Measuring Progress

Progress is not only economic growth. Measuring progress requires taking people’s opinions seriously   This year marks the fourth consecutive year of rapid growth in Latin America. The average Latin American’s productivity is now 16% higher and purchasing capacity is 24% higher than four years ago. With currencies appreciating in most countries, purchases of automobiles and imported goods have soared. The inflow of international capital and the credit recovery have raised real estate values and equity prices. There is a boom in investment in mining in Peru, in agroindustry in Brazil, and in hotels in Colombia. The most important day-to-day economic decision facing the Chávez administration is what to spend the bonanza on, and the Bachelet administration how to save it.   Signs of economic progress are evident. But many of the things that are most important to people have seen little improvement. Jobs are still unstable and of poor quality because labor informality has not given an inch. Urban congestion, as never before, consumes the time and energy of the inhabitants of Mexico City, Santiago and Sao Paulo. The maras or street gangs have altered the daily life of millions of Central Americans who consider crime the most serious problem in their countries. And everywhere there is a very deep-rooted perception that societies have been unjust and are continuing to treat the socially and economically excluded unjustly.   If progress does not consist purely of economic growth, how can it be measured? A growing group of psychologists and economists believe that only people themselves can know how well they feel, and so the best measure of well-being is provided by polls on happiness. Psychologist Daniel Kahneman, who received the 2002 Nobel Prize in Economics for his contribution to measuring happiness, even considers that a System of National Well-Being Accounts should be created, not to replace but to complement traditional national macroeconomic accounts.   However, maximizing happiness cannot be the objective of public policy, as is proposed by the constitutional reform in Venezuela (Article 112). That could easily lead to governments interfering not only with economic incentives but with private lives because marital relations, friendships and religious beliefs are, together with personality features, some of the individual factors that most powerfully affect perceptions of happiness. It would also open the doors to the use of the most varied forms of psychological manipulation in an effort to influence perceptions and alter how expectations and fears are formed or manifested.   But this does not mean that subjective opinions should be ignored. Gross domestic product (GDP) is not a complete measure of the progress of a society because it only includes production of goods that can be valued through the market. Public goods, which are not traded in the market, are excluded from the GDP or are included by inadequate valuation methods. For example, the government’s contribution to GDP is measured by the pay of the bureaucracy, and the defense sector’s contribution by the value of arms produced and wages paid to the armed forces.   The quality of the environment or public transport is crucial to people’s well-being. Without it there can be no progress, whether or not public goods are in the GDP. Fortunately, methods are now being developed to measure their contribution to well-being. In essence, their value for an individual is equivalent to the additional income they would have to receive in order to make them feel as good if a public good to which they have access were taken away. Or, the other way round: their value is equivalent to the income that could be taken away from an individual so that they would feel equally good if they were given a public good that they do not now have. “Public bads” such as crime or noise can be valued in a similar way.   Using these methods it has been calculated[1], for example, that the loss of well-being from terrorism in affected areas in Northern Ireland is equivalent to 41% of the average income of the Irish. It has also been calculated[2] that the noise around Amsterdam airport brings an average loss of well-being equivalent to 680 euros a year to each of the 148,000 families affected. With calculations like these, victims can exercise their rights, the political system can identify the problems and needs that are most important for the electorate, and society gets a more balanced view of gains and losses in quality of life.   Progress is not only economic growth. Measuring progress beyond GDP means taking people’s opinions seriously. This requires, first, a broad public discussion about which aspects of quality of life should be considered as part of social progress and the objectives of public policies, and which not; and, second, a systematic effort to measure individual opinions and perceptions on the most important variables that affect quality of life. Governments of developed countries are backing both these tasks[3]. It is time for Latin American governments to do the same.   Note: The author is a researcher at the IDB but his opinions are his own.

6 Responses to "Measuring Progress"

  1. Joey Hundert   November 30, 2007 at 9:08 pm

    I have recently heard a very thoroughly researched economist speak on this topic. Mark Anielski helped to marshal the Genuine Progress Indicator (GPI) which goes about defining and measuring wellbeing.http://www.anielski.com/His book, “The Economics of Happiness” is an excellent read.

  2. Guest   December 5, 2007 at 12:06 pm

    How does the concept of “progress” relate to the concept of economic “happiness”? Any relation btw the two?

  3. Eduardo Lora   December 7, 2007 at 11:53 am

    Thanks for the comments. The GPI is one among many indicators of progress that have been proposed in the last few years. The main problem with all the indices available is that they reflect what is measured, not necessarily what matters most to people or to society. That is why Ruut Veenhoven, a leading philosopher in the topic, considers that “happinness” is the only really comprehensive measure of quality of life –what progress is about. But, as he discusses in an excellent article (Journal of Happinness, 2000) subjetive perceptions are just one of the four qualities of life of any person (i.e. a 2X2 matrix of inner and outer qualities X chances and outcomes). Constructing a comprehensive measure of quality of life for a society faces not just the problem of information, but of selecting a set of objectives deemed socially desirable. A difficult task, no doubt, but that is what the OECD is pursuing in their initiative “Fostering and Measuring the Progress of Societies”.