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Competitiveness

Happy people, happy economy? Moving beyond GDP in measuring economic success in 2022

Published 11 January 2022 in Competitiveness • 7 min read

One Swiss canton is turning the tables on the status quo of economic health, by departing from the norm of taking GDP as the measure par excellence, and looking concomitantly into how citizens’ happiness has a bearing on the economy, explains Professor Arturo Bris.

 

Towards the end of last year, the cantonal parliament of Vaud in Switzerland approved a motion to consider alternatives to Gross Domestic Product (GDP) to measure the success of the economy. Among those cited were happiness (“bonheur”) and prosperity (“prospérité”), the latest measures to be considered more apt for modern times than those of economic growth and productivity.

GDP has been the accepted standard for measuring and managing the size of an economy since it was developed in 1934. It is based on simple accounting and provides governments with an efficient tool to pull the main levers of the economy. It has become a measure of success which, owing to its widespread use, has allowed governments to benchmark policies.

But there are holes in the fabric of what GDP measures, including the relationship between economic growth and income inequality, as I have written about before. While since the Global Financial Crisis of 2008 GDP has grown on average in most developed markets, real wages have declined because most of the gains of a bigger economy have rewarded capital, not labor. As a result, national governments and international organizations have started looking for alternatives.

The Swiss are not novel in their focus on happiness and prosperity. They follow the lead of Bhutan, a country that measures and manages happiness among the country’s KPIs. As I discuss in my book The Right Place: How National Competitiveness Makes or Breaks Companies, the country’s decision to focus on the happiness of its citizens was not plucked out of thin air; it was deeply rooted in Bhutanese tradition.

Bhutan’s legal code of 1729 stated that, “If the government cannot create happiness for its people, then there is no purpose for government to exist.” It stressed that Bhutanese laws must promote happiness for all sentient beings and, as a predominantly Buddhist nation, it was clear to the king that the cultivation of compassion stemmed from this ancient wisdom. The focus needed to be not only on the economic progress of Bhutan, but on a “flourishing human society living in harmony with nature.”

Consequently, Bhutan has defined the Gross National Happiness Index as its main indicator, on the basis that happiness should not only be related to individual fulfilment, but rather should be a collective behavior that is achievable through the implementation of public policies.

This Buddhist monastery is one of the most famous in Bhutan. Composed of seven temples, it has been considered a meditation sanctuary since the 8th century.

When GDP falls short

Economic growth and GDP, such a successful partnership to date, are encountering ever more cracks in terms of their joint ability to assess “successful” economies. There are several reasons why.

1. Income inequality

In search of economic growth, countries have ended up with massive income inequalities. Economic development typically comes at the expense of more income inequality, especially among less developed and less competitive economies. This is something that we have observed at the IMD World Competitiveness Center over the last 20 years, with countries such as Malaysia, Thailand and Estonia that have moved up our competitiveness rankings; as they have risen, inequalities in these countries have also increased.

2. Quality of life

Economic growth is easy to achieve when countries depend on natural resources and do not need sensible industrial policies that create jobs and generate salaries and tax revenues. This means such countries could see high growth levels in output without really improving the quality of life of their citizens; this would be the case if, for example, the export gains are captured by corrupted governments or foreign powers.

3. Accuracy

GDP also measures some contributions to country value in a questionable way; various activities – such as domestic work – are not included, while others – particularly the value of the public sector – are wrongly accounted for.

4. Sustainability

Finally, sustainability is not being accounted for well in GDP measurements. If GDP measures success, and sustainability is a key success factor for economies in the coming years, countries should grow more as they implement more social and environmentally driven policies. However, by and large this is not the case. If, for example, countries substitute domestic coal production with imports of biofuel, the country’s GDP is penalized. And yet it is a desirable move from an environmental point of view.

Generally, too, economic development based on economic growth has not yielded satisfactory results in a big part of our world, particularly in Africa and Latin America.

But can we measure happiness?

We need to take a new look at what is contributing to prosperity in today’s society, and create new metrics accordingly. This we have known for several years, but what is now coming to the fore is that we need to put individuals at the heart of any rehashed GDP equivalent. We have ever more choices, which is generally seen as a positive consequence of economic development. And the pandemic has reignited debates on the social and economic advantages of individualism versus collectivism.

In this vein, prosperity and happiness would seem to be ideal candidates. The problem is how to measure them and, even more importantly, how to manage them. The business case on measuring happiness has been made. One model – The Happiness Index – measures “happy” employees by virtue of their:

  • clear direction
  • enablement to success
  • psychological safety
  • positive relationships
  • aligned meaning and purpose
  • opportunities to grow
  • freedom to take opportunities
  • feelings of acknowledgement
“Happiness refers to individual self-satisfaction, which can be obtained in multiple ways and is related to feelings. Prosperity is an economic concept, whereby individuals enjoy a job, and income, and the material benefits that derive from it.”

But the economic case – that is, how to ensure that society at large, and not just employees in the context of their companies, is happy – is a bigger beast to tackle.

An easier task may be to look at which policies can be implemented to increase the prosperity of a country. For example, how to ensure fair work-from-home policies, and labor laws that emphasize work-life balance. These may not necessarily yield economic growth, but they will increase quality of life, a measure that involves non-material sources of satisfaction such as social life, safety and weather. 

In fact, our single starting point for assessing contributions to wellbeing should be measuring the value of governments and the public sector. The tools we currently use to measure the value of the public sector – its benefits at an individual and societal level – are problematic, and call into question whether quantitative metrics are even the right approach. Assuming we can truly assess the value of the public sector, we then need to reform it, in order to eliminate inefficiencies and functions that do not serve the public good.

Happiness refers to individual self-satisfaction, which can be obtained in multiple ways and is related to feelings. Prosperity is an economic concept, whereby individuals enjoy a job, and income, and the material benefits that derive from it.

However, both definitions depend on social, historical and geographical considerations. There are therefore no unique definitions of happiness or indeed prosperity and ; being “prosperous” in Brazil may not mean the same as in Russia. That said measuring GDP has also only ever been a rough guide to economic success, and so any such future metrics would be similar in this regard.

Equality equals economic success

Creating new metrics is an opportunity to make new tools that will help us craft a more just, equal society. Aside from the moral argument to do so, the limit to economic growth is income inequality. A recent study in the US showed how income inequality is quelling growth in aggregate demand (spending by households, businesses and governments); an ever larger share of income is shifting to wealthier households, and these tend to save rather than spend.

 

Durable happiness goes hand in hand with pursuing economic objectives

Merely adopting non-economic metrics of performance – such as happiness – would not be sustainable;  the key to a robust social system is an economic system capable of the production of goods and services. The extent to which a productive system of this kind can create prosperity for individuals (happiness being part of that measure) determines the quality of our societies.

If follows that simply assessing “happiness” is not enough. Happiness can be measured — but whether it can be managed is much less clear. The core of any successful society is job creation and the subsequent welfare created by that.

Environmental and social objectives are not enough alone, meaning countries must also continue to pursue economic objectives, which are the one necessary condition for a sustainable world.

As for Vaud, the Swiss canton is in a privileged position: it is set to create a new model for economic success that other countries could replicate, in a bid to include the many factors that are of great relevance to society, but that GDP fails to measure.  

Authors

Arturo Bris - IMD Professor

Arturo Bris

Professor of Finance at IMD

Arturo Bris is Professor of Finance at IMD. Since January 2014 he is also leading the world-renowned IMD World Competitiveness Center. He is Program Director of the Navigating Fintech Innovation and Disruption program.

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