GPI part two

Here’s the second installment of my article on the GPI. Part One is here.

I

Last week I argued that, as well intentioned as it might be, the Australia Institute’s Genuine Progress Indicator (GPI) for Australia was systematically biased towards pessimism about our economic welfare. I showed in detail in two areas how the cost of transport and industrial accidents appears to be steadily falling and yet this good news is effectively masked in the GPI accounting.

Whether it was the full explanation was unclear, but double counting population growth in the process of indexing costs certainly helped the GPI calculations to eliminate any clear trend from a base series of transport deaths which fell in absolute terms by nearly 60% from 1970 to 2003 and as a death rate of the population by nearly three quarters. Likewise the steadily falling rate and absolute number of industrial accidents was transformed into a series that rose steadily with GDP.

Though many of the subtractions to GDP seem commonsensical enough even if one takes issue with the methodology, so too one would have expected some obvious additions to the GPI if we are to balance the ledger to drag the GDP numbers closer to our aspirations and our experienced prosperity.

Indeed the United Nations Development Programme’s Human Development Index (HDI) adopted at around the time the GPI was being developed, was a similar response to the inadequacies of GDP though its use was focused on measuring welfare in developing countries whilst the GPI was focused on developed countries. The HDI brings two considerations centre stage alongside GDP life expectancy and educational attainment.

Like all those columns added to the GDP to make up the GPI, these two things are ‘invisible’ to GDP. But had they been counted in the GPI it would look much less gloomy. Life expectancy has continued to lengthen since 1950 when the GPI series begins and educational attainment grew sharply during just that period that we are told GPI begins lagging GDP growth.

Both points are not just ones of values (most of us value longer life and education). They’re also about economics. Longer living more educated citizens are more productive. That’s why they call education ‘human capital’.

Life expectations.jpg
infant mortality.jpg

In an earlier paper on the development of the GPI, its principal architect in Australia discussed the importance of including capital items in the measure. Indeed the idea that we are running down our natural capital dominates the philosophy and the numbers of the GPI.

He did however concede that “human capital, a potentially major factor in the sustainability of income levels, has been excluded from the index for methodological and data reasons. . . . In order to measure [the increasing] value [of human capital over the period] we would need to define human capital in a way that reflects its contribution to future well-being. This is no easy task. . . . If we included some part of education and health spending as investments in human capital then the effect would be to shift the GPI curve upwards by a small amount (Hamilton, 1997, p.6)”

ABS work suggests the amount is far from small. ABS experimental estimates released in 2004 had Australia ‘s stock of human capital valued at $5.6 trillion in 2001, a real increase of 75% over the foregoing twenty years (ABS, 2006, p, 46). Although this is a measure of stock rather than the annual increment to Australian human capital, ‘back of the envelope’ calculations will show that allowing for human capital would dwarf the costs imposed by the negative columns in the GPI.

In 1999 it was reported that human capital was “an area of future work”. I have been   told that substantial work was done in 2005.   Whether it contained work on human capital I cannot say. In any event the 2005 work appears to have been put on hold and has not yet seen the light of day. The work regarding human capital still seems to be something for the future.

retention rates.gif
retention rates 2.gif

II

The GPI is so concerned about the depletion of economic capital from our oil and gas wells that it deducts an implausible $65 billion in 2000. That’s 13 per cent of GDP or over a quarter of the ‘weighted personal consumption’ figure from which the GPI is built! This from a think tank that argues (rightly in my view) that strong measures to tackle global warming would not be hugely expensive.

And here’s something more to think about in the same vein.

If we’re stealing oil and gas from the next generation will we give anything back in return? From an economic perspective the answer is an emphatic ‘yes’. For each generation bequeaths to its successors economic riches which are vast in comparison to the resources they run down. Our main bequest to the next generation is of a truly inexhaustible resource our know-how, patents, software, blueprints, Woody Allen movies, the Simpsons and Kath (not to mention Kim).

Of course this is not to minimise our problems. It is not to say that more wealth is worth even one extinct species let alone the risk to which we are putting the glories of the Great Barrier Reef. One might still take the view that today’s crowded, pressured, commercialised and spin-doctored-to-death world isn’t a patch on life as it was decades ago.

