The quest for the perfect measure of human progress is distracting

The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

US congresswoman Ilhan Omar recently joined a growing list of political leaders pushing to supplement gross domestic product with a broader measure of human progress, an idea conservatives lampoon as “squishy indeed”. But this movement dates to Simon Kuznets, the Nobel laureate who invented the precursor to GDP to quantify US losses during the Depression.

Even Kuznets pushed for a higher standard, saying this crude tally of stuff bought and sold did not reflect a society’s wellbeing. In 1968, Robert Kennedy said gross output measures everything “except that which makes life worthwhile”, including the health, education and welfare of children.

Researchers have since proposed alternatives that range from “gross national happiness” to Malaysia’s “fuzzy quality of life index”. Omar prefers GPI, the “genuine progress indicator”, now the main contender alongside BLI, the “better life index” endorsed by the OECD.

All aim to modify or replace GDP with social or environmental factors, but disagree on the factors. It may be decades before the world settles on a new standard, if that is at all possible. As experts debate, the sense that rising prosperity is not lifting most of mankind is spreading. But an interim fix is at hand: replace GDP with per capita GDP as the main target of policymakers and the key measure of progress.

Measuring GDP per person (or average income) reflects progress on many social welfare indicators reasonably well, and captures a threat that the new alternatives ignore: population decline.

Nations with higher per capita GDP tend to have higher life expectancy and levels of social support, lower infant mortality and poverty levels, less air pollution and corruption. Many of these measures are strong predictors of life satisfaction. The latest World Happiness Report ranks just one country with per capita GDP under $15,000 (Costa Rica) in the top 25 and none with per capita GDP over $15,000 in the bottom 70. The factor that best explains the happiness survey results is per capita GDP. Among emerging countries, those with higher per capita income typically score better on the UN’s multidimensional poverty index, which includes quality of life measures such as access to drinking water, a solid roof overhead and basic assets like a bicycle.

Many people believe that once incomes reach a level sufficient to provide a comfortable life, more money doesn’t add much to contentment. But even among advanced economies, progressively higher income does show a clear tie to higher happiness scores. The higher income Swiss and Norwegians are happier than the somewhat less rich Germans and French.

Advocates of moving “beyond GDP” say that mobilising nations to achieve a dollar target enslaves governments to Mammon, at the expense of what makes life worthwhile. Many people sympathetic with this view point to the case of Bhutan, which though relatively poor has often been feted as “the world’s happiest country”. Is it? Bhutan ranked 95th in the 2019 happiness survey.

Critics of per capita GDP focus on what it misses, including the hot button issues of inequality and CO2 emissions, but in seeking a more perfect measure they are resisting the urgent need for improvement.

Economic growth is a pillar of human progress, and it is under threat. As birth rates fall, the working age population is shrinking from Germany and China to Japan and Russia. Fewer workers means slower economic growth, possibly with higher inflation. Total GDP captures neither population decline nor welfare, and still reigns thanks to inertia. A measure so deeply ingrained in the system is hard to drop.

But unlike the new alternatives, per capita GDP is available now in real time for most countries, and it’s more telling. Consider future recessions. In nations where total GDP is shrinking, per capita GDP may well not be, if the population is shrinking more rapidly. Increasingly, slowdowns in total GDP will not be slowdowns in average income, or in the human progress that comes with it. Even as the pie grows more slowly, each person can get a bigger slice.

Adopting per capita GDP as the new standard would paint a less alarming picture of the global growth slowdown. It would ease pressure on politicians to generate growth faster than what shrinking labour forces will allow. Indirectly, it would promote the aims of those who want slower growth to limit climate change. And it would be a step towards the holy grail: a broad measure of human happiness.

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