Don’t worry (about GDP), be happy: We need a better way to measure well-being
GDP can’t measure this.
When we talk about economic progress we almost always focus on the expansion of gross domestic product (GDP) — the market value of all goods and services produced within a country. However, a number of studies have found that faster production growth does not necessarily translate into increased well-being.
A number of prominent economists, along with the small Asian kingdom of Bhutan, are advocating that we look beyond traditional economic indicators and start measuring happiness. In the wake of the devastating global financial crisis, which revealed that the developed world’s GDP growth during the past twenty years was driven by cheap credit rather than an improvement in quality of life, it is time to take another look at how we are measuring economic progress.
“Development cannot go against happiness,” the President of Uruguay Jose Mujica said during a speech at the Rio+20 conference last week. “It must be in favor of love, of preserving the earth. It must (facilitate) human relationships, taking care of children, and having friends.”
If economic development doesn’t make us happy, what’s the point? Money is important especially for the poor but a number of recent studies have shown that once you reach middle income status the link between higher income and happiness is broken. There are a number of other things that affect our well-being.
GDP — which equals the sum of private consumption, investment, government spending and trade (exports minus imports) — clearly misses some key aspects of what makes us happy and prosperous. We can extract and export all the oil or minerals that we want and it will surely boost our GDP but it will have little positive impact on our well-being.
The Nobel Prize winning economist Joseph Stiglitz also points out that GDP fails to reflect quality improvements and can reward inefficiency. For example, GDP is boosted by producing more cars but not more efficient cars. GDP grows if your government increases spending, even if this spending is wasteful.
Economist Jeffrey Sachs believes that the focus on GDP growth is leading to increased consumerism and environmental damage. Most governments are judged by GDP performance and in turn they promote consumption and natural resource extraction—two big drivers of GDP growth.
There are a few alternative measures already in use. Bhutan tracks its “Gross National Happiness”, or GNH, in order to build an economy that is more closely aligned with its Buddhist principles. Sachs and Columbia University’s Earth Institute recently launched a “World Happiness Report” at the United Nations. The New Economic Foundation (NEF), a British think tank, produces the Happy Planet Index (HPI) which measures “the extent to which countries deliver long, happy, sustainable lives for the people that live in them.” It uses data on life expectancy, experienced well-being and ecological footprint.
When you look at Latin America’s GDP per capita most countries rank somewhere in the middle, not the richest but not the poorest. However, the region excels in the happiness rankings. According to the HPI, Costa Rica ranks number one, followed by Vietnam and Colombia. There are seven Latin American countries in the top ten. Overall middle income countries in Latin America and Asia are much happier than the United States (which ranks 105th) and Western Europe, despite having much lower GDP levels.
The HPI is too simplistic to become a standard measure. It misses some important factors like crime, violence and inequality (I am not sure if all of Central America deserves to be in the top ten). But the various happiness measures that exist make the point that increased economic output does not always translate into increased well-being.
We need to look more closely at the things that make us happy like trust, social networks, a clean environment and adequate work, health and housing. GDP is an inadequate measure and may be focusing our attention in the wrong areas. It’s time we focused our statisticians’ attention on the pursuit of happiness.