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Report by the Commission on the Measurement of Economic Performance and Social Progress

Written By Gopal Krishna on Thursday, April 29, 2010 | 3:12 AM

Report by the Commission on the Measurement of Economic Performance and Social Progress
Link: http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

Executive Summary
Why has this report been written?

1) In February 2008, the President of the French Republic, Nicholas Sarkozy, unsatisfied with the present state of statistical information about the economy and the society, asked, Joseph Stiglitz (President of the Commission), Amartya Sen (Advisor) and Jean Paul Fitoussi (Coordinator) to create a Commission, subsequently called “The Commission on the Measurement of Economic Performance and Social Progress” (CMEPSP). The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement; to consider what additional information might be required for the production of more relevant indicators of social progress; to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way.

2) In effect, statistical indicators are important for designing and assessing policies aiming at advancing the progress of society, as well as for assessing and influencing the functioning of economic markets. Their role has increased significantly over the last two decades. This reflects improvements in the level of education in the population, increases in the complexity of modern economies and the widespread use of information technology. In the “information society”, access to data, including statistical data, is much easier. More and more people look at statistics to be better informed or to make decisions. To respond to the growing demand for information, the supply of statistics has also increased considerably, covering new domains and phenomena.

3) What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance. So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.

4) However, there often seems to be a marked distance between standard measures of important socio economic variables like economic growth, inflation, unemployment, etc. and widespread perceptions. The standard measures may suggest, for instance that there is less inflation or more growth than individuals perceive to be the case, and the gap is so large and so universal that it cannot be explained by reference to money illusion or to human psychology. In some countries, this gap has undermined confidence in official statistics (for example, in France and in the United Kingdom. only one third of citizens trust official figures, and these countries are not exceptions), with a clear impact on the way in which public discourse about the conditions of the economy and necessary policies takes place.

5) There may be several explanations for the gap between the statistical measurement of socio-economic phenomena and citizen perception of the same phenomena:
– The statistical concepts may be correct, but the measurement process may be imperfect.
– In many cases, there are debates about what are the right concepts, and the appropriate use of different concepts.
– When there are large changes in inequality (more generally a change in income distribution) gross domestic product (GDP) or any other aggregate computed per capita may not provide an accurate assessment of the situation in which most people find themselves.
If inequality increases enough relative to the increase in average per capital GDP, most people can be worse off even though average income is increasing
– The commonly used statistics may not be capturing some phenomena, which have an increasing impact on the well-being of citizens. For example, traffic jams may increase GDP as a result of the increased use of gasoline, but obviously not the quality of life. Moreover, if citizens are concerned about the quality of air, and air pollution is increasing, then statistical measures which ignore air pollution will provide an inaccurate estimate of what is happening to citizens’ well-being. Or a tendency to measure gradual change may be inadequate to capture risks of abrupt alterations in the environment such as climate change.
– The way in which statistical figures are reported or used may provide a distorted view of the trends of economic phenomena. For example, much emphasis is usually put on GDP although net national product (which takes into account the effect of depreciation), or real household income (which focuses on the real income of households within the economy) may be more relevant. These numbers may differ markedly. Then, GDP is not wrong as such, but wrongly used. What is needed is a better understanding of the appropriate use of each measure.

6) Indeed, for a long time there have been concerns about the adequacy of current measures of economic performance, in particular those solely based on GDP. Besides, there are even broader concerns about the relevance of these figures as measures of societal well- being.

To focus specifically on the enhancement of inanimate objects of convenience (for example in the GNP or GDP which have been the focus of a myriad of economic studies of progress), could be ultimately justified – to the extent it could be – only through what these objects do to the human lives they can directly or indirectly influence. Moreover, it has long been clear that GDP is an inadequate metric to gauge well-being over time particularly in its economic, environmental, and social dimensions, some aspects of which are often referred to as sustainability.

Why is this report important?
7) Between the time that the Commission began working on this report and the completion of this Report, the economic context has radically changed. We are now living one of the worst financial, economic and social crises in post-war history. The reforms in measurement recommended by the Commission would be highly desirable, even if we had not had the crisis. But some members of the Commission believe that the crisis provides heightened urgency to these reforms. They believe that one of the reasons why the crisis took many by surprise is that our measurement system failed us and/or market participants and government officials were not focusing on the right set of statistical Report by the Commission on the Measurement of Economic Performance and Social Progress indicators. In their view, neither the private nor the public accounting systems were able to deliver an early warning, and did not alert us that the seemingly bright growth performance of the world economy between 2004 and 2007 may have been achieved at the expense of future growth. It is also clear that some of the performance was a “mirage”, profits that were based on prices that had been inflated by a bubble. It is perhaps going too far to hope that had we had a better measurement system, one that would have signalled problems ahead, so governments might have taken early measures to avoid or at least to mitigate the present turmoil. But perhaps had there been more awareness of the limitations of standard metrics, like GDP, there would have been less euphoria over economic performance in the years prior to the crisis; metrics which incorporated assessments of sustainability (e.g. increasing indebtedness) would have provided a more cautious view of economic performance. But many countries lack a timely and complete set of wealth accounts – the ‘balance sheets’ of the economy – that could give a comprehensive picture of assets, debts and liabilities of the main actors in the economy.

