Measuring Growth and Success

Terence Jeyaretnam

Eighteen months ago, French President Nicholas Sarkozy established an International Commission on the Measurement of Economic Performance..., owing to his dissatisfaction with the state of statistical information about the economy and society.

The report, released on the 14th of September The European Union recommends introducing an index in 2010 to track life qualities such as a clean environment, social cohesion and wellbeing to complement the gross domestic product (GDP) indicator in shaping policy. The environmental index will chart progress in areas such as greenhouse gas emissions, pollution, water use and waste generation to better reflect economic and social progress.

So what’s the concern? The key question is whether GDP provides a good measure of living standards. In many cases GDP suggests far better performance than a countries citizens’ own perceptions. For example, before the global financial crisis, US growth according to GDP seemed much stronger than that of Europe – prompting European pundits to argue that US-style capitalism was the way forward, not realizing the strong correlation to the growth in GDP in the US to levels of US household debt. The focus on GDP also creates conflicts, such as political focus to increase GDP, while key election issues focus on such matters as environment, health and community benefits - which all act to lower GDP.

There is a much more significant issue here – society’s attempt to reduce down to one single number or indicator what is going on in our complex world. This same paradigm seems to now be applied to such environmental impacts as greenhouse gas emissions, with the Carbon Pollution Reduction Scheme trying to price a tonne of carbon. Our attempt to simply the web of life may indeed work against us – it has with GDP. While we have merrily been increasing GDP, our quality of life has been heading in the opposite direction almost at the same pace. Just as a company needs to account for the depreciation of its capital, so too, our national accounts need to reflect the depletion of natural resources and the degradation to our environment, says Joseph Stiglitz, the Chairman of the Commission on the Measurement of Economic Performance and Social Progress.

Sources: The numbers game: making sense of GDP, The AGE 9th September 2009 and EU to introduce new indicator to complement GDP, www.wbcsd.org accessed 18th September 2009

Terence Jeyaretnam is a Director of Net Balance (terence@netbalance.com), based in Melbourne.