Bringing Gross National Happiness into play

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Sunday, 6 April 2014 18:30 by Ken Wolff

In my series of articles about where the Left should be heading in our new world, I suggested that adopting Gross National Happiness (GNH) as a measure of economic progress should be one element of a new approach for the Left. In this piece I will examine why that is important, what it means, and how Labor can also move towards adopting the concept of GNH while still seeking government.

The basic idea is that GNH, in one form or another, would replace, or at the very least supplement, the current measure of economic progress, Gross Domestic Product (GDP).

The use of GDP to measure economic activity only arose during the Great Depression of the 1930s, when the American government was concerned that they did not see the depression coming. The government asked economic experts for a model that would allow it to keep track of the economy and so have a chance of foreseeing such events in the future. GDP only came into widespread use, however, after 1944, with the Bretton Woods agreement and the establishment of the World Bank and the IMF (International Monetary Fund).

GDP measures a nation’s economic activity either by summing the outputs of every category of enterprise to reach a total market value of products and services, or by summing the expenditure in acquiring those goods and services, or the income of the producers in selling them: each approach should come to the same final number.

There is also another measure termed Gross National Product (GNP). It differs from GDP only in terms of measuring the value of all products and services produced by a nation, whether within its own borders or overseas by its citizens:

For example, if a Japanese company such as Honda has an auto-manufacturing plant in the United States then the output of that plant becomes part of the U.S. GDP but not its GNP because Honda is not a U.S.-owned company. The output of the plant instead becomes a part of Japan’s GNP.

It would be interesting to see how Australia measured up on GNP given the prevalence of overseas ownership of our businesses.

The use of GDP, however, began being questioned as early as the late 1950s. Even its creator, Simon Kuznets, said that ‘the welfare of a nation can scarcely be inferred from a measurement of national income’.

A major problem with GDP is that it measures only productive activity and takes no account of the losses or costs associated with the activity:

… it tends to go up after a natural disaster. Reconstruction and remediation spur intense activity that is registered by GDP, while the destruction, lives lost, suffering and disruption to families and communities in the wake of a flood, cyclone or bushfire are ignored.

Or as Robert Kennedy said in 1968:

… the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. [added emphasis]

And while GDP aggregates national income, it does nothing to indicate how that income is distributed. That is why the Gini coefficient is sometimes used, as it provides a statistical measure of distribution: under the Gini coefficient it is theoretically possible for a rich and a poor country to have the same coefficient, simply meaning that the low national income of the poor country is distributed among families and households in the same proportions as the higher income of the rich country.

The small nation of Bhutan, rather than relying on GDP to follow its progress, decided in 1972 to adopt a measure of Gross National Happiness (GNH).

Although the term “Gross National Happiness” was first coined by the 4th King of Bhutan the concept has a much longer resonance in the Kingdom of Bhutan. The 1729 legal code, which dates from the unification of Bhutan, declared that “if the Government cannot create happiness (dekid) for its people, there is no purpose for the Government to exist.”

(Perhaps we should apply that last statement to our governments!)

GNH has nine ‘domains’: psychological well-being, health, education, time use, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standards.

There are also 33 indicators and 124 variables for measuring results. There are roles for government, communities and individuals in achieving ‘happiness’. ‘Happiness’ is defined by having a ‘sufficiency’ in the domains. In Bhutan, the government’s main role is in decreasing the ‘insufficiencies’ of ‘unhappy’ people. While in one sense the GNH is specific to Bhutan (it includes a number of local cultural indicators), its purpose of measuring well-being applies where GDP fails. GNH has been discussed in UN forums and has influenced economists in the developed world.

A number of alternatives to GDP have been developed over the years such as the Fordham Index of Social Health (FISH), the Genuine Progress Indicator (GPI) and more recently the Social Progress Index (SPI).

The UN has the Human Development Index (HDI) which basically looks at life expectancy at birth, years of schooling and literacy, and gross national income per capita — developed countries, like Australia, tend to score highly on this as it is primarily aimed at developing nations. The SPI is similar but adds extra dimensions and allows disaggregation of results, so that while Australia still rates highly overall on the SPI it rates more lowly (as many rich countries do) on the sub-set of ecosystem sustainability: and while Sweden tops the SPI it ranks more lowly on ‘shelter’ owing to weaknesses in affordable housing.

In 2012, the UN introduced the Inclusive Wealth Index (IWI) which includes not only economic capital, but human capital and environmental capital, and provided a report on 20 countries, examining their growth between 1990 and 2008: an example of four nations comparing GDP and IWI growth is shown in the following table:

Nation GDP growth 1990-2008 IWI growth 1990-2008
China 422% 45%
USA 37% 13%
Brazil 31% 18%
South Africa 24% -1%

The lower IWI growth in each country was due primarily to the depletion of natural resources in achieving GDP growth. An interesting contrast is Germany, which achieved 30% GDP growth but 38% growth using the IWI owing to significant investment in human capital (education).

In the same period Australia achieved average annual growth of 2.2% in GDP but only 0.1% in IWI.

Similarly other measures, like the FISH and GPI show that in the USA, the UK and Australia, GDP has grown significantly since the 1970s (up to threefold in the USA) but the FISH and GPI indexes have barely moved.

When the results of these alternative measures are considered, it clearly suggests that rising GDP has not improved social well-being, and that economies are not growing as strongly as suggested if the costs of achieving GDP are factored in. If the Gini coefficient is added into the equation, it also shows increasing inequality in the distribution of wealth in many nations, both developing and developed, since the 1970s. If those aren’t good reasons for adopting something other than GDP as a measure of progress, I don’t know what is!

