Should our institutions still focus on the GDP growth in order to achieve the well-being of population?   13th of December 2011

MEASURING WELL-BEING AND SOCIETAL PROGRESS From three OECD experts : Enrico Giovannini and Jon Hall (OECD Statistics Directorate) Marco Mira d'Ercole (OECD Directorate for Employment, Labour and Social Affairs)

MEASURING WELL-BEING AND SOCIETAL PROGRESS The subject : GDP / GDP per capital Well-being and societal progress Limits of GDP New tools of measure

Our presentation I. « We Growth » + « We GDP » : why ? II. So, what’s wrong with this tool ? III. Ok, but what else can we do ?

GDP = C+I+G+NX Part 1: What is GDP? GDP(Gross Domestic Product): The overall market value of all the goods and services a country produces. GDP = C+I+G+NX Consumer Spending Government Spending Investment Net exports

Part 1: Why is GDP so important? It indicates if a country’s economy is growing/shrinking. It is used to compare a country with other countries. It is used to asses the well being of the citizens of a country. Main assumption: As GDP rises so does the well being of the citizens of a country.

Easterlin Paradox, General Convention in Recent Economic Literature : Is GDP important for assessing human development/well being? There have been many studies conducted in the recent years emphasizing that GDP is not an ultimate indicator for development and well being. Although the paper and we share the same view on the matter, the question remains : Is GDP really that unimportant?

Easterlin Paradox, General Convention in Recent Economic Literature : Is GDP important for assessing human development/well being? Although we agree that GDP is not enough to assess a country’s performance, and many other measures are needed to fully understand how a country performs we argue that GDP is also an important indicator.

Phillipines, Manilla

Hong Kong

Tunusia

Thailand:

Tokyo

Part 1: Is GDP important? Controversial Findings Across Literature: Economic growth has long been considered an important goal of economic policy, yet in recent years some have begun to argue against further trying to raise the material standard of living, claiming that such increases will do little to raise well-being. These arguments are based on a key finding in the emerging literature on subjective well-being, called the “Easterlin paradox,” which suggests that there is no link between the level of economic development of a society and the overall happiness of its members. In several papers. Richard Easterlin has examined the relationship between happiness and GDP both across countries and within individual countries through time.1 In both types of analysis he finds little significant evidence of a link between aggregate income and average happiness. In contrast, there is robust evidence that within countries those with more income are happier.

BETSEY STEVENSON - JUSTIN WOLFERS : Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox Easterlin asked whether “richer countries are happier countries.” Examining two international datasets, he found a relationship across countries between aggregate happiness and income that he described as “ambiguous” and, although perhaps positive, small. However, this relationship has been argued as prevailing only over low levels of GDP per capita; once wealthy countries have satisfied basic needs, they have been described as on the “‘flat of the curve,’ with additional income buying little if any extra happiness.” Although the literature has largely settled on the view that aggregate happiness rises with GDP for low-income countries, there is much less consensus on the magnitude of this relationship, or on whether a satiation point exists beyond which further increases in GDP per capita are associated with no change in aggregate happiness.

BETSEY STEVENSON - JUSTIN WOLFERS : Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox Why? : The early cross-country studies of income and happiness tended to be based on only a handful of countries, often with rather similar income per capita, and hence did not lend themselves to definitive findings. As the relationship between subjective well-being and the log of income is approximately linear, the analysis in terms of absolute levels of GDP per capita likely contributed to the lack of clarity around the relationship between income and happiness among wealthier countries. New large-scale datasets covering many countries point to a clear, robust relationship between GDP per capita and average levels of subjective well- being in a country. no evidence that countries become satiated—the positive income-happiness relationship holds for both developed and developing nations.

Earlier regressions:

Later regressions with more data:

Hapiness vs. Life Satisfaction: The economics literature has tended to treat measures of happiness and life satisfaction as largely interchangeable, whereas the psychology literature distinguishes between the two. The results suggest that these measures may not be as synonymous as previously thought: happiness appears to be somewhat less strongly correlated with GDP than is life satisfaction

Hapiness vs. Life Satisfaction:

Hapiness vs. Life Satisfaction:

It is true that it doesn’t always matter:

Part 2 : So, what’s wrong ? Main hypothesis : the GDP per capita = measure country’s capacity to deal with the material needs of its population BUT when developed societies move from scarcity to plenty … is it still so pernitent ?

