Measuring economic performance: Looking beyond GDP

While GDP is a broad measure of a country’s economic performance, it falls way short as a comprehensive measure of the economic health of a nation in more ways than one.

It is the highlight of every National Day Message from the Prime Minister[1]. No National Day Rally speech gets delivered without its mention. Economic statistics dished out by the government never fail to mention it. It is used as  the main measure of how well our nation is doing economically. Indeed, it is such an important statistic that the bonuses of all the Cabinet ministers and 60,000 civil servants are pegged to it.

I am talking, of course, about Singapore’s Gross Domestic Product (GDP).

The GDP is the market value of all final goods and services produced in a country in a year. Specifically, it is the sum of consumption, investment, government spending and exports, minus imports, in one year. Economists usually talk about GDP in terms of its year-on-year growth, measured as a percentage increase (or decrease) from the previous year. Also frequently quoted is the GDP per capita, which is the GDP divided by the total number of residents in the country.

GDP a poor measure of performance

While GDP is a broad measure of a country’s economic performance, it falls way short as a comprehensive measure of the economic health of a nation in more ways than one.

Firstly, GDP measures economic activity, not necessarily economic benefit. For example, if a factory here manufacturers 20,000 semiconductor chips and exports them, that income adds to Singapore’s GDP. But if the government dips into our reserves and gives $4.5 billion worth of ang pows to companies during the recession, or MINDEF spends $1.6 billion on new F-15 warplanes, those also increase the GDP.

Secondly, GDP does not measure the income that Singaporeans earn. GDP per capita is often wrongly used to gauge the average salary earned by Singaporeans. With 46% of GDP made up of profits earned by corporations[2] – half of them foreign-owned – Singapore’s average per capita household income of $24,309[3] is far less than our oft-quoted $53,192 GDP per capita[4].

Thirdly, GDP fails to measure the distribution of income. Our GDP per capita gives the impression that we are an incredibly rich nation. However most of those riches are in the hands corporations, wealthy elites and foreigners. Singapore’s Gini coefficient[5] ─ a measure of income inequality ─ is 55% higher than the OECD average[6]. (The OECD is a grouping of mostly rich nations. The higher the Gini coefficient, the more unequal the country is.)

Fourthly, GDP ignores all activities and services that have no price attached to them. Homemakers who raise Singapore’s next generation and volunteers serve the less fortunate are all making a tremendous contribution to society, yet their efforts add nothing to the GDP.

The list could go on. The main issue here is that GDP does not measure the well-being of Singaporeans. It may measure how much economic activity is going on in the country, but it does not measure whom that activity benefits.

This is why I think the use of GDP to determine ministers’ and civil servants’ bonuses gives them the wrong goal to strive for in their work. The government can easily boost GDP by giving tax breaks and subsidies to attract foreign companies to Singapore. These companies may end up employing mainly foreigners to increase their output, leaving Singaporeans not very much better off.

For example, the biomedical industry, which was aggressively promoted by the Economic Development Board, is very capital intensive and employs a very high proportion of foreigners. The industry’s output boosts our GDP, but with questionable benefit to Singaporeans.

Alternative measures of economic health

It is time that Singapore looks beyond GDP as a measure of the economic health,  progress and performance.

For a start, we could take a page out of the report by France’s Commission on the Measurement of Economic Performance and Social Progress[7], chaired by Nobel economics laureate Joseph Stiglitz, which was released in September.

The Stiglitz Commission recommended looking at income and personal consumption rather than production as a measure of economic progress. Domestic consumption is one area where we rank quite lowly for a developed economy. It currently stands at less than 40% of GDP, compared with 60% for Hong Kong[8].

The Commission also recommended giving more prominence to the measurement of distribution of income, consumption and wealth. The Gini Coefficient should be a key figure to track, rather than dismissed as unimportant, as Mr Lee Kuan Yew recently did at an NUS forum.

I would like to see the Department of Statistics (DOS) put out more data not just on household income, but per capita household income. A search on the DOS website throws up many reports about household income, but the only one which lists per capita household income is dated 2003 ─ some six years ago!

Our government statisticians should also publish separate figures for Singaporeans and permanent residents (PR), since new arrivals ─ and we had almost 100,000 of them last year ─ tend to be financially much better off than the average Singaporean, and may make the overall “resident” data look more positive than it really is.

The unemployment rate is a measure of the state of the economy that frequently appears next to the GDP. Unfortunately in Singapore, the unemployment rate for Singaporeans and PRs are always lumped together as the “resident unemployment rate”. This tends to cloud the real employment situation among citizens.

We should also look at productivity growth more closely. Singapore’s labour productivity growth has been declining since 2004. It has been in negative territory since the third quarter of 2007, dropping to a low of -7.5% in the second quarter of 2008[9]. Declining productivity coupled with increasing costs augurs badly for the Singapore economy.

One contributory factor to our decreasing productivity could be the influx of cheap foreign labour into the economy. Cheap labour often reduces companies’ impetus to invest in mechanisation, automation and training their local workers for higher value-adding work. A simple example in Singapore is the use of foreign workers to man the “stop and go” signs at road construction zones. In other developed countries, the portable traffic lights are used, while the workers are put to more productive use operating complex construction machinery.

