– By Mukesh Jain
It is time for budget again and on the day of budget, I will hear a debate on the TV Channels about the positives and negatives of the budget, most of which, I already know, will emanate from the political leanings of the speaker rather than a dispassionate analysis of the numbers. Even if we could analyze the numbers in dispassionate way, most people like me do not understand the big economic terms like fiscal deficit, revenue or capital account, fringe benefit etc. People like me try to search only meaningful thing in the budget, whether there has been some change in the Income Tax rates or tax implications of home loans. Rest I leave to the economists to discuss. Is that what should be the only concern of mine in an important document like budget. What about the security environment, housing conditions, pollution level?
Are we measuring wrong things in the economy?
In the year 2008 Jean-Paul Fitoussi, a French economist and Professor of Economics at the Institut d’études politiques de Paris and Professor Joseph Stiglitz, an American economist and professor at Columbia University were invited by the President of France Sarkozy. They were given an unusual task to identify the limitations of GDP as an indicator of social progress and economic performance; and to come up with some alternative means of measuring social progress. These two famous economists were selected by Sarkozy because of their work in this field for many years. Time magazine, in the year 2011, one year later, named Stiglitz as one of the 100 most influential people in the world.
They were later joined in this project by Nobel Laurette economist Amartya Sen. The group of experts working on this theme released a report in 2010, ‘Mismeasuring our Lives: Why GDP doesn’t add up’. The most important recommendation of this report was that there was a gap between the traditional economic measures like economic growth, inflation, unemployment and the public perceptions about progress. They suggested that it is time that nations move away from the traditional measures of economics and adapt those measures which are connected to people’s lives either directly or indirectly and they also take into account the sustainability of progress given environmental and other concerns. Essentially they suggested that government “shift emphasis from measuring economic production to measuring people’s well-being”. The report suggested that it is now time that governments collect additional information about people’s quality of life that measures both objective and subjective wellbeing and how it changes over time, and reflects the diversity of peoples’ experiences and linkages amongst dimensions of people’s lives. During his presentation of the Report at a conference, Nicolas Sarkozy said: “In today’s circumstances, this report is important not just technically (but) also politically. It deals with questions that concern not only economists, statisticians and accountants, but also politics, and as a consequence, the whole world”. The Report’s key message was simple: change the focus of our statistics from measuring the size of economic production, which is what GDP is about, to measuring what shapes the well-being of people today and that of future generations.
Sarkozy was not the first leader to express concern about the non-representative nature of GDP. Just over 50 years ago, Robert Kennedy gave expression to similar concerns:
“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and … nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children. Yet 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”
Simon Smith Kuznets, an American economist and statistician who received the 1971 Nobel Memorial Prize in Economic Sciences had also warned that GDP grew out of the Great Depression to answer a very important question: how could we quantify the loss in economic output that was evidently occurring? Over time, unfortunately it has expanded into a measure of welfare: of economic welfare first, and of general welfare second.
Most economists now agree that the GDP doesn’t provide a sufficiently detailed picture of the living conditions that ordinary people experience. Addressing these perceptions is vital for the credibility and accountability of public policies. Societal progress is about improvements in the well-being of people and households. Assessing such progress requires looking not only at the functioning of the economic system but also at the diverse experiences and living conditions of people. The conclusion is very clear: GDP is not a good measure of wellbeing. As Joseph Stiglitz said: “What we measure affects what we do. If we focus only on material well-being – on, say, the production of goods, rather than on health, education, and the environment – we become distorted in the same way that these measures are distorted; we become more materialistic.”
How GDP falls short
GDP by definition is an aggregate measure that includes the value of goods and services produced in an economy over a certain period of time. It does not take into account the negative effects created in the process of production and development. For example, GDP takes a positive count of the motor vehicles produced in a country but does not account for the emissions they generate; it adds the value of the cigars we produce and consume but fails to subtract the bills for lung diseases caused by them; it includes the value of constructing new buildings but does not discount for the vital forests they replace.
Environmental degradation is a significant externality that the measure of GDP has failed to reflect. GDP also fails to capture the distribution of income across society – something that is becoming more pertinent in today’s world with rising inequality levels in the developed and developing world alike. It cannot differentiate between an unequal and an egalitarian society if they have similar economic sizes. As rising inequality is resulting in a rise in societal discontentment and increased polarization, policymakers will need to account for these issues when assessing development. Another aspect of modern economies that makes GDP anachronistic is its disproportionate focus on what is produced. We, as a society are moving more and more to service economy catered by Uber and Amazon. As the quality of experience is superseding relentless production, the notion of GDP is quickly falling out of place.