Part 2 : so what’s wrong ? Increase income => increase well-being ??? Increase income => Decrease well-being ??? What is well-being ? «  Social indicators aim to provide information on well-being. They focus on observable outcomes in a variety of fields (health, literacy, poverty) based on the premise that most people would agree about the value of what is being described and that these social characteristics can be measured reliably and independently of people’s subjective perceptions »

Part 2 : so what’s wrong ? Let’s compare GDP and Social Indicators. Four indicators have been chosen for each of those four domains : Self-sufficency Equity Health statut Social cohesion

Health statut > Highest degrees of correlation Social cohesion > Lowest degrees of correlation

Part 2 : so what’s wrong ? Other way than focus on social indicators to measure well-being : new way of calculating the real income. GDP doesn’t take into account : Non-market activities (hard to measure) Illegal activities, home activities and leisures. Changes in assets values (influence consumption) Negativ externalities (polution, depletion of non- renewable resources) Inequality of income distribution

Part 2 : so what’s wrong ? « Money doesn’t buy hapiness » … and it is particulary true when basic needs of society are filled. The non-market factors Attached a monetary value to non-monetary factors Leisure time Inequality of distribution of economic resources Since 1980’s, increase of inequalities Environment Take into account resources and capital stocks

Inequalities : Who benefits from growth ? So in countries where income growth has been skewed towards the better-off, applying the higher value of the coefficient will reduce the annual change in household income (the United Kingdom, the Czech Republic, the United States) while in those where the poorer deciles have benefited more it will tend to increase the annual change (Mexico, Spain, Norway)

Environment and resources « Higher GDP levels generally tend to stress the environment more, but also increase the capacities and resources for dealing with environmental problems ».

GDP and environement? + + Exponential growth € € Time of double Work 4 households Firms € 4 Time of double Goods and services Growth is potentially unfinite No pb of sharing Natural resources ? Infinites … Or indefinitely substitutable Si la croissance est infinie, pas de problème de partage : tout le monde finira par en profiter. A partir du moment où le gâteau est fini, le problème du partage se pose de manière considérablement plus aigüe ! Ressources naturelles infinies : bonne approximation jusqu’à une période récente… Ressources indéfiniment substituables : quand il n’y a plus de rhinocéros laineux on chasse le mammouth, quand il n’y a plus de mammouth on chasse… etc 2 1 Time of double 2% par an => 35 ans 3% par an => 24 ans 0.5

- - + Stock and GDP + + W K P Stock of Renewable natural sources Ressources renouvelables : l’eau (surtout de surface), les ressources halieutiques, les produits de l’agriculture (plus ou moins mais admettons) Stocks non renouvelables (aux échelles de temps qui nous intéressent) : l’eau encore (mais cette fois-ci les nappes phréatiques fossiles), les hydrocarbures fossiles, plus généralement tous les minerais, les sols cultivables L’économie ne fait que transformer des ressources naturelles et du travail humain en produits de consommation des sols, de l’eau, et du travail humain -> des aliments végétaux, c’est l’agriculture des aliments végétaux et du travail humain -> des aliments animaux (en plus petite quantité), c’est l’élevage des minerais, de l’énergie, et du travail humain -> des produits manufacturés, c’est l’industrie et même les services… nécessitent beaucoup d’économie matérielle sur laquelle s’appuyer Une boucle de rétroaction positive : une partie des trucs et des machins ne sert pas à être consommés tout de suite, ça sert à en faire plus plus tard, ça s’appelle du capital Une seconde boucle de rétroaction positive, avec tous ces trucs et ces machins, la population se porte bien, elle augmente Ce faisant, on puise de plus en plus vite dans les stocks non renouvelables, et même les ressources renouvelables se mettent à manquer. Qui plus est, sous-produit indésirable : la pollution (en fait il y a une pollution par polluant). La pollution, en retour, affecte les stocks non renouvelables (par exemple la pollution d’une nappe fossile, la pollution d’un sol…) et les ressources renouvelables (pollution qui affecte les ressources halieutiques (par exemple les poissons du Rhône, le PCB), changement climatique peut affecter la bonne santé des forêts, de la production agricole. On en est là. Il y a un problème… Dans une situation comme ça, comment faudrait-il compter ? Eh bien, à chaque fois qu’on produit un bien, il faudrait compter, en positif, le bénéfice qu’il nous apporte, et en négatif, la perte en capital naturel qu’il induit. Et si la perte est supérieure au gain, il faut s’arrêter ! Eh bien ça n’est pas comme ça qu’on compte. En économie, on ne compte que le travail humain (les ressources naturelles sont gratuites…), et on ne mesure que l’argent versé pour le travail humain, c’est le PIB. Autrement dit, on s’est doté d’un indicateur : le PIB, qu’on cherche à faire croître le plus possible, et qui a pour principale caractéristique de mesurer la vitesse à laquelle on va… dans le mur ! Le résultat net d’une journée de travail humain n’est donc pas nécessairement d’avoir enrichi l’humanité, mais dans bien des cas de l’avoir affaibli ! L’effet réel de la crise économique actuelle est qu’on va moins vite dans le mur, l’effet des plans de relance sera d’aller plus vite dans le mur ! K + Stock of Renewable natural sources Stock of non-renewable natural sources P (From JM Jancovici)

