Opinion & Commentary
GDP stands the test of time
Ed Mishan, a leading English economist, writing when Simon Kuznets was complaining about the shortcomings of GDP as an indicator of growth, bewailed that growth meant that the Riviera, art galleries and theatres were becoming crowded by the hoi polloi, reducing his 'welfare'. The crowding, thankfully, has become much worse. I bet the Monets of the National Gallery will be jammed, but I'll be happy to queue up with other victims of growth.
GDP is, of course, an imperfect measure of 'welfare'. Its purpose is to measure output. It does so objectively, at market prices that express people's choices of goods and services. With all its limitations, it has therefore stood up to 40 years of searching for better measures.
The genuine progress indicator, or GPI, which Clive Hamilton extolled in these pages last week, gives a different slant on growth to GDP ('Genuine progress not indicated,' March 8). Instead of focusing on the resources available, it tries to add up the way resources are used for 'welfare'.
This is highly subjective, with values varying among social and ethnic groups and from country to country. The English place a high value on housing, while the French think that good food is important. The GPI, by imputing market prices to the preparation of meals at home, favours the former, downgrading the great benefit, admittedly mostly to women, that rising incomes have brought to the pleasures of 'eating out', even if it is only at McDonald's.
'Australia has grown relatively slowly during the past 50 years'
Because the GPI is highly subjective, it has not replaced GDP as the principal measure, albeit rough, of growth. Besides, bean counters have shown a very high correlation between GDP, GPI and similar measures.
At the end of the day, whichever the measure, Australia has grown relatively slowly during the past 50 years. The recent 'catch up' years have been an exception to lagging behind the United States, most Western European countries and developing countries such as Singapore. The 50c equivalent of a US dollar tells us that our productivity and labour costs are not internationally competitive.
Hamilton rightly stresses the importance of the environment, but taking action on, for example, desalination or lowering hydrocarbon emissions depends on the availability of resources. The greatest environmental advances have been in the most rapidly growing countries.Australians are whingeing about petrol prices that are about half those in West European countries that take seriously the damage that cars do to the environment. Would our GPI rise or fall if we doubled petrol prices to reduce traffic?
Kuznets argued that growth leads to greater relative poverty. Forty years of research indicate this to be wrong. Gary Fields, Anthony Atkinson and many other have shown that economic growth, as measured by GDP, unambiguously leads to a reduction in poverty in developing and developed countries. Just as importantly, without growth, poverty cannot be reduced. Don't we want to reduce poverty in Australia?
'Economic growth...unambiguously leads to a reduction poverty in developing and devloped countries'
Among the issues leading to the current voting swing, the perception that 'welfare' has not improved, particularly in the countryside, may be a factor. But this view is not factually based. The real income of the lowest quintile of Australian families has risen markedly. Life is certainly different today.
Many women like being in the workforce; but to different degrees at different times of their life cycle, they prefer part-time to full-time work. Many people like to combine study, leisure interest and part-time work. Shift work is becoming an increasingly favoured option. Many workers prefer contract work to being employees. Lifetime employment, particularly on repetitive factory tasks, does not hold much charm for young people.
Economic change has enormous benefits. Of course, it also has costs, and these costs are high if people can be persuaded that they are victims rather than taking advantage of new opportunities. Consider the dairy industry. Some dairy farms have to bear the cost of change, albeit with taxpayer support.
But milk output is rising and so are jobs in growing milk product exports. Milk prices, an important item in low-income budgets, have fallen. And higher productivity in dairying means more job opportunities in other industries and more resources for environmental care and 'welfare'.
About the Author:
Helen Hughes is Senior Fellow of The Centre for Independent Studies and is Emeritus Profesor of Economics at the Australian National University.
