The origin of gross domestic product, the value of all final goods and services produced in a country within a given year, as a measure of an economy’s overall performance can be traced to the Great Depression that had its roots in the stock market collapse in 1929 in the United States of America. It then quickly spread to the rest of the world. The federal government of President Franklin D. Roosevelt introduced a slew of banking reforms and initiated large-scale public projects to restore employment and business confidence. This called for reliable information on the magnitude of the destruction in different segments of the economy. A team of scientists headed by Simon Kuznets laid down the principles for constructing aggregate indices like GDP out of data collected from different parts of the country. There was debate on what to include, exclude as well as on other procedural matters. Eventually, a standardised System of National Accounts came to be accepted by most countries of the world in the post-War years.
From the beginning, it was recognised that GDP suffers from serious limitations as a measure of citizens’ well-being. In addition to being insensitive to the distribution of income within the country, GDP leaves out activities outside the ambit of market transactions (because valuation is not possible without market prices); fails to adequately account for improvement in the quality of products and the introduction of new products (often of better quality and lower price); and fails to reflect the social costs of production and consumption. Yet, GDP continues to be almost the sole basis for judging a nation’s performance and its global ranking. Little wonder then that raising the growth rate occupies a central place in the political rhetoric. The crucial issue of the sustainability of growth over the long run gets scant attention.
Some innovations have emerged to address the GDP’s limitations. For example, Time Use Surveys are used to get an idea about the allocation of time to labour market work, household work, child care and leisure. Private sector equivalent jobs are then used to assign value to the unpaid work part. ‘Hedonic pricing’ methods are applied to tackle the undervaluation of quality change. These advances have borne fruit and research on refinement continues.
Since GDP leaves out so many important dimensions of well-being, supplementary measures have been proposed. In 2010, a committee headed by Amartya Sen, Joseph Stiglitz and Jean-Paul Fitoussi suggested a ‘dashboard approach’ in which several indicators covering financial, human and natural wealth and inequality in distribution, among other things, are to be carefully monitored by national governments to capture true progress on the path of welfare. Other tools, such as Index of Sustainable Economic Welfare and Genuine Progress Indicator, differ in detail but adjust GDP upward for unpaid household work and reduced working hours and downward for environmental damage. Some related measures reduce GDP when income inequality increases.
These attempts are praiseworthy. But most economists and environmental experts think that they are inadequate. Sustainable growth calls for bringing the interest of future citizens more explicitly into the calculations to ensure that our activities are not diminishing their income earning potential. And herein lies the importance of national wealth rather than national income. While an individual’s current income and spending are important determinants of his/her present standard of living, whether he/she will be able to sustain that standard over, say, the next decade depends on the state of his/her assets or wealth. If he/she is borrowing recklessly or selling accumulated or inherited assets to finance high consumption today, his/her welfare may actually be declining even though his/her contribution to GDP remains high.
The great defect of conventional national income accounting is that only current spending shows up, not its source or consequences.
GDP is the equivalent to the income statement at the national level. It gives a view that is at best partial, at worst potentially misleading and dangerous because it ignores what is happening to the nation’s stock of productive assets and, hence, its ability to sustain income and consumption in the future. In the process of generating current income, we are running down not only our machines and factory buildings (physical capital) but also inflicting serious damage on the environment and the stock of natural endowments. The monetary value of energy used in production and transportation is counted, but not the depletion of finite resources such as fossil fuel, coal, copper or lithium. Pollutants released by a factory into a river are ignored. If a wetland is drained to build a shopping mall, the construction of the latter contributes to GDP but the destruction of the former goes unrecorded. Social wealth will be reduced if the value of the mall is less than that of the wetland lost forever. Future generations will in that case inherit an economy with a lower net worth.
From the point of view of sustainable growth, its impact on future generations is crucial. But national income accounting practices offer no help whatsoever when making intergenerational decisions. One generation might go on a consumption splurge by using up the nation’s coal reserves and forest covers, sending its growth rate into double digits. But the nation’s wealth account, if available, will capture the destruction and this might force politicians and voters to wake up to what is happening on the resource front.
This is the key point insisted upon by Partha Dasgupta and other economists in the ongoing discourse on sustainability. Getting a clear view of national wealth through a national balance sheet will give the present generation the ability to see what sort of future it is leaving behind for the next generation. GDP, even when supplemented by suitable dashboard indicators, is not sufficient in this respect.
Economists have come up with the concept of ‘comprehensive wealth’ or ‘extended wealth’ in this context. This encompasses, in addition to physical capital (roads, ports, machinery), human capital (health, education, population size and composition), natural capital (ecosystems, natural resources) and even cultural capital (trust, social norms). The ultimate objective is a balance sheet showing the net change in the stock of this comprehensive wealth. GDP growth is sustainable if it does not make this net change negative.
A balance sheet of comprehensive wealth may seem like a tall order. The statistics needed do not exist yet, but neither did GDP before the government asked for it. Till date, mankind has invested huge intellectual efforts and billions of dollars in developing and refining GDP, the Human Development Index, and other social indicators of progress. In comparison, the effort to produce a balance sheet version of national accounts has been negligible. But such a version is essential if the planet is to be saved.
Soumyen Sikdar is a former professor, IIMC
