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Lost in statistics

Gross domestic product fails as a true measure of economic welfare. It’s time to come up with better measures of human progres, writes RK Pachauri.

columns Updated: Mar 06, 2011 13:47 IST

Ever since countries across the globe started measuring economic progress in terms of gross domestic product (GDP), several analysts and thinkers have criticised this measure, because according to them, it does not measure genuine progress. French President Nicolas Sarkozy deserves credit for having set up a commission on the measurement of economic performance and social progress, chaired by the Nobel Prize-winning economist Joseph Stiglitz, with the involvement of our own Nobel laureate Amartya Sen and Jean Paul Fitoussi of France. The report of this commission was submitted to Sarkozy recently, and he has rightly called for a set of measures for assessing human welfare different from the flawed practice of assessing economic development on the basis of the GDP.

Needless to say, conservative organisations have regarded this exercise as meaningless. The Wall Street Journal published an op-ed piece on September 30, which went to the extent of stating that France has come up with this devious exercise only because its own record of growth and GDP in recent decades has been very poor. It stated, “France has excellent reason to suppress GDP statistics,” because, as it asserted, since 1982 — among developed nations — France has been lagging in GDP growth with a mere 2.1 per cent annual rate in comparison to the US’s 3.3 per cent. However, this assertion is questionable.

There are several groups across the world which have been consistently questioning the structure and direction of economic growth in the US, perhaps because the US economy has clearly been increasing its entropy as clearly highlighted decades ago by late Nicholas Georgescu-Roegen, a distinguished economist ahead of his time. A California-based organisation called Redefining Progress has pursued a relentless campaign for many years now in attempting a rational assessment of real economic progress quite distinct from measures contained in the GDP of a country.

An interesting article brought out by them refers to a newspaper headline that came out on October 28, 2005, soon after Hurricane Katrina, proclaiming, ‘Economy brushes off storms and expands by 3.8 per cent in 3Q, beating estimates.’ The author of the article rightly laments this characterisation, which according to him in one fell swoop dismissed the inequitable and catastrophic toll associated with 1,836 preventable deaths, over 850,000 housing units damaged, destroyed or left uninhabitable, disruption of 600,000 jobs, permanent inundation of 118 square miles of marsh land, etc. all of which was implied as being irrelevant to the US economy.

It is becoming increasingly obvious that GDP fails as a true measure of economic welfare, particularly if the negative impacts of our current patterns of growth and development are lost in minor statistics covering costs of hospital expenses and reconstruction and reparations consequent on damage that is taking place worldwide, say, as a result of climate change.

It is becoming increasingly apparent that human activities are imposing a heavy footprint on the natural resources of the earth and are degrading and damaging ecosystems across the planet.

Stiglitz’s report highlights the limitations of GDP in this context, and mentions in particular the fact that GDP focuses only on production, rather than income and consumption. He also elaborates on how GDP doesn’t account for the cost of environmental damage, nor does it take household-level production into account. It was the famous economist Pigou who said that when someone marries his housekeeper, the GDP of the country goes down. Despite these flaws, unfortunately no substitute for the GDP has evolved, and we continue to emphasise production of goods and services as the only means to assess economic progress, completely ignoring all its negative implications and impacts.

However, now that a leader like Sarkozy has mobilised the intellectual resources of the distinguished group chaired by Stiglitz, I hope he ignores the distorted view of the Wall Street Journal and mounts a widespread effort to ensure that the world comes up with better measures and metrics of human welfare.

On the 140th birth anniversary of Mahatma Gandhi this year, it would be relevant to recall his words, “Speed is irrelevant, if you are going in the wrong direction.” We must find measures that flash red lights as we move in the wrong direction.

RK Pachauri is Director-General, The Energy and Resources Institute (TERI) and Chairman Intergovernmental Panel on Climate Change (IPCC)