The quest for the perfect measure of human progress is distracting
The writer, global chief strategist of Morgan Stanley Investment Management, is the author of “The Ten Rules of Successful Nations”
US Congresswoman Ilhan Omar recently joined a growing list of political leaders pushing to supplement gross domestic product with a broader measure of human progress, an idea that Conservatives call “spongy indeed.” But this movement dates from Simon Kuznets, the Nobel Prize winner who invented the forerunner of GDP quantify American losses during the Depression.
Even Kuznets pushed for a higher standard, saying this crude tally of things bought and sold did not reflect the well-being of a company. In 1968 Robert Kennedy said gross output measures everything “except what makes life worth it”, Including children’s health, education and well-being.
Researchers have since come up with alternatives that range from “gross national happiness” to Malaysian happiness. “Vague index of quality of life”. Omar prefers the GPI, the “real indicator of progress”, now the main competitor alongside the BLI, the “better living index” approved by the OECD.
All aim to modify or replace GDP by social or environmental factors, but disagree on these factors. It may be decades before the world settles on a new normal, if at all possible. As pundits debate, the feeling that increasing prosperity does not lift most of humanity is spreading. But an interim solution is at hand: replace GDP with GDP per capita as a primary target for policymakers and a key measure of progress.
Measuring GDP per capita (or average income) reflects fairly well the progress of many indicators of social well-being and captures a threat that new alternatives ignore: population decline.
Countries with higher GDP per capita tend to have higher life expectancy and levels of social support, lower child mortality and poverty levels, less air pollution and corruption. Many of these measures are strong predictors of life satisfaction. The last World Happiness Report ranks a single country with a GDP per capita below $ 15,000 (Costa Rica) in the top 25 and none with a GDP per capita above $ 15,000 in the bottom 70. The factor that best explains the results of the happiness survey is GDP per capita. Among emerging countries, those with the highest per capita income tend to perform better in the UN rankings. multidimensional poverty index, which includes quality of life measures such as access to clean water, a solid roof and basic goods like a bicycle.
Many people believe that once incomes reach a level sufficient to ensure a comfortable life, more money does not add much to contentment. But even among advanced economies, progressively higher income shows a clear link with higher happiness scores. The Swiss and Norwegians with higher incomes are happier than the Germans and the slightly less wealthy French.
Proponents of overshooting the GDP argue that mobilizing nations to achieve a dollar target enslaves governments to Mammon, at the expense of making life worth it. Many sympathetic people in this regard bring up the case of Bhutan, which, although relatively poor, has often been celebrated as “the happiest country in the world”. Is it? Bhutan ranked 95th in the 2019 Happiness Survey.
Critics of GDP per capita focus on what it lacks, including the burning issues of inequality and CO2 emissions, but in seeking a more perfect measure, they resist the urgent need for improvement.
Economic growth is a pillar of human progress, and it is under threat. As birth rates decline, the working-age population shrinks from Germany and China to Japan and Russia. Fewer workers means slower economic growth, perhaps with higher inflation. Total GDP does not capture population decline or well-being, and still reigns through inertia. A measure so deeply rooted in the system is difficult to abandon.
But unlike the new alternatives, GDP per capita is now available in real time for most countries, and that’s more telling. Think about future recessions. In countries where total GDP is declining, GDP per capita may well not be if the population is declining faster. Increasingly, slowdowns in total GDP will not be slowdowns in average income or the human progress that goes with it. Even if the pie grows slower, each person can get a bigger slice.
Adopting GDP per capita as the new normal would paint a less alarming picture of slowing global growth. This would ease the pressure on politicians to generate faster growth than the shrinking workforce allows. Indirectly, this would favor the goals of those who want slower growth to limit climate change. And that would be a step towards the Holy Grail: a large measure of human happiness.