.
The Shortcomings of GDP
As an overall barometer of progress, Gross Domestic Product (GDP) has long been criticized because it simply measures economic activity and not genuine improvements in the quality of our lives. As noted long ago by Robert Kennedy, “it measures everything, in short, except that which makes life worthwhile.” GDP lumps together costs with benefits, so that activities that enhance welfare (e.g., education expenditures) have equal weight as expenditures that represent the externalized costs of growth (e.g., oil spill remediation).
GDP also tells us nothing about sustainability. It fails to track the depletion or degradation of natural, human, built, and social capital on which all economic activity ultimately depends. It fails as well to capture the inherent unsustainability of economic activity financed by debt.
Finally, GDP fails to recognize the costs of inequality. It counts growth concentrated in the upper-most income brackets as “progress,” even if incomes and quality of life are falling for most.
Recent Efforts to Replace GDP
The movement to “green” or replace GDP has proceeded in fits and starts for decades. While dozens of new approaches have been developed such as the Genuine Progress Indicator, Green Savings, and Green GDP the traditional GDP-based framework of progress only became more ingrained in our economic thinking and policy structure in recent decades.
However, the political landscape has changed dramatically in the wake of the economic crisis and opportunities for fundamental changes in how we measure economic performance and social progress are now significantly more promising than they have ever been. Consider the following:
In February of 2008, French President Nicolas Sarkozy established the Commission on the Measurement of Economic Performance and Social Progress, led by Joseph Stiglitz. The Commission was charged with addressing the growing disconnect between people’s perceptions of their own day-to-day economic experiences and official economic performance pronouncements by statisticians and politicians. The Commission’s initial report specified the major flaws with GDP and outlined the contours of a better measure. The Commission is hard at work developing a single new indicator to replace GDP. The scope of the Commission’s work has now expanded, and will be housed under the auspices of the Organization for Economic Cooperation and Development (OECD).
In 2007, the European Parliament launched its Beyond GDP initiative, bringing together decision makers and policy experts throughout the world to develop a new set of “headline” indicators that can supplement GDP and gauge a nation’s overall sustainability. Eurostat, the EU’s statistical agency, is now developing a workplan to incorporate new indicators into economic performance evaluations and policy analysis.
Also in 2007, the OECD launched its “Measuring Progress of Societies” initiative to foster the development of sets of key economic, social and environmental indicators to monitor how the well-being of a society is evolving. It also seeks to encourage the use of indicator sets to inform and promote “evidence-based decision-making, where the effects of policy on these indicators are quantified over time rather than simply being discussed in purely qualitative terms.”
The newly enacted U.S. health care legislation establishes a Commission on Key National Indicators. The Commission is charged with partnering with the National Academies to establish, maintain, and disseminate indicators responsive to critical public issues including indicators that provide a more accurate portrayal of true economic welfare.
The Economics of Ecosystems and Biodiversity Initiative (TEEB) – a major UNEP study on the economics of biodiversity loss – is researching ways to integrate changes in ecosystem service stocks and flows into national accounts.
For the first time since the early 1990s, the Bureau of Economic Analysis (BEA) is set to consider ways to revamp the U.S. statistical architecture to include “[m]easures of sustainability of economic trends…”1 This could provide a critical policy screen – policies designed to boost GDP must also be shown to be sustainable over time.
Throughout the country, U.S. states are considering new metrics to replace GDP’s state level equivalent – gross state product. The State of Maryland is leading the way. In February, Governor O’ Malley released a Genuine Progress Indicator and sanctioned its use in policy analysis at the state level. The State has expressed interest in coordinating a network of GPI practitioners throughout the United States.
A New Indicator: Valuing Natural Capital
There are two essential features of a macro economic indicator to replace GDP: (1) it should measure genuine economic welfare, not just economic activity, and (2) it should indicate the sustainability of that welfare over time. Proper valuation of natural capital and ecosystem services is essential to a rigorous metric. Economic activities that deplete natural capital, such as overfishing, are by definition unsustainable and therefore should not be credited in a measure of sustainable economic welfare since they limit the next generation’s prospects.
In addition, depleting natural capital degrades ecosystem services important to current welfare. For example, when we lose forests we also lose clean and regular water supplies. The externalized costs (e.g., expenditures on water filtration or groundwater pumping) now show up as positive contributions to GDP when in fact they represent the costs of poor land management. National accounts should be debited, not credited, to reflect these costs.
Replacing GDP with a measure of sustainable economic welfare is not an end to itself but rather a means for guiding policy. For the past 50 years, growth in GDP has been an overall policy objective pursued by governments at every level. Obsession with GDP growth has spurred policies to liquidate natural capital as quickly as possible. By correctly valuing changes in our stocks of natural capital and the ecosystem services that they provide will help advance a science of new metrics capable of inspiring more sustainable policy choices.
Language included in the FY 2011 U.S. Department of Commerce budget request for the BEA. ↩