The genuine progress indicator (GPI) is an alternative metric system which is an addition to the national system of accounts that has been suggested to replace, or supplement, gross domestic product (GDP) as a metric of economic growth. The GPI is used in green economics, sustainability and more inclusive types of economics commonly known as "True Cost" economics.
GPI is an attempt to measure whether a country's growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare (or well-being) of the people in the country. GPI advocates claim that it can more reliably measure economic progress, as it distinguishes between worthwhile growth and uneconomic growth.
The GDP vs the GPI is analogous to the difference between the gross profit of a company and the net profit; the Net Profit is the Gross Profit minus the costs incurred. Accordingly, the GPI will be zero if the financial costs of crime and pollution equal the financial gains in production of goods and services, all other factors being constant.
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Most economists assess the progress in welfare of the people by comparing the gross domestic product over time, that is, by adding up the annual dollar value of all goods and services produced within a country over successive years. However, GDP was never intended to be used for such purpose. It is prone to productivism or consumerism, over-valuing production and consumption of goods, and not reflecting improvement in human well-being. It also fails to distinguish between money spent for new production and money spent to repair negative outcomes from previous expenditure. For example, one million dollars spent to build new homes may be an indication of progress but one million dollars spent in aid relief to those whose homes have been destroyed is not the same kind of progress. This becomes important especially when considering the true costs of development that destroys wetlands and hence exacerbate flood damages. Simon Kuznets, the inventor of the concept of the GDP, notes in his very first report to the US Congress in 1934:
...the welfare of a nation [can] scarcely be inferred from a measure of national income...
An adequate measure must also take into account ecological yield and the ability of nature to provide services. These things are part of a more inclusive ideal of progress, which transcends the traditional focus on raw industrial production.
The need for a GPI to supplement biased indicators such as GDP was highlighted by analyses of uneconomic growth in the 1980s notably that of Marilyn Waring who studied biases in the UN System of National Accounts.
By the early 1990s there was a consensus in human development theory and ecological economics that growth in money supply was actually reflective of a loss of well-being: that lacks of essential natural and social services were being paid for in cash and that this was expanding the economy but degrading life.
The matter remains controversial and is a main issue between advocates of green economics and neo-classical economics. Neoclassical economists understand the limitations of GDP for measuring human wellbeing but nevertheless regard GDP as an important, though imperfect measure of economic output and would be wary of too close an identification of GDP growth with aggregate human welfare. However GDP tends to be reported as synonymous with economic progress by journalists and politicians and the GPI seeks to correct this shorthand by providing a more encompassing measure.
Some economists, notably Herman Daly, John B. Cobb[1] and Philip Lawn[2] have asserted that a country's growth, increased goods production, and expanding services have both "costs" and "benefits"--not just the "benefits" that contribute to GDP. They assert that, in some situations, expanded production facilities damage the health, culture, and welfare of people. Growth that was in excess of sustainable norms (e.g. of ecological yield) had to be considered to be uneconomic. According to the "threshold hypothesis", developed by Manfred Max-Neef, the notion that when macroeconomic systems expand beyond a certain size, the additional benefits of growth are exceeded by the attendant costs. (Max-Neef 1995.)
According to Lawn's model, the "costs" of economic activity include the following potential harmful effects:[3]
Analysis by Robert Costanza also around 1995 of nature's services and their value showed that a great deal of degradation of nature's ability to clear waste, prevent erosion, pollinate crops, etc., was being done in the name of monetary profit opportunity: this was adding to GDP but causing a great deal of long term risk in the form of mudslides, reduced yields, lost species, water pollution, etc. Such effects have been very marked in areas that suffered serious deforestation, notably Haiti, Indonesia, and some coastal mangrove regions of India and South America. Some of the worst land abuses for instance have been shrimp farming operations that destroyed mangroves, evicted families, left coastal lands salted and useless for agriculture, but generated a significant cash profit for those who were able to control the export market in shrimp: this has become a signal example to those who contest the idea that GDP growth is necessarily desirable.
GPI takes account of these problems by incorporating sustainability: whether a country's economic activity over a year has left the country with a better or worse future possibility of repeating at least the same level of economic activity in the long run. For example, agricultural activity that uses replenishing water resources, such as river runoff, will score a higher GPI than the same level of agricultural activity that drastically lowers the water table by pumping irrigation water from wells.
Hicks (1946) pointed out that the practical purpose of calculating income is to indicate the maximum amount people can produce and consume without undermining their capacity to produce and consume the same amount in the future. From a national income perspective, it is necessary to answer the following question: ‘‘Can a nation’s entire GDP be consumed without undermining its ability to produce and consume the same GDP in the future?’’ This question is however largely ignored in contemporary economics, but fits under the idea of sustainability.
The best known attempts to apply the concepts of GPI to legislative decisions are probably the GPI Atlantic indicator pioneered by Ronald Colman for Atlantic Canada, the Alberta GPI pioneered by ecological economist Mark Anielski to measure the long-term economic, social and environmental sustainability of the province of Alberta and the environmental and sustainable development indicators used by the Government of Canada to measure its own progress to achieving well-being goals: its Environment and Sustainable Development Indicators Initiative (Canada) is a substantial effort to justify state services in GPI terms. It assigns the Commissioner for the Environment and Sustainable Development (Canada), an officer in the Auditor-General of Canada's office, to perform the analysis and report to the House of Commons. However, Canada continues to state its overall budgetary targets in terms of reducing its debt to GDP ratio, which implies that GDP increase and debt reduction in some combination are its main priorities.
In the EU the Metropole efforts and the London Health Observatory methods are equivalents focused mostly on urban lifestyle.
The EU and Canadian efforts are among the most advanced in any of the G8 or OECD nations, but there are parallel efforts to measure quality of life or standard of living in health (not strictly wealth) terms in all developed nations. This has also been a recent focus of the labour movement.
GDP is a value neutral measure according to its proponents (but not according to its opponents). It is relatively straightfoward to measure compared to GPI (although measuring GDP is actually quite difficult and involves many choices). Competing measures like GPI define well-being to mean things that the definers ideologically support. Therefore, opponents of GPI claim that GPI cannot function to measure the goals of a diverse, plural society. Supporters of GPI would respond that GDP, when used as a measure of societal well-being, ends up defining well-being to be things that the supporters of GDP ideologically support, and cannot function to measure the goals of a diverse, plural society. Supporters of GDP as a measure of societal well-being claim that competing measures such as GPI are more vulnerable to political manipulation.[4]Finnish economists Mika Maliranta and Niku Määttänen write that the problem of alternative development indexes is their attempt to combine things that are incommensurable. It is hard to say what they exactly indicate and difficult to make decisions based on them. They can be compared to an indicator that shows the mean of a car's velocity and the amount of fuel left.
They add that it indeed seems as if the economy has to grow in order for the people to even remain as happy as they are at present. In Japan, for example, the degree of happiness expressed by the citizens in polls has been declining since the early 1990s, the period when Japan's economic growth stagnated.[5]