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METRICS MATTERS, BUT CAN GDP AND GROWTH ADD UP?

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If measuring poverty is a priority surely in this increasingly performance-oriented society of ours, metrics matter. But one question comes into our minds: will it be possible to replicate past achievements into the future using the same measurements and old fashion path? The MDGs agenda give no answer to that.  Although efficient in setting simplistic headcount measures as poverty targets it was absent on the recommended path out of poverty unconsciously assuming  that fast growth would automatically drag out of poverty a portion of the population. But will GDP based measures still fulfil their prophecy? For decades classic GDP indicators have been the most widely used measure of economic activity. Inspired in Keynesian economics after the Great Depression, Governments took over the control using GDP as the statistic to describe the state of the economy. Up to now in mainstream economics it remains the basis of the standard system of national statistics representing wealth by basically aggregating all goods and services produced in the economy. Governments, policy makers and aid agencies have pursued obsessively GDP growth as a benchmark of economic development. If what we measure is our aspirations then in this pursuit what have we been striving for? The straightforward answer is pure market-based production. GDP was so widely used because it had the advantage of capturing in a single number the monetary valuation of aggregated goods and services produced in the market so no wonder it was essential for monitoring economic activity. But it became so handy that some were wrongly tempted to use it as an indicator of societal well-being mis-measuring our lives. One of the biggest misconceptions of GDP is that it has often been treated as a measure of economic well-being although it represents only marked-based activity. What we measure affects what we do so if we have the wrong metrics we will crave for the wrong things. Thus relying on GDP and growth as a guarantee of societal well-being implies several misconceptions. It means to target production while income and consumption are in fact more suitable to measure living standards. It means that we should track the economy as a whole rather than to focus on the household perspective which is again more pertinent for considerations of living standards. There are several other limitations of GDP as an indicator of economic well-being and social progress, particularly what concerns the poor. How meaningful is growth and GDP to describe poverty if averaging income through GDP per capita does not give any information on the bottom of the wealth distribution where typically poor are? As the agenda shifts towards shared prosperity focusing on the 40% bottom of population, classic GDP measures that look at overall population and unconsciously rely on the top richer as benchmark of wealth will not serve.

Furthermore beyond these technicalities there are also wider conceptual issues. Does GDP accounting systems fit the idiosyncrasies of developing countries?  Looking for example at Africa, with the highest incidence of poverty, does this accounting fits this continent with 80% of the labour force remaining in the informal sector and most of the household incomes relying on family work? How can GDP be suitable if it neglects non-market activities such as home-production? Surely it may be highly understated due to the informal sector and uncounted family work. Similarly one can also reflect on the relevance of Africa´s very high growth rates in the last decade based on export led natural resources exploitation if we consider that in fact most of these profits are repatriated. There are also issues related with the nits and bits of the accounting exercise of GDP. In developing countries where the government is still the largest provider of the economy the value of public production is usually badly measured. As public goods are typically free with no price associated traditionally the solution is to do measurements based on the inputs used to produce rather than on outputs. This not only ignores the productivity of public services but also neglects a crucial dimension of poverty reduction: the service delivery quality of public goods. Additional issues arise from pricing.  Price signals have to be interpreted with care in temporal and spatial comparisons that sometimes do not comply with the features of developing countries´ economies. For example in the African context prices highly fluctuate in space and time due to seasonal patterns, supply issues such deficiencies in transport and logistics or regional production patterns. Additionally prices tend to deviate from society´s underlying valuation or due to quality changes. Therefore for a number of reasons prices may not provide a useful vehicle for aggregation, if we consider that ideally they should be accounting devices unchanged while observing quantities of goods.

So it is true that flawed or biased statistics can lead us to make incorrect inferences and GDP is a wrong indicator to measure well-being, but how much of this quest for GDP increase has contributed to reduce poverty?

No doubt growth has dragged out of poverty many poor people through broad-based economic growth that generates more and better-paid jobs functioning as the structural transformation that creates middle class. But it is very likely that growth had an impact on the easy to reach poor positioned closely below the poverty line. Empirically, the explanation comes from the distributions of consumption that typically take a shape that reflects a concentration of the population around the middle of the income distribution, with a thinning of the population density around the two tails. Economic growth results in scaling up the consumption levels of all persons in the population (under the assumption of unchanged inequality) making poverty fall as economic growth progresses. However, because the majority of the population is concentrated around the middle of the consumption distribution, progressively the fraction of the population that is lifted out of poverty as a result of economic growth will decline. Growth reduces poverty because it moves a large number of people that tend to live on consumption levels near the average, (while relatively fewer live on very high or very low consumption levels), but when poverty reduction has reached what can be called the saturation point associated to the mass of people concentrated in the middle of the consumption distribution, poverty reduction will increasingly reach fewer people, even if the pace of growth remains unchanged. That is why after the big push growth may have diminishing returns on poverty meaning that the pace of poverty reduction may be lower in the future. (M. Ravallion, 2013)

Several WB growth simulations based on several scenarios provide interesting insights. A country growing at a steady rate under the assumption of unchanging inequality may not reduce poverty. The only way that a constant rate of poverty decline can be delivered is if growth, in fact, accelerates over time. Also if it is difficult to accept that global poverty would decline at a constant rate all the way through to 2030, one would also not expect that poverty decline will display a straight-line trajectory. Recent findings show that poverty reduction is scattered and not a uniform process. Indeed in many countries, there are resistant poverty pockets with individuals that are alienated from development process, excluded, discriminated or simply trapped in poverty which tend to be insensitive to growth to leave poverty.

Business as usual will not deliver the previous results, so albeit the striking linearity in the decline of the global poverty headcount since early 1980s, the future path may well have a significant uneven progress. (WB report, 2014)

Undoubtedly there exists virtually a mechanical relationship between growth and the sensitivity of poverty reduction but additional poverty reduction will only be possible assuring distribution policies to the bottom of the income distribution, i.e. the poorest. Surely growth will not be a panacea, but the idea of shared prosperity still retains the emphasis on growth but now measured by household national surveys based on income or consumption instead of national accounts. The current agenda shifts the attention to the growth of the average income (or consumption) of the bottom 40 percent of the people in a given country rather than to the previous overall average income. It changes dramatically the tone clearly stating inclusive growth as a priority.

In the aftermath of the financial crisis our society and economy have changed and the measures have not kept pace, measures such as GDP were a mis-representation of wealth and wellbeing and in the future no matter how thrilling poverty eradication may be, we should not rely on the omnipresent effect of growth to fulfil this vision. No doubt recent remarkable achievements were in fact a considerable reduction in absolute poverty, but in the in the future business as usual with poverty reduction mostly driven by growth, plain macro-economic stability or post-conflict catching up effects will no longer be sustainable. It shall be more meaningful to address specific issues such as security and climate change in an integrated fashion with poverty analysis than to burst growth by its own, demanding knowledge-based and assertive policy driven efforts tackling extreme poverty with more surgical precision.

Please see full article in the Research Essays Page.

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