Johan Fourie's blog

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Measuring progress

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GDP is perhaps the most popular and influential measure in Economics. Everyone from presidents to plebs use it to show that ‘the economy’ is ‘doing well’, ‘recovering’, ‘accelerating’, and what we economists consult to identify a country’s ‘growth’, ‘development’, ‘progress’. It’s universally accepted (at least by economists) that higher economic growth is good for a country, and for an obvious reason: those countries that have experienced high growth rates have managed to achieve goals that are universally accepted as good: reducing poverty, and increasing the living standards of people. In short, a higher GDP (per capita) is an excellent indication that people are better-off than before.

But GDP is not panoptic. It measures the Gross Domestic Product, meaning the total value of all goods and services produced within the borders of a country for a year. Thus the more stuff we produce, the higher the GDP. Divide all that stuff by the number of people that live in a country, and you get GDP per capita. Each person in the Central African Republic, for example, ‘produced’ $272 in 2012. Compare that to Norway, a country with about the same number of people and rich in resources, where each person ‘produced’ $99558, more than 200 times more. Or think of it this way, for each yearly salary of a Norwegian, an inhabitant of CAR had to work 210 years to earn an equivalent income. (Numbers from the World Bank.)

Yet is this average Norwegian 210 times ‘better-off’ than the average CAR citizen? This of course depends on what you mean by ‘better-off’. Economists have developed a fuzzy concept called utility to address this concept of what best can be described as a combination of satisfaction and happiness. But there is no standard measure of ‘utility’. The United Nations have developed the Human Development Index which not only considers income (GDP) but also other standards of living, including education, health and inequality. The correlation to GDP remains high, as is indicated by our example: Norway is not only the second most affluent country on earth (after Luxembourg) but also receives the highest score on the UN HDI. In short, if you could choose your place of birth, you should choose Norway. The CAR, however, ranks 180th of 187 countries. A more recent measure, the Happy Planet Index, aims to include ‘sustainability’ as a criterion; sustainability is here measured as the ecological footprint. Here, Norway is ranked 29th and CAR 137th. The correlation between GDP, then, and other measures of living standards seems high, which is the reason for its popularity. 


It helps to note, however, that GDP hasn’t always been pervasive. I listened to Dan Hirschman present a paper ‘Inventing the economy’ in Chicago last week. Hirschman, a PhD candidate in Sociology at Michigan, noted that the concept of national income did not exist before the 1930s, when the need arose to measure the impact of the Great Depression. While earlier economists, notably Smith, had written about the ‘wealth of nations’ implying the capacity of a country to produce output, the technical challenge of measuring such production (of goods and services) was not overcome before the middle of the twentieth century. The measurement of GDP as we know it today was only standardised in the 1940s, and many African countries only adopted it after independence in the 1960s. (See Google’s Ngram viewer above of the phrase ‘Gross Domestic Product’ appearing in English-language books. It’s really only the 1950s that the phrase is popularised.) This also explains why using historical data series of GDP are fraught with difficulties. Morten Jerven has shown the inconsistencies between data banks in earlier GDP estimates for twentieth-century African countries: compare, for example, the CAR 1960 GDP estimates in the Penn World Tables, the IMF statistics and Angus Maddison’s historical estimates.

Yet while Jerven’s point has important implications for scholars who use historical data series in regression analyses, for example, we should be careful to equate the past with the present. Most African countries have significantly improved their capacity in collecting and analysing data. Hirschman, in his presentation, referred to Jerven’s work and mentioned that several African countries’ GDP data is still poor. I would be hesitant to jump to this conclusion, mostly because GDP estimates are subject to all sorts of political influence and biases, even in the developed world, which means that the ‘accuracy’ of these estimates is not ‘good’ or ‘bad’ but rather somewhere along a continuum with many dimensions. Caution, also, because such pronouncements suggests a whiff of first-world arrogance.

The trouble with measuring GDP in Africa and elsewhere today is that the nature of economies are changing rapidly. The issue of whether to include, for example, housework, has always plagued economists. (As Hirschman noted in his talk, Norway, for example, did include it for several years before the standardisation of national income statistics where it was excluded.) But because of the continued technological changes – and the movement to digital production and cross-border trade-in-services – what qualifies for ‘value-added’ is not always clear. (Take the 3D printer: if I print my own toys at home, would this be added to GDP? It should, but who cares about toys, right? Well, what if I print my own house?)

That is why I’m so excited to read Diane Coyle’s new book, GDP: A Brief but Affectionate History. She promises to explain how and why the difference between current estimates of GDP and what we hope to measure – living standards, utility, welfare – might be growing. Perhaps it’s time for a new measure?

Don’t bet against GDP though. It’s popular because it tracks, crudely and inadequately but ultimately helpfully, how we’ve progressed over the last 200 years. And economic historians are continually expanding our understanding of the economic past; my own work with Jan Luiten van Zanden has attempted to measure South Africa’s GDP since 1700. Others have begun work on even earlier periods in Europe.

How we measure economic progress is important. It tells us about the progress countries have made, and allows us to compare, fairly accurately, differences in income between peoples, both between and within countries. Gross Domestic Product, to misquote Winston Churchill on democracy, is perhaps the worst way to measure progress, except for all those other ways that have been tried from time to time.

Written by Johan Fourie

November 29, 2013 at 10:32

2 Responses

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  1. Dear Johan,

    Thanks for the plug! I wanted to offer a couple quick points of clarification, that I almost surely garbled in the talk and Q&A.

    1. The idea of national income has been around since the 17th century. But it was rarely calculated and rarely used, and not available for policymaking in a timely fashion (e.g. within a year or two) until the 1930s.

    2. The routine production of official national income statistics takes off in the 1930s. Standardization – at least in principle if not in the nitty gritty details – on the global level starts in the 1940s and continues to present, to varying (and mostly high) degrees. The idea of putting together national income statistics into accounts is also basically new to the 1930s. As is calling national income an indicator of “the size of the economy.” In the US, the Depression is a big impetus. In the UK, it takes WWII. For much of the rest of the world, it’s planning in the post-war period (and/or simply following the new global norm, as organizations like the UN and World Bank come to expect such data, and offer aid for producing it). Also, interestingly, it’s GNP and not GDP that takes center stage for the first few decades (although the difference between the two is quite small conceptually compared to some of the big debates that happened before GNP was standardized, e.g. the housework debate).

    3. The standards are written in such a way as to require a lot of data, some of which doesn’t exist for the past or for many poorer countries in the recent present. While there are all kinds of issues with GDP data in rich countries, in general, many more transactions take place in ways that generate data that can be captured by national income accountants. Politicization may well be an issue – though I haven’t seen much evidence of that in the US at least. (For example, the technocrats at the BEA (and its precursor agencies) fought very hard to keep welfare measurement out of the GDP because they feared it would lead to overt politicization, for example. And there have been, to my knowledge, very few scandals or even accusations of bias (less so than with inflation measurement, for example).) But, as Jerven documents very ably, there are some serious issues in many African national income statistics, especially involving the assumptions used to project data many years after an existing base year for which good data are available. Hence why it was possible for Ghana’s GDP to jump 60%. And he expects similar jumps from other countries with outdated base years.

    Dan Hirschman

    November 29, 2013 at 20:22

    • Thanks for the clarification, Dan. Was an excellent talk, by the way. All the best for what must be the final stages of the PhD.

      Johan Fourie

      December 1, 2013 at 07:28

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