Measures of Progress
Article by Wayne Visser
The Concept of Indicators
The world we live in is exceedingly complex. We use indicators to simplify things. Indicators work in the same way as a map. They are meant to be a guide, a representation of reality, which help us to understand the lie of the land. The scale of the map and what it is trying to measure will determine how accurately and completely it approximates reality.
It is the same with indicators. Some indicators are high level, global estimates; others are detailed, local measures. Some focus on economic activity; others on social welfare. They help us to understand ‘where we’re at’ and how things have changed over time. Checked against our objectives, indicators tell us whether things are good or bad, better or worse.
So far, so good. Except that sometimes we get lazy. In the midst of our information overload, we are tempted to oversimplify. We settle for using in a 1:50 000 scale map, when we really need a 1: 5 000. Or we use a two-dimensional route map, when a three dimensional contour map is called for. This is the main problem with economic indicators today.
Limitations of GDP
Gross Domestic Product (GDP) is the classic example. GDP is a simple and useful measure of economic activity: the sum of all the goods and services produced and sold in a country in a given year. Yet ever since its invention, politicians, multilateral agencies and economists have used GDP as a proxy measure for progress, welfare and quality of life.
This was never the intention. GDP’s creator Simon Kuznets said in 1934: “The welfare of a nation can scarcely be inferred from a measurement of national income.”
The main weakness of using GDP as a measure of progress is that it measures the quantity, but not the quality, of economic growth. Hence, if there is a war or an environmental catastrophe or a growth in the drugs trade, more goods and services are sold, but society is not better off as a result. To simplify, it makes no distinction between the ‘goods’ and ‘bads’ in the economy.
Another fundamental flaw with GDP is that it ignores vast areas of economic activity, simply because it is not included in the formal economy. This includes the ‘invisible’ work performed by households, parents, communities, charities, religious institutions, non-governmental organisations and the informal sector. The economic value of these ‘free’ activities is substantial.
The third limitation of GDP is that it hides inefficiencies and double counting. If a bakery in Cape Town bakes bread and trucks it up to Johannesburg to sell, and a Johannesburg bakery sends identical bread to Cape Town for sale, GDP counts the economic effort spent on both. But is this efficient? Are we better off than if each had sold the bread locally?
GDP also fails to pick up inequity or ethical considerations. It tells us nothing about the conditions under which the goods and services were produced, who are buying them or how the revenues are …
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Cite this article
Visser, W. (1997) Beyond Growth: Measures of Progress. Money Values online column.