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PostPosted: Fri Nov 26, 2010 7:17 pm 

Joined: Sun Sep 12, 2010 2:49 pm
Posts: 596
Progress by any other measure


The "Genuine Progress Indicator" or GPI is a better balance sheet of the costs and benefits of grow than the GDP, says Dilip D'Souza.

March 2004 - Voltage stabilizers intrigue me. In India, and especially in rural or small-town India, these relatively expensive devices have been indispensible for years now. If you operate a refrigerator, a computer, a stereo system or other such electronic gadget, a stabilizer is like an insurance policy against damage. You'd be a fool not to use one.

So, given the huge market for knick-knacks you would want to protect with stabilizers, making them is a profitable enterprise. In fact, it's safe to say that the stabilizer business makes a steady contribution to the health of our economy.

Spare a thought, though, for why we need stabilizers in the first place: because of wild voltage fluctuations in the electricity that's supplied to us. Those happen because of inefficiencies in the generation and transmission of electricity. We are so used to these fluctuations now that we don't even think they are abnormal: we just buy stabilizers and put them to use like any other consumer product. In fact, they are just another consumer product.

We probably also don't think, as we buy stabilizers, that we are pumping up the GDP of the country, which we are. But if we did think of it, we might find a small perversity here. Since we tolerate inefficiency in one part of our economy -- the generation of electricity -- we need devices whose production and purchase shore up another part of our economy. A simplistic view? But this is essentially what is happening. A whole industry, for a wholly unnecessary product, has grown out of inefficiency. What's more, if our electricity supply ever becomes stable and reliable -- an aim certainly worth striving for -- that whole industry will become redundant.

Put another way, inefficiencies which actually cause severe losses lead to a boost in the GDP. If we correct those inefficiencies, we could end up damaging specific sectors in the economy. Look at your voltage stabilizer in that perverse light.

Now every political party is infatuated with the GDP. Asking for votes, they all promise "rapid" or "double-digit" yearly increases in the GDP, as if that is an unquestionably desirable thing. But such infatuation leaves unanswered this question: how is it that tolerating inefficiency is considered a positive influence on our economy?

The problem lurking here is the use of the GDP as an indicator of economic health. The Gross Domestic Product is just a measure of market activity: money changing hands. Every transaction of money adds to the GDP. With barely a question, this has become the indicator of the health of a nation. The greater the GDP, and especially the faster it grows, the better a country is said to be doing. No wonder our parties promise to raise it.

But think: should we not account for the kind of transactions made? Should there not be some totting up of the costs to the country of certain sorts of market activities?

Take the use of stabilizers, again. Let's say you buy a computer. Doing so, you add to the GDP. Some weeks later, the unstable electricity supply fries your shiny new Pentium (which once happened to me). You either repair it or buy a new one. Whichever, you add to the GDP. This time, you are a little more clever: you buy yourself a stabilizer as well. With that purchase, you add to the GDP again.

Instead of just one purchase, you have made at least three, all of which fed the greedy maw of GDP. You have contributed, three times over, to making India's economy a booming, vibrant one. Why, you may wonder, are you also three times as annoyed?

If something is hard to measure -- family life, open spaces, natural resources, pollution, the impact of fluctuating voltages -- it simply does not count in GDP calculations.
Take another, more insidious example. In Tamilnadu, there's a town that may be the hosiery capital of the world. Millions of pieces of underwear come out of Tirupur every year -- whatever you're wearing as you read this probably did so. Its hosiery factories are profitable successes, small jewels in India's economy.

But the rapid development of Tirupur has meant that its water sources are either hopelessly polluted by its factories or have dried up altogether, unable to keep up with the demand. For some years, Tirupur has trucked in water for its residents at a substantial cost. You guessed it: paying that cost adds to the GDP. Some day, someone will have to pay to clean up the pollution. You guessed it again: that transaction will also add to the GDP.

That is, Tirupur's pollution contributes to our GDP twice: once when its factories do the polluting, and once again when money must be spent to clean up. In some ways, Tirupur has robbed its future to pay for its present success. But even that theft is considered a gain for the economy.