These various approaches do, however, indicate that there is a serious attempt being made to move away from the exclusive use of GDP as a measure of economic progress. It is perhaps an acknowledgment that GDP measures economic activity, not progress.

In recent years the GPI was the front runner to replace GDP. It has been adopted by the US states of Maryland and Vermont and a number of other states, Utah, Minnesota and Oregon, are considering it, and Canada has adopted aspects of it.

It is probably the most popular because, like GDP, it is still measuring economic growth based on monetary values but, instead of just summing all production, it includes the dollar value cost of some activities and tries to give a value to other activities not currently valued in the market, for example:

  • the poor benefit more than the rich from a rise in income, so the GPI rises when their share of national wealth increases
  • the value of housework and volunteering are added, calculated at the rate of hiring someone to undertake the same tasks
  • the costs arising from crime are deducted
  • costs of pollution, degradation of wetlands, forests, farmland, etc are costs to be deducted from economic growth, as are estimates of longer term environmental damage
  • the GPI also goes up if leisure time increases
  • for consumer durables GPI treats the capital expenditure as a cost to the economy and the value is added for each year of service they provide.
It is more difficult to calculate than GDP, which may weigh against its widespread use and with the UN’s Inclusive Wealth Index now in play, the latter may become more favoured over the next few years (especially if it adds a measurement of social capital which it is aiming to do).

While the GPI and similar approaches may keep economists happy and provide governments with a more realistic measure of economic growth, it may not necessarily make the people happier.

Even the OECD has recognised that measuring well-being goes beyond purely monetary indicators. Subjective measures such as ‘life satisfaction’ are now included in survey questions on well-being and the OECD acknowledges evidence that this subjective measure actually shows up in objective measures: people showing a higher level of life satisfaction are likely to be more productive, more collaborative in the workplace, generally have better long-term health, can better pursue long-term goals and so on.

A problem with the current approach is that it is leading towards having a number of different measures operating together— some suggest that GDP remains important to monitor the economic cycle. So we could end up with GDP reflecting movements in economic activity, something like GPI or IWI taking a wider view of the costs of achieving GDP, and something that measures social well-being. Such a combination, while valuable, would leave policy makers with the discretion as to which they choose to drive policy. Public debate needs to drive policy and that really requires a single approach that can be readily understood, not having to combine the different evidence from three or more measures.

To my mind the GNH already blends much of what these other measures are trying to achieve.

In its surveys, it asks questions on life satisfaction and self-reported health status but also about the number of healthy days a person experienced in the past month; it asks about time use, working hours and sleeping hours (as sufficient sleep is seen as necessary for health and productivity); it asks about political participation; about social support, community relationships, and victims of crime; about pollution and wildlife and an individual’s environmental responsibility. In approaching education, it looks at literacy and educational qualifications but also at knowledge and values (based on the dominant Buddhist precepts in Bhutan). Three of its five knowledge questions are about local cultural issues, but it also asks about the Constitution and HIV/AIDS (a significant issue in Bhutan). The 2010 report concluded that despite rising literacy, people’s ‘knowledge’ of their locality was poor. I think that wider focus on local knowledge and values is an interesting inclusion that could have application in Western countries, as it attempts to quantify knowledge obtained outside the formal education system.

Yes, the GNH would need to be adapted to a modern western economy but the basics are there. For measurement purposes it would be possible to use the statistical approaches developed for some of the other indexes mentioned previously. In Australia, the ABS (Australian Bureau of Statistics) already conducts Social Trends surveys and that data can also be used.

So this is not an impossible task. People may baulk at the idea of a ‘happiness’ index but it can be renamed – perhaps a National Well-being Index or a National Progress Indicator.

Labor, in seeking government, would no doubt be reluctant to take the concept of GNH to an election. They would be open to criticism by the LNP that they were ignoring ‘economic fundamentals’ — the LNP already rates higher with the electorate in terms of ‘managing the economy’. That is one reason I suggested in my three part article on the Left that Labor needs to work at changing the tenor of the economic debate.

Being realistic, I would see Labor adopting the multiple-measure approach, at least initially: so there would be GDP, GPI or IWI, and a well-being measure akin to GNH. But what needs to be done is make GDP a background measure, and begin emphasising the real value of our economy (GPI or IWI) and the social benefits (improved well-being and equity). Labor should seek to emphasise that the order of importance of these measures is GPI/IWI first, well-being second and GDP third, and focus on GPI/IWI, not GDP, in public debate. The long term strategy should be that GDP drops from public view as the main measurement of economic progress and that, over time, well-being assumes first place in the public hierarchy of progress measurements. The other measurements, and eventually only the GPI/IWI, then become the economic background against which the government decides which policies are tenable to improve social well-being (happiness).

That will take time and will not be easy. The vested interests of big business and global corporations will mostly oppose it. They like GDP because it measures what they are producing, taking no account of environmental or social costs. While GDP reigns, so does big business because it can argue that for every downturn or slowing in GDP growth it needs government policies that will help it boost production and so increase GDP again. I will concede that at the WEF at Davos in January this year, the global corporations represented there did show some concern for environmental and resource costs because they are realising that continued unfettered use of natural resources and damage to the environment will eventually affect their ‘bottom line’. Unfortunately there appears no sign of this realisation in Australia and that is unlikely to change while GDP rules the economic debate here and while political parties also pay homage to it.

What do you think?