We live in a world where social media delivers troves of information and entertainment at no price at all, the value for which cannot be encapsulated by simplistic figures. Our measure of economic growth and development also needs to adapt to these changes in order to give a more accurate picture of the modern economy. More fundamentally, individuals’ well-being is affected by other factors than economic production and the income generated by it. It is shaped by their sense of security, and their relationship with others, not measured by the GDP.
In spite of its shortcoming as a measure of a country’s success, GDP has remained its key proxy. We live in a world of metrics, where we are constantly quantifying our progress, our success. What we measure affects what we do. If we measure the wrong thing, we will do the wrong thing. If we don’t measure something, it becomes neglected, as if the problem didn’t exist. If we don’t measure inequality or environmental degradation, we are less likely to attend to these concerns. Of course, measures will always be imperfect. That’s not the issue. The real question is, are they misleading us?
Governments across the world deliver a wide range of social services and interventions. But are the social services helping? How can we tell if the services and interventions are actually improving the lives of the people they are designed to help? How do we know if we are investing in the right things? Could we invest earlier or smarter? Should we be working with a different group of people? Should we disinvest to free up resources to be used better elsewhere?
Can we measure the wellbeing of the people and also realign our investment through budget according to how we define a good life?
What makes for a good life? While the richness of human experience cannot be captured in numbers alone, it is important that the statistics shaping public policy reflect both people’s material living conditions, and the quality of their lives. This includes how life is changing over time, how lives differ across different population groups, and whether today’s well‑being is achieved at the cost of depleting resources for the future.
Wellbeing measurement quantifies the outcomes of social policy. By measuring the wellbeing of the people receiving a service or intervention and comparing it to an estimate of the wellbeing they would have experienced without the intervention, we can gauge the effectiveness of the intervention in improving wellbeing outcomes. Wellbeing measurement can be used to see if a social service is making an individual, family healthier, happier, has led to a new job or change in earnings, improved their social connections or their sense of cultural identity for example. A clear view of the different aspects (domains) of wellbeing can provide a common reference point to compare outcomes in a more coherent, robust and transparent way. It can also remind decision-makers to consider the full range of impacts that matter to people and provide them information that helps support those decisions.
Bridging the gap between better data and better lives
Government agencies often operate in silos, focusing on the resources and outputs for which they are directly responsible (housing, health, education, employment, etc.) and without reference to the wider impacts of their actions. For example, crime and justice agencies will focus on the direct impacts of their actions in reducing crime and enforcing safety measures, despite the fact that spill-overs from other policy areas and society-wide patterns (such as poverty, housing, or lack of public health and education services) may be large. Policy spill-overs also operate in the other direction, with personal safety as a major determinant of outcomes in other policy areas, e.g. as a driver of education outcomes and social connections. Similar spill-overs occur in all policy areas.
By identifying the range of outcomes to be considered by all policies, frameworks for measuring people’s well-being can promote consistency across government and provide a common language for agencies to discuss these impacts. Additionally, a multi-dimensional well-being framework (i.e. a framework that encompasses the range of aspects that matter to people’s lives) can generate positive interactions between government agencies, pushing them to co-ordinate their actions and programmes to achieve some higher level objective and helping them to do so. These frameworks can also assist in clarifying responsibilities across and within different levels of government and different groups of stakeholders, increasing co-ordination among policies.
Encouraging different government departments to consider the wide range of well-being outcomes and impacts of their programmes has the potential to help policy-makers identify impacts of programmes, and articulate trade-offs and spill-overs more explicitly and transparently. Accountability for results is fundamental to efficient and effective governance. It is the ultimate rationale for evaluating policy interventions ex post, and is an important input into strategic priority setting. Well-being frameworks can form the basis for the accountability procedures of government agencies.
In defining the set of desired outcomes expected from policy interventions through a range of indicators relating to people’s well-being, ex post policy evaluation can increase accountability for a wider range of outcomes than previously considered. Agreement on the dimensions and indicators of people’s well-being can also streamline external accountability measures, such those exercised through parliamentary oversight, audit agencies and by civil society, creating a common language and a consensus on the types of benefits expected from various policies and programmes.
