Creating a Scoreboard for Economic Development

In a growing number of countries, new instruments are being put in place to end an excessive reliance on GDP as the single yardstick for measuring development. Beyond the mere publication of indicators whose aim is to measure the various dimensions of economic, social and environmental performance, parliaments have passed laws mandating the publication of annual reports on the quality of growth, and governments themselves have put in place scoreboards of various types.

The case for broadening the approach to economic development is not new. Even the founding fathers of national accounts acknowledged that GDP has many shortcomings: it neglects domestic labor and unpaid community services (as the old joke goes, a man who marries his cleaning lady actually reduces GDP), it counts nuisances as positives (traffic jams increase GDP) and it does not value the depletion of natural resources (an oil-producing country has a higher GDP if it draws excessively on its reserves than if it manages them wisely), to name just a few. Furthermore GDP is a gross concept, which may render its evolution misleading. For example, a country can impoverish itself because it does not invest enough to replace the capital stock, yet register a positive GDP growth rate.

But the case for a change has got stronger. One reason is clearly environmental sustainability. It is simply mind-boggling to think that we could gradually engineer a climate disaster yet fail to record the growing risk of it in our economic indicators. The same largely applies to financial sustainability. Spain's impressive growth record in the 2000s was built on debt and ended in a collapse. As long as the bubble continued to develop, however, the government could – and actually did – claim success. Equally, income inequality is a cause for concern. Growth means little if half of the population hardly benefits from it, as was the case in the United States in the first decade of the century.

True, in these cases it would be incorrect to claim that governments are not or were not informed. But it is one thing to diagnose what may go wrong and something else to ensure that information is provided in such a way that governments are incentivized to act. When parliament, journalists and the public are all focused on a single number, policymakers inevitably give to this number a greater weight than warranted by social preferences. But things are likely to be different when other numbers are given official recognition. What gets measured and publicized – or not – matters enormously.

A good example is provided by Germany. Because it is very conscious that its population is set to decline sharply, Germany has turned the reduction of public debt into a priority economic policy objective. The constitution was amended a few years ago to mandate the government to abide by a "debt break" that is more demanding than the European rules for public finances. But the German lawmakers forgot to include in their scoreboard the asset side of the government balance sheet. The results have been a remarkable reduction of the public debt ratio, and an unfortunate neglect of public investment and the renewal of the stock of public infrastructures. This does not make sense inter-generationally: future generations will care about the debt they inherit, but also about the state of national infrastructure. It is very likely that a more even-handed approach would have given German policymakers an incentive to strike a different balance between reducing debt and increasing investment.

The question, however, is what should be done to remedy this situation. One avenue is to change the way GDP is computed, to better reflect economic developments. This is actually constantly being done. For example, national accountants in the U.S. and Europe have recently changed the rules for recording research and development expenditures. These were previously considered as current expenditures but are now counted as investment. This adequately reflects the changing nature of modern economies, where brick and mortar matters less and intangibles more.

Further steps in this direction are possible and desirable. In a world of increased resource scarcity, the depletion of natural resources and additions to the carbon stock should be accounted for. This suggests moving away from a nearly exclusive reliance on gross figures and relying more on net figures.

Not everything can be monetized, however. It is relatively easy to account for carbon emission or capture, provided it is given a social value, but to do the same for biodiversity would be much more disputable. A reduction in the number of natural species is irreversible and it will therefore affect all future generations, perhaps in an unpredictable way. It is hard to decide what price mankind should put on the preservation of existing species.

By the same token, it would make little sense to tweak the GDP numbers to take into account the distribution of income. Equity matters considerably but this is no reason for considering that the measurement of total income depends on who is getting it. This would amount to saying that the size of a pie changes depending on how it is divided among the participants in a dinner party.

The solution is rather to create a scoreboard that comprises the most relevant variables and indicators and to ensure that government action is assessed on the basis of its performance regarding each and every one of them. This would not force using disputable assumptions to aggregate dimensions that are hardly commensurable.

The choice of variables is admittedly a serious challenge. Their number should remain limited enough to ensure that they actually serve as a guide for action. To publish dozens of indicators is useful for informational purposes, but the more their number grows, the more the assessment of government performance is being diluted. A focus on four or five indicators alongside GDP is a way to complement it. But if they are 20, everybody will keep on focusing on the same old GDP.

Which indicators should be given priority is a matter of social choice. Priorities do not need to be the same in various societies: deforestation, for example, is an issue for Brazil but hardly for Finland. It would make sense, however, to choose variables that cover the three main dimensions of debt and assets, environmental sustainability, and equity. All three are actually of high relevance for China.

Jean Pisani-Ferry teaches at the Hertie School of Governance in Berlin and serves as commissioner-general for Policy Planning in Paris. He is a former director of Bruegel, the Brussels-based economic think tank