Friday, 20 February 2015

Why statisticians must produce a measure of “clean GDP”

This article from previous contributor, journalist Donato Speroni, argues the case for an adjusted GDP measure that excludes socially and environmentally harmful modes of production to give a clearer picture of countries' sustainable growth.

Eleven years after the 1st OECD World Forum in Palermo, economists and statisticians, politicians and representatives of civil society will again meet – this time in Guadalajara, Mexico  - on the 13-15 October 2015 for the 5th OECD World Forum on Statistics, Knowledge and Policy jointly organised by the National Statistics Office of Mexico (INEGI) and the OECD.

A lot of work has been done in the past decade thanks to OECD, and I have already written about it in my previous post on ProgBlog. But I have come to the conclusion, already presented in my Italian blog on the Corriere della  Sera website, that we are now facing two different directions of research.

1)  The first one is the production of sophisticated dashboards for measuring progress across all the components of collective well-being, taking into consideration objective data and subjective perceptions, the current situation of societies but also their sustainability into the future, average  well-being but also the range of inequalities in order to evaluate the inclusiveness of  societies. This has been the main challenge in recent years, and has been widely discussed in all the World Forums, from Palermo to Istanbul, from Busan to New Delhi.
2) The second one is a new way to measure production, in order to take into account its effects on the different kinds of capital (environmental, social and human) which together represent the total wealth of a nation. The purpose is to have a measure of “clean GDP”, or in other words new wealth produced, net of consumption of irreplaceable natural resources and of the fraying of the social fabric.

I say this because, after all the work that has been done, we have to face an unpleasant truth. Gross domestic product, the ubiquitous measure of wealth production that influences the policy of all states, will not be, at least in the short and medium term, replaced by an all-encompassing measure of welfare. Neither the legendary Happiness Index of Bhutan, nor other complex indexes to measure progress will undermine GDP.

This does not mean that progresses made in recent years, including indicators of BES, (Benessere equo e sostenibile) developed in Italy, are not important. But indicators of well-being may coalesce into a "dashboard" presenting many different data with limited impact on politicians and media: in the Italian BES there are 135 indicators. They cannot be synthesized into one composite indicator. As Nobel Prize Joseph Stiglitz once said, “it would be like pretending to have in your automobile only one indicator which tells you simultaneously the speed at which you are going and how much gasoline is left in the tank”. There are also big difficulties in international comparisons of well-being dashboards, because what matters most to an Italian can be very different from priorities of a Finnish and even more from those of an Indian person. It is for this reason, I think, that the OECD Better life index leaves the choice of the weights of the different dominions of well-being up to the user.
Yet GDP alone is not enough, as Robert Kennedy had already declared nearly 50 years ago, and it is less and less useful to measure the actual progress of a society. The new book by Naomi Klein "This changes everything", dramatically raises the issue of the type of growth that can be compatible with the increasingly difficult objective of containing climate change within the limit of two degrees centigrade.

We don’t have to agree with all the political proposals by Ms Klein to recognize that we have a big problem, which requires an urgent solution. No one can propose a generalized “degrowth”, because the world certainly needs more development. But the opinion of Ms Klein is that the richest 20% of the world should contain their consumption to leave room for other countries and decrease their emissions by 8 – 10% yearly.

However, (in my opinion) the reduction of total consumption, even as a result of virtuous practices, could result in a disaster for our national economies. Imagine for example the impact of the spread of the “car sharing” practices, inducing many families to give up their car. It would result in reducing car manufacturing and consumption and therefore a significant drop in GDP. If the parameters of international assessment remain attached to GDP (e.g. financial ratings and ratios between GDP and the stock of sovereign debt, as in Europe), the country that had courageously embarked on the path of reducing the use of automobiles would lose its credibility on the international markets.
Yet, somehow we have to deal with this problem. We know from the Global Footprint calculations that mankind actually consumes 1.5 times the resources that the Earth can produce in one year: we already need one and a half planets to meet our consumption needs and we will need even more when in the next 20 years the middle class of the world, earning from 10 to 100 dollars a day, will move from 1.8 billion to 4.8 billion people.

It we take GDP as a measure of consumption, we can calculate that a reduction of one third of the average world per capita GDP (down to a measure comparable with “consuming” the resources of only one planet per year) would result in a per capita GDP similar to that of Kosovo or Mongolia. For a country like Italy, this would mean going back to the GDP per capita rate of fifty years ago.
How to make this transformation, without falling into a Great Depression, but rather promoting, to use the language of Klein, aGreat Transformation’? Probably the first thing to do is to look beyond the aggregate figure of GDP to get a more accurate picture of production and consumption patterns. In fact there are different kinds of GDP. The quality of our consumption is much different in comparison to 50 years ago. Cars travel more miles on less fuel and fewer changes of lubricant, refrigerators require less electricity and can be partially sourced from renewable sources. So, getting back to the GDP level of 50 years ago (or more correctly, to the level of exploitation of planetary resources that was needed to produce the GDP of 50 years ago) would not necessarily mean returning to the quality of life of 50 years ago.

Here is the challenge that arises for economists and statisticians. Alongside dashboards measuring overall well-being, we must have a specific measure of "good GDP", i.e. that part of the production of wealth that does not impact on the environment and corresponds to an effective progress of the community. Recall, for example, that GDP measures not only the production of goods (which almost always requires the use of natural resources and results in harmful emissions into the environment) but also that of services, which (usually) do not have these drawbacks. Paradoxically, if we exchanged poems on the Internet for a fee, we would increase GDP.
Of course we cannot live on poetry: we need goods, starting with food (which requires consumption of land, water, agricultural machinery and fertilizers) and beyond. But the attempt to measure the production of wealth through the lense of sustainability deserves more attention, because “good GDP” could grow even if “GDP overall” might decrease. In the OECD World  Forum in Busan, in 2009, Stiglitz told the audience that during the Clinton administration he had proposed a way of measuring GDP net of carbon dioxide emissions, but said he was stopped by the reaction of the American oil companies.

Recently, in an interview to an Italian newspaper, Stiglitz said: “GDP is a good measure for industrial, commercial and financial production, but measures only the amount. Instead you must calculate the quality of production, taking technology into consideration”.  
This is precisely what we mean by "good GDP": a number that measures not only the quantity of goods produced, but also their technological quality, because a GDP that destroys the resources of future generations is not real wealth creation.

I don’t underestimate the methodological problems. In practice we would need to calculate a "value added" that not only subtracts the use of raw materials and semi-finished products from total production, as happens now, but also emissions and other negative impacts on the natural and social environment. Of course it is not easy to “give a price” to the destruction of the environment or to other negative impacts of production on society, but GDP calculation already includes difficult estimates (for example the value of the production of the public sector, or the value of the black economy and of some criminal activities), so I think that statisticians could do it. The Genuine Progress Indicator is already an effort in this direction.

Why do I think that this is important? Because such a revolution in national accounting would change political priorities, with significant consequences in the balance of power, helping the world to face the difficult challenges of the future.
Donato Speroni