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Growth indicator controversy

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by Njowepo, Oct 1, 2011.

  1. Njowepo

    Njowepo JF-Expert Member

    Oct 1, 2011
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    [h=2]Growth indicator controversy[/h]Per capita GrossDomestic Product (GDP per head) is used by many developmental economists as anapproximation of general national well-being. However, these measures arecriticized as not measuring economic growth well enough, especially incountries where there is much economic activity that is not part of measuredfinancial transactions (such as housekeeping and self-homebuilding), or wherefunding is not availablefor accurate measurements to be made publicly availablefor other economists to use in their studies (including private andinstitutional fraud, in some countries).
    Even thoughper-capita GDP as measured can make economic well-being appear smaller than itreally is in some developing countries, the discrepancy could be still biggerin a developed country where people may perform outside of financialtransactions an even higher-value service than housekeeping or homebuilding asgifts or in their own households, such as counseling, lifestylecoaching , a more valuable home décor service, and time management. Even free choicecan be considered to add value to lifestyles without necessarily increasing thefinancial transaction amounts.
    More recent theoriesof Human Development have begun to see beyond purely financial measures ofdevelopment, for example with measures such as medical care available,education, equality, and political freedom. One measure used is the Genuine Progress Indicator, which relates strongly to theoriesof distributivejustice. Actual knowledge about what creates growth is largely unproven; howeverrecent advances in econometricsand more accurate measurementsin many countries is creating new knowledge by compensating for the effects ofvariables to determine probable causes out of merely correlational statistics.

    Genuine progress indicator
    From Wikipedia, thefree encyclopedia

    The genuine progress indicator (GPI) is analternative metric system which is an addition to the national system ofaccounts that has been suggested to replace, or supplement, gross domesticproduct (GDP) as a metric of economic growth. The GPI is used in greeneconomics, sustainability and more inclusive types of economics commonly knownas "welfare" economics.[citation needed]

    GPI is an attempt tomeasure whether a country's growth, increased production of goods, andexpanding services have actually resulted in the improvement of the welfare (orwell-being) of the people in the country. GPI advocates claim that it can morereliably measure economic progress, as it distinguishes between worthwhilegrowth and uneconomic growth.

    The GDP vs the GPI isanalogous to the difference between the gross profit of a company and the netprofit; the Net Profit is the Gross Profit minus the costs incurred.Accordingly, the GPI will be zero if the financial costs of crime and pollutionequal the financial gains in production of goods and services, all otherfactors being constant.

    2 Theoretical foundation 2.1"Income" vs. "capital depletion"

    3 Applying thegenuine progress indicator to legislative decisions
    4 Criticism
    5 Supporting countries and groups
    6 See also
    7 References
    8 Further reading 8.1 News articles
    8.2 Scientific articles and books

    9 External links


    Most economistsassess the progress in welfare of the people by comparing the gross domesticproduct over time, that is, by adding up the annual dollar value of all goodsand services produced within a country over successive years. However, GDP wasnever intended to be used for such purpose. It is prone to productivism orconsumerism, over-valuing production and consumption of goods, and notreflecting improvement in human well-being. It also fails to distinguishbetween money spent for new production and money spent to repair negativeoutcomes from previous expenditure. For example, one million dollars spent tobuild new homes may be an indication of progress but one million dollars spentin aid relief to those whose homes have been destroyed is not the same kind ofprogress. This becomes important especially when considering the true costs ofdevelopment that destroys wetlands and hence exacerbate flood damages. SimonKuznets, the inventor of the concept of the GDP, notes in his very first reportto the US Congress in 1934:

    ...the welfare of anation [can] scarcely be inferred from a measure of national income...

    An adequate measuremust also take into account ecological yield and the ability of nature toprovide services. These things are part of a more inclusive ideal of progress,which transcends the traditional focus on raw industrial production.


    The need for a GPI tosupplement biased indicators such as GDP was highlighted by analyses ofuneconomic growth in the 1980s notably that of Marilyn Waring who studiedbiases in the UN System of National Accounts.

    By the early 1990s therewas a consensus in human development theory and ecological economics thatgrowth in money supply was actually reflective of a loss of well-being: thatlacks of essential natural and social services were being paid for in cash andthat this was expanding the economy but degrading life.

    The matter remainscontroversial and is a main issue between advocates of green economics andneo-classical economics. Neoclassical economists understand the limitations ofGDP for measuring human wellbeing but nevertheless regard GDP as an important,though imperfect measure of economic output and would be wary of too close anidentification of GDP growth with aggregate human welfare. However GDP tends tobe reported as synonymous with economic progress by journalists and politiciansand the GPI seeks to correct this shorthand by providing a more encompassingmeasure.