Various countries are now trying to measure wellbeing of their citizens by new matrices. The Social Progress Index (SPI) ranks countries according to three equally weighed criteria: basic human needs, wellbeing (mostly SWB), and opportunity for social mobility. The Happy Planet Index (HPI), which endows the ecological footprint domain with a particularly heavy weighting, proves that national accounts variables and their weights are trivial. Considering only “experienced wellbeing,” the data from the HPI are similar to those from the SPI, with Scandinavian and North American countries at the top of the list, and Sub-Saharan countries at the bottom.
The OECD’s Better Life Index allows individuals to decide how important each of 11 domains is to them. The 11 domains are housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety, and work-life balance. Using similar methodologies, the UN’s World Happiness Report decomposes happiness (SWB) by regions of the world, and, using regression analyses, determines which factors explain the variance in happiness in each region of the world as well as in each country. It is not surprising that North America, Australia, New Zealand, and Western Europe top the regional list, given the average GDP per capita of those countries and the relationship between GDP and life satisfaction discussed earlier. However, it is surprising that, given their significantly lower GDPs per capita, countries in Latin America and the Caribbean enjoy comparable levels of happiness to those in Western Europe.
These different indexes demonstrate that in measuring national wellbeing, wellbeing correlates significantly with different domains of life (including income), and that a country’s relative progress looks different, depending on what factors we choose to include in indexes. Importantly, these indexes demonstrate that the more data about a country that is available, the better equipped decision makers will be to use measures to both design and assess public policies, depending on what they and their constituents value. Thus, multi-dimensional dashboard indexes are descriptive, not prescriptive – decision makers are free to decide what factors to prioritize.
In Australia, a well-being (Living Standards) framework was developed in 2004 by the Treasury to underpin analysis and advice across the areas under its responsibility. The framework includes 5 well-being elements (consumption possibilities, their distribution, the risk borne by individuals and society, the complexity of choices, and the freedom and opportunity enjoyed by people). In France since April 2015, law 411 requires the Government to submit an annual report to Parliament on progress on 10 new indicators reflecting the country’s economic, social and environmental situation. The report, which should include an assessment of the impact of the main reforms envisaged on these indicators, can be debated in Parliament upon request by the government.
Building on the National Statistical Institute’s “Measures of equitable and sustainable well-being”, a law in Italy approved in 2016 stipulated a narrow set of 12 indicators that should be annually reported to Parliament in the context of budgetary discussions. In New Zealand, the Treasury Living Standards Framework was developed in 2011 as part of an internal process intended to enhance policy advice, and as a response to external criticisms regarding the Treasury’s vision. This well-being framework is intended to provide evidence-based advice to Ministers on the lives of New Zealanders, and to be used as input into the policy process, rather than a decision-making tool in itself.
World Happiness Report 2019 placed India at rank number 140. Surveyed by the UN Sustainable Development Solutions Network, India has dropped down seven spots in the happiness rankings as compared to its 2018 ranking. The “Global Happiness Survey” from market research firm Ipsos, ranked India 9th amongst the 28 global markets. There is not a systematic method in place, however, to assess the well-being of India’s citizenry on an ongoing basis. India, as do most other countries, puts considerable emphasis on measuring GDP growth and tracking other economic indicators routinely and regularly. The assumption is that moving the needle positively on those metrics will cause benefits to flow through to citizens.
Towards a Wellbeing Budget
Economic growth has raised living standards around the world. However, modern economies have lost sight of the fact that the standard metric of economic growth, gross domestic product (GDP), merely measures the size of a nation’s economy and doesn’t reflect a nation’s welfare. One of the most fundamental questions we are trying to address though any measurement of economy is ‘how are we doing?’, as individuals, as communities and as a country. New Zealand is the first western country to design its entire budget based on wellbeing priorities and instruct its ministries to design policies to improve wellbeing.
Measuring and improving indicators of wellbeing, such as clean air and water, access to housing and healthcare, education standards, economic mobility, social harmony and community safety, and a safe climate, is the core work of that government. A wellbeing approach gives budgets real meaning for real people. It makes us citizens again, not merely customers of government services. The wellbeing budget is founded on the idea that financial prosperity alone is not a sufficient measure of the quality of life. Badged as a world’s first “wellbeing budget”, the Kiwi approach is to direct the resources of government towards measuring and improving upon what makes the biggest difference in people’s lives.
