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| | A better measurement of performance to fine-tune economic policies
by Professors Joseph E. Stiglitz, Amartya Sen and Jean-Paul Fitoussi
Commission on the Measurement of Economic Performance and Social Progress
After conducting research during several months, the members of the Commission on the Measurement of Economic Performance and Social Progress presented their recommendation on September 14, 20091. The Stiglitz Commission, named after Joseph E. Stiglitz, the Nobel Prize laureate for economic sciences, was asked by French President Nicolas Sarkozy to rethink the current statistical tools to measure economic performance, in which the dominant weight of the Gross Domestic Product (GDP) often proved to be misleading.
As indicated by Professor Stiglitz in a recent article published by Project Syndicate2, ”In our performance-oriented world, measurement issues have taken on increased importance: what we measure affect what we do.” Hence the need to make sure that our statistical tools correctly describe the situation.
The financial crisis deserves the credit for questioning most of the assumptions on which the current economic system is based. “The current crisis isn’t just making us free to devise other models, another future and another world. It compels us to do so,” stated the French President in his address to a gathering of international economists and experts attending the presentation of the final report at the University of Paris/Sorbonne.
Let us hope that this new challenge will also apply to the agricultural world, which more than any other, is marred by major errors of appreciation largely attributable to traditional models (World Bank, FAPRI, OECD)––the very models that guided the liberalization policies conducted during the past 20 years, while ignoring the damages they generated3. Moreover, we do not have, in agricultural activities, any procedure or indicator that provide precise, frequent and conclusive data on the various markets and pursued policies, unlike other activities such as finance, the environment or ethics.
Is this the reason why policies implemented in agriculture are by and large unsuitable? The excerpts from the Stiglitz report we are reproducing below, together with the recommendations expressed by the economist, are leading us in that direction. In any case, one thing is certain: now more than ever, agriculture needs a “compass” that shows the course to be stayed. This is the task to which momagri intends to contribute through y the creation of a rating agency tailored to food and agriculture to minimize asymmetrical data on international exchanges, anticipate failures on agricultural markets and improve policies implemented in agricultural activities 4.
PFM
Excerpts of the Executive Summary of the Report by the Commission on the Measurement of Economic Performance and Social Progress
Why has this report been written? 1) In February 2008, the President of the French Republic, Nicholas Sarkozy, unsatisfied with the present state of statistical information about the economy and the society, asked, Joseph Stiglitz (President of the Commission), Amartya Sen (Advisor) and Jean Paul Fitoussi (Coordinator) to create a Commission, subsequently called “The Commission on the Measurement of Economic Performance and Social Progress” (CMEPSP). The Commission’s aim has been to identify the limits of GDP as an indicator of economic performance and social progress, including the problems with its measurement; to consider what additional information might be required for the production of more relevant indicators of social progress; to assess the feasibility of alternative measurement tools, and to discuss how to present the statistical information in an appropriate way.
2) In effect, statistical indicators are important for designing and assessing policies aiming at advancing the progress of society, as well as for assessing and influencing the functioning of economic markets. Their role has increased significantly over the last two decades. This reflects improvements in the level of education in the population, increases in the complexity of modern economies and the widespread use of information technology. In the “information society”, access to data, including statistical data, is much easier. More and more people look at statistics to be better informed or to make decisions. To respond to the growing demand for information, the supply of statistics has also increased considerably, covering new domains and phenomena.
3) What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance. So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.
4) However, there often seems to be a marked distance between standard measures of important socio economic variables like economic growth, inflation, unemployment, etc. and widespread perceptions. The standard measures may suggest, for instance that there is less inflation or more growth than individuals perceive to be the case, and the gap is so large and so universal that it cannot be explained by reference to money illusion or to human psychology. In some countries, this gap has undermined confidence in official statistics (for example, in France and in the United Kingdom. only one third of citizens trust official figures, and these countries are not exceptions), with a clear impact on the way in which public discourse about the conditions of the economy and necessary policies takes place.
(…)
6) Indeed, for a long time there have been concerns about the adequacy of current measures of economic performance, in particular those solely based on GDP. Besides, there are even broader concerns about the relevance of these figures as measures of societal wellbeing. To focus specifically on the enhancement of inanimate objects of convenience (for example in the GNP or GDP which have been the focus of a myriad of economic studies of progress), could be ultimately justified – to the extent it could be – only through what these objects do to the human lives they can directly or indirectly influence. Moreover, it has long been clear that GDP is an inadequate metric to gauge well-being over time particularly in its economic, environmental, and social dimensions, some aspects of which are often referred to as sustainability.
