Book Review: The Economics of Poverty by Martin Ravallion

May 6, 2016

Links I Liked

May 6, 2016

Here’s a summary of The Economist’s important critique of GDP and suggestions for reform

May 6, 2016
empty image
empty image

‘Laws are like sausages, it is better not to see them being made’ said Otto von Bismarck. Turns out you can probably economist GDP coveradd GDP to that list.

Last week’s Economist had a comprehensive takedown of the uses and abuses of Gross Domestic Product as an indicator of wellbeing, economic health or pretty much anything else. People have been critiquing GDP ever since it was created, but the Economist piece matters both because it shows that GDP is actually getting less useful over time, and also because it’s the Economist saying so. As a service to non subscribers, here’s a flavour of the critique from a 3 page briefing and some suggestions for reform from the accompanying leader.

First some of the more unpalatable ingredients of the GDP sausage:

‘In a world where houses are Airbnb hotels and private cars are Uber taxis, where a free software upgrade renews old computers, and Facebook and YouTube bring hours of daily entertainment to hundreds of millions at no price at all, many suspect GDP is becoming an ever more misleading measure.

The modern conception of GDP was a creature of the interwar slump and the second world war. A measure created when survival was at stake took little notice of things such as depreciation of assets, or pollution of the environment, let alone finer human accomplishments. In a famous speech in March 1968, Robert Kennedy took aim at what he saw as idolatrous respect for GDP, which measures advertising and jails but does not capture “the beauty of our poetry or the strength of our marriages”.

Economist GDP fig 1A problem with GDP even when it is being asked to do nothing more than measure production is that it is a relic of a period dominated by manufacturing. In the 1950s, manufacturing made up more than a third of British GDP. Today it makes up a tenth. But the output of factories is still measured much more closely than that of services. Manufacturing output is broken down into 24 separate industries in the national accounts; services, which now make up 80% of the economy, are subdivided into only just over twice that number of categories.

A bias toward manufacturing is not the only distortion. By convention GDP measures only output that is bought and sold…. This convention means that so-called “home production”, such as housework or caring for an elderly relative, is excluded from GDP, even though such unpaid services have considerable value.’

So much for the critique, and here are the interesting suggestions for sorting it out:

‘Measuring prosperity better requires three changes. The easiest is to improve GDP as a gauge of production. Junking it altogether is no answer: GDP’s enduring appeal is that it offers, or seems to, a summary statistic that tells people how well an economy is doing. Instead, statisticians should improve how GDP data are collected and presented. To minimise revisions, they should rely more on tax records, internet searches and other troves of contemporaneous statistics, such as credit-card transactions, than on the standard surveys of businesses or consumers. Private firms are already showing the way—scraping vast quantities of prices from e-commerce sites to produce improved inflation data, for example.

Second, services-dominated rich countries should start to pioneer a new, broader annual measure, that would aim to GDPcapture production and living standards more accurately. This new metric—call it GDP-plus—would begin with a long-overdue conceptual change: the inclusion in GDP of unpaid work in the home, such as caring for relatives. GDP-plus would also measure changes in the quality of services by, for instance, recognising increased longevity in estimates of health care’s output. It would also take greater account of the benefits of brand-new products and of increased choice. And, ideally, it would be sliced up to reflect the actual spending patterns of people at the top, middle and bottom of the earnings scale: poorer people tend to spend more on goods than on Harvard tuition fees.

Although a big improvement on today’s measure, GDP-plus would still be an assessment of the flow of income. To provide a cross-check on a country’s prosperity, a third gauge would take stock, each decade, of its wealth. This balance-sheet would include government assets such as roads and parks as well as private wealth. Intangible capital—skills, brands, designs, scientific ideas and online networks—would all be valued. The ledger should also account for the depletion of capital: the wear-and-tear of machinery, the deterioration of roads and public spaces, and damage to the environment.

Building these benchmarks will demand a revolution in national statistical agencies as bold as the one that created GDP in the first place. Even then, since so much of what people value is a matter of judgment, no reckoning can be perfect. But the current measurement of prosperity is riddled with errors and omissions. Better to embrace a new approach than to ignore the progress that pervades modern life.’