8) We are also facing a looming environmental crisis, especially associated with global warming. Market prices are distorted by the fact that there is no charge imposed on carbon emissions; and no account is made of the cost of these emissions in standard national income accounts. Clearly, measures of economic performance that reflected these environmental costs might look markedly different from standard measures.

9) If the view expressed in the preceding paragraphs is not necessarily shared by all members of the Commission, the whole Commission is convinced that the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass. The decisions they (and we as individual citizens) make depend on what we measure, how good our measurements are and how well our measures are understood. We are almost blind when the metrics on which action is based are ill-designed or when they are not well understood. For many purposes, we need better metrics.

Fortunately, research in recent years has enabled us to improve our metrics, and it is time to incorporate in our measurement systems some of these advances. There is also consensus among the Commission members that better measures may enable us to steer our economies better through and out of crises. Many of the indicators put forward by the report will lend themselves to this purpose.

10) ... [policy]...

11) ...[progress in statistical measurement]
By whom has the report been written?

12) ...

13) ...[audience 1.] ...political leaders...

14) ... 2. policy-makers...

15) ... 3. academic community...

16) ... 4. civil society organization...public...

What are the main messages and recommendations?

17) The report distinguishes between an assessment of current well-being and an assessment of sustainability, whether this ca last over time. Current well-being has to do with both economic resources, such as income, and with non-economic aspects of peoples’ life (what they do and what they can do, how they feel, and the natural environment they live in). Whether these levels of well-being can be sustained over time depends on whether stocks of capital that matter for our lives (natural, physical, human, social) are passed on to future generations.

To organise its work, the Commission organized itself into three working groups, focusing respectively on: Classical GDP issues, Quality of life and Sustainability. The following main messages and recommendations arise from the report

Towards better measures of economic performance in a complex economy
18) Before going beyond GDP and tackling the more difficult task of measuring well-being, it is worth asking where existing measures of economic performance need improving. Measuring production – a variable which among other things determines the level of employment – is essential for the monitoring of economic activity. The first main message of our report is that time has come to adapt our system of measurement of economic activity to better reflect the structural changes which have characterized the evolution of modern economies. In effect, the growing share of services and the production of increasingly complex products make the measurement of output and economic performance more difficult than in the past. There are now many products whose quality is complex, multi-dimensional and subject to rapid change.

This is obvious for goods, like cars, computers, washing machines and the like, but is even truer for services, such as medical services, educational services, information and communication technologies, research activities and financial services. In some countries and some sectors, increasing “output” is more a matter of an increase in the quality of goods produced and consumed than in the quantity. Capturing quality change is a tremendous challenge, yet this is vital to measuring real income and real consumption, some of the key determinants of people’s material well-being. Under-estimating quality improvements is equivalent to over-estimating the rate of inflation, and therefore to under-estimating real income. The opposite is true when quality improvements are overstated.

19) Governments play an important part in today’s economies. They provide services of a “collective” nature, such as security, and of a more “individual” nature, such as medical services and education. The mix between private and public provision of individual services varies significantly across countries and over time. Beyond the contribution of collective services to citizens’ living standards, individual services, particularly education, medical services, public housing or public sports facilities, are almost certainly valued positively by citizens. These services tend to be large in scale, and have increased considerably since World War II, but, in many cases, they remain badly measured. Traditionally, measures have been based on the inputs used to produce these services (such as the number of doctors) rather than on the actual outputs produced (such as the number of particular medical treatments). Making adjustments for quality changes is even more difficult. Because outputs are taken to move in tandem with inputs productivity change in the provision of these services is ignored. It follows that if there is positive (negative) productivity change in the public sector, our measures under (over)-estimate economic growth and real income. For a satisfactory measure of economic performance and living standards it is thus important to come to grips with measuring government output. (In our present, admittedly flawed, system of measurement based on expenditures, government output represents around 20% of GDP in many OECD countries and total government expenditure more than 40% for the OECD countries.)

20) While there are methodological disagreements about how to make the adjustments to quality or how to go about measuring government output, there is a broad consensus that adjustments should be made, and even about the principles which should guide such adjustments. The disagreements arise in the practical implementation of these principles. The Commission has addressed both the principles and the difficulties in implementations, in its Report.