The perverse nature of GDP is not just that it counts every transaction of money as a gain. It is also that it counts only transactions of money. It is also that it blithely ignores the environmental and social costs society will have to pay for depleting natural resources or ignoring social issues. Today, the more we use up India's natural resources, the more our GDP rises. There must be something wrong with a measure in which depleting your capital counts as current income, in which disaster is seen as gain.

But that's the GDP for you.

For so long has the GDP been so closely identified with a country's economic advance that people think of it as written in stone, a kind of standard. In reality, it is little more than a relic of an earlier era, when compulsions hardly relevant today drove its definition. The GDP is actually an avatar of the old Gross National Product, and both are strangely perverse measures. To understand why, consider the origins of the GNP.

In 1932, the US Commerce Department gave a young economist, Simon Kuznets, the task of devising a way to account for how well the economy was doing. It had no way to monitor the performance of the economy, a special hardship in those Depression years. It's not important here to spell out exactly what Kuznets came up with; enough to understand that he measured production and spending in the faltering economy of those years. Kuznets's work laid the foundation for what became the GNP and later the GDP.

Particularly during World War II, the GNP was the primary way the US kept track of its economy. As America pumped planes, tanks and guns out of its wartime factories, Kuznets' system helped locate and make use of unused production capabilities. This huge engine of production not only prepared a nation for war, it also brought it charging out from the Depression.

Significantly, this played a crucial, if little-known, role in winning the war. Lacking such an accounting system, Hitler had set himself far lower production targets. The US entry into the war meant that it would inexorably overwhelm German production and win the war.

This close identification of GNP with pure production, riding on victory in the war, set the course for economic policy for the next half-century. Because the war had been won, because US industrial output had been a major factor, and because the GNP measured that output, the craze for production became the peacetime model too. Production was a Good Thing. And while the military was the great wartime consumer, in peacetime it was ordinary citizens who consumed the products factories were churning out. Production was more than a Good Thing, it was Progress itself. Therefore the GNP, measuring production, measured progress too.

Nobody noticed at the time that Kuznets' system completely ignored social and environmental issues. In its single-minded devotion to industrial output, it also completely ignored other kinds of production.

This has had particularly harsh consequences for the developing world. Kuznets himself recognized the foolishness of the GNP when applied to poorer nations. There, significant production happens in the household economy, the voluntary sector -- all invisible to the GNP. If development aims to raise GNP, as it always has in these countries, it effectively marginalises the household economy. The results were clear in countries like India, Pakistan or Indonesia.

When the GNP mutated into the GDP in 1991, there was one subtle, insidious fallout. The earnings of a multinational company with plants in India, say, counted as part of the GNP of the country -- Germany, for example -- where it was owned. But under the rules of the GDP, they are counted towards the GDP of the country where the plants are located, even though the profits return to the MNC's home country. This peculiar little lie means that several desperate countries seem on paper to be booming. Meanwhile, richer countries walk away with resources of poorer ones, and this gets called a gain for the poor!

Many economists, aware of the shortcomings of the GDP, have put their minds to finding alternatives. But there is a block they must overcome, a simple principle they have lived with for years. In his famous text on Economics, Paul Samuelson puts it this way: "Economics focuses on concepts that can actually be measured."

That is, if something is hard to measure -- family life, open spaces, natural resources, pollution, the impact of fluctuating voltages -- it simply does not count in GDP calculations.

But just because we cannot always give a rupee value to some things, must we assume they have no value? (Think of this: Why does every new parent strive to spend time at home with her child? Surely not because such time spent has no value.) The challenge is to find a way to assign values to such things that are more real than zero, and take those values into account in a new measure of economic well-being. This would mean we start accounting for factors, positive and negative, which we all know are crucial to our national health, which each of us cares about every day, but which the GDP artfully sidesteps.

A research institute in California called Redefining Progress has proposed one such measure, called the "Genuine Progress Indicator" or GPI. The GPI starts with the same data the GDP is based on, but makes some changes. The result is not perfect, but it is a better balance sheet of the costs and benefits of growth.

Here, briefly, are just three of the factors the GPI accounts for.

There's crime. The GPI counts the money we spend deterring and punishing crime and repairing the damage it causes. So does the GDP, of course; but these sums, like others, inflate the GDP. The GPI acknowledges that this money is spent to reverse damage to society caused by crime; thus it accounts for these expenditures as losses, not gains.