Part 2 : so what’s wrong ? Third approach : just ask to people. Life satisfaction and global income, two findings Across countries, people living in countries with a higher GDP per capita tend to report being happier at a given point in time, but the size of the gain in subjective well-being tends to decline once GDP per capita exceeds USD 10 000 (Frey and Stutzer, 2002). Across time, the coexistence of a rapid rise in GDP per capita with stable levels of subjective well-being has been interpreted as evidence that greater material prosperity does not necessarily make people happier.

Life satisfaction and GDP

Movie extracts ? http://www.storyofstuff.org/movies-all/story-of- stuff/

Questions to everybody What do you think ? Other ideas of variables ? Do you think you are « happier » than your parents ? Grand-parents ? Personnaly which « variables » influence your well- being ? Do our institutions take them into account ?

Part 3: So, what can we do? Suggestions on new indicators that can help us to go over this old GDP. And the problem about their effective application

"Create your own index for a better life" Part 3: New indicators. The new OECD proposal. "How do you define a better life? What matters most to you – good schools, safe streets or something else "Create your own index for a better life" http://www.oecdbetterlifeindex.org/

Part 3: New indicators. How to compute them Giving to each of these eleven variables a weight that exactly represents how much they count in our life. Why new variables have been introduced in the model? The main innovative feature is that we have now personal variables about people's feelings and self-satistacion that GDP has never considered.

Part 3: New indicators. Let's observe deeply these variables. You will get "flowers" and, depending on the weight you gave to them, the bigger their petals will be, the more attractive that country is for you to live in.

Quite different scenario with the BLI, isn't it?

Part 3: New indicators. The overall scenario in Turkey. (Difference with GDP?)

How these two affect each other? Income. Self-satisfaction.

How the scenario could be if we compare the variables included in the GDP with the ones never taken into account before?

Innovations and defeacts. Not a single index for everyone, but a personal index for each of us. The most useful feature of the BLI is the interactivity. So you can define the importance of each of these eleven available topics, overweighting the most important ones or simply avoiding others. More effective and more flexible than the GDP. It takes into account well-being even in the case of economic decrease. Easy to find the perfect place to live in :)

Innovations and defects. Doesn't that complicate the previous situation? Less efficiency with not a single indicator. Its effective implementation is much more difficult than the GDP.

Part 3: New indicators. Hard to implement. Many economists argue that there should be an index for each of these variables, in order to achieve more effectiveness in each sector they evaluate. But the biggest problem is the achievement of the optimal intersection of an easy understanding and good index reliability. People need a fast-to-understand index but at the same time the single measurement is too synthetic to involve all the factors we need to evaluate the real well-being.

Part 3: The big idea of 3 nobel prizes. The commission for the GDP adequacy evaluation. This is the reason why the Stiglitz-Sen-Fitoussi commission wants to keep using the old GDP and start to supplement it with new synthetic indicators. These new indicators have new data which do not come from any economic activity. How reliable do you guys think it will be?

Research goes on, we can only wait... (or act?) Thanks for your attention.

GDP per capita, IMF 2009