From production to well-being

21) Another key message, and unifying theme of the report, is that the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being. And measures of well-being should be put in a context of sustainability. Despite deficiencies in our measures of production, we know much more about them than about well-being. Changing emphasis does not mean dismissing GDP and production measures. They emerged from concerns about market production and employment; they continue to provide answers to many important questions such as monitoring economic activity. But emphasising well-being is important because there appears to be an increasing gap between the information contained in aggregate GDP data and what counts for common people’s well-being. This means working towards the development of a statistical system that complements measures of market activity by measures centred on people’s well-being and by measures that capture sustainability....
Recommendation 1: When evaluating material well-being, look at income and consumption rather than production

22) GDP is the most widely-used measure of economic activity. ... GDP mainly measures market production – expressed in money units – and as such it is useful. However, it has often been treated as if it were a measure of economic well-being. Conflating the two can lead to misleading indications about how well-off people are and entail the wrong policy decisions. Material living standards are more closely associated with measures of net national income, real household income and consumption – production can expand while income decreases or vice versa when account is taken of depreciation, income flows into and out of a country, and differences between the prices of output and the prices of consumer products.

Recommendation 2: Emphasise the household perspective

23) While it is informative to track the performance of economies as a whole, trends in citizens’ material living standards are better followed through measures of household income and consumption.

Indeed, the available national accounts data shows that in a number of OECD countries real household income has grown quite differently from real GDP per capita, and typically at a lower rate. The household perspective entails taking account of payments between sectors, such as taxes going to government, social benefits coming from government, and interest payments on household loans going to financial corporations. Properly defined, household income and consumption should also reflect in-kind services provided by government, such as subsidized health care and educational services. Recommendation 3: Consider income and consumption jointly with wealth

24) Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth. A household that spends its wealth on consumption goods increases its current well-being but at the expense of its future well-being. The consequences of such behavior would be captured in a household’s balance sheet, and the same holds for other sectors of the economy, and for the economy as a whole. To construct balance sheets, we need comprehensive accounts of assets and liabilities....
Recommendation 4: Give more prominence to the distribution of income, consumption and wealth

25)...
Recommendation 5: Broaden income measures to non-market activities

26)

27) Once one starts focusing on non-market activities, the question of leisure arises. Consuming the same bundle of goods and services but working for 1500 hours a year instead of 2000 hours a year implies an increase in one’s standard of living. Although valuation of leisure is fraught with difficulties, comparisons of living standards over time or across countries needs to take into account the amount of leisure that people enjoy.

Well-being is multi-dimensional
28) To define what well-being means a multidimensional definition has to be used. Based on academic research and a number of concrete initiatives developed around the world, the Commission has identified the following key dimension that should be taken into account. At least in principle, these dimensions should be considered simultaneously:

i. Material living standards (income, consumption and wealth);
ii. Health;
iii. Education;
iv. Personal activities including work
v. Political voice and governance;
vi. Social connections and relationships;
vii. Environment (present and future conditions);
viii. Insecurity, of an economic as well as a physical nature.

All these dimensions shape people’s well-being, and yet many of them are missed by conventional income measures.
Objective and subjective dimensions of well-being are both important

Recommendation 6: Quality of life depends on people’s objective conditions and capabilities.

29) The information relevant to valuing quality of life goes beyond people’s self-reports and perceptions to include measures of their “functionings” and freedoms. In effect, what really matters are the capabilities of people, that is, the extent of their opportunity set and of their freedom to choose among this set, the life they value. The choice of relevant functionings and capabilities for any quality of life measure is a value judgment, rather than a technical exercise. ... There is a consensus that quality of life depends on people’s health and education, their everyday activities (which include the right to a decent job and housing), their participation in the political process, the social and natural environment in which they live, and the factors shaping their personal and economic security. Measuring all these features requires both objective and subjective data....

Recommendation 7: Quality-of-life indicators in all the dimensions covered should assess inequalities in a comprehensive way

30) ...
Recommendation 8: Surveys should be designed to assess the links between various quality-of-life domains for each person, and this information should be used when designing policies in various fields
...
by Professor Joseph E. Stiglitz 1, Amartya Sen 2 and Jean-Paul Fitoussi
1. Professor, Chair, Columbia University
2. Professor, Chair, Adviser, Harvard University
3. Professor, Coordinator of the Commission, IEP
Other Members
Bina Agarwal University of Delhi
Kenneth J. Arrow Stanford University
Anthony B. Atkinson, Warden of Nuffield College
François Bourguignon, School of Economics,
Jean-Philippe Cotis, Insee,
Angus S. Deaton, Princeton University
Kemal Dervis, UNPD
Marc Fleurbaey, Université Paris 5
Nancy Folbre, University of Massachussets
Jean Gadrey, Université Lille
Enrico Giovannini, OECD
Roger Guesneries, Collège de France
James J. Heckman, University of Chicago
Geoffrey Heal, Columbia University
Claude Henry, Sciences-Po/Columbia University
Daniel Kahneman, Princeton University
Alan B. Krueger, Princeton University
Andrew J. Oswald, University of Warwick
Robert D. Putnam, Harvard University
Nick Stern, London School of Economics
Cass Sunstein, University of Chicago
Philippe Weil Sciences Po

Report by the Commission on the Measurement of Economic Performance and Social Progress
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