GDP (the market value of all final goods and services consumed during a period of time) per capita is by far the most widely used measure of a country’s standard of living.
Before GDP there were no reliable measures of national welfare. Richard Stone and James Meade created the concept (on request from Keynes) during the immediately post-war period. The creation of a measureable national measure was actually a huge achievement. But over the decades criticism has mounted. As far back as 1934 Simon Kuznets said “The welfare of a nation can scarcely be inferred from a measurement of national income”.
So why is it still being used and what implications has this for a country like Indonesia?
In 2009, then French president Nicolas Sarkozy established the international Commission on the Measurement of Economic Performance and Social Progress, because he and others such as Joseph Stiglitz , the chair of the commission, felt current statistical information about the economy and society didn’t capture the true picture of how nations were developing and didn’t take into account the structural changes in, and the complexity of, modern economies. At the time Sarkozy said “Nothing is more destructive than the gap between people’s perceptions of their own day-to-day economic well-being and what politicians and statisticians are telling them about the economy”
This is particularly pertinent to Indonesia which continues to experience significant economic growth. It’s GDP in 2011 was $846.8 billion. The country’s gross national income per capita has steadily risen from $2,200 in the year 2000 to $3,563 in 2012.
One of the questions Stiglitz, Sarkosy and others ask is; Does GDP provides a good measure of living standards, especially in societies that are becoming more unequal i.e. the widening gap between average (mean) income and the median income? He do we measure living standards in a country like Indonesia where, out of a population of 234 million, more than 32 million Indonesians currently live below the poverty line, of $1.25 a day. 40% live on less than $2 a day? At the same time the top 40 richest are now worth a total of $88.6 billion. If I’ve done my sums right, that’s just under 10% of the whole country’s GDP.
The key failing of GDP in a country like Indonesia is that it fails to measure the welfare impacts of economic activities. A palm oil plantation in Sumatra adds value to GDP because GDP doesn’t include the value of the forest destruction necessary to create the plantation. In fact the forest destruction is an economic activity and so therefore IS including – positively.
The Commission looked at how we can continue to use GDP which ignores the environmental impact of growth and development. It suggests focusing the monetary aggregation on items for which reasonable valuation techniques exist, such as physical capital, human capital and certain natural resources. This would make it possible to assess the “economic” component of sustainability, that is, whether or not countries are over-consuming their economic wealth (forests, fishing stocks, water supplies.
GDP also does little to assess the well-being of a nation’s people, little to assess quality of life. Einstein’s famous quote has been used to highlights GDP’s major flaw; “Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted”. Of course, no single measurement can be used for something as broad and complex as “well-being”. Well-being is multi-dimensional and needs to include material living standards, health, education, work (both inside and outside the home), social relationships, environment, political freedom, and security.
Lastly, the problem with GDP in Indonesia is that it actually isn’t calculated very well. The growing gap between household surveys (consumption measures) and GDP indicate that something is wrong. A new “ People’s Welfare Index” (or IKRAR, Indeks Kesejahteraan Rakyat) has recently been launched to measure the effectiveness of programmes to reduce poverty and income inequality. The index has three main indicator clusters, namely Economic Justice, Social Justice and Democracy.
Globally, Sarkosy’s commission received a lot of attention. The European Commission responded with ‘GDP and beyond: Measuring progress in a changing world’, and stated that there was no reason why it could not improve its indicators and announced that it ‘intends to develop a comprehensive environmental index and improve quality-of-life indicators’ for inclusion in both the European System of Accounts, and member states’ own national accounts systems.
One of the most popular alternatives and one that would suit Indonesia’s situation, is adjusted net saving, also known as genuine saving (this link leads to an interesting graph on how to estimate adjusted net saving). Basically it measures 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. Compared to GDP, Indonesia’s negative adjusted net saving rates imply that total wealth is in decline. This paints a very different picture, then, of Indonesian growth. But it may be a more realistic one. But will the GDP portrayal be the one that prevails?