But in so far as we are trying to generate worthwhile measurements of economic wellbeing, correcting market valuations with almost exclusive attention to the negatives and almost none to the positive, seems like a dubious foundation for helping us think about measures to improve our economic, social and environmental lot.

III

Finally, I wonder if part of the problem is that the GPI is a tad inbred.

When I consulted the Wikipedia about the GPI the relevant entry said (until I put in my oar!) that neo-classical economists regard GDP as “a perfectly valid means of ”’measuring progress”’. Perhaps some of the worst do, but no decent economist, neoclassical or otherwise is unaware of GDP’s basic shortcomings as a measure of welfare.

At the moment the GPI exists in a netherworld. Its advocates and architects seem unable to decide whether the GPI should be built to make tendentious points of advocacy or whether, by aspiring to higher standards of rigour it might force itself into broader currency.

We will never get widespread agreement on some of its more contentious claims. There will always be people who’ll want to weight inequality as either more or less important than it the way it’s weighted in the GPI. But the GPI website already makes the right move here allowing different users to generate GPI with their own weightings.

If the GPI is to fulfill its potential it must operate as an agent of dialogue and growing consensus across a wider band of the political spectrum than it now does. I wonder what agreement might be possible between the left and the centre or even the those on the right of the political spectrum on the contents of a more general indicator of economic wellbeing than GDP.

I don’t know how far we’d get, but it would be fun trying. It might help us build a little more common ground across wider reaches of the political spectrum.

References

Australian Bureau of Statistics (ABS) 2006. “Measures of Australia’s Progress” Canberra, 31 May 2006 cat. 1370.0.

Hamilton, C (with contributions from Saddler H.) 1997. “The Genuine Progress Indicator: A new index of changes in well-being in Australia” Australia Institute, Discussion Paper 14. (pdf)
Hamilton, C and Dennis, R., 2000. “Tracking Well-being in Australia: The Genuine Progress Indicator 2000, Austrlia Institute, Discussion Paper Number 35, December. (pdf)
Thanks to Clive Hamilton, Richard Denniss and Ian Castles for helpful comments on earlier drafts. Mistakes of fact or interpretation that remain are those of the author.

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4 Responses to GPI part two

  1. Angharad says:

    I think the problem with any single indicator such as GDP or GPI is that it tries to be an indicator of everything. It’s too reductionist for me.

    We can have lots of fun arguing about what should be in it, or at least considered in thinking about wellbeing or progress or whatever, but the instrument itself is too flawed to be useful. So I favour something a bit more complex.

    Doesn’t make such a good headline though or provide such a good focus.

  2. Ian K says:

    I appreciate your efforts on this subject because you make some good points. I do have problems with assessing human capital, though.

    Are higher education retention rates necessarily good? It may reflect the government hiding youth unemployment. Alternatively it may be that cracking the employment market is more complicated. A VCR with more complicated instructions than its competitor may or may not be worth the effort. Equally, further education could prove enlightening or tend to drudgery.

    How do we assess intellectual property in general? Does it just continually accumulate in one big useful pile as you seem to imply or does some knowledge merely cancel out other knowledge, eg how to make a bomb versus how to disarm it? Does having a head crammed with modern pop culture make Shakespeare more or less accessible? Will all the knowledge poured into increasing the sophistication of the IC engine be seen in the future as deleterious in that it tended to delay the adoption of more climate-friendly technology?

  3. Thanks for your comments Ian. I symapthise with your points. In principle it would be nice to measure capital as well as income in a broad measure of economic wellbeing. However you run into lots of complications when you try, such as the ones you’ve pointed out. That’s one reason why those who built our national accounting standards left them out.

    So my point was not so much that all capital items should be captured in some summary measure. It was rather that the architects of the GPI claim that it’s important to take account of capital depletion but then ignore what is clearly a much greater capital accretion.

    Having tried to do a bit of measurement of the value of IP (pdf), I agree that your questions raise very difficult conceptual and measurement issues. But even a lower bound of IP accretion would add very substantially to a measurement of economic productive power.

  4. Pingback: Club Troppo » Children, human capital and economic growth

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