How can we measure up in a sustainable world?

Every quarter we wait for the statisticians to tell us how the economy has been performing. And Gross Domestic Product, a common measure of how we are travelling, has been even more in the news than usual, as people have been hoping the recession is over and GDP is rising again.

Trouble is not many people think about that ‘gross’ bit. Gross of what? The answer is gross of the fixed capital we used in producing all the stuff we did. By rights, any sensible measure of how the economy’s going ought to count that rather important cost — especially if you’re thinking about the sustainability of economic growth, which must surely be looked at only after counting what you’ve used up to produce it. At a minimum we ought to be focusing on Net Domestic Product.

The D part of GDP isn’t especially helpful either. ‘Domestic’ means produced within New Zealand, even if the income belongs to foreigners. Again, this has a sustainability perspective: you might well feel there’s a vulnerability in being eternally dependent on overseas investment to get stuff made here. ‘National’ (belonging to us) measures — GNP rather than GDP, for example — are more aligned with what we can earn on our own.

These aren’t just picky statistical points. Our GDP — the headline grabber — was $177.5 billion in the year to March 2008. Take off the capital we used producing it ($25.1 billion), and the share that belongs to people overseas ($13.4 billion) and you get a substantially lower measure called ‘national disposable income’, which was $139.7 billion (it doesn’t add up exactly because I’m ignoring some rats and mice).

In short, the measure everyone uses to tell how we’re going, especially over any long-term sustainability basis, has some serious flaws. It’s not useless — it does add up the value of what’s produced in New Zealand — but it has limitations. Which is why there’s a new push to see if statisticians can come up with something more aligned to how we’re going on a sustainable basis.

Statistics New Zealand, like many other OECD number crunchers, has signed up for a new way of tracking our sustainability. The idea is, are we leaving the next generation the same (or better) stock of capital than we inherited? And that capital is broadly defined to include not just factories and machines, but also a functioning ecosystem and all the social and cultural infrastructure that’s needed to keep society in good (and enjoyable) nick. If we’ve got ours, but only at the cost of diminishing the capital we pass on, we’re on an ultimately unsustainable path. Pass on what we inherited in the same or better shape, and everything’s sweet.

But measuring that stock, and the shape it’s in, would be a gigantic job. In practice, at this stage the best we can do is use a battery of indicators that suggest whether various bits of that capital endowment are heading in the right direction.

‘Measuring New Zealand’s progress using a sustainable development approach’ is Statistics New Zealand’s stab at the answer and a fascinating read. Overall, the results are a mixed bag: on some scores, such as our work, knowledge and skills base, we’re doing fine. On others, such as biodiversity and measures of energy use, we appear to be going backwards.

It’s clearly a work in progress. Some of the areas it has reported on — such as economic resilience, social connection and governance, and culture and identity — are inherently difficult to measure, but even so I don’t reckon the measures reported always got to the nub of the issue. On economic resilience, for example, it’s fine to point to things like how much capital and infrastructure each of us has to work with, or how diversified our exports have become. But I’d be concentrating as much (or more) on things like, how often we have recessions, how long they last, how bad they are, and what sort of savings people have to survive the bad times.

Warts and all, these are the statistics of the future for people seeking a holistic view of the economy. We’ve been fixated on GDP, but we’re moving to better and broader measures. President Sarkozy’s recent Commission on the Measurement of Economic Performance and Social Progress didn’t get a wonderful reception in the Anglophone media. But its report (at www.stiglitz-sen-fitoussi.fr) is the bee’s knees if you really want to understand why new perspectives, like this latest set from Statistics New Zealand, are needed in a post-Kyoto, post-Copenhagen world.

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