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Home / Opinion / Columns /  Let us reconsider the way that economic welfare is measured

Separated by a dozen years, the global financial crisis (GFC) of 2008 and the pandemic of 2020 have had a stereophonic economic impact on the world. Livelihoods, savings and discretionary spending have been threatened, reduced and lost. The impact on the real incomes of households around the world vary, dependent in part on governmental responses by way of relief and (livelihood) recovery. Inequality has inexorably risen in almost all countries.

The world is juggling these two crises amid the longer-term challenge of climate change. Already, in just the first half of 2020, we have seen climate change wreak havoc through hurricane Amphan in West Bengal, the hottest summer in six decades in the UK, a locust attack in Pakistan, and a longer season of wildfires in the western United States.

Let me begin with a confession. I come from a Hayekian persuasion in neo-classical economics. It is in the spirit of exploration and learning that I invite you to heterodox ideas in my columns. Since the mid 1940s, the preferred indicator for global prosperity has been growth in gross domestic product (GDP) and its close cousin GDP per capita. Noble laureate Simon Kuznets proposed the modern revival of GDP as a measure of the market value of all final goods and services produced during a specific time period. Kuznets presciently pointed out that “with quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured". Even though Kuznets was careful to point out its limitations, it was adopted as the benchmark of growth and welfare at the Bretton Woods conference of 1944, and has remained so ever since.

In a world rendered even more unequal by the pandemic and one where extreme weather events threaten to make it worse, a new language of “prosperity" and “welfare" will have to be explored. Many alternate approaches have been proposed to measure “welfare" beyond mere “growth". The idea of gross national happiness (GNH) has remained a smart marketing slogan for Bhutan, even though it embeds interesting ideas of harmony with nature and other such “domains" of happiness. Some economists have asked the question whether “de-growth" may be a preferred state if it can lead to greater welfare.

One promising conceptual approach has been the “doughnut" theory of economic welfare proposed by Oxford economist Kate Raworth. In Raworth’s framework, the destination of economic welfare is reached when the goals of seven economic foundations are met without overshooting nine environmental ceilings. The inner ring of the doughnut represents the minimum social foundations to be met, and the outer ring of the doughnut represents a boundary or ceiling on environmental impact. The idea is to leave no one behind in the “hole" of the doughnut. The social foundations that Raworth postulates are Maslowian ideals like food, clothing and shelter, combined with democratic ones like social equity, political voice, peace and justice. Environmental ceilings, in turn, refer to things like ocean acidification, climate change and biodiversity loss. Metaphorically, you might think of it as driving with a speed limit, both to reduce risk and optimize fuel usage.

Governments have been attempting to incorporate these elements in their policy goals. The idea of “inclusive growth" is an attempt to focus on social foundations at the same time as increasing the growth of GDP. A sectoral policy of emphasis or subsidy for solar power, for example, is an attempt to balance a country’s energy sources with more environmentally favourable alternatives. However, the lesson from accelerating climate change and the pandemic is that this is not “far enough, fast enough".

In 2009, Tim Jackson wrote a pioneering report on Prosperity without Growth for the UK Sustainable Development Commission. Jackson says that “the conventional response to the dilemma of growth is to call for ‘decoupling’: continued economic growth with continually declining material throughput". While the global economy has achieved this to a degree, the decoupling refers to a situation where resource impacts decline relative to GDP in growth terms (that is, they grow slower). This is the case, for instance, with declining crude oil usage growth as a function of GDP growth. Jackson adds that “physical and mental health matter. Educational and democratic entitlements count. Trust, security and a sense of community are vital to social wellbeing". As we know from the pandemic, people suffer physically and mentally when these things are absent. Society itself is threatened when they decline.

The very word prosperity is made up of “pro" in Latin, meaning going well for us, and “speres", in accordance with our expectations. A time of widespread pestilence reminds us that future notions of prosperity and welfare will need to embed inclusivity, equality and sustainability. Materialism, wanton consumption and untempered resource usage may have to be consigned to the rejection pile of history. Notwithstanding the simplicity of the GDP measure, we will have to add nuance to it in order to more accurately measure the welfare of individuals and communities.

P.S: “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP," said Simon Kuznets.

This is the first of a two-part series on rethinking received economic wisdom in the aftermath of the covid pandemic.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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