There's the household economy. Taking care of our children, cleaning the house, cooking: tasks like these are vital to our well-being and that is why we do them every day. Yet if money does not change hands, the GDP does not account for them. The GPI does, valuing household work at the rate we would pay somebody to do it.

There's depletion of resources and the effects of pollution. As oil or minerals are used up, a country should treat this is as a cost, not a gain: just as families might if their bank accounts were diminishing. The GPI does just that. It also includes as costs the damage to our health and to agriculture from air and water pollution.

The GPI looks at more than twenty factors, like these three, that the GDP ignores. Put together, they form a far more realistic measure of how each of us views the state of our country, our lives, than the GDP does with its devotion to growth and production.

Applied to the American economy, the GPI is revealing indeed. While US per capita GDP has about tripled since 1950, the GPI trend is startlingly different. After increasing during the 1950s and 1960s, it declined to its mid-60s level by 1995, before rising again: but it is still at less than a third of per capita GDP. That may explain why so many Americans, through the rosy pronouncements about progress during the Reagan and Clinton years, feel more and more pessimistic about their lives. To that extent, the GPI is a closer match than the GDP to the conditions people live in every day.

But as its authors at RP themselves point out, the GPI is not necessarily the answer. They write: "Measurement is a means, not an end." What's more important than measurement is to get those who speak easily of boosting the GDP to tell us exactly what they mean. And if they cannot see or will not address the costs of "progress", they are only as blind as the GDP has been for years.

And that should tell us something. ⊕

Dilip D'Souza
March 2004

Dilip D'Souza writes regularly on the living conditions of India's donwtrodden people. He is a regular columnist with rediff.com. He is also the author of two books Branded by Law: Looking at India's Denotified Tribes [Penguin 2001], and more recently, The Narmada Dammed: An Inquiry into the Politics of Development. Redefining Progress may be reached at http://www.rprogress.org.

PostPosted: Fri Nov 26, 2010 7:22 pm 

Joined: Sun Sep 12, 2010 2:49 pm
Posts: 596
GDP planning: number crunching won't do


The budget reflects our continued affliction for numbers and the GDP growth rate. It also follows the Prime Minister's insistence that planners shoot for higher growth rates, especially on the back of an economy that has surprised everyone. But, asks Sudhirendar Sharma, will the juggling of numbers do it?

4 March 2006 - The budget is out and one thing it reflects is our continued affliction for numbers: the focus is on growth rate with the Finance Minister P Chidambaram saying 'I believe that growth is the antidote to poverty.' This also follows Prime Minister Manmohan Singh's insistence on a higher growth rate for the next Five Year Plan. The Planning Commission is working to get the approach paper for the country's 11th Five Year plan, beginning 2007, up on the table for getting a nod from the National Development Council. The paper is some weeks away.

The rampaging bull at the stock markets has complemented the growth rate by breaching the 9000 mark for the first time in history, and then, the 10000 mark. Going by news reports, $21 billion dollars were added to the $140 billion foreign exchange reserves in one year alone. According to the the Economic Survey released on 27 February, the GDP for 2005-06 has been 8.1 per cent and the country can expect to sustain a growth rate of 10 per cent per annum.

Inequality, income growth, GDP

Suppose there are only 2 people in the country - the first earns Rs.100 and the other nothing. So the total GDP is Rs.100.

Next year, suppose the first one saw her income increase to Rs.120. The other saw no growth. So the total GDP is Rs.120, with 20% growth.

Despite the impressive growth, only the wealthiest person in economy benefited, and the poorest saw no gain, yet the GDP growth number doesn't reflect that.

This simple example illustrates that unless inequality in India is falling, higher growth mathematically just means higher growth for the wealthiest people.

This problem was recognized by Montek Singh Alhuwalia (then at the World Bank). Alhuwalia's solution, the Ahluwalia-Chenery Welfare Index, was an alternative measure of income growth, one that gave equal weight to growth of all sections of society.
--Tarun Jain, Univ. of Virginia.

