What GDP doesn't tell

At a time when India is tracking gross domestic product (GDP) growth and all that can influence it even minutely with near-compulsive obsession, French President Nicolas Sarkozy has asked world leaders to junk the fascination for the indicator. In a speech on the first anniversary of the collapse of Lehman Brothers, he invited them to join a “revolution” in the measurement of economic progress to account for factors such as healthcare availability and leisure time.

He also released a report by two Nobel Prize-winning economists — Joseph Stiglitz and Amartya Sen — that recommends looking at household income, consumption and wealth rather than national production for a better reflection of material living standards. Sarkozy’s comment and the report has brought back focus on the long-held view that GDP can’t measure economic welfare.

The Stiglitz-Sen report has compiled all previous works in the field. The report, for instance, quotes a study by Professor Richard Easterlin to suggest that in spite of a 30 per cent increase in the American GDP per head between 1972 and 1993, the share of individuals who were “very happy” did not increase. Economists call this lack of correlation the Easterlin paradox.

Instead of GDP, a better measure of welfare, observe Stiglitz and Sen, is household consumption. In 1989, Herman Daly and John B. Cobb fine-tuned this concept, proposing the index of sustainable welfare (ISEW). Unlike GDP, which simply adds together all expenditures, ISEW balances consumer expenditure by such factors as income distribution and cost associated with pollution and other unsustainable costs.

France, the leisure vacationer’s paradise, has all the reasons to take the lead in shifting to such a measure for economic welfare. As does India with its vast force of home makers-cum-managers, whose contribution to economic welfare GDP overlooks.