I’ve blogged before on the limits of gross domestic product [glossary] as a measure of development, commenting on the absurdity of the BP oil spill being good for America’s GDP.
As a measure of development, GDP per capita offers at best a rough proxy. A country like Oman or Saudi Arabia may have a relatively high GDP per capita, but may be less able to translate that wealth into improvements in quality of life (measured in terms of life expectancy, literacy, infant mortality, or other similar measures). By contrast, a country like Costa Rica may be able to make good progress in addressing social development, reducing infant mortality, increasing life expectancy, and reducing levels of malnutrition, despite having a comparatively lower GDP per capita.
As a proxy for development, then, GDP may tell us little about human development in a particular country. Indeed, GDP per capita suffers from several shortcomings:
First, it tells us nothing about the distribution of income within a particular country. Take, for example, Kuwait. While the country as a whole has a relatively high GDP per capita, that income is unevenly distributed, with some Kuwaitis having significant wealth while others (mostly migrant laborers) having very little indeed. GDP per capita does not address inequality, hiding such disparities.
Second, GDP hides externalities—those costs associated with an economic transaction that are not incorporated into the price of a good. See my post on the BP oil spill for more information on externalities.
Third, GDP generally does not include activities taking place n the informal sector, including unrecorded economic activities, illegal activities, or unpaid work contributing to the social welfare. This exclusion has a particular gendered dynamic as well, with much of the work associated with social reproduction excluded from the formal sector.
There are alternatives. The Human Development Index has been around for nearly twenty years. and the differences in country rankings between the HDI and GDP per capita makes for an interesting comparison. France has proposed using something like the genuine progress indicator to measure development. Chad Jones and Pete Klenow (ht to Chris Blattman) offer an alternative measure based on consumption, leisure, inequality, and mortality. Feminist economist Marilyn Waring has long campaigned for a more radical measure based on time use. And as James Hammock blogged at Triple Crisis, the Oxford Poverty and Human Development Initiative (OPHDI) has proposed to use an new index that incorporates income, access to health care, education, and nutrition.
What differences does the measurement make? Plenty. While the Jones/Klenow index correlates highly with GDP per capita, there are important variations, most significantly,
Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries are farther behind due to lower levels of life expectancy and higher levels of inequality. In recent decades, rising life expectancy boosts annual growth in welfare by more than a full percentage point throughout much of the world. The notable exception is sub-Saharan Africa, where life expectancy actually declines.
In defining and measuring development, we need to remember what the purpose of development actually is. Growing GDP is best seen as a means to an end. The goal is not necessarily to expand the economy, but to expand the economy in order to achieve the ultimate goal of improving the human condition. The problem is that using GDP per capita as a proxy for development obscures the means for the ends.