We should examine more comprehensive ways to measure the welfare of our workers. One such measure is the total hours worked per week and the amount of leisure time enjoyed by workers. Singapore ranks highest in the total number of hours worked per week compared to countries in Asia and the Pacific[10]. It doesn’t take a rocket scientist to figure out that if you are working longer hours but earning the same pay, your economic situation has not improved.

The contributions of homemakers who care for and educate children, and the work of volunteers should be measured and reflected in our nation’s overall economic health.

Finally, environmental damage and pollution caused by “productive” activities like oil refining and petrochemicals processing should also be counted as a cost to the economy.

I have outlined just a few of the measures of economic progress that I feel our policymakers, academics, the media and ordinary citizens should be looking at alongside GDP figures. How we choose to summarize and present them will be tricky, given there is no globally agreed metric to measure both economic health and citizens’ well-being.

But one thing is for sure, the government must stop feeding Singaporeans with a diet of only GDP and resident unemployment rates as a gauge of how well our country is performing economically.

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Do you have any ideas on what metrics Singapore should use to measure economic performance? Share your ideas in the comments section below.

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[1] The Prime Minister’s National Day Message in 2007, 2008 and 2009.

[2] Reassessing Singapore’s economic future by Manu Bhaskaran, The Edge.

[3] Average household income divided by average household size (2008 figures from Department of Statistics).

[4] Key Indices 2008, Department of Statistics.

[5] Key Household Income Trends 2008, Department of Statistics

[6] OECD data.The average OECD Gini coefficient is 0.31, while Singapore’s is 0.48.

[7] View full report here.

[8] Strategies for the future by Basant Kapur, Straits Times, 16 June 2009.

[9] Singapore’s Declining Productivity Growth: An Exploratory Paper by Neo Boon Siong and Susan Chung, Lee Kuan Yew School of Public Policy.

[10] International Labor Organization (2009). Labor and Social Trends and the Pacific 2006- Progress towards Decent Work.

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10 thoughts on “Measuring economic performance: Looking beyond GDP”

  1. I agree with you fully. Growth today in developed nations has become uneconomic. Non-mainstream economists and environmentalists have argued for decades that the GDP is flawed and that a true measure of progress ought to differentiate transactions that add to well-being and those that decrease it. There are alternative metrics such as the Genuine Progress Indicator (GPI) and the Index of Sustainable Economic Welfare (ISEW) that Singapore should adopt alongside the GDP to measure true progress, but it will definitely put us in a bad light because of the costs incurred in resource depletion and environmental degradation. So while we delude ourselves into thinking we are rich because of our high GDP, we are in reality accumulating huge amounts of ecological debt which will require painful reckoning in the near future.

    http://dieoff.org/page11.htm
    http://en.wikipedia.org/wiki/Genuine_progress_indicator
    http://en.wikipedia.org/wiki/ISEW

    “Uneconomic Growth Today

    The definition of uneconomic growth is growth that produces higher costs than benefits. The United Nations has documented examples of five types of uneconomic growth:

    * jobless growth, where the economy grows, but does not expand opportunities for employment;

    * ruthless growth, where the proceeds of economic growth mostly benefit the rich;

    * voiceless growth, where economic growth is not accompanied by extension of democracy or empowerment;

    * rootless growth, where economic growth squashes people’s cultural identity; and

    * futureless growth, where the present generation squanders resources needed by future generations.”

    http://www.steadystate.org/CASSEDownsides.html

  2. TM – Thanks for your insights and suggestions! They will certainly be useful for any future revisions/updates to this article. I’m interested to find out more about GPI and ISEW. I’ve seen them mentioned during my research for this article, but how credible are they, and have they been adopted by anyone or any country?

  3. Hi Gerald, sadly the GPI and ISEW have not been officially adopted by any government in the world. GDP remains the chief indicator of economic well-being. The only country I know of that ranks an alternative indicator above GDP is the nation of Bhutan which has embraced the Gross National Happiness (GNH).

    http://en.wikipedia.org/wiki/Gross_national_happiness

    However, ecological economists have attempted to calculate true progress using the GPI in America and Canada and their results show that while GDP has almost doubled since the 1970s, GPI has been essentially flat.

    http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

    http://www.greeneconomics.ca/AlbertaGPI

    http://gpiatlantic.org/gpi.htm

    The way I see it, the main problem is that mainstream economists have a wrong set of units for accounting. They reduce everything to dollars and cents which are nothing more than abstractions divorced from the material world. Oil prices hit a low in 1999 at $17/barrel but the price did not tell us what was left in the ground for us to extract. All it did was to create the temporary illusion that oil was plentiful, and that alternative sources of energy were therefore uneconomic and unnecessary – in dollar terms – according to the self-deluded economists.

    Had they learned to calculate the economic inputs/outputs of a nation in terms of energetic units (Watts, BTUs, etc.), biocapacity and ecological footprint, they would have realized that our entire growth-centric-consumerist economic paradigm is one giant energy sink and resource blackhole that is squandering away at unsustainable rates the earth’s natural capital and natural resources that have taken eons to form.

    http://dieoff.org/page175.htm

  4. Sir,

    1. How Singapore economic development is measured or evaluated?
    2. Critique on the country experience?

    Mabuhay!

    from Philippines

  5. An intriguing discussion is worth comment. I do think that you should publish more on this issue, it
    might not be a taboo subject but typically people do not talk
    about these subjects. To the next! All the best!!

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