France seeks alternatives to GDP

Gross Domestic Product, also know as GDP, is not a sustainable indicator. Indeed it only focuses on the economy and makes no mention of societies and environment. So we need alternatives that would take that into account.

This is even more urgent with the current economic downturn. Indeed, even if things are slowly and difficultly getting better, we have an opportunity to change our way of reasoning and embrace a paradigm shift.

This is why the French President – Nicolas Sarkozy – asked the renowned economist and Nobelist Joseph Stiglitz to work on finding another indicator.

As the Wall Street Journal notes :

(…) The Stiglitz report recommends that economic indicators should stress well-being instead of production, and for non-market activities, such as domestic and charity work, to be taken into account. Indexes should integrate complex realities, such as crime, the environment and the efficiency of the health system, as well as income inequality. The report brings examples, such as traffic jams, to show that more production doesn’t necessarily correspond with greater well-being.

“We’re living in one of those epochs where certitudes have vanished… we have to reinvent, to reconstruct everything,” Sarkozy told a press conference at Sorbonne university. “The central issue is [to pick] the way of development, the model of society, the civilization we want to live in.”

Sarkozy commissioned the report at the start of 2008 from a 22-member commission headed by Stiglitz and including Nobel Prize winner Amartya Sen, as well as the then-head statistician of the Organization of Economic Cooperation and Development, Enrico Giovannini.

The Guardian gives us more details as Mr. Stiglitz published an article there :

(…) The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more – even if inefficiently – output goes up.

In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.

Likewise, quality improvements – say, better cars rather than just more cars – account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality.

The same problems in making comparisons over time apply to comparisons across countries. The US spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things.

I recommend you reading the full article as it is very interesting.

Andrew Revkin brings more details on Dot Earth :

A Nobel laureate, Joseph E. Stiglitz, has joined the circle of economists convinced that the world needs new ways of measuring progress as human numbers and appetites butt up against the planet’s limits and old economic models have hit some speed bumps.

In The Financial Times yesterday, Dr. Stiglitz, who teaches at Columbia University, outlined the results of a study he and other economists conducted for President Nicolas Sarkozy of France providing advice on a basket of measurements that might better reflect whether a country is advancing the quality of lives while not diminishing the environment.

Mr. Sarkozy embraced the findings and called on France’s econometric bureaucracy to shift how it assesses progress and on world leaders and international institutions to do the same.

Here again, the reflection is worth your time.

I am very proud to see that it is the French government that begun this reflection. Let’s hope this will be followed by acts on a global scale.