Indeed, the economy has surprised everyone, giving optimism for setting a challenging growth target. This euphoria of growth, of an India shining, was sure to take the planners and economists to a new high, not just the PM and the FM. The Prime Minister's reiteration of his expectations of growth while commenting on the budget speech on 28 February, and earlier, his asking the planners to juggle with numbers to set a 10 per cent GDP over the next five years, must be seen in this light.

But will juggling the numbers do it?

Underlying these figures is the familiar divide between India shining and Bharat in darkness, also seen in the Economic Survey. While the growth rate may have shown steady progress, food grain availability has declined to an all time low of 438 grams per day. The prices of essential foodgrains are going up -- wheat is up by 10.7 per cent, and pulses up by 19 per cent. Markets may have performed beyond expectations but the unemployment rate in rural and urban areas has reached an all time high of 9 and 9.3 per cent respectively. Earlier, unemployment increased to an unprecedented high of 7.2 per cent, the National Sample Survey had reported. The skewed development affects no less than two-thirds of the country's population, an estimated 72 crore people.

Agriculture, that contributes to one-fourth of country's GDP and has around 410 million people in total relying on it, continues to stagnate at 2 per cent. Low farm productivity and lack of investment in farming has led to the inevitable decline in growth from an impressive 3.8 per cent during the recent past. With over 17,000 farmers' suicides in the past few years, the future of 60 per cent of India's population remains uncertain.

The poor care less about impressive numbers like the growth rate of GDP. They care about whether jobs are available, how much those jobs pay and what the cost of living is! Even if farming sector with its dependant population were merely left to the mercy of monsoon risks, growing unemployment will continue to scare the growth curves.

Under current conditions, planners have a serious task at hand - of creating a growth model sans agriculture. And it isn't that farming reforms have not been pursued by governments. Farm sector reforms have been pursued thus far under an infrastructure development model: roads, irrigation networks, potable water and sanitation, and marketing infrastructure in rural areas. Much of the proposed Rs 24,000 crore towards Bharat Nirman is aimed at building infrastructure. But infrastructure is necessary, not sufficient. Infrastructure is needed, and not at the cost of other priorities like education, employment and health.

In addition, contract farming policies being pursued by states like Punjab, Rajasthan and Andhra Pradesh and the Land Lease Act 2005 of Chattisgarh clearly reflect the tilt towards corporatisation of agriculture. Apparently, contract farming policies are aimed at easing the debt burden on small and marginal farmers through leasing out of land to companies. While contract farming is luring farmers to lease out their small holdings (which doesn't sustain them anyway), evidence is showing that they migrate to shanties in urban areas. With productivity being low even in irrigated areas, farmers already have little option and the policy environment further encourages the migratory trend. Farmers' lands in the meanwhile are tilled by someone else.

But with the manufacturing sector driving growth, the task for our planners has been made easy. For once, Indian manufacturing has become lean, competitive and innovative. Not without reason, it has logged an impressive growth of 11.3 per cent. In its stunning performance from a low of 7.9 per cent last year, growth of manufacturing has helped gloss over weak farm sector performance.

Brewing discontent

Meanwhile, over past few months, the running debate about the US economy has drawn quite a few parallels to the Indian situation. Despite recent GDP growth, wages for most U.S. workers haven't kept up with inflation, and most Americans have good reason to feel unhappy about the economy. Similar to an upbeat Delhi, Washington too churns out its favourite growth statistics!

Yet, there are gross differences in two situations. While 11,000 people may have turned up to fill 400 jobs at a new Wal-Mart super store in Northern California recently, the fact that at a legal minimum, fully employed Americans paid at 5$ an hour get at least $40 dollars a day makes them distinct to most wage labour in India, who survive on less than a dollar a day (or 4-5$ dollars a day in purchasing power terms). Added to this is the fact that the increasing income inequality between the poor and the rich is creating social unrest that the current growth paradigm will find hard to arrest.

