Better metrics than GDP would have enabled a stronger response to crisis

Better measurement of the economy and of people’s well-being could have led governments to respond more strongly to mitigate the damage caused by the 2008 financial crisis and reduce people’s continuing loss of trust in public institutions, according to a new report released by the Organisation for Economic Cooperation and Development.

“Beyond GDP: Measuring What Counts for Economic and Social Performance” targets the widely-used gross domestic product indicator as a crude measure that does not present the full picture of a country’s economic situation.

It also criticizes the widespread use of GDP as a gauge for policy success, when it should not be used as a proxy for economic or general well-being.

The report argues that the 2008 crisis and its aftermath illustrate why a change in perspective is needed.

The GDP loss that followed the crisis was not the temporary one-off event predicted by conventional macro-economic models, the authors note. But its effects have lasted over time, suggesting that the crisis caused the permanent loss of significant amounts of capital; including “hidden capital” in the form of “lower on-the-job training, permanents scars on youths entering the labor market during a recession, and lower trust in an economic system “rigged” to benefit a few.”

The report finds that different metrics, such as people’s economic insecurity, would have revealed the consequences of the recession were deeper than GDP statistics suggested. And it concludes that as a result, the importance of bolstering safety nets and social protection was not sufficiently taken into account.

“Beyond GDP” is authored by the three co-chairs of the High-Level Group on the Measurement of Economic Performance and Social Progress, Professor Joseph E. Stiglitz, Professor Jean-Paul Fitoussi and OECD Chief Statistician Martine Durand. The group was formed to follow up on the recommendations made in 2009 by a French government-appointed commission of enquiry that examined how the wealth and social progress of a nation could be measured, without relying on GDP as the sole measure.

To assess a country’s health and people’s conditions, the authors recommend governments should use a dashboard of indicators encompassing the most important aspects of people’s lives, such as skills, health, jobs and income, as well as economic security, environmental degradation and trust.

Policy makers should not only take into account average outcomes but also how policies affect different segments of society and give a balanced consideration to well-being today and in the future. The indicators should be sufficiently broad to reflect key concerns and narrow enough to be readily understood by policymakers and the public.

“It is only by having better metrics that truly reflect people’s lives and aspirations that we will be able to design and implement better policies for better lives,” said OECD Secretary-General Angel Gurría. “It’s essential to try to establish the truth of people’s lives rather than the truth we find it most practical to study. This will play a key role in restoring people’s trust in institutions and supporting inclusive growth,” he said at the launch of the report at the 6th OECD World Forum on Statistics, Knowledge and Policy in Incheon, Korea in November.

Professor Stiglitz said too much emphasis had been placed on GDP as the leading measure of the health of economies and societies.

“Ahead of the crisis, this blinded policy makers to the dangers lurking and led them to make the wrong policy choices in the aftermath,” he said. “If we do not look at the things that matter in life – whether that is inequalities, how people feel they are doing, their health and capabilities, or environmental sustainability – we cannot make the right choices for people, societies and the planet.”

Using measures outside of aggregate economic output will tie social development to the performance of the economy.

“People can’t live without at least the hope of social progress,” said Professor Fitoussi. “This was the backbone of our work – we scrutinized the available metrics to determine how and why they might hide a regressive evolution, from economic security to trust, passing through sustainability, inequalities including those of opportunities, and other measures and determinants of well-being,” he said.

“The central question, instead of focusing on GDP, then becomes: growth of what and for whom?”

While the “Beyond GDP” agenda has sometimes been characterized as “anti-growth,” the authors say this is not the case. “The use of a dashboard of indicators reflecting what we value as a society would have led, most likely, to stronger GDP growth than that actually achieved by most countries after 2008,” the report states.

The report also evaluates the progress made in developing metrics that go beyond GDP since 2009 and their use in policy making.

Wealth and income inequality, especially, are playing a much more central role in policy discussions today.

But, the authors state, important progress is still needed in a range of areas, such as measuring what happens at both ends of the income distribution; integrating different data sources; and measuring the joint distribution of income, consumption and wealth at the individual level.

In addition, it is necessary to look at horizontal inequalities between different groups, inequalities within households and the way resources are shared and managed. And when discussing inequality, it is important to consider the inequality of opportunity instead of just inequality of outcomes.

“Inequality of opportunity is even more unacceptable than inequality of outcomes, but the operational distinction between the two is fuzzy, as we don’t observe all circumstances that shape people’s outcomes and are independent of their efforts,” the report notes.

“Beyond GDP” contains a set of 12 recommendations, which include urging the international community to invest in upgrading the statistical infrastructure of poor countries; allowing statistical offices to use tax records to capture developments in the top-end of the distribution; integrating information on inequalities in macro-economic statistics to understand who benefits from GDP growth; routinely assessing the effects of policies on people’s economic insecurity, to better measure sustainability and resilience; and, to measure trust and social norms through both surveys and experimental tools.

The report will serve as a reference for the OECD’s Better Life Initiative, which focuses on developing statistics that can capture aspects of life that matter to people and that, taken together, help to shape the quality of their lives.