GDP does not reflect standard of living fully

Straits Times Forum 23 Jul 10;

I REFER to Nominated MP Viswa Sadasivan's speech in Parliament, reported on Wednesday ('Look beyond GDP for true measure of welfare'), where he called on the Government to track indicators beyond Gross Domestic Product (GDP).

Measuring GDP is important as it provides knowledge of the amount of goods and services produced by our economy.

However, its shortcomings as a measure of standard of living have been well documented, most notably by Nobel Prize economics laureate Joseph Stiglitz.

GDP puts no value on leisure. Therefore, a society that works longer hours will have a higher GDP, but it may not score in human measurements like education and health.

It does not capture the work done in the non-paid sector. This includes volunteer work, parenting and household chores, all of which are essential for the well-being of a functioning and gracious society.

It is also a measurement that ignores the impact of productive activities on the environment. This is because negative effects are not taken into account in the calculation of increased utility.

An extreme and perverse example is the recent BP oil spill in the Gulf of Mexico. A disaster like that would actually increase GDP, because to clean up the spill, jobs are created, while measures to mitigate the harm also boost GDP.

There have been attempts to develop credible alternatives to GDP. Examples include the United Nations Human Development Index, which combines GDP with health and education measurements, and the Happy Planet Index, which combines life expectancy, life satisfaction and how environmentally sustainable a country's economic activity is.

Nonetheless, many of these measurements are often dismissed by governments, and it may take some time before measurements like Bhutan's Gross National Happiness gain credibility.

In the meantime, a simple step towards looking beyond GDP is simply to recognise that it was never designed to be an indicator of an economy's welfare; it was simply intended to measure the economy.

Seah Su Chen (Ms)