One indicator of income inequality is the Gini coefficient, conceived by Italian statistician Corrado Gini, and used by development economists. Measured on a scale between 0 and 1, where 0 implies perfect equality and 1 connotes total inequality. The Gini coefficient in India now varies between 0.37 and 0.42 and more significantly has been steadily rising with the advent of liberalisation and globalisation. The GC for the United States has also risen in recent times, from 0.40 in 1980 to 0.42 in 1990 and the figure for 2000 stood at an all time high of 0.46. China's Gini coefficient has increased from 0.34 in 1999 to 0.45 now, the People's Daily, published from Beijing, reported recently. (The obvious caveat with Gini coefficients is that equality should not come about because everyone became poorer.)

GC apart, rising inequality is also being indicated through protest actions by peasants and workers. Quoting the People's Daily again, in China, such actions jumped from 58,000 in 2003 to 74,000 in 2004. The recent protest by adivasis in Kalinga Nagar, Orissa wherein a dozen adivasis were killed in police firing, indicates that the proposed 44 steel plants in the region mean little to the poor if it is at the cost of their existence and traditional livelihoods. Infrastructure investment has to be seen in this light, and it is brewing discontent.

India may have shown prosperity but it has been far more iniquitous than ever before. Witness the glaring gap between the rich and the poor in access to clean drinking water, decent housing, good education, proper health care and reliable power supply. The poor have been trapped into 'inequality trap' in addition to being in the 'poverty trap.' The distinction is that in the first trap 'the poor are poor because the rich are rich' and in the second 'the poor are poor because they are poor.'

Simply put the country needs a policy thrust that can raise GDP by redistributing assets, raise national savings and the growth rate. Unless the projected economic growth rate shows up in wages and until market surges translate to more universally affordable basic services, the model of growth based on GDP may continue to risk social unrest and chaos. It may be true that the last 40 odd years were relatively peaceful despite substantive inequality, but this is no guarantee that it will continue to remain so. This is the challenge before our planners, to ensure that economic expansion benefits everyone.

Number crunching alone will not do. ⊕

Sudhirendar Sharma
4 Mar 2006

Sudhirendar Sharma, formerly with the World Bank, is a water expert and Director of the Delhi-based Ecological Foundation

PostPosted: Fri Nov 26, 2010 7:34 pm 

Joined: Sun Sep 12, 2010 2:49 pm
Posts: 596
by Triple Alpha

What is not included in GDP

http://www.helium.com/items/601857-the- ... -not-count

The purpose of this article is to show that although GDP as a measuring devise is quite good. It still has many flaws and therefore these flaws must be taken into consideration when discussing GDP.

GDP is calculated by combining value added by all businesses, including manufacturing, mining and services. The total of all of the economic activity in one country, even if the assets are owned abroad. For example the value of the goods less the costs. GDP is usually outputted in an index form.

There are many things which are not included in GDP.

1 Gifts, I am sure most of you will have sent money abroad at some time.
2 Transfer payments, and this includes pensions.
3 Domestic activities and unpaid activities, there are billions of voluntary hours worked in almost every country around the world
3 Second hand transactions and barter transactions.
4 Intermediate Transactions, lets track a piece of wood. Its chopped down , then sold to someone who chops it into planks, its then sold to someone else to make a table, the table is then sold to a retailer who then sells it to you, in this case the figure used for GDP is the end price v start price.
5 Leisure, for example if your job becomes easier because of an improvement and therefore you get more leisure time.
6 Environmental costs, although these are measured elsewhere.
7 Changes in quality, lets be honest, you can buy a much better electronic product today for the same amount of (inflation adjusted) money compared with 20 years ago.
8 Non profit making and inefficient activities.
9 Resource depletion, some countries this is very important.

Much of the data used in GDP is collected by sending out surveys to different companies. They will send out surveys to a select bunch of retailers and manufacturers to ask for details of their output or sales on a monthly basis. Then comes the estimate of the whole. The governments can obviously use this to their advantage by selecting the companies that they know are steady companies and not choose the smaller companies who are more likely to be erratic. Therefore most smaller companies will never get asked to perform a survey for the government as this may upset the figures.

Unrecorded transactions are perhaps the biggest blight on the reliability of GDP. It is currently estimated that in Italy unrecorded transactions amount to one third of GDP, USA 10-20%, UK 8-10% and Japan 3%. Although this can be not be proved as by their very nature are a secret. Italy and the USA do adjust their GDP to account for this but this is obviously a guess.

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