The wellbeing budget was developed with reference to over 60 indicators highlighted within the New Zealand Treasury’s Living Standards Framework. The LSF is a flexible framework that prompts our thinking about policy impacts across the different dimensions of wellbeing, as well as the long-term and distributional issues and implications. The actual content was informed by a public discussion and consultation process that centred on a draft set of wellbeing indicators. To Prime Minister Jacinda Ardern, the purpose of government spending is to ensure citizens’ health and life satisfaction, and that — not wealth or economic growth — is the metric by which a country’s progress should be measured. GDP alone, she said, “does not guarantee improvement to our living standards” and nor does it “take into account who benefits and who is left out.”
Bloomberg said “New Zealand has taken an important step in the right direction. Other nations should follow its lead.” It’s an approach that merits serious consideration. At a time when some argue the traditional capitalist model has made us more anxious and isolated than previous generations, defining success less strictly in terms of wealth and more in terms of overall well-being is likely to appeal to many people. Other countries may come to embrace New Zealand’s approach. In fact, some have already anticipated it.
NITI Aayog should be tasked to create a dashboard of wellbeing measures for India. The dashboard will be a combination of indicators calculated from objective data (like unemployment rate) and subjective data (like life satisfaction or trust in Government). The dimensions for the dashboard may be Governance (Trust in Government; Voter turnout etc.); Health ( healthy life expectancy, Disability, Anxiety or depression, satisfaction with heath care); Work related measures ( Unemployment rate, Job Satisfaction, Volunteering, Art and Culture participation); Living conditions (Crime rate, feeling safe, natural environment and pollution, belonging to neighbourhood, Access to key services); Economy ( Disposable Income, Inflation etc); Personal Finances ( Household income and household wealth) etc. having designed a dashboard of wellbeing indicators, which acts as a long term vision board for us, we can define the short term outcomes which will contribute to these indicators. A budget can be planned around these short term outcomes and more than one ministries may be made accountable to achieve these outcomes as opposed to the traditional allocation of budget in silos. For example ‘Women Safety’ may be an important indicator on our dashboard and ‘Safe Public places for Women’ may be a short term outcome we are trying to achieve in a particular year. Let us presume that evidence based analysis suggests that public places may be made safer for women by the following initiatives:
• Invest in Safety of public places: better street lighting and redesigning streets and ‘hot spots’ of crime
• Developing comprehensive laws and policies: Capacity building and awareness building
• Data driven , evidence based policing: Collecting data to get deeper understanding on crime and violence against women and aligning policing resources to meet this
• Transform Social norms: Transformational awareness activities in schools and communities towards gender equality and respectful gender relationships.
The next step will be to decide to allocate X1, X2, X3 and X4 for the above mentioned initiatives to the respective ministries for achieving these sub-outcomes, and the total allocation for ‘Safe public places for women’ will be X1+X2+X3+X4 and it will not be left only on policing or ministry of home to achieve women safety. This approach will not only recognize the multifaceted nature of social problems but also will bring out clearly the accountability of various government agencies and also encourage synergistic working.
The budget created for all the outcomes in this manner will bring the following benefits:
• Breaking down agency silos and working across government to assess, develop and implement policies that improve wellbeing
• Focusing on outcomes that meet the needs of present generations at the same time as thinking about the long-term impacts for future generations
• Tracking our progress with broader measures of success, including the health of our finances, natural resources, people and communities
The idea that economic and other data can be better presented with a dashboard of indicators than as a single number or ranked list is very much in the air among experts and policy makers. The economist Richard Easterlin imported the happiness discussion to his discipline with a 1974 paper pointing out that the results of national happiness polls did not correlate all that well with per capita income. Rich people were generally happier than poor people in the same country, but richer countries weren’t necessarily happier than poorer ones; and beyond a certain level, rises in income over time failed to increase happiness. It took quite a while for the so-called Easterlin paradox to garner much attention from other economists. But the recent emergence of behavioral economics, which takes psychological research seriously, has caused an explosion of surveys about happiness and well-being.
How a country chooses to measure economic wellbeing affects how priorities are set and how resources are allocated.
Hope to see a wellbeing budget in the next financial year!
(Mukesh Jain, is an alumnus of IIM Ahmedabad and of the Kennedy School of Government, Harvard University)