After coming to the conclusion that our current way of measuring the health of an economy using GDP is insufficient at best, it is natural to have a look at the alternatives.
There is consensus that in order to create a framework that more accurately values the things that are thought to increase quality of life, one needs to include natural, social, and human capital along with economic capital. This means adjusting traditional accounting systems for things such as opportunity for entrepreneurship, safety and security, education, degradation of natural resources, health, and personal freedom, all of which obviously are essential for a decent quality of life.
Here are some alternative ways to measure prosperity.
Adjusted Net Savings
The World Bank has calculated the costs to natural capital for 20 years already, and have made a measurement called Adjusted Net Savings (ANS), which ”measure the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution”. While the ANS is one of the better measurements, as mentioned in a previous article on this topic, it still falls short of including social capital.
Genuine Progress Indicator
The Genuine Progress Indicator (GPI) is another alternative, developed by the think-tank, Redefining Progress. GPI differs from adjusted net savings in two main ways: (1) it focuses on an adjusted measure of consumption, rather than on savings and (2) it includes many more categories of adjustments. The most unique, and controversial adjustment is to personal consumption expenditures for income distribution; more equal income distributions increase the GPI, while less equal distribution reduces it. Further, the GPI adds or subtracts categories of spending based on whether they enhance or detract from national well-being. In 2004, for example, $1,4 trillion is subtracted for cumulative CO2 emissions. Per capita GDP in the US was $36,595 while the per capita GPI was estimated to be $15,036.
According to this indicator, not only do traditional accounting measures such as GDP considerably overstate the health of the economy; in several years since the 1970s, per capita well-being has actually declined. In those years, declines in income equality and leisure time, coupled with increases in cost of crime, pollution, and other social ills, have more than offset the increases due to larger levels of economic activity and increases in socially productive activities such as volunteerism.
Legatum Prosperity Index
The Legatum Institute’s work on including and balancing various adjustments to traditional ways of measuring welfare is probably the most interesting current alternative to GDP. Extensive research has been done to develop a comprehensive evaluation of the various forms of capital, resulting in a score that aims to measure true prosperity. The Legatum Institute also points to the interesting aspect of using this model to unveil possible socio-economic reasons for countries’ varying performances and conflicts. For instance, African and ex-Soviet countries have remarkable resources in social capital, but suffer from poor governance and corruption, therefore failing to allocate the riches equally, which hinders prosperity.
Further, Asian countries such as China, Saudi-Arabia, Vietnam, Thailand, and Malaysia might have strong economic growth, but are among the worst in the world at safeguarding personal freedom.
The continued pursuit of economic growth without challenging what it comes at the expense of is indeed worrying. While it may be argued that measuring social and human capital is never going to be an exact science, there is clearly a need to value the things that make life worth living, not just the cash in your pocket.
What are your thoughts?
Carl Frederik Kontny holds a BSc. in environmental science, policy, and management from the University of Bergen and a BSc. in economics from the University of Oslo. While originally from Oslo, he has lived both in Minnesota and in London before returning closer to home to attend a MSc. in energy economics at NMBU, just outside of his hometown. Carl Frederik has a special interest in energy policy and ways to effectively integrate the value of natural, social, and human capital when measuring economic growth and prosperity.