Why is this report important?
7) Between the time that the Commission began working on this report and the completion of this Report, the economic context has radically changed. We are now living one of the worst financial, economic and social crises in post-war history. The reforms in measurement recommended by the Commission would be highly desirable, even if we had not had the crisis. But some members of the Commission believe that the crisis provides heightened urgency to these reforms. They believe that one of the reasons why the crisis took many by surprise is that our measurement system failed us and/or market participants and government officials were not focusing on the right set of statistical to deliver an early warning, and did not alert us that the seemingly bright growth performance of the world economy between 2004 and 2007 may have been achieved at the expense of future growth. It is also clear that some of the performance was a “mirage”, profits that were based on prices that had been inflated by a bubble. It is perhaps going too far to hope that had we had a better measurement system, one that would have signaled problems ahead, so governments might have taken early measures to avoid or at least to mitigate the present turmoil. But perhaps had there been more awareness of the limitations of standard metrics, like GDP, there would have been less euphoria over economic performance in the years prior to the crisis; metrics which incorporated assessments of sustainability (e.g. increasing indebtedness) would have provided a more cautious view of economic performance. But many countries lack a timely and complete set of wealth accounts – the ‘balance sheets’ of the economy – that could give a comprehensive picture of assets, debts and liabilities of the main actors in the economy.
8) We are also facing a looming environmental crisis, especially associated with global warming. Market prices are distorted by the fact that there is no charge imposed on carbon emissions; and no account is made of the cost of these emissions in standard national income accounts. Clearly, measures of economic performance that reflected these environmental costs might look markedly different from standard measures.
9) If the view expressed in the preceding paragraphs is not necessarily shared by all members of the Commission, the whole Commission is convinced that the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass. The decisions they (and we as individual citizens) make depend on what we measure, how good our measurements are and how well our measures are understood. We are almost blind when the metrics on which action is based are ill-designed or when they are not well understood. For many purposes, we need better metrics. Fortunately, research in recent years has enabled us to improve our metrics, and it is time to incorporate in our measurement systems some of these advances. There is also consensus among the Commission members that better measures may enable us to steer our economies better through and out of crises. Many of the indicators put forward by the report will lend themselves to this purpose. (…)
(…)
Recommandation n°1 : When evaluating material well-being, look at income and consumption rather than production
Recommandation n°2 : Emphasise the household perspective
Recommandation n°3 : Consider income and consumption jointly with wealth
Recommandation n°4 : Give more prominence to the distribution of income, consumption and wealth
Recommandation n°5 : Broaden income measures to non-market activities
Recommandation n°6 : Quality of life depends on people’s objective conditions and capabilities. Steps should be taken to improve measures of people’s health, education, personal activities and environmental conditions. In particular, substantial effort should be devoted to developing and implementing robust, reliable measures of social connections, political voice, and insecurity that can be shown to predict life satisfaction.
Recommandation n°7 : Quality-of-life indicators in all the dimensions covered should assess inequalities in a comprehensive way
Recommandation n°8 : Surveys should be designed to assess the links between various quality of-life domains for each person, and this information should be used when designing policies in various fields
Recommandation n°9 : Statistical offices should provide the information needed to aggregate across quality-of-life dimensions, allowing the construction of different indexes.
Recommandation n°10 : Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey.
Recommandation n°11 : Sustainability assessment requires a well-identified dashboard of indicators. The distinctive feature of the components of this dashboard should be that they are interpretable as variations of some underlying “stocks”. A monetary index of sustainability has its place in such a dashboard but, under the current state of the art, it should remain essentially focused on economic aspects of sustainability.
Recommandation n°12 : The environmental aspects of sustainability deserve a separate follow up based on a well-chosen set of physical indicators. In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage (such as associated with climate change or the depletion of fishing stocks.)
1 The report is available at: http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf
2 “GDP Fetichism”, Project Syndicate, http://www.project-syndicate.org/commentary/stiglitz116
3 It is today increasingly recognized that standard models currently used by international institutions to back up their liberalization policies are both incomplete and simplistic and that their use has led to totally false conclusions. Please see the October 2, 2006 article, “The momagri model” which outlines these models’ various flaws. http://www.momagri.org/UK/momagri-model/The-momagri-model_91.html
4 Please read our January 5, 2009 article “Why is it Imperative to Set up a Ratings Agency for Agriculture?” http://www.momagri.org/UK/Nar-Agency/Why-is-it-Imperative-to-Set-Up-a-Ratings-Agency-for-Agriculture-_415.htm | |
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Advocating for
agricultural market
regulation and global
food governance | |
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