Moving beyond GDP will improve policymaking and drive social progress

By Michael Green via Europe's World

7/21/16

Since its introduction more than eighty years ago, Gross Domestic Product (GDP) has assumed unrivalled authority as the de facto measure of a country’s progress. But eight years on from the global downturn, and as Europe continues to grapple with the economic and social challenges facing nation states, it’s time for all of us – academics, policymakers, entrepreneurs, citizens and the media – to ask ourselves some difficult questions about how we quantify and define progress, and what more we can do to improve the lens through which we evaluate it.

GDP has always been limited as a tool for evaluating a country’s progress. Its creator Simon Kuznets wrote in the 1930s that ‘the welfare of a nation can scarcely be inferred from a measurement of national income’. You only have to look at the widespread social malaise in many Arab countries that led to the 2011 Arab Spring, or the security challenges in Mexico and other Latin American countries over the last decade, to see the starkly illustrated shortcomings of economic growth as a proxy for social progress. Yet it continues to be the leading global metric by which societies judge themselves, despite a series of major shortcomings.

“Economic growth is frequently referred as though it represents overall progress”

The first of these is its inability to accurately reflect a country’s social progress. It excludes many important economic activities including volunteer work, while including factors such as the costs of crime, increasing prison populations and the depletion of natural resources. Its second limitation is the way it is used and interpreted. The US Bureau of Economic Analysis describes the purpose of measuring GDP as to answer questions such as ‘how fast is the economy growing’. Yet per capita GDP is often used to compare quality of life in different countries. Economic growth is frequently referred to by economists, politicians and the media as though it represents overall progress. You could also add a third limitation – its scope as a national measure, providing only a country-wide snapshot, lacks the granularity to offer detail about the growth of regions within countries.

As a result of these limitations, the Social Progress Index (SPI) was developed – the most inclusive and ambitious measure of social progress ever attempted. Rather than focusing on economic factors, SPI asks questions that are fundamental to a population’s wellbeing: Does a country have the capacity to satisfy the basic needs of its people? Does it have the infrastructure and the instruments to allow citizens and communities to improve their quality of life? Does it offer each citizen the opportunity to reach their full potential?

Many previous efforts to create an alternative index, from the Human Development Index through to the OECD Better Life Indicators, have been focused on replacing GDP by co-mingling the measurement of economic and social factors. The Social Progress Index takes a different approach, creating a measure of social performance that is independent of economic factors as a complement to, not as a substitute for, GDP. This allows for comparisons with GDP trends, for example showing that countries sharing a certain GDP level may substantially differ on social progress.

Indeed, the findings from previous iterations of our Index show that whilst there is a positive relationship between economic growth and social progress (wealthier countries typically show better social outcomes than lower-income countries) variability among countries can nevertheless be considerable. We have identified a series of under and over performers –countries that exceed or fall short on social progress compared to countries of a similar per capita GDP. The message is clear. At any level of GDP per capita, there are opportunities for higher social progress and risks of lower social progress.

The new 2016 Index compares the social progress of over 130 nations – representing more than 9 of 10 people on the planet. By creating a holistic measure of national wellbeing that is independent of GDP, it is helping us to understand under what conditions economic growth is inclusive and where it is not. What’s more, SPI can be applied to regions within countries, providing an even more detailed picture of social progress, informing and guiding good policymaking at both the national and local level.

At any level of GDP, there are risks of lower social progress”

That’s exactly what has been launched here in Europe. A three-year collaboration process led by the European Commission, promoted by Orkestra, Deloitte and the Social Progress Imperative was agreed in October 2014 to produce a Social Progress Index for 272 regions in the 28 European Union countries. This EU Regional SPI will inform the development of a network of European Regions sharing knowledge on social progress drivers and expertise on socially-innovative policies. The draft version was launched in February 2016 by DG Regional and Urban Policy for public consultation. The European Commission highlighted that the Index could make a contribution to the ‘beyond GDP’ debate, which could also help regions to identify peers, at any level of economic development, from whom they could learn and, if applicable, prioritise issues they want to address with their Cohesion Policy Programme. Finally, it could serve as a means for the Commission to assess whether the 2014-2020 programmes address the right issues in the right places.

GDP will of course continue to be a crucial measure of economic progress, but technological advances in the 21st Century enable nations to undertake data collection that was impossible at the time GDP was first conceived. The Social Progress Index is helping policymakers all over the world to identify priorities and take action to remedy shortcomings. Combined with GDP, SPI has the power to create a more accurate and informed picture of progress – and that can only be good for all of us.