How to measure social welfare

Written by TCA Ramanujam | Updated: Sep 22 2009, 03:25am hrs
The chief sources of social welfare are not to be found in economic growth per se but in a far more selective form of development, EJ Mishan wrote in The Costs of Economic Growth.

The President of France, Nicolas Sarkozy, is a bold and colourful public figure. At a time when the West is reeling under the rigours of recession and GDP estimates are falling, he has called for a revolution in the way national wealth is measured. At his initiative, more than 20 Noble Laureates in economics investigated the veracity of established economic tools used to measure the way an economy is moving, by statistical figures of GDP. He commissioned a group of economists to examine whether there is progress in the measurement of individual and collective wellbeing through this age old system. Can there be better indicators of social welfare than the GDP

For the greater part of the 20th century, economists have pinned their faith in the concept of GDP for measuring the rate of growth or decline of an economy. GDP is calculated without subtracting capital consumption. Hence it is gross. It measures activity located in the country regardless of ownership. It includes activities carried on in the country by foreign-owned companies and excludes activities of firms owned by residents but carried on abroad. Hence it is domestic. Product indicates that it measures real output produced rather than output absorbed by residents. Growth is an increase in an economic variable, normally persisting over successive periods. Economists have known immiserising growth where welfare decreases despite statistical growth.

There are several models of growth. The Harrod-Domar growth model is most famous. It considers the consequence of fixed capital-labour ratios and savings propensities. Technology and innovation accelerate growth. Technical progress increases the efficiency of labour, and this is known as the Harrod-Neutral model. Here, labour efficiency increases faster than the number of workers available. This is labour-saving growth. It has to be contrasted with Hicks-Neutral technical progress, where the efficiency of all factors increases in the same proportion. These theories of growth depend on the capital-output ratio and per capita increase in income. They also form the basis of the Keynesian saving/investment equality and an assumption about the propensity to save. The pattern of growth of the economy can then be easily determined mathematically.

This concept of GDP measurement has come under virulent attack. American economist Paul Romer highlighted the fact that the GDP concept ignores fundamentals. It concentrates on land, labour and capital. There is a fourth dimension to growth, namely knowledge. This can revolutionise the fundamentals of economic thought. The Japanese economists came up with a fifth dimension, namely time. JIT (Just In Time) is as much a factor of production as any of the above four. The GDP concept has no use for these factors. A former British Prime Minister complained that he was expected to guide the economy on ancient statistics, rather like running a train on an out-of-date time table. Alas! Economists and administrators have shared a touching faith in the great ability of their crafts to find the answers for developmental problems.

The International Commission on Measurement of Economic Performance and Social Progress set up by the French President has now submitted its report, showing that GDP does not answer basic issues concerning peoples welfare. GDP is a poor measure of wellbeing. The Commission has tried to provide guidance for creating a broader set of indicators that will capture more accurately both wellbeing and sustainability. Such a new indicator would look at issues like environmental protection, work/life balance and the economic output required to rate a countrys ability to maintain sustainable happiness for its people.

GDP statistics are no longer a good measure of societal wellbeing. Economic output might have fallen in France but its healthcare system is ranked as the worlds best by the World Health Organisation. It has a comparatively short working week adding to peoples leisure. Its fertility levels are the highest in Europe. Human Development indicators are not reflected in GDP. Income and wealth inequalities do not promote welfare. Uneven distribution of resources can be fatal to growth. Life expectancy years (72 in China and 64 in India), infant mortality (20 in China and 57 in India) and maternal mortalit (45 in China and 450 in India) will not be taken into account in arriving at GDP figures.

Nor will disregard of environment and pollution of the same be reflected in GDP. China emits 1.802 billion tonnes of carbon dioxide; it is the worlds biggest polluter followed by the US (1.586), Russia (0.432) and India (0.43). Disregard of green house gas emissions can push the planet deep into dangerous global warming.

Professor Joseph E Stiglitz, who served as chairman of the Commission on the Measurement of Economic Performance and Social Progress, has called for alternative ways of measuring welfare. Welfare or normative economics is the study of how economic activities ought to be organised. Welfare criteria are rules for judging whether one state of economy is better or worse than another.

It is imperative that India should adopt the new criteria given by the Stiglitz Commission in measuring the success of its welfare programmes.

The author is a former Chief Commissioner of Income Tax and ex-member Income Tax Appellate Tribunal