    Some economists,notably Herman Daly, John B. Cobb[1] and Philip Lawn[2] have asserted that acountry's growth, increased goods production, and expanding services have both"costs" and "benefits"--not just the "benefits"that contribute to GDP. They assert that, in some situations, expandedproduction facilities damage the health, culture, and welfare of people. Growththat was in excess of sustainable norms (e.g. of ecological yield) had to beconsidered to be uneconomic. According to the "threshold hypothesis",developed by Manfred Max-Neef, the notion that when macroeconomic systemsexpand beyond a certain size, the additional benefits of growth are exceeded bythe attendant costs. (Max-Neef 1995.)

    According to Lawn's model, the"costs" of economic activity include the following potential harmfuleffects:[3]
    a) Cost ofresource depletion
    b) Cost of crime
    c) Cost of ozonedepletion
    d) Cost offamily breakdown
    e) Cost of air,water, and noise pollution
    f) Loss offarmland
    g) Loss ofwetlands

    Analysis by RobertCostanza also around 1995 of nature's services and their value showed that agreat deal of degradation of nature's ability to clear waste, prevent erosion,pollinate crops, etc., was being done in the name of monetary profitopportunity: this was adding to GDP but causing a great deal of long term riskin the form of mudslides, reduced yields, lost species, water pollution, etc.Such effects have been very marked in areas that suffered seriousdeforestation, notably Haiti,Indonesia, and some coastalmangrove regions of Indiaand South America. Some of the worst landabuses for instance have been shrimp farming operations that destroyedmangroves, evicted families, left coastal lands salted and useless foragriculture, but generated a significant cash profit for those who were able tocontrol the export market in shrimp: this has become a signal example to thosewho contest the idea that GDP growth is necessarily desirable.

    GPI takes account ofthese problems by incorporating sustainability: whether a country's economicactivity over a year has left the country with a better or worse futurepossibility of repeating at least the same level of economic activity in thelong run. For example, agricultural activity that uses replenishing waterresources, such as river runoff, will score a higher GPI than the same level ofagricultural activity that drastically lowers the water table by pumpingirrigation water from wells.

    "Income" vs. "capitaldepletion"

    Hicks (1946) pointedout that the practical purpose of calculating income is to indicate the maximumamount people can produce and consume without undermining their capacity toproduce and consume the same amount in the future. From a national income perspective,it is necessary to answer the following question: ‘‘Can a nation’s entire GDPbe consumed without undermining its ability to produce and consume the same GDPin the future?’’ This question is however largely ignored in contemporaryeconomics, but fits under the idea of sustainability.

    Applying the genuineprogress indicator to legislative decisions

    The best knownattempts to apply the concepts of GPI to legislative decisions are probably theGPI Atlantic indicator pioneered by Ronald Colman for Atlantic Canada, theAlberta GPI pioneered by ecological economist Mark Anielski to measure thelong-term economic, social and environmental sustainability of the province ofAlberta and the environmental and sustainable development indicators used bythe Government of Canada to measure its own progress to achieving well-beinggoals: its Environment and Sustainable Development Indicators Initiative(Canada) is a substantial effort to justify state services in GPI terms. Itassigns the Commissioner for the Environment and Sustainable Development (Canada), an officer in the Auditor-General of Canada'soffice, to perform the analysis and report to the House of Commons. However, Canadacontinues to state its overall budgetary targets in terms of reducing its debtto GDP ratio, which implies that GDP increase and debt reduction in somecombination are its main priorities.

    In the EU theMetropole efforts and the London Health Observatory methods are equivalentsfocused mostly on urban lifestyle.

    The EU and Canadianefforts are among the most advanced in any of the G8 or OECD nations, but thereare parallel efforts to measure quality of life or standard of living in health(not strictly wealth) terms in all developed nations. This has also been arecent focus of the labour movement.


    GDP is a valueneutral measure according to its proponents and expresses what we do, not whatwe should do. This is compatible with the fact that different people havedifferent preferences and different opinions on what is well-being. Competingmeasures like GPI define well-being to mean things that the definersideologically support. Therefore, they cannot function as the goals of a pluralsociety. Moreover, they are more vulnerable to political manipulation.[4]

    This article maycontain parts that are misleading. Please help clarify this article accordingto any suggestions provided on the talk page.

    Finnish economistsMika Maliranta and Niku Määttänen write that the problem of alternativedevelopment indexes is their attempt to combine things that areincommensurable. It is hard to say what they exactly indicate and difficult tomake decisions based on them. They can be compared to an indicator that showsthe mean of a car's velocity and the amount of fuel left.

    They add that itindeed seems as if the economy has to grow in order for the people to evenremain as happy as they are at present. In Japan,for example, the degree of happiness expressed by the citizens in polls hasbeen declining since the early 1990s, the period when Japan'seconomic growth stagnated.[5]

    Supporting countriesand groups
    Canada planning applications. GDPhas functioned as an "income sheet". GPI will function as a"balance sheet," taking into consideration that some income sourcesare very costly and contribute a negative profit overall.
    Redefining Progress. Reports and analyses. Anon-profit organization with headquarters in Oakland, California.See also: Publications of Redefining Progress
    From Wikipedia, thefree encyclopedia