 

3 comments

  1. I am a development Greenhorn student and am in a ‘debate’ with my lecturers whether a report focusing on ‘Improving educational outcomes for African Americans in rural Texas’ is relevant for a module which normally focuses on Middle or Low income countries.

    I want to write a report based on a County with high rates of poverty; the local GDI is reported as approx $22K a year and over 70% of kids in the district are classed as ‘economically disadvantaged’, 50% of African Americans fail state exams and drop out rate is high. Gini for the county is app 5.4 and there is high unemployment, half the downtown commercial area is derelict, there is no public transport and crime rates match city levels. Downtown commerce is stagnant and/or decaying with vast proportion of shops boarded up.

    My proposal to generate interventions to support and improve the educational experience for African Americans has been denied. My take as an concerned educator is that if systems fail, wherever they are, and children suffer then the problem warrants attention, especially if the only argument is based on the GDP index.

    Having lived here for several years now the reality of life seems totally out of sync with the GDP ranking and have some questions.

    Why is national debt not an indicator within economic measurement?
    I have been told it is very complicated but have gathered that international loans are required to generate growth, but if the debt is so large it can never be repaid (again could be misconception I have about the U.S) then isn’t the whole economy/perception of wealth like a fantasy?

    Is a measure of individual debt from credit cards and private loans included in consumption?
    People do consume a lot here (which I understand is measured) but for so many here it is all done with credit and private loans from dodgy looking businesses set up in disused gas stations.

    Is measurement reported via the government or independent organizations? And is there a possibility of changing the approach?
    I have seen documentaries that say data is cleverly skewed here to hide actual levels of unemployment, a stagnating economy, and negative growth in real wages. With no sense in making a crises public how can the system be made more transparent/public for the masses?

    Would it be relevant to measure data on numbers of drug addicts and school drop-outs, rates of diabetes/obesity (Diseases related to over-consumption/poor education)?
    I am sure there are reasons but it seems social issues, which are really bringing depressed places down are ‘buried/ignored/irrelevant to the people discussing statistics? A report on NPR recently put the number of ‘registered’ addicts at 17 million, surely this has a negative impact on the economy and gives a huge indication on the well being/mental health of a country.

    If anyone has the time to do GDP for dummies, I would be very grateful?

    1. I recommend Cobb et al’s article, “If the GDP is Up, Why is America Down?” It gives a clear historical and conceptual account of GDP, and an introduction to their GDI. It might be worth finding more detail on the GDI, or even Daly’s ISEW to help understand the meaning of these things. Given your thoughtfulness, you might also appreciate Ethan Miller’s work, such as “Occupy! Connect! Create” in which he does semantic analysis of “Economics” in applying the concept of “Livelihood.”
      In the Cobb et al article, you’ll certainly get a clear idea of how the number of addicts certainly is part of an economic mainstream that structures its values in ways that became anti-social probably shortly after WWII. When all kinds of destructive expenditures are viewed positively, and profit- and S/h maximization were the priority, how could people in communities prioritize human-scale values?
      In addition, some study of the co-operative business model, and Danish, German, and Emiglia Romana Italy jurisdictions will probably provide some illumination. The rise of renewable energy in Denmark occurred in a society where a national poet Nikolai Grundtvig helped set a national educational culture, perhaps not to differently from John Dewey in the US. Then, anti-nuke protests in the 1970s sparked artisan mechanics to reinvent wind turbines, and a few steps later, to numerous groups of Danes founding wind co-ops. In the 1980s, those co-ops helped lead wind development there, until it inspired many Germans with a little fright power from Chernobyl. German citizens have pursued a number of different kinds of RE co-ops. The model has also been taken up around Europe and in the US.
      Paul Gipe has written on the subject on-line, and I’ve got my masters thesis if you’re interested.
      That gets me to the Co-operative Economics perspectives by the likes of Gar Alperovitz, David Ellerman (see William Greider’s The Soul of Capitalism for a fine non-specialist’s treatment), Jaroslav Vanek, and Anna Milford, and the Ecological Economics of Herman Daly. Send me an email, if you like, at mrmtaichi@ecologyfund.net

Leave a comment

Translate »