GDP and beyond Robin Lynch National Accounts in Practice – Advanced course Luxembourg, 2-11 October 2018 THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

GDP and beyond What’s good about GDP? GDP is the key measure of economic growth It is well measured, with a strong conceptual background and clearly described methods It is used globally in public debate and policy setting to measure national economic progress

GDP and beyond What’s lacking with GDP? It has been used as a proxy for a general measure of progress in society, but It does not measure environmental sustainability It does not measure social inclusion, or well-being, or welfare, or happiness, or income distribution, or poverty,

GDP and beyond So what shall we do? Develop inclusive indicators to better inform public debate and policy formulation, such as social cohesion education health

GDP and beyond Affordability of goods and services Air quality Poverty Crime Depleting natural resources

GDP and beyond What already exists? The Human Development Index (UNDP) The “true” wealth of nations (World Bank) Society progress (OECD) The ecological footprint (NGOs)

GDP and beyond What already exists? Indices of well-being and life satisfaction (researchers, academic studies) Sets of broad social and environmental indicators (EU and EU member states) Integrated economic and environmental accounts

GDP and beyond - EU views Two thirds of EU citizens agree that social, environmental and economic indicators should be considered in developing EU and government policies Complementing GDP with environmental and social indicators of concern to citizens would reassure that policy was relevant to the daily experiences of citizens, beyond average income measures.

GDP and beyond Published on 21st Jan 2014 by EU Commission Employment and Social Developments in Europe 2013  (21/01/2014) Chapter 7: Indicators of inclusive growth to complement GDP growth

GDP and beyond Quotes from Ch 7 Maximising economic growth is not an end in itself Growth is a key component of well-being by ensuring improvements in living standards The benefits need to be widely and fairly distributed across society

GDP and beyond Equity in benefits is needed to enjoy democratic support (not just the privileged few) EU objectives increasingly focus on integrating economic development with social and environmental quality and sustainability European Strategy for growth: Europe 2020 “Deliver growth that is smart!

GDP and beyond Smart = investment in education, research, sustainable use of energy; inclusive with an emphasis on job creation and poverty reduction However, there is widespread concern that benefits of economic growth are not shared fairly OECD report (2013) shows that after the financial crisis, poorer households either lost more income or benefitted less from recovery

GDP and beyond On social side – which indicators best highlight the social realities behind macro-economic aggregates and averages (GDP and GDP per capita) A single indicator (similar to GDP) cannot reflect all the complexities of changes in “well-being” and a dashboard was needed, showing a mix of indicators

GDP and beyond This presentation focuses on beyond GDP measures which reflect national accounts concepts and estimates These are mostly income-based measures of inclusive growth and/or shared prosperity How do distributional measures of income inform the wider sustainability agenda?

GDP and beyond Sources include National accounts EU statistics on Income and Living Conditions (EU-SILC) ECB Household finance and consumption survey (HFCS) Eurofound European Quality of Life survey Eurostat indicators of quality of life and sustainable development

GDP and beyond Why complement GDP? Does not measure costs of pollution Does not measure benefits of social cohesion GDP per capita, levels and growth, does not show how the benefits are shared within society

GDP and beyond Stiglitz report says that trends in living standards and well-being are better measured through household income and consumption, than just market production (GDP) Atkinson(2013) says that rather using the instruments of economic policy to increase GDP, the policy maker should focus on the interests of individual citizens

GDP and beyond Growth, inflation, employment should be used to in terms of how members of society benefit Household income and expenditure, with distributional character, are better measures of the success or failure of economic policy than aggregates such as GDP The benefits of growth are not equally distributed, with some becoming worse off even as average income increases

GDP and beyond Measures of inclusive growth Stiglitz report says Measures of household income, especially adjusted household income that includes imputed income transfers to pay for health and education provided by the state, are simple and useful ways to complement national accounts in the area of living standards

GDP and beyond Decomposition of national accounts data In 2011, Eurostat and OECD launched a joint expert group to determine methods to generate distributional information consistent with national accounts Can national accounts measures be allocated between household groups, in revealing disparity measures for income, consumption and savings?

GDP and beyond Further work is under way to test the robustness of using micro-indicators to spread economic aggregates across households

GDP and beyond Median versus average income Median income is the income of the household which has equal numbers of households receiving less income as opposed to more income

GDP and beyond For example, five households have income of 100, 200, 300, 500 900 The average income is 400, the median is 300 The ratio of median to average is 75% Now the rich get richer, and the numbers become 100, 200, 300, 700, 1200 – average 500, median 300

GDP and beyond Then the ratio of median to average is 300/500 = 60%, down from 75% If the poor catch up, then the numbers could become 200, 250, 300, 350, 400 Average = 300, median still 300 and so ratio of median to mean is 100% The median does not capture all disparities, but is a step in the right direction, beyond the average

GDP and beyond So, complement national accounts figures (averages and aggregates) by median income figures These can reveal distributional implications lying behind the national accounts aggregates Specific proposal – annual growth rate in real median income is a key indicator to complement Average income per capita growth.

GDP and beyond This kind of analysis can be extended to quintiles of household income, to show distributional effects within each band There are also standard measures of income inequality already widely compiled and used in policy debate Gini coefficient is the most commonly known

GDP and beyond Conclusions 1. Compile and publish growth in real median income 2. Also show “inequality in income” measures such as the Gini coefficient 3. Publish the Sen index of real national income

GDP and beyond 4. Publish and monitor life satisfaction (happiness) indicators

GDP and beyond From a national accounts point of view The new initiatives reflect a better understanding of the different roles and purposes of national accounts measures such as GDP, and socially relevant measures such as real median household income It is not to “correct” GDP, it is to complement it