Institute For The Future

Quantifying well-being for measuring progress

As a statistician who taught international development in grad school, I am really interested in looking at different measures of economic development of nations. I am especially intrigued by the different yearly rankings from the World Bank of nations on different economic indicators like the Gross National Income (GNI) previously known as the Gross National Product or value of goods and services produced by residents of the country (some of which originates outside the country), GNI per capita, Gross Domestic Product (GDP) or value of goods and services produced within a country, GDP-per capita, GDP-PPP (GDP along with purchasing power parity that factors the purchasing power of local currency).

 

While different nations come on top on each of these indicators, what each indicator has in common is that they were measuring economic production or market value of goods and services. Each one of them tells you how much goods and services are being produced in the country and globally, but they come short when it comes to informing about what is happening at the household level: Are people living longer? Is the standard of living rising and falling? Do children have access to education?

 

Many economists have argued over the year that all these popular measures are internally fraught because they measure only market production, and give no inkling about the well-being of people: well-being measured through indicators like disposable income, income distribution, life expectancy, political freedom and access to education.

 

It was following these criticisms that the United Nations Development Program (UNDP) came up with up the Human Development Index (HDI) a composite measure that measures social development along with economic development. HDI comprises of three measures: GDP-PPP, life expectancy and access of education (adult literacy rate plus enrollment levels at primary, secondary and tertiary level). There is also the Gross National Happiness index that measures quality of life.

 

Following the Great Recession, we are seeing attempts to develop new measures of economic development/well-being. Famous economist Joseph Stiglitz and Nobel laureate Amartya Sen authored a report on the Measurement of Economic Performance and Social Progress last year. What is different about the measure proposed by Stiglitz and Sen is that unlike in the past it attempts to quantify sustainability and include it as a measure of well-being. I just finished reading the report myself since we have been thinking about well-being at the Institute. The report supports a shift from production to well-being “shift emphasis from measuring economic production to measuring people’s well-being. And measures of well-being should be put in the context of sustainability.”

 

In the report Sitglitz and Sen make several recommendations about creating a new composite for measuring well-being. Here are some of them that resonated with me:

 

1. Emphasize the household perspective: GDP is a good measure of national economic activity, but “citizens’ material living standards are better followed through measures of household consumption and income.” While GDP is a great snapshot of a nation’s economic activity it does not shed any light on the economic situation of individuals. Looking at the last one year we know that the economy can recover without any real economic gains to individuals and households. The US economy grew substantially in the last quarter, but wages fell, unemployment remains at a record level, and households savings and net worth have been eroded with falling home prices and the retirement accounts.

2. Include Quality of life indicators to measure well-being. The authors identified eight dimensions of well-being: (a) material living standards (b) health (c) education (d) personal activities including work (e) political violence and governance (f) social connections and relationships (g) environment—present and future conditions (h) insecurity of an economic as well as a physical nature.

3. Use a pragmatic approach towards measuring sustainability – create a well-defined dashboard of indicators for measuring essentially economic aspects of sustainability. This should also include an" indicator of proximity to dangerous levels of environmental damage (such as associated with climate change or the depletion of fishing stocks)."

 

While this is a good start for creating a new index for measuring well-being in a more holistic manner, it still needs to be seen whether governments and economic entities alike will embrace it. The biggest problem is that such a measure might run corollary to current principles of economic growth through rise in GDP. It is possible that growth in GDP might bring down well-being of citizens.